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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the delivery of the final prospectus
supplement. This prospectus supplement and the accompanying prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
(Subject to Completion dated September 9, 1997)
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 31, 1996)
MORTGAGE INDEX AMORTIZING TRUST 1997-1
$250,000,000 __% FIXED RATE ASSET BACKED NOTES, CLASS A1
The Mortgage Index Amortizing Trust 1997-1 (the 'Trust') will be formed
pursuant to a trust agreement to be dated as of September 1, 1997 (the 'Trust
Agreement') and entered into by Lehman ABS Corporation (the 'Depositor') and
Wilmington Trust Company, as owner trustee (the 'Owner Trustee'). The Trust will
issue $250,000,000 aggregate principal amount of Fixed Rate Asset Backed Notes,
Class A1 (the 'Class A1 Notes' or the 'Notes'). The Notes will be issued
pursuant to an indenture to be dated as of September 1, 1997 (the 'Indenture'),
among the Trust, The Bank of New York as indenture trustee (the 'Indenture
Trustee') and Lehman Brothers Special Financing Inc. (the 'Swap Counterparty').
The Trust will also issue $7,735,000 aggregate face amount of Floating Rate
Asset Backed Certificates, Class A2 (the 'Class A2 Certificates' or the
'Certificates' and, together with the Notes, the 'Securities'). The Certificates
are not being offered hereby.
The assets of the Trust will consist of certain asset backed securities (the
'CABS') each issued pursuant to a pooling and servicing agreement or a master
pooling and servicing agreement (collectively, the 'Underlying Agreements') and
certain eligible investments (the 'Eligible Investments'). Each CABS evidences
an interest in a trust or master trust created by one of the Underlying
Agreements, the property of which includes credit card receivables
(collectively, the 'Receivables') generated or to be generated from time to time
in the ordinary course of business in a portfolio of revolving credit card
accounts (collectively, the 'Accounts'), all monies due in payment of the
Receivables and certain other properties, as more fully described herein. If at
any time a CABS Early Amortization Event (as defined herein) occurs with respect
to a CABS, the Indenture Trustee will use all payments received to purchase
additional CABS or other Eligible Investments in accordance with guidelines
described herein.
In addition, the Trust will enter into the Swap Agreement with the Swap
Counterparty pursuant to which the Trust will agree to exchange amounts received
as payments of interest on the CABS for payments from the Swap Counterparty in
an amount equal to the interest due on the Securities. The Swap Agreement will
also provide that on each Payment Date following the Principal Commencement Date
(each as described herein) the Swap Counterparty will be required to pay the Pay
Down Amount (as defined herein) to the Indenture Trustee. The payment
obligations of the Swap Counterparty under the Swap Agreement will have the
benefit of a financial guaranty insurance policy (the 'Swap Policy') issued on
the Closing Date (as defined below) by Ambac Assurance Corporation (the 'Swap
Guarantor').
The Class A1 Notes will bear interest at a rate equal to % per annum,
payable on the 25th day of each month or, if such day is not a Business Day, the
next succeeding Business Day (each, a 'Payment Date') commencing October 25,
1997. The Class A2 Certificates will represent fractional undivided interests in
the Trust. Interest at a rate equal to one month LIBOR plus % will be
distributed to the Class A2 Certificateholders on each Payment Date.
No scheduled payments of principal will be made to the holders of the Class
A1 Notes and Class A2 Certificates until the Payment Date that occurs on
September 25, 1999 (the 'Principal Commencement Date'). However, if certain
events of default occur, principal may be payable on an earlier date. Principal
will be payable monthly to the holders of the Class A1 Notes and the Class A2
Certificates. The Class A1 Noteholders will receive an amount that is equal to
the product of (i) the percentage that corresponds to the PSA Index Rate as
shown on the Prepayment Calculation Table and (ii) the Principal Amount (as
defined herein) of the Class A1 Notes, rounded to the nearest $1,000 (the 'Note
Amortization Amount'). The Class A2 Certificateholders will receive an amount
that is equal to the product of (i) 71.60% of the percentage that corresponds to
the PSA Index Rate as shown on the Prepayment Calculation Table and (ii) the
Face Amount (as defined herein) of the Class A2 Certificates, rounded to the
nearest $1,000 (the 'Certificate Amortization Amount'). The aggregate amount of
principal paid in any month is referred to as the 'Pay Down Amount'.
There is currently no market for the Class A1 Notes offered hereby and there
can be no assurance that such a market will develop or if it does develop that
it will continue. See 'RISK FACTORS' herein.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and Prospectus
to investors. This is in addition to the obligation of dealers acting as
underwriters to deliver a Prospectus Supplement and Prospectus with respect to
their unsold allotments or subscriptions.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE NOTES, SEE 'RISK FACTORS' ON PAGE S-11 HEREIN.
------------------------
The Class A1 Notes offered hereby constitute part of a separate series of
Asset Backed Notes being offered by Lehman ABS Corporation from time to time
pursuant to its Prospectus dated December 31, 1996. This Prospectus Supplement
does not contain complete information about the offering of the Class A1 Notes.
Additional information is contained in the Prospectus and investors are urged to
read both this Prospectus Supplement and the Prospectus in full as well as any
prospectus relating to the CABS. Sales of the Class A1 Notes may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
------------------------
THE NOTES REPRESENT INTERESTS IN THE ASSETS OF THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN THE DEPOSITOR, INDENTURE TRUSTEE OR ANY AFFILIATE
THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE NOTES
NOR THE CABS ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY.
THESE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Class A1 Notes offered hereby will be purchased by Lehman Brothers Inc.
(the 'Underwriter') from the Depositor and will, in each case, be offered by the
Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. The aggregate
proceeds to the Depositor from the sale of the Class A1 Notes are expected to be
$ before deducting expenses payable by the Depositor of $ .
The Class A1 Notes are offered subject to prior sale and subject to the
Underwriter's right to reject orders in whole or in part. It is expected that
the Class A1 Notes will be delivered in book-entry form through the facilities
of The Depository Trust Company on or about September , 1997 (the 'Closing
Date').
------------------------
LEHMAN BROTHERS
September , 1997
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus and in the prospectus
and prospectus supplement for each CABS. Certain capitalized terms used herein
are defined elsewhere in this Prospectus Supplement or in the Prospectus.
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SECURITIES OFFERED........................ $250,000,000 Fixed Rate Asset Backed Notes, Class A1 (the 'Class A1
Notes' or the 'Notes'). The Trust (as defined below) is also
issuing $7,735,000 Floating Rate Asset Backed Certificates, Class
A2 (the 'Class A2 Certificates' or the 'Certificates' and, together
with the Class A1 Notes, the 'Securities'). The Certificates are
not being offered hereby.
TRUST..................................... Mortgage Index Amortizing Trust, 1997-1 (the 'Trust' or the
'Issuer'), a Delaware business trust established pursuant to the
Trust Agreement (as defined herein). The assets of the Trust will
consist of the CABS and Eligible Investments (each as further
described below). In addition, the Trust will enter into the Swap
Agreement (as defined herein) with Lehman Brothers Special
Financing Inc. (the 'Swap Counterparty'), pursuant to which the
Trust will agree to exchange the proceeds received with respect to
the CABS and any Eligible Investments for payments from the Swap
Counterparty in order to pay certain amounts due on the Class A1
Notes and the Class A2 Certificates.
DEPOSITOR................................. Lehman ABS Corporation.
INDENTURE................................. The Class A1 Notes will be issued pursuant to an indenture dated as
of September 1, 1997 (the 'Indenture') among the Trust, The Bank of
New York in its capacity as indenture trustee (the 'Indenture
Trustee') and the Swap Counterparty in an initial aggregate
principal amount of $250,000,000. (The outstanding principal amount
of the Class A1 Notes at any time shall be referred to as the
'Principal Amount'). The Indenture Trustee will allocate
distributions of principal and interest received in respect of the
CABS and any Eligible Investments to holders of the Class A1 Notes
(the 'Class A1 Noteholders') in accordance with the Indenture.
TRUST AGREEMENT........................... Pursuant to a trust agreement dated as of September 1, 1997 (the
'Trust Agreement'), between the Depositor and Wilmington Trust
Company in its capacity as owner trustee (the 'Owner Trustee'), the
Trust will issue the Class A2 Certificates in an initial aggregate
principal amount of $7,735,000. (The outstanding face amount of the
Class A2 Certificates at any time shall be referred to as the 'Face
Amount'). The Class A2 Certificates will represent fractional
undivided interests in the Trust.
SECURITY FOR THE
CLASS A1 NOTES.......................... The assets of the Issuer will consist of the CABS (as defined
herein). The proceeds of the CABS will from time to time be invested
by the Indenture Trustee in Eligible Investments. The Indenture
Trustee shall instruct the Market Agent to purchase the highest
yielding Eligible Investments available from a recognized broker-
dealer. 'Eligible Investments' are any floating rate securities
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rated AAA or A-1+ by Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc. ('S&P') and Aaa or P1 by Moody's
Investors Service, Inc. ('Moody's') including new CABS which meet
these criteria. In addition the Issuer will enter into the Swap
Agreement (as defined herein).
The Issuer will pledge the CABS, the Eligible Investments, its rights
under the Swap Agreement and the Swap Policy and all proceeds
thereof to the Indenture Trustee as security for the Issuer's
obligations under (i) the Class A1 Notes and (ii) the Swap
Agreement (other than the rights under the Swap Agreement).
CABS...................................... $100,145,00 First USA Credit Card Master Trust, Class A Floating Rate
Asset Backed Certificates, Series 1997-5; $50,000,000 First USA
Credit Card Master Trust, Class A Floating Rate Asset Backed
Certificates, Series 1997-2; $13,000,000 First USA Credit Card
Master Trust, Class A Floating Rate Asset Backed Certificates,
Series 1997-1 and $94,590,000 First USA Credit Card Master Trust,
Class A Floating Rate Asset Backed Certificates, Series 1996-4. The
CABS were each issued pursuant to an Underlying Agreement. As of
the Closing Date, the aggregate principal balance of the CABS is
$257,735,000. The CABS are further described in 'Description of the
CABS' herein.
DESCRIPTION OF CLASS A1 NOTES............. The Class A1 Notes will be secured by the assets of the Trust
pursuant to the Indenture.
A. INTEREST RATE PAYABLE
ON CLASS A1 NOTES................ The Class A1 Notes represent $250,000,000 aggregate Principal Amount.
Interest will accrue on the unpaid Principal Amount of the Class A1
Notes at a rate per annum equal to %, calculated on the basis of
a 360-day year consisting of twelve 30-day months.
B. INTEREST PAYMENTS ON
THE CLASS A1 NOTES............... Interest will be payable to Class A1 Noteholders on each Payment
Date. Interest in respect of a Payment Date will accrue on the
Class A1 Notes from and including the preceding Payment Date (or in
the case of the first Payment Date, from and including the Closing
Date) to but excluding such current Payment Date (each, an
'Interest Accrual Period'). A failure to pay interest on the Class
A1 Notes on any Payment Date, which failure continues for five
Business Days, constitutes an Event of Default under the Indenture.
A 'Business Day' is any day other than a Saturday or Sunday or
another day on which banking institutions in New York, New York are
authorized or obligated by law, regulations or executive order to
be closed.
C. PRINCIPAL PAYMENTS ON
THE CLASS A1 NOTES............... No principal is scheduled to be payable to the Class A1 Noteholders
until the September 1999 Payment Date (the 'Principal Commencement
Date'). However, if an Event of Default (as defined herein) occurs
under the Indenture, the Indenture Trustee or the holders of the
Securities may declare the Class A1 Notes due and payable as
further described under 'The Indenture-- Events of Default; Rights
Under Events of Default' herein.
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Upon any acceleration after an Event of Default the 'Distributable
Amount' shall equal the sum of (i) the principal received on the
CABS and any Eligible Investments on such Payment Date by the
Trust, (ii) the proceeds from the sale of the CABS and any Eligible
Investments and (iii) the amount due from the Swap Counterparty, if
any, pursuant to the Swap Agreement with respect to principal, each
as calculated by the Calculation Agent. Such payments of principal
will be paid first to the Class A1 Noteholders and, once the Class
A1 Noteholders have been paid all principal and interest owing to
them, to the holders of the Class A2 Certificates ('Class A2
Certificateholders'). The Class A1 Noteholders and the Class A2
Certificateholders shall be referred to collectively herein as the
'Securityholders.'
Beginning on the Principal Commencement Date, Class A1 Noteholders
will receive principal payments ('Note Amortization Amounts')
monthly on each Payment Date. The Note Amortization Amount will be
determined by the Calculation Agent five Business Days prior to the
related Payment Date and will equal the product of (i) the
percentage that corresponds to a given PSA Index Rate for such
Payment Date (as set forth on the Prepayment Calculation Table
included herein) (the 'Monthly Amortization Rate') and (ii) the
Principal Amount of the Class A1 Notes, before giving effect to
payment of principal on such Payment Date, rounded to the nearest
$1,000. The Class A2 Certificateholders will receive monthly
principal payments (the 'Certificate Amortization Amount') equal to
the product of (i) 71.60% of the Monthly Amortization Rate and (ii)
the Face Amount of the Class A2 Certificates, before giving effect
to payment of principal on such Payment Date, rounded to the
nearest $1,000. The aggregate amount distributed monthly on each
Payment Date on and after the Principal Commencement Date, which is
equal to the sum of the Note Amortization Amount and the
Certificate Amortization Amount, is referred to herein as the 'Pay
Down Amount'. On the Final Scheduled Payment Date (as described
below) the Pay Down Amount will be equal to the remaining Principal
Amount of the Class A1 Notes.
Four Business Days prior to each Payment Date (beginning with the
fourth Business Day preceding the Principal Commencement Date and
continuing until both the Principal Amount of the Class A1 Notes
and the Face Amount of the Class A2 Certificates have been reduced
to zero) (the 'Solicitation Date'), (i) the Indenture Trustee will
direct the Market Agent to sell (in accordance with the Sale
Procedures, as described below) a face amount of CABS and any
Eligible Investments in a combined amount equal to the Pay Down
Amount (the proceeds of such sale shall be referred to herein as
the 'Sale Proceeds'), (ii) the Swap Counterparty will be required
to make a payment to the Trust under the Swap Agreement in an
amount equal to the Pay Down Amount and (iii) such Sale Proceeds
will be paid to the Swap Counterparty under the Swap Agreement.
In the event of a CABS Early Amortization Event (as defined herein)
to the extent that the face amount of such CABS has not
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been repaid in full (a 'Credit Loss'), the Face Amount of the Class
A2 Certificates will be reduced pro rata by such Credit Loss until
it is reduced to zero. Then the Principal Amount of the Class A1
Notes will be reduced pro rata by the remaining amount of such
Credit Loss. Any such principal reduction will not be reinstated
and will result in the Certificateholders or the Noteholders
receiving less than the Face Amount of the Class A2 Certificates or
the Principal Amount of the Class A1 Notes, as applicable.
D. SALE PROCEDURES..................... In the event the Indenture Trustee is required to sell CABS or
Eligible Investments as described above, the Market Agent on behalf
of the Trust will sell such CABS to the highest of not less than
three solicited bidders for such CABS or Eligible Investments
(which bidders may include Lehman Brothers Inc., the Swap
Counterparty, the Swap Guarantor or their respective affiliates).
The CABS will be sold in the order of priority described herein. No
assurance can be given as to whether the Market Agent will be
successful in soliciting bids to purchase the CABS or the Eligible
Investments. Any such sale shall settle one business day prior to
the related Payment Date.
E. PAYMENT DATE........................ The 25th day of each month or, if such day is not a Business Day, the
next succeeding Business Day, commencing October 25, 1997.
F. RECORD DATE......................... Payments on the Class A1 Notes will be made to the Class A1
Noteholders in whose name the Class A1 Notes were registered at the
close of business on the day immediately preceding such Payment
Date, or, if Definitive Notes are issued, at the close of business
fifteen days prior to such Payment Date, or, with respect to the
first Payment Date, the Closing Date (the 'Record Date').
G. MANDATORY PREPAYMENT................ In addition to the prepayments of principal on the Class A1 Notes
beginning on the Principal Commencement Date, the Class A1 Notes
and the Class A2 Certificates will be redeemed by the Issuer, at a
price equal to 100% of the Principal Amount of the Class A1 Notes
and the Face Amount of the Class A2 Certificates plus accrued
interest thereon, when the Principal Amount of the Class A1 Notes
is equal to or less than 10% of the original principal amount of
the Class A1 Notes.
H. FINAL SCHEDULED PAYMENT
DATE OF THE NOTES................ To the extent not previously paid, the Principal Amount of the Class
A1 Notes will be due on August 25, 2004 (the 'Final Scheduled
Payment Date' or the 'Maturity Date').
Failure to pay the full Principal Amount of the Class A1 Notes on the
Final Scheduled Payment Date constitutes an Event of Default under
the Indenture.
I. FORM AND REGISTRATION............... The Class A1 Notes will initially be delivered in book-entry form
('Book-Entry Notes') and will be represented by one or more
permanent global securities in fully registered form without
coupons deposited with a custodian for and registered in the name
of a nominee of The Depository Trust Company ('DTC'). Beneficial
interests in such global securities will be shown on,
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and transfers thereof will be effected only through, records
maintained by DTC and its direct or indirect participants.
Transfers within DTC will be in accordance with its usual rules and
operating procedures. So long as the Class A1 Notes are Book-Entry
Notes, such Class A1 Notes will be evidenced by one or more
securities registered in the name of Cede & Co. ('Cede'), as the
nominee of DTC. The interests of such Class A1 Noteholders will be
represented by bookentries on the records of DTC and participating
members thereof. All references in this Prospectus Supplement to
Class A1 Notes reflect the rights of Class A1 Noteholders only as
such rights may be exercised through DTC and its participating
organizations for so long as such Class A1 Notes are held by DTC.
The Class A1 Notes will be issued in fully registered, certificated
form to Noteholders or their respective nominees ('Definitive
Notes'), rather than to DTC or its nominee only if (i) the
Administrator advises the Indenture Trustee in writing that DTC is
no longer willing or able to discharge properly its
responsibilities as depository with respect to the Notes, and the
Indenture Trustee or the Depositor are unable to locate a qualified
successor, (ii) the Administrator, at its option, elects to
terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default, Noteholders evidencing not less
than 50% of the aggregate unpaid principal amount of the Class A1
Notes advise the Indenture Trustee and DTC through Participants in
writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of the
Noteholders.
J. DENOMINATIONS....................... The Class A1 Notes will be issued in minimum denominations of
$100,000 and integral multiples of $1,000 in excess thereof.
K. TITLE............................... DTC, or its nominee, will be deemed the registered holder of Book-
Entry Notes. Title to each Definitive Note will be held by the
Class A1 Noteholder (or its nominee) in whose name such Class A1
Note has been registered.
L. EVENTS OF DEFAULT................... Events of default (each, an 'Event of Default') under the Indenture
include, among others: the failure of the Trust to pay interest or
principal on any Class A1 Note when such amount becomes due and
payable and, with respect to interest, such failure continues for
more than five Business Days. See 'The Indenture--Events of
Default; Rights under Events of Default' herein.
If an Event of Default occurs, the Indenture Trustee may (and, under
circumstances described under 'The Indenture--Events of Default;
Rights under Events of Default,' will) direct the Market Agent to
liquidate all of the CABS and any Eligible Investments.
The Distributable Amount shall be applied to make payments in the
following priority:
(i) (a) the amount, if any, owed by the Trust to the Swap
Counterparty, to be paid pari passu (except to the extent of any
Credit Loss, which will be borne first by the Class A-2
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Certificateholders and then the Class A-1 Noteholders) with (b) the
amount of interest accrued and unpaid on the Class A1 Notes;
(ii) the Principal Amount of the Class A1 Notes;
(iii) the amount of interest accrued and unpaid on the Class A2
Certificates;
(iv) the Face Amount of the Class A2 Certificates; and
(v) any remaining amounts may be used to satisfy obligations of the
Swap Counterparty to the Swap Guarantor arising from collateral
arrangements used to secure the Swap Counterparty's obligations
under the Swap Agreement and other swap agreements that have the
benefit of one or more insurance policies issued by the Swap
Guarantor.
DESCRIPTION OF CLASS A2 CERTIFICATES...... Each Class A2 Certificate will represent an undivided interest in the
Trust as described herein.
A. INTEREST RATE PAYABLE ON
CLASS A2 CERTIFICATES............ The Class A2 Certificates represent $7,735,000 aggregate Face Amount.
Interest will accrue on the unpaid Face Amount of the Class A2
Certificates at a rate per annum equal to one month LIBOR plus
%, calculated on the basis of the actual number of days in each
Interest Accrual Period divided by 360 (the 'Class A2 Accrual
Rate').
B. INTEREST DISTRIBUTIONS ON THE
CLASS A2 CERTIFICATES............ Except as otherwise provided herein, interest will be distributed to
the Class A2 Certificateholders on each Payment Date. Interest in
respect of a Payment Date will accrue on the Class A2 Certificates
during the preceding Interest Accrual Period.
C. PRINCIPAL DISTRIBUTIONS ON
THE CLASS A2 CERTIFICATES........ Beginning on the Principal Commencement Date the Class A2
Certificateholders will receive principal payments in an amount
equal to the Certificate Amortization Amount. However, if an Event
of Default (as defined herein) occurs under the Indenture, the
Indenture Trustee or the holders of the Securities may declare the
Class A2 Certificates due and payable as further described under
'The Indenture--Events of Default; Rights Under Events of Default'
herein.
D. RECORD DATE......................... Distributions on the Class A2 Certificates will be made to Class A2
Certificateholders in whose name the Class A2 Certificates were
registered on the day immediately preceding such Payment Date, or,
if Definitive Certificates are issued, fifteen days prior to such
Payment Date, or, with respect to the first Payment Date, the
Closing Date.
E. EXPECTED FINAL
DISTRIBUTION DATE................ The Face Amount of the Class A2 Certificates is expected to be
distributed to the Class A2 Certificateholders on August 25, 2004
(the 'Expected Final Distribution Date').
F. SUBORDINATION....................... Distributions of interest and principal on the Class A2 Certificates
will be subordinated in priority of payment to the payment of
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amounts due on the Class A1 Notes. Consequently, Class A2
Certificateholders will not receive any amounts due on the Class A2
Certificates on any date until the full amount of interest and
principal due on the Class A1 Notes on such date is paid in full.
G. FORM AND REGISTRATION............... The Class A2 Certificates will initially be delivered in book-entry
form ('Book-Entry Certificates') and will be represented by one or
more permanent global securities in fully registered form without
coupons deposited with a custodian for and registered in the name
of DTC, subject to limited exceptions.
All transfers of interests in the Class A2 Certificates are subject
to certain restrictions.
H. DENOMINATIONS....................... The Class A2 Certificates will be issued in minimum denominations of
$100,000 and integral multiples of $1,000 in excess thereof and
will not be eligible to be resold or subdivided into units smaller
than the minimum denomination for issuance.
I. TITLE............................... DTC, or its nominee, will be deemed the registered holder of the
Book-Entry Certificates. Title to each Definitive Certificate will
be held by the Class A2 Certificateholder (or its nominee) in whose
name such Class A2 Certificate has been registered.
MARKET AGENT.............................. Lehman Brothers Inc. will serve as market agent (the 'Market Agent')
for the Trust. In such capacity, Lehman Brothers Inc. will act on
behalf of the Trust in connection with the sale and purchase of the
CABS and perform various other duties. Under certain circumstances,
Lehman Brothers Inc. may be removed as Market Agent by the Swap
Counterparty or the Swap Guarantor. See 'The Swap Agreement' and
'The Market Agent Agreement' herein.
CALCULATION AGENT......................... Lehman Brothers Special Financing Inc. will serve as calculation
agent (the 'Calculation Agent') for the Trust in connection with
the Swap Agreement. Under certain circumstances, Lehman Brothers
Special Financing Inc. may be removed as Calculation Agent by the
Indenture Trustee or the Swap Guarantor. See 'The Swap
Agreement--The Calculation Agent' herein.
SWAP AGREEMENT............................ On the Closing Date the Trust will enter into the Swap Agreement with
the Swap Counterparty. Pursuant to the Swap Agreement, the amounts
due to the Trust will be computed to match the amounts payable to
the holders of the Class A1 Notes and the Class A2 Certificates in
respect of interest on each Payment Date and principal on and after
the Principal Commencement Date. The amounts due to the Swap
Counterparty will be computed to match all amounts received as
distributions of interest on the CABS and on any Eligible
Investments and the proceeds from the sale of the CABS and any
Eligible Investments in respect of each Payment Date on which
principal is payable.
On any date on which interest is received on the CABS or any
Eligibile Investments, the Trust will be required to pay such
amounts to the Swap Counterparty. On each Payment Date the Swap
Counterparty will be required to pay to the Trust an amount equal
to all interest due on such Payment Date in respect of the
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Class A1 Notes and the Class A2 Certificates. On each Payment Date
after the Principal Commencement Date, in addition to the payments
by the Trust and the Swap Counterparty in respect of interest due
on the Class A1 Notes and the Class A2 Certificates, the Trust will
pay to the Swap Counterparty an amount equal to all proceeds
received from the sale of those CABS and Eligible Investments being
sold in respect of such Payment Date and the Swap Counterparty will
pay to the Trust an amount equal to the Pay Down Amount in respect
of the Class A1 Notes and the Class A2 Certificates for such
Payment Date.
Upon a Swap Counterparty Replacement Event, the Swap Guarantor will,
to the extent practicable, replace the Swap Counterparty with
another Swap Counterparty (which may be the Swap Guarantor or any
affiliate thereof); provided that such replacement will not result
in a reduction or withdrawal of the ratings assigned to the Class
A1 Notes or the Class A2 Certificates and certain other criteria
are satisfied. Upon such replacement, the Trust will assign its
rights under and in respect of the original Swap Agreement to the
Swap Guarantor. A 'Swap Counterparty Replacement Event' includes,
among other events (i) a failure of the Swap Counterparty to pay
required amounts under the Swap Agreement, (ii) the bankruptcy or
insolvency of the Swap Counterparty, (iii) a failure of the Swap
Counterparty to provide sufficient collateral under collateral
arrangements in respect of the Swap Agreement and certain other
swap agreements it enters into from time to time which are insured
by the Swap Guarantor and (iv) certain events of illegality and
certain tax events.
SWAP COUNTERPARTY......................... The Swap Counterparty will be Lehman Brothers Special Financing Inc.
('LBSF'). Its executive office is at Three World Financial Center,
New York, New York 10285. Upon a Swap Counterparty Replacement
Event, LBSF (or any successor Swap Counterparty) will be replaced
by the Swap Guarantor as described herein under 'The Swap
Agreement.'
SWAP GUARANTOR............................ The Swap Guarantor will be Ambac Assurance Corporation ('Ambac'). Its
executive office is at One State Street Plaza, New York, New York
10004.
CALCULATION OF LIBOR...................... LIBOR applicable to the calculation of the interest rate on the Class
A2 Certificates in respect of a Payment Date shall be equal to the
rate of one month deposits in United States dollars which appears
on Telerate Page 3750 as of 11:00 a.m., London time, on the related
LIBOR Determination Date. On September , 1997, the Calculation
Agent will determine LIBOR for the period from the Closing Date to
October 25, 1997. Thereafter, the Indenture Trustee will determine
LIBOR on the second Business Day prior to the Payment Date on which
such Interest Accrual Period commences (each, a 'LIBOR
Determination Date').
The LIBOR applicable to the CABS is described under 'Description of
the CABS' herein.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............................ In the opinion of Brown & Wood LLP, for federal income tax purposes,
the Trust will not be an association or publicly traded
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
partnership taxable as a corporation and the Class A1 Notes will be
treated as debt. Each Class A1 Noteholder by the acceptance of a
Class A1 Note will agree to treat the Class A1 Notes as
indebtedness for federal, state and local income and franchise tax
purposes. See 'Certain Federal Income Tax Consequences' and 'State
Tax Consequences' herein.
ERISA..................................... Generally, plans that are subject to the requirements of ERISA and
the Code are permitted to purchase instruments like the Class A1
Notes that are debt under applicable state law and have no
'substantial equity features' without reference to the prohibited
transaction requirements of ERISA and the Code. In the opinion of
Brown & Wood LLP, the Class A1 Notes will be classified as
indebtedness without substantial equity features for ERISA
purposes. However, if the Class A1 Notes are deemed to be equity
interests and no statutory, regulatory or administrative exemption
applies, the Trust will hold plan assets by reason of a Plan's
investment in the Class A1 Notes. Accordingly, any Plan fiduciary
considering whether to purchase the Class A1 Notes on behalf of a
Plan should consult with its counsel regarding the applicability of
the provisions of ERISA and the Code and the availability of any
exemptions.
RATING.................................... It is a condition to the issuance of the Class A1 Notes and the Class
A2 Certificates that the Class A1 Notes be rated 'Aaa' by Moody's
Investor's Service, Inc. ('Moody's') and 'AAA' by Standard & Poor's
Rating Services, a division of The McGraw-Hill Companies, Inc.
('S&P'), and that the Class A2 Certificates be rated 'Aa2' by
Moody's and 'AAA' by S&P. There is no assurance that such rating
will continue for any period of time or that it will not be revised
or withdrawn entirely by such rating agency if, in its judgment,
circumstances (including, without limitation, the rating of the
Swap Counterparty or the Swap Guarantor) so warrant. A revision or
withdrawal of such rating may have an adverse effect on the market
price of the Securities. A security rating is not a recommendation
to buy, sell or hold securities.
</TABLE>
S-10
<PAGE>
RISK FACTORS
Limited Liquidity. There is currently no secondary market for the Class A1
Notes. Lehman Brothers Inc. currently intends to make a market from time to time
in the Class A1 Notes but is under no obligation to do so. There can be no
assurance that a secondary market will develop in the Class A1 Notes or, if a
secondary market does develop, that it will provide holders of the Class A1
Notes with liquidity of investment or will continue for the life of the Class A1
Notes.
Trust's Relationship to the Depositor. The Depositor is not obligated to
make any payments in respect of the Class A1 Notes, the Class A2 Certificates or
the CABS.
Substitution of the CABS. If, at any time, a CABS Early Amortization Event
occurs with respect to any of the CABS, the Indenture Trustee shall retain all
distributions received on such CABS and shall direct the Market Agent to use
such proceeds to purchase new CABS or other Eligible Investments meeting certain
guidelines (as set forth under 'Description of the CABS--CABS Early Amortization
Event' herein). Since all of the CABS are issued by First USA Credit Card Master
Trust, a CABS Early Amortization Event of one series of CABS may result in the
liquidation of all series of CABS. The Market Agent's ability to substitute the
outstanding principal balance of all CABS with new CABS or Eligible Investments
that satisfy the guidelines set forth herein may be limited due to market
conditions at such time.
The Swap Agreement. The purchase of the Class A1 Notes involves risks
associated with the Swap Agreement, the Swap Counterparty and the Swap
Guarantor. To the extent provided in the Swap Agreement, investors in the Class
A1 Notes will be relying on the Swap Counterparty and the Swap Guarantor as a
source of payments on the Class A1 Notes.
On each Solicitation Date, the Indenture Trustee will direct the Market
Agent to sell the CABS or Eligible Investments to the highest bidder of not less
than three solicited bidders for such CABS or Eligible Investments. Such bidders
may include Lehman Brothers Inc., the Swap Counterparty, the Swap Guarantor, or
their respective affiliates; provided, however, that the Swap Counterparty, the
Swap Guarantor, Lehman Brothers Inc. and their respective affiliates will not be
obligated to bid. Bidders need not be limited to recognized broker-dealers.
Upon a Swap Counterparty Replacement Event, the Swap Guarantor, to the
extent practicable, will replace LBSF with another Swap Counterparty (which may
be the Swap Guarantor); provided that such replacement will not result in a
reduction or withdrawal of the ratings assigned to the Class A1 Notes or the
Class A2 Certificates and certain other criteria are satisfied. Upon such
replacement, the Trust will assign its rights under and in respect of the
original Swap Agreement to the Swap Guarantor. In addition, such replacement of
the Swap Counterparty by the Swap Guarantor will also cause the automatic
replacement of the Calculation Agent with the new Swap Counterparty or its
designee, and will also permit the Swap Counterparty to appoint a new Market
Agent so long as such appointment would not cause a reduction or withdrawal of
the ratings on the Class A1 Notes or the Class A2 Certificates and certain other
criteria are satisfied.
Effect of Prepayment Calculation Table. The PSA Index Rate and the
Prepayment Calculation Table will determine the rate of prepayment of the Class
A1 Notes and the Class A2 Certificates. As illustrated in the Prepayment
Calculation Table, if the PSA Index Rate for any month is equal to or less than
125, the Monthly Amortization Rate for such month will be 0.118%. At PSA Index
Rates above 125, the corresponding Monthly Amortization Rates will increase. If
the PSA Index Rate for any month is equal to or greater than 750, the Monthly
Amortization Rate for such month will be 100%.
Yield Considerations. The yield to maturity for each of the Class A1 Notes
and the Class A2 Certificates will depend upon the purchase price thereof, the
effect of the Prepayment Calculation Table and the actual characteristics of the
mortgage loans underlying the Reference Collateral Pool (the 'Base Mortgage
Loans'). Generally, if the actual rate of prepayments on the Base Mortgage Loans
is slower than the rate anticipated by an investor who purchased Class A1 Notes
at a discount, the actual yield to such investor may be lower than such
investor's anticipated yield. If the actual rate of prepayments on the Base
Mortgage Loans is faster than the rate anticipated by an investor who purchased
Class A1 Notes at a premium, the actual yield to such investor also may be lower
than such investor's anticipated yield. As described above, variations in the
rate of prepayment of the Class A1 Notes may be significant.
The timing of changes in the rate of principal prepayments on the Base
Mortgage Loans (and, thus, the rate of prepayment of the Class A1 Notes and the
Class A2 Certificates) also may significantly affect the yield to an
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<PAGE>
investor, even if the average rate of principal prepayments is consistent with
such investor's expectations. In general, the earlier the payment of principal,
the greater the effect on an investor's yield to maturity. Investors must make
their own decisions as to the appropriate assumptions, including payment
assumptions, to be used in deciding whether to purchase the Class A1 Notes. See
'Risk Factors--Effect of Prepayment Calculation Table' above.
Reinvestment Risk. As described herein, the rate of prepayment of the Class
A1 Notes depends on a number of factors, including the PSA Index Rate (which in
turn reflects the rate of prepayments on the Reference Collateral Pool) and the
effect of the Prepayment Calculation Table. Accordingly, it is not possible to
predict the rate at which principal of the Class A1 Notes will be paid.
Moreover, since prevailing interest rates are subject to fluctuation, there can
be no assurance that investors in the Class A1 Notes will be able to reinvest
the payments thereon at yields equaling or exceeding the yield on such Class A1
Notes. It is possible that yields on such reinvestments will be lower, and may
be significantly lower, than the yield on the Class A1 Notes. Investors in the
Class A1 Notes should consider the related reinvestment risk in light of other
investments that may be available to such investors.
Prepayment Considerations and Risks Relating to the Reference Collateral
Pool. The rate of principal prepayments on the Reference Collateral Pool (as
reflected in the PSA Index Rate) will include prepayments and liquidations
resulting from default, casualty or condemnation and payments made pursuant to
any guaranty of payment by, or option to repurchase of, the Federal Home Loan
Mortgage Corporation ('FHLMC'). In general, when the level of prevailing
interest rates declines sufficiently relative to the interest rates on fixed
rate mortgage loans, the rate of prepayment is likely to increase, although the
prepayment rate is influenced by a number of other factors, including general
economic conditions and homeowner mobility. Based upon published information,
the rate of prepayments on 30-year single-family mortgage loans has fluctuated
significantly in recent years.
Acceleration of mortgage payments as a result of transfers of the mortgaged
property is another factor affecting prepayment rates. The FHLMC Participation
Certificates Offering Circular indicates under 'Mortgage Purchase and Servicing
Standards--Mortgage Servicing--Assumption and Due-on-Transfer Policies' therein
that most of the mortgage loans that FHLMC purchases contain 'due-on-transfer'
clauses permitting automatic acceleration upon a transfer of the mortgaged
property or an interest therein regardless of the creditworthiness of the
transferee. The FHLMC Participation Certificates Offering Circular also
indicates that, except in the case of certain types of transfers described
therein, FHLMC generally requires its servicers to enforce such due-on-transfer
clauses and to demand full payment of the remaining Principal Amount of the
related mortgage to the extent permitted under the securities instrument and
state and federal law.
Potential Conflicts of Interests. The Calculation Agent is the Swap
Counterparty and, accordingly, potential conflicts of interest may exist between
the Swap Counterparty and the holders of Class A1 Notes. The Swap Counterparty
is obligated to carry out its duties and functions as Calculation Agent in good
faith and using its reasonable judgment.
Rating of the Securities. It is a condition to the issuance and sale of the
Securities that the Class A1 Notes be rated 'Aaa' by Moody's and 'AAA' by S&P
and that the Class A2 Certificates be rated 'Aa2' by Moody's and 'AAA' by S&P. 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. The ratings address the likelihood of the receipt of distributions due
on the Securities pursuant to their terms. However, the Rating Agencies do not
evaluate, and the ratings of the Securities do not address, the possibility that
investors may receive a lower yield than anticipated. There can be no assurance
that a rating will remain 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.
THE TRUST
GENERAL
The Issuer, Mortgage Index Amortization Trust 1997-1, 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. The Trust
Agreement constitutes the 'governing instrument' under the laws of the State of
Delaware relating to
S-12
<PAGE>
business trusts. After its formation, the Issuer will not engage in any activity
other than (i) acquiring, holding and managing the CABS and the other assets of
the Trust and proceeds therefrom, (ii) issuing the Class A1 Notes and the Class
A2 Certificates, (iii) making payments on the Class A1 Notes and the Class A2
Certificates, (iv) entering into the Swap Agreement and any replacement Swap
Agreement and (v) engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or connected
therewith.
The Trust's principal offices are in Wilmington, Delaware in care of
Wilmington Trust Company as Owner Trustee, at the address listed below under
'The Owner Trustee.'
DESCRIPTION OF THE CLASS A1 NOTES
GENERAL
The Class A1 Notes will be issued pursuant to the Indenture dated as of
September 1, 1997, among the Trust, The Bank of New York, as Indenture Trustee
and the Swap Counterparty. The Depositor will provide a copy of the Indenture to
prospective investors without charge upon request.
The following summaries describe certain terms of the Class A1 Notes and
the Indenture. The summaries do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the provisions of the
Indenture. Wherever particular defined terms of the Indenture are referred to,
such defined terms are thereby incorporated herein by reference. See 'The
Indenture' herein for a summary of additional terms of the Indenture.
The Class A1 Notes will be issued in book-entry form only ('Book-Entry
Notes'). The Class A1 Notes will be issued in minimum denominations of $100,000
and integral multiples of $1,000 in excess thereof. See 'The
Indenture--Book-Entry Notes' herein.
PAYMENTS ON CLASS A1 NOTES
Payments on the Class A1 Notes, as described below, will be made by the
Indenture Trustee on each Payment Date. Payments to each Class A1 Noteholder
holding through DTC will be made through the facilities of DTC to an account
specified in writing by such holder as of the preceding Record Date or in such
other manner as may be agreed to by the Indenture Trustee and such holder. The
final payment in retirement of a Class A1 Note will be made only upon surrender
of the Class A1 Note to the Indenture Trustee at the office thereof specified in
the notice to Class A1 Noteholders of such final payment. Notice will be mailed
prior to the Payment Date on which the final payment of principal and interest
on a Class A1 Note is expected to be made to the holder thereof.
PAYMENTS OF INTEREST
Interest on the Principal Amount of the Class A1 Notes will accrue at a
rate per annum equal to % (the 'Class A1 Accrual Rate') and will be payable
monthly on each Payment Date.
Interest in respect of a Payment Date will accrue on the outstanding
principal of the Class A1 Notes during the preceding Interest Accrual Period
relating to such Payment Date.
Except for payments made pursuant to the Swap Agreement described below,
interest payments on the Class A1 Notes will be funded from the collections of
interest on the CABS, and on Eligible Investments, if any, on such date.
Interest on the CABS is payable on the 17th day of each month except for First
USA Credit Card Master Trust, Series 1996-4 which is payable on the tenth day of
each month or, if such day is not a Business Day, the next succeeding Business
Day. Interest on any Eligible Investments will be payable based on the terms of
each of the Eligible Investments. If interest collections on the CABS, and on
Eligible Investments, if any, plus amounts received with respect to the Swap
Agreement are not sufficient to pay the interest due on the Class A1 Notes for
any Payment Date and such default continues for five Business Days, an Event of
Default will occur in respect of the Class A1 Notes.
PAYMENTS OF PRINCIPAL
No principal is scheduled to be payable to the Class A1 Noteholders until
the September 1999 Payment Date (the 'Principal Commencement Date'). However, if
an Event of Default occurs under the Indenture, the
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<PAGE>
Indenture Trustee or the holders of the Securities may declare the Class A1
Notes due and payable as further described in 'The Indenture--Events of Default;
Rights Under Events of Default' herein.
Beginning on the Principal Commencement Date and on each Payment Date
thereafter until the Principal Amount of the Class A1 Notes has been paid in
full, Noteholders will receive a monthly principal payment (each, a 'Note
Amortization Amount') calculated as described below. Five Business Days days
prior to each Payment Date, the Calculation Agent will determine the aggregate
monthly amortization amount for the Class A1 Notes and for the Class A2
Certificates, which is the sum of the Note Amortization Amount and the
Certificate Amortization Amount for such Payment Date (the 'Pay Down Amount').
The Note Amortization Amount for a Payment Date will equal the product of (i)
the percentage (the 'Monthly Amortization Rate') that corresponds on the
'Prepayment Calculation Table' with the PSA Index Rate for such Payment Date and
(ii) the Principal Amount of the Class A1 Notes, before giving effect to any
payment of principal to Class A1 Noteholders on such Payment Date, rounded to
the nearest $1,000.
Upon the determination of a Pay Down Amount, the Market Agent, on behalf of
the Indenture Trustee, will sell CABS and Eligible Investments, if any, in a
combined amount equal to the Pay Down Amount. The CABS and any Eligible
Investments will be sold in accordance with the Sale Procedures (as defined
below) and in the following order of priority: (i) the CABS and Eligible
Investments with the earliest maturity will be sold first and the remaining CABS
and Eligible Investments will be sold in order of their maturity (such order of
priority, the 'CABS Amortization Schedule'). Pursuant to the Swap Agreement, the
Swap Counterparty will be required to pay to the Trust an amount equal to the
Pay Down Amount and the Sale Proceeds will be paid to the Swap Counterparty. See
'Description of the CABS--CABS Early Amortization Event' and 'The Swap
Agreement' herein.
'Sale Procedures' means that on the Solicitation Date the Indenture
Trustee, on behalf of the Issuer, will direct the Market Agent to sell the CABS
and Eligible Investments, if any, to the highest bidder of not less than three
solicited bidders for such CABS and Eligible Investments. The bidders may
include Lehman Brothers Inc., the Swap Counterparty, the Swap Guarantor or their
respective affiliates, provided however, that Lehman Brothers Inc., the Swap
Counterparty, the Swap Guarantor, and their respective affiliates are not
obligated to bid and the bidders need not be limited to recognized
broker-dealers. No assurance can be given as to whether the Market Agent will be
successful in soliciting bids to purchase the CABS and Eligible Investments, if
any.
On the Final Scheduled Payment Date, to the extent not previously paid, the
Principal Amount of the Class A1 Notes will be due and payable. On such date the
Indenture Trustee will sell the remaining CABS and Eligible Investments in
accordance with the Sale Procedures and the Swap Agreement.
CREDIT LOSS
In the event that a CABS Early Amortization Event occurs with respect to
any of the CABS and the Trust receives proceeds from the CABS in an amount that
is less than the Face Amount of such CABS (a 'Credit Loss'), the Face Amount of
the Class A2 Certificates will be reduced pro rata by the amount of such Credit
Loss until it is reduced to zero. In the event that such Credit Loss is greater
than the Face Amount of the Class A2 Certificates, then the Principal Amount of
the Class A1 Notes will be reduced pro rata by any remaining amount of such
Credit Loss.
MANDATORY PREPAYMENT
The Issuer will be required to prepay the entire remaining Principal Amount
of Class A1 Notes and Face Amount of Class A2 Certificates on any Payment Date
on which the Principal Amount of the Class A1 Notes is less than or equal to 10%
of the original principal amount of the Class A1 Notes. On such Payment Date the
Class A1 Notes and Class A2 Certificates will be prepaid at a price equal to
100% of their outstanding principal amounts plus all accrued interest thereon.
TERMINATION
All obligations of the Depositor and the Indenture Trustee created by the
Indenture will terminate upon the payment to Noteholders, Certificateholders,
the Swap Counterparty and the Swap Guarantor of all amounts required to be paid
to them pursuant to the Indenture.
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<PAGE>
CALCULATION OF THE PAY DOWN AMOUNT
As described herein, commencing on the Principal Commencement Date and on
each Payment Date thereafter until the Class A1 Notes and the Class A2
Certificates are paid in full, the Issuer will prepay a portion of the Principal
Amount of each of the Class A1 Notes and the Face Amount of each of the Class A2
Certificates on the basis of the calculation of the aggregate Pay Down Amount
for such Payment Date, which includes the Note Amortization Amount, which is the
amount applied on any Payment Date to prepay Class A1 Notes, and the Certificate
Amortization Amount, which is the amount applied to prepay the Class A2
Certificates. The Principal Amount of Class A1 Notes and the Face Amount of
Class A2 Certificates prepaid on any Payment Date will vary based on the Monthly
Amortization Rate, the monthly prepayment rate specified in the Prepayment
Calculation Table that corresponds to the PSA Index Rate for such month. The PSA
Index Rate for any month reflects the rate of reduction in aggregate principal
amount of outstanding 30 year Federal Home Loan Mortgage Corporation ('FHLMC')
8% mortgage participation certificates issued in calendar year 1996 (the
'Reference Collateral Pool').
PREPAYMENT CALCULATION TABLE
<TABLE>
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
0-125 0.118%
126 0.174
127 0.229
128 0.285
129 0.341
130 0.396
131 0.452
132 0.508
133 0.563
134 0.619
135 0.675
136 0.730
137 0.786
138 0.842
139 0.897
140 0.953
141 1.009
142 1.064
143 1.120
144 1.176
145 1.231
146 1.287
147 1.343
148 1.398
149 1.454
150 1.510
151 1.565
152 1.621
153 1.677
154 1.732
155 1.788
156 1.805
157 1.821
158 1.838
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
159 1.854%
160 1.871
161 1.888
162 1.904
163 1.921
164 1.938
165 1.954
166 1.971
167 1.987
168 2.004
169 2.021
170 2.037
171 2.054
172 2.071
173 2.087
174 2.104
175 2.120
176 2.137
177 2.154
178 2.170
179 2.187
180 2.204
181 2.220
182 2.237
183 2.253
184 2.270
185 2.287
186 2.303
187 2.320
188 2.337
189 2.353
190 2.370
191 2.386
192 2.403
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
193 2.420%
194 2.436
195 2.453
196 2.470
197 2.486
198 2.503
199 2.519
200 2.536
201 2.556
202 2.576
203 2.596
204 2.616
205 2.637
206 2.657
207 2.677
208 2.697
209 2.717
210 2.737
211 2.757
212 2.777
213 2.797
214 2.817
215 2.838
216 2.858
217 2.878
218 2.898
219 2.918
220 2.938
221 2.958
222 2.978
223 2.998
224 3.018
225 3.039
226 3.059
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
227 3.079%
228 3.099
229 3.119
230 3.139
231 3.159
232 3.179
233 3.199
234 3.219
235 3.240
236 3.260
237 3.280
238 3.300
239 3.320
240 3.340
241 3.360
242 3.380
243 3.400
244 3.420
245 3.441
246 3.461
247 3.481
248 3.501
249 3.521
250-400 3.541
401 3.575
402 3.609
403 3.643
404 3.677
405 3.711
406 3.745
407 3.779
408 3.813
409 3.847
410 3.881
411 3.915
412 3.949
413 3.983
414 4.017
415 4.051
416 4.085
417 4.119
418 4.153
419 4.187
420 4.221
421 4.255
422 4.289
423 4.323
424 4.357
425 4.392
426 4.426
427 4.460
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
428 4.494%
429 4.528
430 4.562
431 4.596
432 4.630
433 4.664
434 4.698
435 4.732
436 4.766
437 4.800
438 4.834
439 4.868
440 4.902
441 4.936
442 4.970
443 5.004
444 5.038
445 5.072
446 5.106
447 5.140
448 5.174
449 5.208
450 5.242
451 5.276
452 5.310
453 5.344
454 5.378
455 5.412
456 5.446
457 5.480
458 5.514
459 5.548
460 5.582
461 5.616
462 5.650
463 5.684
464 5.718
465 5.752
466 5.786
467 5.820
468 5.854
469 5.888
470 5.922
471 5.956
472 5.990
473 6.024
474 6.058
475 6.093
476 6.127
477 6.161
478 6.195
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
479 6.229%
480 6.263
481 6.297
482 6.331
483 6.365
484 6.399
485 6.433
486 6.467
487 6.501
488 6.535
489 6.569
490 6.603
491 6.637
492 6.671
493 6.705
494 6.739
495 6.773
496 6.807
497 6.841
498 6.875
499 6.909
500 6.943
501 7.315
502 7.687
503 8.060
504 8.432
505 8.804
506 9.176
507 9.549
508 9.921
509 10.293
510 10.665
511 11.038
512 11.410
513 11.782
514 12.154
515 12.526
516 12.899
517 13.271
518 13.643
519 14.015
520 14.388
521 14.760
522 15.132
523 15.504
524 15.876
525 16.249
526 16.621
527 16.993
528 17.365
529 17.738
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
530 18.110%
531 18.482
532 18.854
533 19.227
534 19.599
535 19.971
536 20.343
537 20.715
538 21.088
539 21.460
540 21.832
541 22.204
542 22.577
543 22.949
544 23.321
545 23.693
546 24.065
547 24.438
548 24.810
549 25.182
550 25.554
551 25.927
552 26.299
553 26.671
554 27.043
555 27.416
556 27.788
557 28.160
558 28.532
559 28.904
560 29.277
561 29.649
562 30.021
563 30.393
564 30.766
565 31.138
566 31.510
567 31.882
568 32.255
569 32.627
570 32.999
571 33.371
572 33.743
573 34.116
574 34.488
575 34.860
576 35.232
577 35.605
578 35.977
579 36.349
580 36.721
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
581 37.093%
582 37.466
583 37.838
584 38.210
585 38.582
586 38.955
587 39.327
588 39.699
589 40.071
590 40.444
591 40.816
592 41.188
593 41.560
594 41.932
595 42.305
596 42.677
597 43.049
598 43.421
599 43.794
600 44.166
601 44.538
602 44.910
603 45.282
604 45.655
605 46.027
606 46.399
607 46.771
608 47.144
609 47.516
610 47.888
611 48.260
612 48.633
613 49.005
614 49.377
615 49.749
616 50.121
617 50.494
618 50.866
619 51.238
620 51.610
621 51.983
622 52.355
623 52.727
624 53.099
625 53.472
626 53.844
627 54.216
628 54.588
629 54.960
630 55.333
631 55.705
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
632 56.077%
633 56.449
634 56.822
635 57.194
636 57.566
637 57.938
638 58.310
639 58.683
640 59.055
641 59.427
642 59.799
643 60.172
644 60.544
645 60.916
646 61.288
647 61.661
648 62.033
649 62.405
650 62.777
651 63.149
652 63.522
653 63.894
654 64.266
655 64.638
656 65.011
657 65.383
658 65.755
659 66.127
660 66.499
661 66.872
662 67.244
663 67.616
664 67.988
665 68.361
666 68.733
667 69.105
668 69.477
669 69.850
670 70.222
671 70.594
672 70.966
673 71.338
674 71.711
675 72.083
676 72.455
677 72.827
678 73.200
679 73.572
680 73.944
681 74.316
682 74.688
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
683 75.061%
684 75.433
685 75.805
686 76.177
687 76.550
688 76.922
689 77.294
690 77.666
691 78.039
692 78.411
693 78.783
694 79.155
695 79.527
696 79.900
697 80.272
698 80.644
699 81.016
700 81.389
701 81.761
702 82.133
703 82.505
704 82.878
705 83.250
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
706 83.622%
707 83.994
708 84.366
709 84.739
710 85.111
711 85.483
712 85.855
713 86.228
714 86.600
715 86.972
716 87.344
717 87.716
718 88.089
719 88.461
720 88.833
721 89.205
722 89.578
723 89.950
724 90.322
725 90.694
726 91.067
727 91.439
728 91.811
<CAPTION>
PSA MONTHLY
INDEX AMORTIZATION
RATE RATE
- ---------- ------------
<S> <C>
729 92.183%
730 92.555
731 92.928
732 93.300
733 93.672
734 94.044
735 94.417
736 94.789
737 95.161
738 95.533
739 95.905
740 96.278
741 96.650
742 97.022
743 97.394
744 97.767
745 98.139
746 98.511
747 98.883
748 99.256
749 99.628
750 and up 100.000
</TABLE>
The 'PSA Index Rate' means, with respect to any Payment Date (in the
following order of priority):
(i) the rate that appears as of 3:00 p.m. (New York City time) on the
related Prepayment Determination Date (as defined below) on the Reference
Bloomberg Page (as defined below) under the column heading '1 MO' opposite
the row 'PSA';
(ii) if such rate does not appear on the Reference Bloomberg Page as
of 3:00 p.m. (New York City time) on such Prepayment Determination Date,
the Calculation Agent (as defined below) will request FHMLC to provide a
quotation of the monthly prepayment speed (calculated according to the PSA
Standard Prepayment Model (as defined below)) for the Reference Collateral
Pool for the applicable month. If FHMLC provides such quotation, the PSA
Index Rate will be the quotation provided by FHMLC;
(iii) if the Calculation Agent determines that FHMLC has not provided
such quotation by 5:00 p.m. on the second Business Day following such
Prepayment Determination Date, the Calculation Agent will request five
major securities dealers selected by the Calculation Agent to provide a
quotation of the monthly prepayment speed (calculated according to the PSA
Standard Prepayment Model) for the Reference Collateral Pool for the
applicable month. If only one quotation is so provided, the PSA Index Rate
will be the quotation so provided. If two or three such quotations are so
provided, then the PSA Index Rate will be the arithmetic mean of such
quotations (rounded to the nearest whole integer) as determined by the
Calculation Agent. If four or five such quotations are provided, the
highest quotation (or, in the event of equality, one of the highest) and
lowest quotation (or, in the event of equality, one of the lowest) will be
eliminated and the PSA Index Rate will be the arithmetic mean (rounded to
the nearest whole integer) of the remaining quotations as determined by the
Calculation Agent; and
S-18
<PAGE>
(iv) if no such quotation is provided as requested in clause (iii)
above, then the PSA Index Rate will be the PSA Index Rate determined with
respect to the Payment Date preceding the applicable Distribution Date (or,
in the case of the first Payment Date, the monthly prepayment speed
(calculated according to the PSA Standard Prepayment Model) for the
Reference Collateral Pool obtained from the sources specified in clauses
(i)-(iii) above, in that order, with respect to the most recent month for
which such information is available.
'Reference Bloomberg Page' means the display designated as page 'FMAC A017'
and titled 'Reference Collateral 30-year 8.00, Issued in 1996' (or such other
page selected by the Calculation Agent as may replace page FMAC A017 for the
purpose of displaying the monthly prepayment speed (calculated based on the PSA
Standard Prepayment Model) for the Reference Collateral Pool) on the Bloomberg
Financial Markets Service (or such other service selected by the Calculation
Agent as may replace such service).
'PSA Standard Prepayment Model' or 'PSA' means the methodology set forth
under 'Mortgage Prepayment Models--The PSA Standard Prepayment Model' in the
'Uniform Practices for the Clearance and Settlement of Mortgage-Backed
Securities and Other Related Securities of the Public Securities Association'.
The 'Prepayment Determination Date' for any Payment Date on which a payment
of principal on the Class A1 Notes is due will be the fourth Business Day of the
month in which such Payment Date occurs. The Calculation Agent will notify the
Indenture Trustee of the PSA Index Rate for each Payment Date promptly after its
determination hereof.
The calculation of the PSA Index Rate, which involves numerous mortgage
pools, may differ among dealers and other market participants, which differences
may be significant. The Calculation Agent reserves the right to determine
whether any modification in PSA methodology or in the timing or procedures
affecting publication or dissemination of the PSA prepayment rate for the
Reference Collateral Pool warrants an adjustment to the foregoing calculation
procedures, whereupon such procedures will be deemed to be amended as so
determined by the Calculation Agent; provided that no change in such procedures
will be effective without the written consent of the Swap Counterparty and the
Swap Guarantor.
The 'Calculation Agent' shall mean the Swap Counterparty under the Swap
Agreement.
HISTORICAL PSA INDEX RATES
The table below sets forth historical values of the PSA Index Rate for the
Reference Collateral Pool (the 30-year FHLMC 8% mortgage participation
certificates issued in calendar year 1996) since June 1997 as calculated by the
Underwriter:
<TABLE>
<S> <C>
June 1997.......................................................... 278
July 1997.......................................................... 275
August 1997........................................................ 306
</TABLE>
The text and table above are included solely for information purposes. It
is not intended to reflect the likely or anticipated prepayment experience of
the Reference Collateral Pool during any future periods. Investors must make
their own assumptions regarding the future prepayment experience of the
Reference Collateral Pool and the effect thereof on the rate of prepayment and
yield on the Class A1 Notes.
Certain Additional Information About the PSA Standard Prepayment
Model. Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used herein with respect to the Base
Mortgage Loans is the PSA Standard Prepayment Model. 100 PSA assumes prepayment
rates of 0.2% per annum of the then unpaid Principal Amount of such pool of
mortgage loans in the first month of the life of such mortgage loans and an
additional 0.2% per annum in each month thereafter until the 30th month.
Beginning in the 30th month and in each month thereafter during the life of such
mortgage loans, 100 PSA assumes a constant prepayment rate of 6% per annum.
Multiples may be calculated from this prepayment rate sequence. For example, 150
PSA assumes prepayment rates will be 0.3% per annum in the first month, 0.6% per
annum in the
S-19
<PAGE>
second month, and increasing by 0.3% in each succeeding month until reaching a
rate of 9% per annum in the 30th month and remaining constant at 9% per annum
thereafter. Similarly, 200 PSA assumes prepayment rates will be 0.4% per annum
in the first month, 0.8% per annum in the second month and increasing by 0.4% in
each succeeding month until reaching a rate of 12% per annum in the 30th month
and remaining constant at 12% per annum thereafter. 0 PSA assumes no
prepayments. Having the PSA Standard Prepayment Model as an industry standard
allows actual prepayment experiences of pools of mortgage loans to be expressed
by reference to such model.
PREPAYMENT AND ADDITIONAL STRUCTURING ASSUMPTIONS
AND DECREMENT TABLE
The following table indicates the percentage of original principal amount
of the Class A1 Notes that would be outstanding after each of the dates shown at
various PSA Index Rates after application of the Prepayment Table and the
corresponding weighted average life of the Class A1 Notes. The table has been
prepared on the basis of the Additional Structuring Assumptions (as defined
below). However, the Base Mortgage Loans will not necessarily have the
characteristics assumed; nor are the Base Mortgage Loans likely to prepay at a
constant percentage of PSA. Moreover, diverse remaining terms to maturity of the
Base Mortgage Loans could produce slower or faster principal payments than
indicated in the table at the specified PSA Index Rates, even if the weighted
average maturity of the Base Mortgage Loans is identical to the weighted average
maturity specified in the Additional Structuring Assumptions.
Unless otherwise specified, the information in the following table has been
prepared on the basis of the following assumptions (such assumptions, the
'Additional Structuring Assumptions'):
-- the Base Mortgage Loans prepay at the PSA Index Rates specified in
the related table;
-- the issue date for the Class A1 Notes and Class A2 Certificates is
September 25, 1997;
-- the first distribution of principal on the Class A1 Notes and the
Class A2 Certificates occurs on September 25, 1999.
PERCENT OF ORIGINAL PRINCIPAL AMOUNT OF CLASS A1 NOTES OUTSTANDING
<TABLE>
<CAPTION>
125 PSA 155 PSA 200 PSA 250 PSA 400 PSA 500 PSA 750 PSA
DATE INDEX RATE INDEX RATE INDEX RATE INDEX RATE INDEX RATE INDEX RATE INDEX RATE
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
September 25, 1997............. 100 100 100 100 100 100 100
September 25, 1998............. 100 100 100 100 100 100 100
September 25, 1999............. 100 98 97 96 96 93 0
September 25, 2000............. 98 79 72 63 63 39 0
September 25, 2001............. 97 64 53 41 41 17 0
September 25, 2002............. 96 51 39 26 26 0 0
September 25, 2003............. 94 41 28 17 17 0 0
August 25, 2004................ 0 0 0 0 0 0 0
AVERAGE LIFE:.................. 6.75 5.00 4.50 4.00 4.00 3.00 2.00
</TABLE>
S-20
<PAGE>
DESCRIPTION OF THE CLASS A2 CERTIFICATES
GENERAL
The Class A2 Certificates will be issued pursuant to the Trust Agreement to
be dated as of September 1, 1997, between the Depositor and Wilmington Trust
Company, as Owner Trustee. The Depositor will provide a copy of the Trust
Agreement to prospective investors without charge upon request.
The following summaries describe certain terms of the Class A2 Certificates
and the Trust Agreement. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the Trust Agreement. Wherever particular defined terms of the Trust Agreement
are referred to, such defined terms are thereby incorporated herein by
reference. See 'The Trust Agreement' herein for a summary of additional terms of
the Trust Agreement. The Class A2 Certificates are not being offered hereby.
The Class A2 Certificates will be issued in book-entry form only
('Book-Entry Certificates'), subject to limited exceptions. The Class A2
Certificates will be issued in minimum denominations of $100,000 and integral
multiples of $1,000 in excess thereof and will not be eligible to be resold or
subdivided in units smaller than the minimum denomination for issuance; provided
that one Class A2 Certificate may be issued in such denomination as may be
necessary to represent the remainder of the aggregate amount of Class A2
Certificates.
DISTRIBUTIONS ON CLASS A2 CERTIFICATES
Pursuant to an administration agreement entered into between the Trust, the
Indenture Trustee, The Bank of New York as administrator (the 'Administrator')
and the Owner Trustee (the 'Administration Agreement'), distributions on the
Class A2 Certificates, as described below, will be made on behalf of the Owner
Trustee by the Administrator on the Payment Date to persons in whose names the
Class A2 Certificates are registered on the Record Date. The expected final
distribution in retirement of a Class A2 Certificate will be made only upon
surrender of the Class A2 Certificate to the Owner Trustee at the office thereof
specified in the notice to Class A2 Certificateholders of such final
distribution. Notice will be mailed prior to the Payment Date on which the
expected final distribution of principal and interest on a Class A2 Certificate
is expected to be made to the holder thereof.
DISTRIBUTIONS OF INTEREST
Interest on the Face Amount of the Class A2 Certificates will accrue at a
rate per annum equal to the Class A2 Accrual Rate and will be distributable
monthly on each Payment Date. The Indenture Trustee will determine LIBOR on each
LIBOR Determination Date based on the rate of one month deposits in United
States dollars appearing on Telerate Page 3750 as of 11:00 a.m. London time.
Interest in respect of a Payment Date will accrue on the Face Amount of the
Class A2 Certificates during the preceding Interest Accrual Period.
DISTRIBUTIONS OF PRINCIPAL
Principal will be distributed to the Class A2 Certificateholders beginning
on the Principal Commencement Date. However, if an Event of Default occurs under
the Indenture the Indenture Trustee or the holders of the Securities may declare
the Class A2 Certificates due and payable as further described in 'The
Indenture--Events of Default; Rights Under Events of Default' herein.
S-21
<PAGE>
SUBORDINATION
Distributions of interest and principal on the Class A2 Certificates will
be subordinated in priority of payment to the payment of interest and principal
due on the Class A1 Notes. Consequently, the Class A2 Certificateholders will
not receive any distributions of interest or principal on any date until the
full amounts due on the Class A1 Notes on such Payment Date are paid in full. In
addition, upon the occurrence of any Event of Default the holders of the Class
A1 Notes will receive all principal and interest owing to them before any
amounts are paid to the Class A2 Certificateholders.
DESCRIPTION OF THE CABS
The Depositor will acquire the CABS for deposit into the Trust from Lehman
Brothers Government Securities Inc. At the time of issuance of the Class A1
Notes and the Class A2 Certificates, the Depositor will cause the beneficial
interest in such CABS, which will be held in book-entry form through the
facilities of DTC, to be delivered to the Indenture Trustee's participant
account at DTC.
All distributions on the CABS will be remitted directly to an account (the
'Collection Account') to be established with the Indenture Trustee under the
Indenture on the Closing Date. The Indenture Trustee will hold such moneys
uninvested and without liability for interest thereon for the benefit of the
Securityholders and the Swap Counterparty.
The table below sets forth certain of the characteristics of the CABS. The
table does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the prospectuses pursuant to which the CABS were
offered and sold.
<TABLE>
<CAPTION>
DESCRIPTION OF THE CABS
----------------------------------------------------------------------------------------------
FIRST USA FIRST USA FIRST USA FIRST USA
CREDIT CARD CREDIT CARD CREDIT CARD CREDIT CARD
MASTER TRUST MASTER TRUST MASTER TRUST MASTER TRUST
ISSUER: SERIES 1997-5 SERIES 1997-2 SERIES 1997-1 SERIES 1996-4
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Principal Amount
Purchased by
Depositor............. $100,145,000 $50,000,000 $13,000,000 $94,590,000
Percentage of Total CABS
Purchased by the
Depositor............. 38.86% 19.40% 5.04% 36.70%
Transferor and
Servicer.............. First USA Bank First USA Bank First USA Bank First USA Bank
Trustee................. The Bank of New York The Bank of New York The Bank of New York The Bank of New York
(Delaware) (Delaware) (Delaware) (Delaware)
Designation............. Class A Floating Rate Class A Floating Rate Class A Floating Rate Class A Floating Rate
Asset Backed Asset Backed Asset Backed Asset Backed
Certificates, Series Certificates, Series Certificates, Series Certificates, Series
1997-5 1997-2 1997-1 1996-4
Initial Certificate
Amount................ $650,000,000 $500,000,000 $750,000,000 $500,000,000
Series Termination
Date.................. April 17, 2007 January 17, 2007 October 17, 2006 April 10, 2009
Certificate Rate........ One Month LIBOR* One Month LIBOR* One Month LIBOR* One Month LIBOR*
+ 0.14% + 0.13% + 0.10% + 0.19%
Payment Date............ 17th Business Day 17th Business Day 17th Business Day 10th Business Day
Commencement of
Principal Payment
Period................ August 17, 2004 May 17, 2004 February 17, 2004 August 10, 2006
Subordinated Amount..... $58,735,000 $45,180,000 $67,770,000 $45,180,000
Optional Repurchase
Percentage............ 5% 5% 5% 5%
Ratings................. Aaa/AAA Aaa/AAA Aaa/AAA Aaa/AAA
</TABLE>
- ------------------
* Telerate LIBOR
Certain information relating to the CABS filed by or on behalf of First USA
Credit Card Master Trust with the United States Securities Exchange Commission
(the 'Commission') can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W. Washington,
D.C. 20549, and
S-22
<PAGE>
at the following regional offices of the Commission: New York Regional Office,
Suite 1300, 7 World Trade Center, New York, New York 10048; Los Angeles Regional
Office, 5670 Wiltshire Boulevard, 11th Floor, Los Angeles, California 90036; and
Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Website that contains certain
information regarding the CABS. The address of the Commission's Website is
http://www.sec.gov.
CABS EARLY AMORTIZATION EVENT
A 'CABS Early Amortization Event' will occur if, at any time, a Rapid
Amoritization Period (as defined in the applicable Underlying Agreements)
commences with respect to any of the CABS. A Rapid Amortization Period will
commence if one or more of the following pay-out events occurs with respect to
the CABS (and, in certain cases, with the election of the trustee under the
CABS, or of holders of CABS representing 50% or more of the investor interest in
the affected series): (i) certain events of insolvency or receivership relating
to the transferor of the CABS (the 'CABS Transferor'), (ii) the First USA Credit
Card Master Trust becomes an 'investment company' within the meaning of the
Investment Company Act of 1940, as amended, (iii) failure of the CABS Transferor
to make payments or deposits in respect of the CABS, (iv) failure of the CABS
Transferor to perform in any material respect covenants or agreements in the
Underlying Agreements which failure has a material adverse affect on the holders
of the CABS and continues unremedied for 60 days or more after written notice
thereof, (v) a representation or warranty made by the CABS Transferor or any
information provided by the CABS Transferor relating to the identity of the
credit card accounts underlying the CABS is incorrect in any material respect
for 60 days or more after written notice thereof and this has a material adverse
affect on the holders of CABS, (vi) the average Portfolio Yield (as such term is
defined in the Underlying Agreements) for any three consecutive monthly periods
is less than the Base Rate (as such term is defined in the Underlying
Agreements) for such three monthly periods, (vii) the CABS Transferor fails to
convey receivables arising under Additional Accounts (as defined in the
Underlying Agreements) to the First USA Credit Card Master Trust as required by
the Underlying Agreements and (viii) any Servicer Default (as defined in the
Underlying Agreements) occurs which would have a material adverse affect on the
holders of the CABS.
If a CABS Early Amortization Event occurs, the Issuer will be required to
direct the Indenture Trustee to apply all the proceeds derived from the
amortization of such CABS to invest in Eligible Investments. Any such Eligible
Investments must: (i) have final maturities that are the same as, or prior to,
the Maturity Date and (ii) have outstanding principal amounts in the aggregate
at least equal to that of the CABS being replaced.
To the extent that such CABS are due to be sold pursuant to the CABS
Amortization Schedule, the Indenture Trustee shall reorder the CABS Amortization
Schedule and will first sell other CABS. See 'Description of the Class A1
Notes--Payments of Principal' herein.
THE DEPOSITOR
Lehman ABS Corporation (the 'Depositor') was incorporated in the State of
Delaware on January 29, 1988. As of January 4, 1993, the Depositor is a wholly
owned, special purpose subsidiary of Lehman Commercial Paper Inc. ('LCPI'),
which is itself a wholly owned subsidiary of Lehman Brothers Inc. ('Lehman
Brothers'), which is a wholly owned subsidiary of Lehman Brothers Holdings Inc.
('Holdings'). None of Lehman Brothers, LCPI, Holdings or the Depositor, nor any
affiliate of the foregoing, has guaranteed or is otherwise obligated with
respect to the Class A1 Notes or the Class A2 Certificates.
The principal executive offices of the Depositor are located at 200 Vesey
Street, Three World Financial Center, New York, New York 10285 (Telephone: (212)
526-7000). See 'The Depositor' in the Prospectus.
THE INDENTURE
The following summary describes certain terms of the Indenture. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Indenture. Whenever particular sections
or defined terms of the Indenture are referred to, such sections or defined
terms are thereby
S-23
<PAGE>
incorporated herein by reference. See 'Description of the Class A1 Notes' herein
for a summary of certain additional terms of the Indenture.
BOOK-ENTRY NOTES
The Book-Entry Notes will be issued in one or more global notes which equal
the aggregate initial principal balance of the Class A1 Notes and which will be
held by a nominee of The Depository Trust Company (together with any successor
depository selected by the Depositor, the 'Depository'). Beneficial interests in
the Book-Entry Notes will be held indirectly by investors through the book-entry
facilities of the Depository, as described herein. Investors may hold such
beneficial interests in the Book-Entry Notes in minimum denominations
representing an original principal amount of $100,000 and integral multiples of
$1,000 in excess thereof. The Depositor has been informed by the Depository that
its nominee will be Cede & Co. ('Cede'). Accordingly, Cede is expected to be the
holder of record of the Book-Entry Notes. Except as described in the Prospectus
under 'Description of the Certificates-Definitive Certificates,' no person
acquiring a Book-Entry Note (each, a 'beneficial owner') will be entitled to
receive a Definitive Note.
Unless and until Definitive Notes are issued, it is anticipated that the
only 'Certificateholder' of the Book-Entry Notes will be Cede, as nominee of the
Depository. Beneficial owners of the Book-Entry Notes will not be Noteholders,
as that term is used in the Indenture. Beneficial owners are only permitted to
exercise the rights of Noteholders indirectly through the Depository and its
participating organizations. Any reports on the Trust provided to Cede, as
nominee of the Depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Depository's participating organizations to
whose Depository accounts the Book-Entry Notes of such beneficial owners are
credited.
For a description of the procedures generally applicable to the Book-Entry
Notes, see 'Description of the Certificates-Book-Entry Certificates' in the
Prospectus.
The Notes will be issued in fully registered, certificated form to
Noteholders or their respective nominees ('Definitive Notes'), rather than to
DTC or its nominee only if (i) the Administrator advises the Indenture Trustee
in writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Notes, and the Trustee or the
Depositor are unable to locate a qualified successor, (ii) the Administrator, at
its option, elects to terminate the book-entry system through DTC or (iii) after
the occurrence of an Event of Default, Noteholders evidencing not less than 50%
of the aggregate unpaid principal amount of the Notes advise the Indenture
Trustee and DTC through Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of the Noteholders.
Upon the occurrence of any of the events described in sections (i), (ii)
and (iii) of the immediately preceding paragraph, DTC is required to notify all
Participants of the availability through DTC of Definitive Notes. Upon surrender
by DTC of the definitive certificates representing the Notes, and instructions
for re-registration, the Indenture Trustee will issue such Notes in the form of
Definitive Notes, and thereafter the Indenture Trustee will recognize the
holders of such Definitive Notes as Noteholders, under the Indenture.
If Definitive Notes are issued, distributions of principal and interest on
the Definitive Notes will be made by the Paying Agent or the Indenture Trustee
directly to the holders in whose names the Definitive Notes were registered on
the related Record Date. Distributions will be made by check mailed to the
address of each holder as it appears on the register maintained by the Indenture
Trustee, except that the final payment on any Definitive Note will be made only
upon presentation and surrender of such Definitive Note on the date for such
final payment at such office or agency as is specified in the notice of final
distribution to holders. The Indenture Trustee will provide such notice to
holders not later than the fifth day of the month of the final distribution.
COLLECTION OF DISTRIBUTIONS ON CABS
The CABS will be assets of the Trust. All distributions on the CABS will be
made directly to the Indenture Trustee. The obligation of the Indenture Trustee
in making payments on the Class A1 Notes is limited to distributions on the CABS
and payments received pursuant to the Swap Agreement which were actually
received by it. However, if the Indenture Trustee has not received a
distribution with respect to a CABS by the fifth
S-24
<PAGE>
Business Day after the date on which such distribution was due and payable
pursuant to the terms of such CABS, the Indenture will require it to take such
actions as may be directed by the Swap Counterparty and are permissible pursuant
to the related Underlying Agreements to ensure that the distribution be made as
promptly as possible and legally permitted and to take such legal action as the
Swap Counterparty or the Swap Guarantor, as applicable, deems appropriate under
the circumstances, including the prosecution of any claims in connection
therewith. The reasonable legal fees and expenses incurred by the Indenture
Trustee in connection with the prosecution of any legal action will be
reimbursable to the Indenture Trustee solely out of the proceeds of any such
action and will be retained by the Indenture Trustee prior to the deposit of any
remaining proceeds in the Collection Account pending distribution thereof to
Class A1 Noteholders. In the event that the Indenture Trustee has reason to
believe that the proceeds of any such legal action may not be sufficient to
reimburse it for its projected legal fees and expenses, the Indenture Trustee
will notify the Class A1 Noteholders that it is not obligated to pursue any such
available remedies unless adequate indemnity for its legal fees and expenses is
provided by the Class A1 Noteholders.
REPORTS TO CLASS A1 NOTEHOLDERS
The Indenture Trustee will mail to the Swap Counterparty, the Swap
Guarantor and each Class A1 Noteholder, at such Class A1 Noteholder's request,
at its address listed on the Note Register maintained with the Indenture Trustee
a report stating (i) the amounts of principal and interest, respectively, paid
on each $1,000 in Principal Amount of Class A1 Notes, (ii) the Principal Amount
of the Class A1 Notes, (iii) the outstanding balance of the CABS, and the (iv)
outstanding balance of any Eligible Investments.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Class A1 Notes, an 'Event of Default' under the
Indenture will consist of: (i) a default for five Business Days or more in the
payment of any interest on any Class A1 Note; (ii) a default in the payment of
the principal of or any installment of the principal of any Class A1 Note when
the same becomes due and payable; (iii) a default in the observance or
performance of any covenant or agreement of the Trust made in the Indenture and
the continuation of any such default for a period of 30 days after notice
thereof is given to the Trust by the Indenture Trustee, the Swap Guarantor, or
the Swap Counterparty, or to the Trust, the Swap Counterparty, the Swap
Guarantor and the Indenture Trustee by the holders of at least 25% in Principal
Amount of the Class A1 Notes; (iv) any representation or warranty made by the
Trust in the Indenture or in any certificate delivered pursuant thereto or in
connection therewith having been incorrect in a material respect as of the time
made, and such breach not having been cured within 30 days after notice thereof
is given to the Trust by the Indenture Trustee or the Swap Guarantor, or to the
Trust, the Swap Guarantor, the Swap Counterparty and the Indenture Trustee by
the holders of at least 25% in Principal Amount of Class A1 Notes; (v) certain
events of bankruptcy, insolvency, receivership or liquidation of the Trust; or
(vi) the occurrence and continuance of a Swap Counterparty Replacement Event
wherein it is impracticable for the Swap Guarantor to replace the then existing
Swap Counterparty with itself or any other Person.
If there is an Event of Default with respect to a Class A1 Note due to late
payment or nonpayment of interest due on a Class A1 Note, additional interest
will accrue on such unpaid interest at the interest rate on the Class A1 Note
(to the extent lawful) until such interest is paid. Such additional interest on
unpaid interest shall be due at the time such interest is paid. If there is an
Event of Default due to late payment or nonpayment of principal on a Class A1
Note, interest will continue to accrue on such principal at the interest rate on
the Class A1 Note until such principal is paid.
If an Event of Default should occur and be continuing with respect to the
Class A1 Notes, the Indenture Trustee, if directed by the holders of a majority
in Principal Amount of the Notes, or, in the case of an Event of Default
described in clauses (iii) or (iv) in the definition thereof, if directed by all
Noteholders, or under certain limited circumstances if directed by the Swap
Guarantor or the Swap Counterparty, will declare the principal of the Class A1
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
the Class A1 Notes.
If the Class A1 Notes are due and payable following an Event of Default,
the Indenture Trustee may institute proceedings to collect amounts due or
foreclose on Trust property, exercise remedies as a secured party, sell the
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CABS or elect to have the Trust maintain possession of the CABS and continue to
apply collections on the CABS as if there had been no declaration or
acceleration; provided, however, that if the Swap Counterparty or the Swap
Guarantor, as applicable, has given instructions to the Indenture Trustee with
respect to such proceedings, remedies or actions, the Indenture Trustee shall
follow such instructions.
If an Event of Default occurs and is continuing with respect to the Class
A1 Notes, the 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 the Class A1 Notes or the Swap Counterparty, if the Indenture
Trustee reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities which might be incurred by it in complying with
such request. Subject to certain limitations contained in the Indenture, the
holders of a majority in Principal Amount of Class A1 Notes will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and the holders of a majority in Principal
Amount of the Class A1 Notes may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Class A1 Notes.
No holder of a Class A1 Note will have the right to institute any
proceeding with respect to the Indenture, unless (i) such holder previously has
given the Indenture Trustee written notice of a continuing Event of Default,
(ii) the holders of not less than 25% in Principal Amount of the Class A1 Notes
have made written request to the Indenture Trustee to institute such proceeding
in its own name as Indenture Trustee, (iii) such holder or holders have offered
the Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for
60 days failed to institute such proceeding and (v) no direction inconsistent
with such written request has been given to the Indenture Trustee during the
60-day period by the holders of a majority in Principal Amount of the Class A1
Notes.
In addition, the Indenture Trustee and the Class A1 Noteholders, by
accepting the Class A1 Notes, will covenant that they will not at any time
institute against the Trust any bankruptcy, reorganization or other proceeding
under any federal or state bankruptcy or similar law.
With respect to the Trust, neither the Indenture Trustee nor the Owner
Trustee in their capacities as trustees, nor any holder of a Class A2
Certificate representing an ownership interest in the Trust nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the Class A1 Notes or for the agreements of the Trust contained in
the Indenture.
CERTAIN COVENANTS
The Indenture will provide that the 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 the
Trust's obligation to make due and punctual payments upon the Class A1 Notes and
the performance or observance of any agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trust has been advised
that the ratings of the Notes then in effect would not be reduced or withdrawn
by any Rating Agency as a result of such merger or consolidation, (v) the 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
Class A1 Noteholder or Class A2 Certificateholder and (vi) the Trust has
received the prior written consent of the Swap Guarantor.
The Trust will not, among other things, (i) except as expressly permitted
by the Indenture, sell, transfer, exchange or otherwise dispose of any of the
assets of the Trust, (ii) claim any credit on or make any deduction from the
principal and interest payable in respect of the Class A1 Notes (other than
amounts withheld under the Code or applicable state law) or assert any claim
against any present or former holder of Class A1 Notes because of the payment of
taxes levied or assessed upon the Trust, (iii) except as contemplated pursuant
to the Indenture, dissolve or liquidate in whole or in part, (iv) permit the
validity or effectiveness of the Indenture to be impaired or permit any person
to be released from any covenants or obligations with respect to the Class A1
Notes under the Indenture except as may be expressly permitted thereby or (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
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of the Trust or any part thereof, or any interest therein or the proceeds
thereof, except as permitted by the Trust Agreement or the Indenture.
The Trust may not engage in any activity other than as specified under 'The
Trust' herein. The Trust will not incur, assume or guarantee any indebtedness
other than indebtedness incurred pursuant to the Trust Agreement and the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all Class A1
Noteholders a report relating to any change in its eligibility and qualification
to continue as Indenture Trustee under the Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of any
indebtedness owing by the Trust to the Indenture Trustee in its individual
capacity, any change in the property and funds physically held by the Indenture
Trustee as such and any action taken by it that materially affects the Class A1
Notes and that has not been previously reported, but if no such changes have
occurred, then no report shall be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing
the Class A1 Notes upon the delivery to the Indenture Trustee for cancellation
of all the Class A1 Notes or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of the Class A1
Notes, the Class A2 Certificates and any amounts due to the Swap Counterparty or
the Swap Guarantor.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority in Principal Amount of the
Class A1 Notes and the consent of the Swap Counterparty and the Swap Guarantor,
the Trust and the Indenture Trustee may execute a supplemental indenture to add
provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Class A1 Noteholders.
Without the consent of the holder of each outstanding Class A1 Note
affected thereby and the consent of the Swap Counterparty and the Swap
Guarantor, however, no supplemental indenture will: (i) change the due date of
any installment of principal of or interest on any Class A1 Note or reduce the
principal amount thereof, the interest rate specified thereon or the redemption
price with respect thereto or change any place of payment where or the coin or
currency in which any Class A1 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 Class A1 Notes, the consent of the holders of which is
required for any supplemental 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 the voting of Class A1 Notes held by the Trust, the Depositor or an
affiliate of the Depositor; (v) reduce the percentage of the aggregate
outstanding amount of Class A1 Notes, the consent of the holders of which is
required to direct the Indenture Trustee to sell or liquidate the CABS if the
proceeds of such sale would be insufficient to pay the principal amount and
accrued but unpaid interest on the outstanding Class A1 Notes; (vi) decrease the
percentage of the aggregate principal amount of Class A1 Notes required to amend
the sections of the Indenture which specify the applicable percentage of
aggregate principal amount of the Class A1 Notes necessary to amend the
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 Indenture with
respect to any of the collateral for the Class A1 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 Class A1 Note of the
security afforded by the lien of the Indenture.
The Trust and the Indenture Trustee may also enter into supplemental
indentures with the consent of the Swap Guarantor, but without obtaining the
consent of the Class A1 Noteholders, for the purpose of, among other things,
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of the
Class A1 Noteholders, provided that such action will not materially and
adversely affect the interest of any Class A1 Noteholder, the Swap Counterparty
or the Swap
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Guarantor as evidenced by a legal opinion satisfactory to the Swap Counterparty,
the Swap Guarantor, the Indenture Trustee and the Depositor.
VOTING RIGHTS
At all times, the voting rights of Class A1 Noteholders under the Indenture
will be allocated among the Class A1 Notes pro rata in accordance with their
Principal Amounts.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Indenture Trustee nor any director, officer or
employee of the Depositor or the Indenture Trustee will be under any liability
to the Trust or the Class A1 Noteholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or negligence in the performance of duties or by reason
of reckless disregard of obligations and duties under the Indenture.
All persons into which the Indenture Trustee may be merged or with which it
may be consolidated or any person resulting from such merger or consolidation
shall be the successor of the Indenture Trustee under the Indenture.
TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Trust Agreement. Whenever
particular sections or defined terms of the Trust Agreement are referred to,
such sections or defined terms are thereby incorporated herein by reference. See
'Description of the Class A2 Certificates' herein for a summary of certain
additional terms of the Trust Agreement.
EXERCISE OF REMEDIES
The Trust Agreement provides that until all the Class A1 Notes have been
paid in full, the Indenture Trustee will take all actions to collect any
distributions due on the Certificates or to exercise remedies pursuant to the
Indenture.
REPORTS TO CERTIFICATEHOLDERS
The Owner Trustee will mail to each Class A2 Certificateholder, at such
Class A2 Certificateholder's request, at its address listed on the Class A2
Certificate Register maintained with the Owner Trustee a report stating (i) the
amounts of principal and interest, respectively, distributed on each $1,000 in
Face Amount of Class A2 Certificates and (ii) the outstanding balance of the
CABS.
AMENDMENT
The Trust Agreement may be amended by the Depositor and the Owner Trustee,
without consent of the Class A1 Noteholders or Class A2 Certificateholders or
the Swap Counterparty, but with the consent of the Swap Guarantor, to cure any
ambiguity, to correct or supplement any provision or for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
thereof or of modifying in any manner the rights of such Class A1 Noteholders or
Class A2 Certificateholders; provided, however, that such action will not, as
evidenced by an opinion of counsel satisfactory to the Owner Trustee, adversely
affect in any material respect the interests of any Class A1 Noteholders or
Class A2 Certificateholders or the Swap Counterparty or the Swap Guarantor. The
Trust Agreement may also be amended by the Depositor and the Owner Trustee with
the consent of the holders of Class A1 Notes evidencing at least a majority in
Principal Amount of Class A1 Notes and Class A2 Certificateholders owning Voting
Interests (as herein defined) aggregating not less than a majority of the
aggregate Voting Interests and with the consent of the Swap Counterparty and the
Swap Guarantor for the purpose of adding any provisions to or changing in any
manner or
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eliminating any of the provisions of the Trust Agreement or modifying in any
manner the rights of the Class A1 Noteholders or Class A2 Certificateholders or
the Swap Counterparty or the Swap Guarantor; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or delay the
timing of, collections of payments on the CABS or distributions that are
required to be made for the benefit of such Class A1 Noteholders or Class A2
Certificateholders or (ii) reduce the aforesaid percentage of the Class A1 Notes
or the Voting Interests of Class A2 Certificates which are required to consent
to any such amendment, without the consent of all the outstanding Class A1 Notes
or Class A2 Certificates, as the case may be.
VOTING INTERESTS
As of any date, the Face Amount of all Class A2 Certificates outstanding
will constitute the voting interest of the Issuer (the 'Voting Interests'),
except that, for purposes of determining Voting Interests, Class A2 Certificates
owned by the Issuer or its affiliates and the Depositor will be disregarded and
deemed not to be outstanding, and except that, in determining whether the Owner
Trustee is protected in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Class A2 Certificates that the Owner
Trustee knows to be so owned will be so disregarded. Class A2 Certificates so
owned that have been pledged in good faith may be regarded as outstanding if the
pledgee establishes to the satisfaction of the Owner Trustee the pledgor's right
so to act with respect to such Class A2 Certificates and that the pledgee is not
the Issuer or its affiliates.
CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust or the Class A2 Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the Trust
Agreement or for errors in judgment; provided, however, that none of the Owner
Trustee, the Depositor and any director, officer or employee thereof will be
protected against any liability which would otherwise be imposed by reason of
willful malfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties under the Trust
Agreement.
All persons into which the Owner Trustee may be merged or with which it may
be consolidated or any person resulting from such merger or consolidation shall
be the successor of the Owner Trustee under the Trust Agreement.
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THE SWAP AGREEMENT
GENERAL
On the Closing Date the Trust will enter into a 1992 International Swaps
and Derivative Association, Inc. ('ISDA') Master Agreement
(Multi-Currency--Cross Border) (such agreement, together with any schedules and
confirmations thereto, the 'Swap Agreement') with the Swap Counterparty modified
to reflect the terms of the Class A1 Notes and the Class A2 Certificates, the
Indenture, the Trust Agreement and the swap transactions described herein.
Under the Swap Agreement, the amount due to the Trust will be computed to
match the amounts payable to the Class A1 Notes and Class A2 Certificates under
the Indenture and Trust Agreement. The amount due to the Swap Counterparty will
be computed to match the interest amounts received on the CABS and any Eligible
Investments and the proceeds from the sale of the CABS and any Eligible
Investments in respect of any Payment Date following the Principal Commencement
Date.
On any day that amounts payable as interest on the CABS and any Eligible
Investments are received, the Trust will be required to pay to the Swap
Counterparty such amounts. On any Payment Date prior to the Termination Date,
the Swap Counterparty will pay to the Trust amounts equal to the amounts payable
on the Class A1 Notes and the Class A2 Certificates.
On each Payment Date on or after the Principal Commencement Date and prior
to the Termination Date the Swap Counterparty will be required to make a payment
to the Trust under the Swap Agreement in an amount equal to the Pay Down Amount
and the Trust will be required to pay to the Swap Counterparty an amount equal
to all proceeds received on the sale of CABS and Eligible Investments on such
day (the 'Sale Proceeds') in order to satisfy a Pay Down Amount. If the amount
realized from the sale of the CABS is less than the Pay Down Amount the Swap
Counterparty will bear this loss. In the event of any Credit Losses on the CABS
the holders of the Certificates and then the holders of the Notes will bear this
loss.
The payment obligations of the Swap Counterparty under the Swap Agreement
are guaranteed by the Swap Guarantor pursuant to and subject to the guarantee
delivered on the Closing Date. The Indenture Trustee will notify the Swap
Guarantor by 3:00 p.m. (New York City time) with respect to any payment of
interest or in respect to any principal payment on the Securities not received
from the Swap Counterparty on any Payment Date and the Swap Guarantor shall
remit such payment (and any interest owing through the date of actual payment,
as may be provided in the Swap Agreement and the Swap Policy) to the Collection
Account within one Business Day after receipt of such notice. The Swap
Counterparty has assigned its rights under and in respect of the Swap Agreement
and other similar swap agreements insured by the Swap Guarantor and certain
other property to a collateral agent for the benefit of the Swap Guarantor to
secure the Swap Counterparty's obligations to the Swap Guarantor arising under
the Swap Agreement and such other similar swap agreements.
The 'Termination Date' will be the Maturity Date, except in the event of a
Mandatory Prepayment. The Termination Date will be designated pursuant to the
Market Agent Agreement.
SWAP COUNTERPARTY REPLACEMENT EVENT
A 'Swap Counterparty Replacement Event' includes, among other events, (i)
failure of the Swap Counterparty to pay required amounts under the Swap
Agreement, (ii) the bankruptcy or insolvency of the Swap Counterparty, (iii) a
failure of the Swap Counterparty to provide sufficient collateral under
collateral arrangements in respect of the Swap Agreement and certain other
similar swap agreements it enters into from time to time which are insured by
the Swap Guarantor and (iv) certain events of illegality and certain tax events.
Upon a Swap Counterparty Replacement Event, the Swap Guarantor will, to the
extent practicable, replace the Swap Counterparty with itself or any other
Person so long as such replacement would not result in a reduction or withdrawal
of the ratings assigned to the Class A1 Notes or the Class A2 Certificates and
certain other criteria are satisfied. Upon such replacement, the Trust will
assign its rights under and in respect of the original Swap Agreement to the
Swap Guarantor. The replacement of the Swap Counterparty by the Swap Guarantor
will not diminish the obligation of the Swap Guarantor to fulfill any
outstanding obligations of the Swap Counterparty under the Swap Agreement, and
the Swap Policy (or a replacement Swap Policy having substantially similar
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terms) shall remain in effect after replacement of the Swap Counterparty. All
expenses associated with the replacement of the Swap Counterparty will be borne
by the Swap Counterparty or the Swap Guarantor. The replacement of LBSF as Swap
Counterparty by the Swap Guarantor upon a Swap Counterparty Replacement Event
will also cause the automatic removal of LBSF as the Calculation Agent and its
replacement by the new Swap Counterparty (or its designee), and will permit the
new Swap Counterparty to appoint a new Market Agent, so long as such appointment
does not cause a reduction or withdrawal of the ratings on the Class A1 Notes or
the Class A2 Certificates and certain other criteria are satisfied.
THE SWAP COUNTERPARTY
The Swap Counterparty will be Lehman Brothers Special Financing Inc.
('LBSF'). LBSF is a Delaware corporation and a wholly owned subsidiary of Lehman
Brothers Inc. Upon a Swap Counterparty Replacement Event, the Swap Guarantor
will designate a replacement for LBSF (or any successor Swap Counterparty) as
described above under '--Swap Counterparty Replacement Event.' The Swap
Guarantor may serve as such replacement Swap Counterparty.
THE SWAP GUARANTOR
The Swap Guarantor will be Ambac Assurance Corporation ('Ambac').
The following information has been supplied by Ambac Assurance Corporation
(the 'Swap Guarantor') for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Underwriter or any of their
affiliates as to the accuracy or completeness of such information.
The Swap Guarantor is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. The Swap Guarantor primarily insures
newly issued municipal and structured finance obligations. The Swap Guarantor is
a wholly owned subsidiary of Ambac Financial Group, Inc. a 100% publicly-held
company. Moody's, Standard & Poor's and Fitch Investors Service, L.P. have each
assigned a triple-A claims-paying ability rating to the Swap Guarantor.
The consolidated financial statements of the Swap Guarantor and its
subsidiaries as of December 31, 1996 and December 31, 1995, and for the three
years ended December 31, 1996, prepared in accordance with generally accepted
accounting principles, included in the Current Report on Form 8-K of AMBAC Inc.
(which was filed with the Commission on March 12, 1997; Commission File Number
1-10777) and the consolidated financial statements of the Swap Guarantor and its
subsidiaries as of June 30, 1997 and for periods ending June 30, 1997 and June
30, 1996 included in the Quarterly Report on Form 10-Q of Ambac Financial Group,
Inc. for the period ended June 30, 1997 (which was filed with the Commission on
August 14, 1997), are hereby incorporated by reference into this Prospectus
Supplement and shall be deemed to be a part hereof. Any statement contained in a
document incorporated herein by reference shall be modified or superseded for
the purposes of this Prospectus Supplement to the extent that a statement
contained herein by reference herein also modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Swap Guarantor and its subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the 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 such documents.
The following table sets forth the Swap Guarantor's capitalization as of
December 31, 1994, December 31, 1995, December 31, 1996 and June 30, 1997,
respectively, in conformity with generally accepted accounting principles.
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AMBAC ASSURANCE CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ ------------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums...................................... $ 840 $ 906 $ 995 $1,036
Other liabilities...................................... 136 295 259 284
------------ ------------ ------------ ------------
Total liabilities................................. $ 976 $1,201 $1,254 $1,320
------------ ------------ ------------ ------------
Stockholder's equity:
Common Stock......................................... $ 82 $ 82 $ 82 $ 82
Additional paid-in capital........................... 444 481 515 520
Unrealized gains (losses) on investments: net of
tax............................................... (46) 87 66 64
Retained earnings.................................... 782 907 992 1,079
------------ ------------ ------------ ------------
Total stockholder's equity........................ $1,262 $1,557 $1,655 $1,745
------------ ------------ ------------ ------------
Total liabilities and stockholder's equity........ $2,238 $2,758 $2,909 $3,065
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
For additional financial information concerning the Swap Guarantor, see the
audited and unaudited financial statements of the Swap Guarantor incorporated by
reference herein. Copies of the financial statements of the Swap Guarantor
incorporated herein by reference and copies of the Swap Guarantor's annual
statement for the year ended December 31, 1996 prepared in accordance with
statutory accounting standards are available, without charge, from the Swap
Guarantor. The address of the Swap Guarantor's administrative offices and its
telephone number are One State Street Plaza, 17th Floor, New York, New York
10004 and (212) 668-0340.
The Swap Guarantor makes no representation regarding the Notes or the
advisability of investing in the Notes and makes no representation regarding,
nor has it participated in the preparation of, this Prospectus Supplement other
than the information supplied by the Swap Guarantor and presented under the
heading 'The Swap Guarantor' and in the financial statements incorporated herein
by reference.
THE SWAP POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
THE CALCULATION AGENT
The Calculation Agent will be LBSF, a wholly-owned subsidiary of Lehman
Brothers Inc., incorporated in the State of Delaware. Five Business Days prior
to each Payment Date, the Calculation Agent will determine the amount scheduled
to be received pursuant to the CABS, the amount due to the Class A1 Noteholders
and the Class A2 Certificateholders with respect to such Payment Date. The
Calculation Agent will also determine all amounts to be paid by the Swap
Counterparty. Under certain circumstances, Lehman Brothers Special Financing
Inc. may be removed as Calculation Agent by the Indenture Trustee. In addition,
as described above, if there is a Swap Counterparty Replacement Event, LBSF will
be automatically removed as the Calculation Agent and will be replaced by the
new Swap Counterparty or its designee.
THE MARKET AGENT AGREEMENT
MARKET AGENT
Pursuant to the Market Agent Agreement, dated as of the Closing Date among
Lehman Brothers Inc., as Market Agent, the Trust and the Indenture Trustee (the
'Market Agent Agreement'), the Market Agent shall: (a) act on behalf of the
Trust in connection with the sale and purchase of the CABS as provided in the
Indenture and (b) perform its duties and comply with the provisions set forth in
the Market Agent Agreement and Indenture.
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The Market Agent Agreement provides that the Market Agent has no liability
for any act or omission except as results from the Market Agent's negligence or
willful misconduct. The Market Agent may assign any and all of its duties,
obligations and rights as Market Agent to any organization controlled by or
under common control with Lehman Brothers Inc. The Market Agent may at any time
resign and be discharged of the duties and obligations created by the Market
Agent Agreement by giving at least 30 days' notice to the Indenture Trustee.
Under certain circumstances, Lehman Brothers Inc. may be removed as Market Agent
by the Swap Counterparty. In addition, as described above under 'The Swap
Agreement,' if there is a Swap Counterparty Replacement Event and the Swap
Guarantor replaces the Swap Counterparty, the new Swap Counterparty will also
have the right to appoint a new Market Agent so long as such appointment would
not cause a reduction or withdrawal of the ratings on the Class A1 Notes or the
Class A2 Certificates and certain other criteria are satisfied.
On each Solicitation Date, the Indenture Trustee will direct the Market
Agent to sell the CABS and any Eligible Investments in compliance with the Sale
Procedures. The settlement of the sale will occur on the fourth Business Day
prior to each Payment Date and the Sale Proceeds will be deposited in an account
established with the Indenture Trustee. 'Sale Procedures' means that the Market
Agent on behalf of the Trust will sell one or more CABS or Eligible Investments
to the highest bidder of not less than three solicited bidders for such CABS or
Eligible Investments (which bidders may include Lehman Brothers Inc., the Swap
Counterparty, the Swap Guarantor or their respective affiliates, provided
however, that neither Lehman Brothers Inc., the Swap Counterparty, the Swap
Guarantor nor any of their respective affiliates are obligated to bid, and which
bidders need not be limited to recognized broker-dealers). In the sole judgment
of the Market Agent, bids may be evaluated on the basis of bids for the CABS or
Eligible Investments or a portion of the CABS or Eligible Investments being sold
or on any other basis selected in good faith by the Market Agent. No assurance
can be given as to whether the Market Agent will be successful in soliciting
bids to purchase the CABS and any Eligible Investments.
THE ADMINISTRATION AGREEMENT
The Indenture Trustee, in its capacity as Administrator, will enter into
the Administration Agreement with the Trust and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in such
Administration Agreement, to enforce the Swap Agreement at the direction of the
Owner Trustee, provide notices and perform other administrative obligations
required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
The Bank of New York is the Indenture Trustee under the Indenture. The
mailing address of the Indenture Trustee is The Bank of New York, 101 Barclay
Street, New York, NY 10286, Attention: Corporate Trust Department.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement.
The mailing address of the Owner Trustee is Wilmington Trust Company, Rodney
Square North, Wilmington, DE 19890, Attention: Corporate Trust Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Class A1 Notes and the Class A2
Certificates will be applied by the Depositor on the Closing Date towards the
purchase price of the CABS, the payment of expenses related to such sale and
other corporate purposes.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Set forth below is a discussion of the anticipated material United States
federal income tax consequences of the purchase, ownership and disposition of
the Class A1 Notes offered hereunder. This discussion is based upon current
provisions of the Internal Revenue Code of 1986, as amended (the 'Code'),
existing and proposed Treasury Regulations thereunder, current administrative
rulings, judicial decisions and other applicable authorities. There are no cases
or Internal Revenue Service ('IRS') rulings on similar transactions involving
notes issued by a trust with terms similar to those of the Class A1 Notes. As a
result, there can be no assurance that the IRS will not challenge the
conclusions reached herein, and no ruling from the IRS has been or will be
sought on any of the issues discussed below. Furthermore, legislative, judicial
or administrative changes may occur, perhaps with retroactive effect, which
could affect the accuracy of the statements and conclusions set forth herein as
well as the tax consequences to Class A1 Noteholders.
This discussion does not purport to deal with all aspects of federal income
taxation that may be relevant to the Class A1 Noteholders in light of their
personal investment circumstances nor, except for certain limited discussions of
particular topics, to certain types of holders subject to special treatment
under the federal income tax laws (e.g., financial institutions, broker-dealers,
life insurance companies, foreign investors and tax-exempt organizations). This
information is directed to prospective purchasers who purchase Class A1 Notes in
the initial distribution thereof, who are citizens or residents of the United
States, including domestic corporations and partnerships, and who hold the Class
A1 Notes as 'capital assets' within the meaning of Section 1221 of the Code.
Taxpayers and preparers of tax returns (including those filed by any partnership
or other issuer) should be aware that under applicable Treasury regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice (i) is given with respect to events that have
occurred at the time the advice is rendered and is not given with respect to the
consequences of contemplated actions and (ii) is directly relevant to the
determination of an entry on a tax return. Accordingly, taxpayers should consult
their own tax advisors and tax return preparers regarding the preparation of any
item on a tax return, even where the anticipated tax treatment has been
discussed herein. PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF CLASS A1 NOTES.
For purposes of this discussion, references to a 'Class A1 Noteholder' are
to the beneficial owner of a Class A1 Note.
CLASSIFICATION OF THE TRUST
In the opinion of Brown & Wood LLP, counsel to the Depositor and the
Underwriter, for federal income tax purposes, the Trust will not be an
association or publicly traded partnership taxable as a corporation. This
opinion will be based on the assumption that the terms of the Indenture, the
Trust Agreement and related documents will be complied with.
As used in this section, the term 'U.S. Investor' means a beneficial owner
of a Class A1 Note that is for U.S. federal income tax purposes 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 (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), an estate whose income
is subject to U.S. federal income tax regardless of its source of income, a
trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States is
able to exercise primary supervision of the administration of the trust and one
or more United States persons have the authority to control all substantial
decisions of the trust, or any foreign corporation, partnership or other entity
which holds a Class A1 Note in connection with a U.S. trade or business.
Notwithstanding the preceding sentence, to the extent provided in Treasury
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date, that elect to continue to be treated
as United States persons also will be a U.S. Investor.
S-34
<PAGE>
TAX TREATMENT OF THE CLASS A1 NOTES
Characterization as Debt. The Depositor, the Owner Trustee, the Indenture
Trustee, and the Class A1 Noteholders by their purchase of the Class A1 Notes
will agree to treat the Class A1 Notes as debt for purposes of any federal,
state and local income and franchise taxes based on or measured by income or
capital. Special Tax Counsel is of the opinion that, although no specific
authority exists with respect to the characterization for federal income tax
purposes of securities having the same terms as the Class A1 Notes, based on the
terms of the Class A1 Notes, the Class A1 Notes will be treated as debt for
federal income tax purposes. The discussion below assumes this characterization
or the Notes is correct.
Treatment of Stated Interest. The Trust intends to treat interest on the
Class A1 Notes, as 'qualified stated interest' under Treasury regulations
relating to original issue discount ('OID') (hereafter the 'OID regulations').
As a consequence, discount on the Class A1 Notes arising from an issuance at
less than par will only be required to be accrued under the OID rules if such
discount exceeds a statutorily defined de minimis amount. Qualified stated
interest, which generally must be unconditionally payable at least annually, is
taxed under a holder's normal method of accounting. De minimis OID is included
in income on a pro rata basis as principal payments are made on the Notes.
A Class A1 Noteholder must include OID in income over the term of the Note
under a constant interest method that takes into account the compounding of
interest. Under the Code, OID is calculated and accrued using prepayment
assumptions where payments on a debt instrument may be accelerated by reason of
prepayments of other obligations securing such debt instrument. Moreover, the
legislative history to the provisions provides that the same prepayment
assumptions used to price a debt instrument be used to calculate OID, as well as
to accrue market discount and amortize premium. Here the Class A1 Notes do not
technically fit within the provisions of the Code that require the use of a
prepayment assumption because they are paid according to the sale of CABS.
Nevertheless, the Class A1 Notes' rate of prepayment is based upon the Pay Down
Amount. Moreover, the Pay Down Amount will be used in pricing the Class A1
Notes. Accordingly, if the Class A1 Notes are issued with OID the Trust intends
to use a prepayment assumption of 3.541%.
Optional Election. As an alternative to the above treatments, accrual
method holders may elect to include in gross income all interest with respect to
a Class A1 Note, including stated interest, acquisition discount, OID, de
minimis OID, market discount, de minimis market discount, and unstated interest,
as adjusted by any amortizable bond premium or acquisition premium, using the
constant yield method described above.
Market Discount. If a Class A1 Noteholder purchases a Class A1 Note for an
amount that is less than its issue price (or, in the case of a subsequent
purchaser, its adjusted issue price), the amount of the difference will be
treated as 'market discount', unless such difference is less than a specified de
minimis amount.
Under the market discount rules, a Class A1 Noteholder will be required to
treat any partial principal payment on, or any gain realized on the sale,
exchange, retirement or other disposition of a Class A1 Note as ordinary income
to the extent of the lesser of (i) the amount of such payment or realized gain
and (ii) the accrued market discount on such Class A1 Note at the time of such
payment or disposition. Market discount will be considered to accrue ratably
during the period from the date of acquisition to the maturity date of the Class
A1 Note, unless the Class A1 Noteholder elects to accrue market discount on a
yield to maturity basis.
A Class A1 Noteholder may be required to defer the deduction of all or a
portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry a Class A1 Note with market discount until the
maturity of the Class A1 Note or its earlier disposition in a taxable
transaction. A Class A1 Noteholder may elect to include market discount in
income currently as it accrues (on either a ratable or yield to maturity basis),
in which case the rules described above will not apply. Generally, a current
inclusion of market discount is treated as ordinary interest income for United
States federal income tax purposes.
Premium. If a Class A1 Noteholder purchases a Class A1 Note for an amount
that is greater than its stated redemption price at maturity, such Class A1
Noteholder will be considered to have purchased the Class A1 Note with
'amortizable bond premium' equal in amount to such excess. A Class A1 Noteholder
may elect to amortize such premium using a constant yield method over the
remaining term of the Class A1 Note. Premium amortizations may offset only
interest otherwise required to be included in respect of the Class A1 Note and
are not treated as a separate deduction.
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<PAGE>
Sale or Other Disposition. If a Class A1 Noteholder sells a Class A1 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 A1 Note. The adjusted tax basis of a Class A1 Note to a particular
Class A1 Noteholder will equal the holder's cost for the Class A1 Note,
increased by any OID, market discount, acquisition discount, and gain previously
included by such Class A1 Noteholder in income with respect to the Class A1 Note
and decreased by the amount of bond premium (if any) previously amortized and by
the amount of principal payments previously received by such Class A1 Noteholder
with respect to such Class A1 Note. Any such gain or loss will be capital gain
or loss if the Class A1 Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains. The Taxpayer Relief Act of 1997 reduces the maximum rates on long-term
capital gains recognized on capital assets held by individuals taxpayers for
more than 18 months as of the date of disposition (and would further reduce the
maximum rates on such gains in the year 2001 and thereafter for certain
individual taxpayers who meet specified conditions). Prospective investors
should consult their own tax advisors concerning these tax law changes.
Tax Consequences to Foreign Holders of Debt. Interest paid (or accrued) to
a Class A1 Noteholder who is a nonresident alien, foreign corporation or other
person who is not a United States person as defined in Section 7701(a)(30) of
the Code (a 'foreign person') generally will be considered 'portfolio interest',
and generally will not be subject to United States federal income tax and
withholding tax, provided, that (i) the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person, (ii) the foreign person is not actually or constructively a '10 percent
shareholder' of the Trust (including a holder of 10% of the outstanding
Certificates) nor a 'controlled foreign corporation' with respect to which the
Trust is a 'related person' within the meaning of the Code, and (iii) the
foreign person provides the Indenture Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Class A1 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 A1 Note is a foreign
person and providing the foreign person's name and address. If a Class A1 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 A1 Note. 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.
Unless the Indenture Trustee receives the appropriate statement from a foreign
investor, the Indenture Trustee will withhold for U.S. withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Class A1 Note by a foreign person will be exempt from
United States federal income and withholding tax, provided that (i) the gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person, and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year of such sale, redemption, retirement or other taxable
disposition of the Class A1 Notes.
If the interest, gain or income on a Class A1 Note held by a foreign person
is effectively connected with the conduct of a trade or business in the United
States by the foreign person, the holder (although exempt from the withholding
tax previously discussed if an appropriate statement is furnished) generally
will be subject to United States federal income tax on the interest, gain or
income at regular federal income tax rates. In addition, if the foreign person
is a foreign corporation, it may be subject to a branch profits tax equal to 30
percent of its 'effectively connected earnings and profits' within the meaning
of the Code for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable tax treaty.
Information Reporting and Backup Withholding. Backup withholding of United
States federal income tax at a rate of 31% may apply to payments made in respect
of the Class A1 Notes to registered owners who are not 'exempt recipients' and
who fail to provide certain identifying information (such as the registered
owner's taxpayer identification number) in the required manner. Generally,
individuals are not exempt recipients, whereas corporations and certain other
entities generally are exempt recipients. Payments made in respect of the Class
A1 Notes to a Class A1 Noteholders must be reported to the IRS, unless a Class
A1 Noteholder is an exempt recipient or establishes an exemption.
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<PAGE>
In addition, upon the sale of a Class A1 Note to (or through) a broker, the
broker must withhold 31% of the entire purchase price, unless either (i) the
broker determines that the seller is a corporation or other exempt recipient or
(ii) the seller provides, in the required manner, certain identifying
information and, in the case of a Class A1 Noteholder which is a foreign person,
certifies that such seller is a foreign person (and certain other conditions are
met). Such a sale must also be reported by the broker to the IRS, unless either
(i) the broker determines that the seller is an exempt recipient or (ii) the
seller certifies its non-U.S. status (and certain other conditions are met).
Certification of the registered owner's non-U.S. status would be made normally
on an IRS Form W-8 under penalties of perjury, although in certain cases it may
be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax liability provided the
required information is furnished to the IRS.
Possible Alternative Characterizations of the Class A1 Notes. Despite
Brown & Wood LLP's opinion that the Class A1 Notes will be treated as debt for
federal income tax purposes, there can be no assurance that the IRS will not
challenge this conclusion and that such challenge would not be successful. If,
contrary to the opinion of Special Tax Counsel, the IRS successfully asserted
that the Class A1 Notes did not represent debt for federal income tax purposes,
the Class A1 Notes might be treated as equity interests in the Trust. If so
treated, the Trust might be treated as a publicly traded partnership taxable as
a corporation with certain adverse consequences (and the publicly traded
partnership taxable as a corporation would not be able to reduce its taxable
income by deductions for interest expense on Class A1 Notes recharacterized as
equity). Alternatively, the Trust would be treated as a publicly traded
partnership that would not be taxable as a corporation because it would meet
certain qualifying income tests. Nonetheless, treatment of the Class A1 Notes as
equity interests in such a partnership could have adverse tax consequences to
certain holders. For example, income to certain tax-exempt entities (including
pension funds) may be 'unrelated business taxable income', income to foreign
holders generally may 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.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Consequences' herein, potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Class A1 Notes. State income tax law may differ substantially from the
corresponding federal tax law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Class A1 Notes hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain restrictions on employee benefit plans subject to ERISA
('Plans') and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under section 501(a)
of the Code is subject to the prohibited transaction rules set forth in section
503 of the Code. Any Plan fiduciary which proposes to cause a Plan to acquire
any of the Securities should consult with its counsel with respect to the
potential consequences under ERISA, and the Code, of the Plan's acquisition and
ownership of the Securities.
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<PAGE>
Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
As discussed under 'Certain Federal Income Tax Consequences' a Plan would
likely realize unrelated business taxable income if it purchases Certificates
since the underlying assets of the Trust are debt financed assets. Thus, the
Certificates are not being offered to Plans. In view of this restriction, the
discussion below is limited to the ERISA considerations resulting from the
purchase and ownership of Notes.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSETS REGULATION
The United States Department of Labor ('DOL') has issued final regulations
concerning the definition of what constitutes the assets of a Plan for purposes
of ERISA and the prohibited transaction provisions of the Code (the 'Plan Assets
Regulation'). The Plan Assets Regulation describes the circumstances under which
the assets of an entity in which a Plan invests will be considered to be 'plan
assets' such that any person who exercises control over such assets would be
subject to ERISA's fiduciary standards. Under the Plan Assets Regulation,
generally when a Plan invests in another entity, the Plan's assets do not
include, solely by reason of such investment, any of the underlying assets of
the entity. However, the Plan Assets Regulation provides that, if a Plan
acquires an 'equity interest' in an entity that is neither a 'publicly-offered
security' (as defined therein) nor a security issued by an investment company
registered under the Investment Company Act of 1940, the assets of the entity
will be treated as assets of the Plan investor unless certain exceptions apply.
If the Class A1 Notes were deemed to be equity interests and no statutory,
regulatory or administrative exemption applies, the Trust could be considered to
hold plan assets by reason of a Plan's investment in the Class A1 Notes. Such
plan assets would include an undivided interest in any assets held by the Trust.
In such an event, the Indenture Trustee and other persons, in providing services
with respect to the Trust's assets, may be parties in interest with respect to
such Plans, subject to the fiduciary responsibility provisions of Title I of
ERISA, including the prohibited transaction provisions of Section 406 of ERISA,
and Section 4975 of the Code with respect to transactions involving the Trust's
assets.
Under the Plan Assets Regulation, the term 'equity interest' is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under 'applicable local law' and which has no 'substantial equity
features.' Although the Plan Assets Regulation is silent with respect to the
question of which law constitutes 'applicable local law' for this purpose, DOL
has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Assets Regulation, DOL declined to provide a precise definition of what
features are equity features or the circumstances under which such features
would be considered 'substantial,' noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making a determination it would be appropriate to take into account whether
the equity features are such that a Plan's investment would be a practical
vehicle for the indirect provision of investment management services.
Brown & Wood LLP ('ERISA Counsel') has rendered its opinion that the Class
A1 Notes will be classified as indebtedness without substantial equity features
for ERISA purposes. ERISA Counsel's opinion is based upon the terms of the Class
A1 Notes, the opinion of Tax Counsel that the Class A1 Notes will be classified
as debt instruments for federal income tax purposes and the ratings which have
been assigned to the Class A1 Notes. However, if contrary to ERISA Counsel's
opinion the Class A1 Notes are deemed to be equity interests in the
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<PAGE>
Trust and no statutory, regulatory or administrative exemption applies, the
Trust could be considered to hold plan assets by reason of a Plan's investment
in the Class A1 Notes.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Class A1 Notes on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, is, or may become, a party in interest with respect to
the Plan, the availability of the exemptive relief provided in the Plan Assets
Regulations and the availability of any other prohibited transaction exemptions.
In addition, prior to purchasing any Class A1 Notes, a fiduciary of a Plan
should make its own determination as to whether the Swap Counterparty, by virtue
of being characterized as the issuer of the Class A1 Notes for federal income
tax purposes, is, or may become, a party in interest with respect to the Plan.
Such other exemptions may include DOL Prohibited Transaction Exemption 84-14
(Class Exemption for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers), 80-51 and 91-38 (Class Exemption for Certain
Transactions Involving Bank Collective Investment Funds) and 90-1 (Class
Exemption for Certain Transactions Involving Insurance Company Pooled Separate
Accounts. There is no assurance that these or other exemptions, even if all of
the conditions specified therein are satisfied, will apply to all of the
transactions involving the Trust's assets.
Any purchaser that is an insurance company should consider the effects of
the 1993 United States Supreme Court decision in John Hancock Mutual Life
Insurance Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517 (1993), on its
purchase of Class A1 Notes or Class A2 Certificates for its general account. In
John Hancock, the Supreme Court ruled that assets held in an insurance company's
general account may be deemed to be 'plan assets' for ERISA purposes under
certain circumstances. In response to that decision, the DOL has issued
Prohibited Transaction Exemption 95-60 (Class Exemption for Certain Transactions
Involving Insurance Company Pooled General Accounts) which, subject to certain
conditions, provides relief from the prohibited transaction rules that under
John Hancock might otherwise be applicable to assets held in an insurance
company's general account. Any such prospective purchaser should consult with
its counsel as to the applicability of this decision and exemption to its
purchase of the Class A1 Notes or Class A2 Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Class A1 Notes under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Class A1 Notes, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the Class A1 Notes will constitute legal
investments for them.
The Depositor makes no representation as to the proper characterization of
the Class A1 Notes for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase Class A1
Notes under applicable legal investment restrictions. The uncertainties
described above (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the Class A1
Notes) may adversely affect the liquidity of the Class A1 Notes.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to Lehman Brothers Inc. (the
'Underwriter'), and the Underwriter has agreed to purchase from the Depositor,
the Class A1 Notes.
The Underwriter is obligated to purchase all the Class A1 Notes offered
hereby if any are purchased.
The Depositor has been advised by the Underwriter that it presently intends
to make a market from time to time in the Class A1 Notes offered hereby;
however, it is not obligated to do so, any market-making may be
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<PAGE>
discontinued at any time, and there can be no assurance that an active public
market for the Class A1 Notes will develop.
Distribution of the Class A1 Notes will be made by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor are expected to be
$ from the sale of the Notes, before deducting expenses payable by the
Depositor of $ . In connection with the purchase and sale of the Notes,
the Underwriter may be deemed to have received compensation from the Depositor
in the form of underwriting discounts, concessions or commissions.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof.
The Underwriter is an affiliate of the Depositor, and the participation by
the Underwriter in the offering of the Notes complies with Schedule E of the
by-laws of the National Association of Securities Dealers, Inc. regarding
underwriting securities of an affiliate.
LEGAL MATTERS
Certain legal matters with respect to the Class A1 Notes will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York and for the
Underwriter by Brown & Wood LLP, New York, New York.
RATING
It is a condition to issuance of the Class A1 Notes that the Class A1 Notes
be rated 'Aaa' by Moody's and 'AAA' by Standard & Poor's and that the Class A2
Certificates be rated 'Aa2' by Moody's and 'AAA' by Standard & Poor's.
A securities rating addresses the likelihood of the receipt by Noteholders
of distributions on the CABS. The rating takes into consideration the
characteristics of the CABS and the structural, legal and tax aspects associated
with the Notes (including, without limitation, the rating of the Swap
Counterparty and the Swap Guarantor. The ratings on the Certificates do not,
however, constitute statements regarding the possibility that Noteholders might
realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-40
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C>
Accounts...................................................................................... S-1
Additional Structuring Assumptions............................................................ S-20
Administration Agreement...................................................................... S-21
Administrator................................................................................. S-21
Ambac......................................................................................... S-9, S-31
Base Mortgage Loans........................................................................... S-11
Beneficial owner.............................................................................. S-24
Book-Entry Certificates....................................................................... S-7, S-21
Book-Entry Notes.............................................................................. S-5, S-13
Business Day.................................................................................. S-3
CABS.......................................................................................... S-1, S-3
CABS Amortization Schedule.................................................................... S-14
CABS Early Amortization Event................................................................. S-23
CABS Transferor............................................................................... S-23
Calculation Agent............................................................................. S-8, S-19
Cede.......................................................................................... S-6, S-24
Certificate Amortization Amount............................................................... S-1, S-4
Certificateholder............................................................................. S-24
Certificates.................................................................................. S-1, S-2
Class A1 Accrual Rate......................................................................... S-13
Class A1 Noteholder........................................................................... S-34
Class A1 Noteholders.......................................................................... S-2
Class A1 Notes................................................................................ S-1, S-2
Class A2 Accrual Rate......................................................................... S-7
Class A2 Certificateholders................................................................... S-4
Class A2 Certificates......................................................................... S-1, S-2
Closing Date.................................................................................. S-1
Code.......................................................................................... S-34
Collection Account............................................................................ S-22
Commission.................................................................................... S-22
Credit Loss................................................................................... S-5, S-14
Definitive Notes.............................................................................. S-6, S-24
Depositor..................................................................................... S-1, S-23
Depository.................................................................................... S-24
Distributable Amount.......................................................................... S-4
DOL........................................................................................... S-38
DTC........................................................................................... S-6
Eligible Investments.......................................................................... S-1, S-2
Equity interest............................................................................... S-38
ERISA......................................................................................... S-37
ERISA Counsel................................................................................. S-38
Event of Default.............................................................................. S-6, S-25
Expected Final Distribution Date.............................................................. S-8
Face Amount................................................................................... S-2
FHLMC......................................................................................... S-12, S-15
Final Scheduled Payment Date.................................................................. S-5
Foreign person................................................................................ S-36
Governing instrument.......................................................................... S-12
Holdings...................................................................................... S-23
Indenture..................................................................................... S-1, S-2
Indenture Trustee............................................................................. S-1, S-2
Interest Accrual Period....................................................................... S-3
</TABLE>
S-41
<PAGE>
<TABLE>
<S> <C>
IRS........................................................................................... S-34
ISDA.......................................................................................... S-30
Issuer........................................................................................ S-2
LBSF.......................................................................................... S-9, S-31
LCPI.......................................................................................... S-23
Lehman Brothers............................................................................... S-23
LIBOR Determination Date...................................................................... S-9
Market Agent.................................................................................. S-8
Market Agent Agreement........................................................................ S-32
Maturity Date................................................................................. S-5
Monthly Amortization Rate..................................................................... S-4, S-14
Moody's....................................................................................... S-3, S-10, S-14
Note Amortization Amount...................................................................... S-1
Note Amortization Amounts..................................................................... S-4
Notes......................................................................................... S-1, S-2
OID........................................................................................... S-35
OID regulations............................................................................... S-35
Owner Trustee................................................................................. S-1, S-2
Parties in interest........................................................................... S-37
Pay Down Amount............................................................................... S-1, S-4, S-14
Payment Date.................................................................................. S-1
Plan Assets Regulation........................................................................ S-38
Plans......................................................................................... S-37
Prepayment Calculation Table.................................................................. S-14
Prepayment Determination Date................................................................. S-19
Principal Amount.............................................................................. S-2
Principal Commencement Date................................................................... S-1, S-3, S-13
PSA........................................................................................... S-19
PSA Index Rate................................................................................ S-18
PSA Standard Prepayment Model................................................................. S-19
Receivables................................................................................... S-1
Record Date................................................................................... S-5
Reference Bloomberg Page...................................................................... S-19
Reference Collateral Pool..................................................................... S-15
Related person................................................................................ S-36
S&P........................................................................................... S-3, S-10
Sale Procedures............................................................................... S-14, S-33
Sale Proceeds................................................................................. S-4, S-30
Securities.................................................................................... S-1, S-2
Securityholders............................................................................... S-4
Solicitation Date............................................................................. S-4
Swap Agreement................................................................................ S-30
Swap Counterparty............................................................................. S-1, S-2
Swap Counterparty Replacement Event........................................................... S-9, S-30
Swap Guarantor................................................................................ S-1, S-31
Swap Policy................................................................................... S-1
Termination Date.............................................................................. S-30
Trust......................................................................................... S-1, S-2
Trust Agreement............................................................................... S-1, S-2
U.S. Investor................................................................................. S-34
Underlying Agreements......................................................................... S-1, S-3
Underwriter................................................................................... S-1, S-39
Voting Interests.............................................................................. S-29
</TABLE>
S-42
<PAGE>
PROSPECTUS
LEHMAN ABS CORPORATION
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES)
------------------------
Lehman ABS Corporation (the 'Depositor') may offer from time to time under
this Prospectus and related Prospectus Supplements the Asset Backed Notes (the
'Notes') and the Asset Backed Certificates (the 'Certificates' and, together
with the Notes, the 'Securities') described herein which may be sold from time
to time in one or more 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').
As specified in the related Prospectus Supplement, the Certificates will
evidence an interest in certain assets deposited into a trust (a 'Trust') by the
Depositor as depositor or transferor pursuant to a Pooling and Servicing
Agreement, Master Pooling and Servicing Agreement, Sale and Servicing Agreement
or Trust Agreement, as described herein. The Notes of each series will be issued
and secured pursuant to an Indenture between the Trust and the Indenture Trustee
specified in the related Prospectus Supplement (the 'Indenture Trustee') and
will represent indebtedness of the related Trust. The Certificates of a series
will represent fractional undivided interests in the related Trust. The property
of each Trust will include assets composed of (a) Primary Assets, which may
include (i) one or more pools of receivables (collectively, the 'Receivables')
generated or to be generated from time to time in the ordinary course of
business in one or more portfolios of accounts (collectively, the 'Accounts'),
purchased from the seller or sellers or transferor or transferors specified in
the related Prospectus Supplement (each a 'Seller') and (ii) CABS Securities (as
defined herein), (b) all monies due thereunder net, if and as provided in the
related Prospectus Supplement, of certain amounts payable to the servicer of the
Receivables, which servicer may also be the Seller, specified in the related
Prospectus Supplement (the 'Servicer'), and (c) certain funds, Enhancement (as
defined herein) and other assets as described herein and in the related
Prospectus Supplement. In addition, if so specified in the related Prospectus
Supplement, the property of the Trust will include monies on deposit in a trust
account (the 'Pre-Funding Account') to be established with the related Trustee,
which will be used to purchase additional Primary Assets or CABS Securities from
a Seller from time to time during the Funding Period specified in the related
Prospectus Supplement.
Purchases of CABS Securities for a Series by the Seller or the Depositor
will be made in secondary market transactions, not from the issuer of such CABS
Securities or any affiliate thereof. See 'Trust Assets--CABS Securities.'
Each Series of Securities will be issued in one or more classes (each, a
'Class'), which may include subclasses. Interest on and principal of the
Securities of a Series will be payable on each Payment Date specified in the
related Prospectus Supplement, at the times, at the rates, in the amounts and in
the order of priority set forth in the related Prospectus Supplement. Securities
may be sold for U.S. dollars or for one or more foreign or composite currencies
and the principal of and any interest on Securities may be payable in U.S.
dollars or one or more foreign or composite currencies.
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. A Series may include one or more classes of Notes
and Certificates. A Series may include one or more classes entitled to
distributions of principal with disproportionate, nominal or no interest
distributions, or to interest distributions with disproportionate, nominal or no
distributions in respect of principal. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust may be
divided into one or more Asset Groups and each Class of the related Series will
be secured by, or will evidence beneficial ownership of, the corresponding Asset
Group, as applicable. Each Series of Securities may be subject to termination
under the circumstances described herein and in the related Prospectus
Supplement.
------------------------
For a discussion of certain factors which should be considered by
prospective purchasers of the Securities, see 'Risk Factors' on page 13 herein
and on page S-11 of the Prospectus Supplement.
------------------------
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES OF A
SERIES EVIDENCE BENEFICIAL INTERESTS IN THE RELATED TRUST ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, ANY SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR,
UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY
ANY OTHER PERSON OR ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH
RESPECT TO ANY SERIES OF SECURITIES WILL BE PURSUANT TO CERTAIN
REPRESENTATIONS AND WARRANTIES SET FORTH IN THE RELATED
POOLING AND SERVICING AGREEMENT, MASTER POOLING AND
SERVICING AGREEMENT, SALE AND SERVICING AGREEMENT,
INDENTURE OR TRUST AGREEMENT, AS DESCRIBED HEREIN OR
IN THE RELATED PROSPECTUS SUPPLEMENT. SEE 'RISK
FACTORS' FOR CERTAIN FACTORS TO BE
CONSIDERED IN PURCHASING THE SECURITIES.
------------------------
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 OR THE
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Lehman Brothers Inc. and the other underwriters set
forth in the related Prospectus Supplement, if any, subject to prior sale, to
withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Lehman Brothers Inc. and the other underwriters,
if any, and certain further conditions. Retain this Prospectus for future
reference. This Prospectus may not be used to consummate sales of the Securities
offered hereby unless accompanied by a Prospectus Supplement.
------------------------
LEHMAN BROTHERS
The date of this Prospectus is December 31, 1996
<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 such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Receivables, the Seller and the Servicer; (iii) the terms of any
enhancement with respect to such Series (the 'Enhancement'); (iv) information
concerning any other assets in the related Trust, including any Enhancement; (v)
the expected date or dates on which the principal amount of each Class of
Securities will be paid to holders of such Securities; (vi) the extent to which
any Class within a Series is subordinated to any other Class of such Series; and
(vii) additional information with respect to the plan of distribution of such
Securities. To the extent that the terms of this Prospectus conflict or are
otherwise inconsistent with the terms of any related Prospectus Supplement, the
terms of such related Prospectus Supplement shall govern.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
'Commission'). Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and its Regional Offices located as
follows: Midwest Regional Office, Citicorp Center, 500 West Madison Street,Suite
1400, Chicago, Illinois 60661; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission,Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Securities And Exchange Commission (the 'Commission') maintains a
Web site at http://www.sec.gov containing reports, proxy and information
regarding registrants, including the Depositor, that file electronically with
the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each Trust pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of any Prospectus Supplement and prior to the termination
of any offering of Securities shall be deemed to be incorporated by reference
into such Prospectus Supplement and this Prospectus. Any statement contained in
a document incorporated or deemed to be incorporated by reference in any
Prospectus Supplement or in this Prospectus shall be deemed to be modified or
superseded for purposes of such Prospectus Supplement and this Prospectus to the
extent that a statement contained in any Prospectus Supplement or in this
Prospectus modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute part of any Prospectus Supplement.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust for a Series of
Securities are required under the Agreement to be forwarded to holders. Unless
otherwise specified in the related Prospectus Supplement, such reports will not
be examined and reported on by an independent public public accountant. See 'THE
AGREEMENTS--Reports to Holders' herein.
2
<PAGE>
SUMMARY OF TERMS
The following 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 contained in the related Prospectus
Supplement to be prepared and delivered in connection with the offering of
Certificates or Notes of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'Glossary of Terms' herein.
<TABLE>
<S> <C>
THE CERTIFICATES............................. Asset Backed Certificates (the'Certificates') are issuable from
time to time in Series pursuant to separate Pooling and
Servicing Agreements, Master Pooling and Servicing Agreements,
Sale and Servicing Agreements, or Trust Agreements (each, an
'Agreement'). Each Certificate of a Series will evidence an
interest in the Trust for such Series, or in an Asset Group
specified in the related Prospectus Supplement. Each Series of
Certificates will consist of one or more Classes, one or more of
which maybe Classes of Variable Interest Certificates, Zero
Coupon Certificates, Principal Only Certificates, Compound
Interest Certificates, Interest Only Certificates, Participating
Certificates, Senior Certificates, Subordinate Certificates or
other types of Certificates. Each Class may differ in, among
other things, the amounts allocated to and the priority of
principal and interest payments, Final Scheduled Payment Dates,
Payment Dates and interest rate. The Certificates of each Class
will be issued in fully registered form in the denominations
specified in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, the Certificates or
certain Classes of such Certificates offered thereby may be
available in book-entry form only.
THE NOTES.................................... Each Series of Securities may include one or more classes of
Notes, which will be issued pursuant to an Indenture between the
Trust and the Indenture Trustee (as amended and supplemented
from time to time, an 'Indenture'). The terms of any Notes will
be set forth in the Prospectus Supplement relating to such
Notes.
Unless otherwise specified in the related Prospectus Supplement,
each class of Notes will have a stated principal amount and will
bear interest at a specified rate or rates (with respect to each
class of Notes, the 'Interest Rate'). Each class of Notes may
have a different Interest Rate, which may be fixed, variable or
an adjustable Interest Rate, or any combination of the
foregoing. The related Prospectus Supplement will specify the
Interest Rate for each class of Notes, and the method for
determining the Interest Rate.
With respect to a Series that includes two or more classes of
Notes, each class may differ as to the timing and priority of
payments, seniority, allocations of losses, Interest Rate or
amount of payments of principal or interest, or 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
Pool of Receivables.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
In addition, a Series may include one or more classes of Notes,
entitled to (i) principal payments with disproportionate,
nominal or no interest payments or (ii) interest payments with
disproportionate, nominal or no principal payments.
All discussions in this Prospectus of the Certificates, the terms
thereof as well as any investment and tax considerations related
thereto will be generally applicable to any Notes.
DEPOSITOR.................................... Lehman ABS Corporation (the 'Depositor') was incorporated in the
State of Delaware on January 29, 1988. As of January 4, 1993,
the Depositor is a wholly owned, special purpose subsidiary of
Lehman Commercial Paper Inc. ('LCPI'), which itself is a wholly
owned subsidiary of Lehman Brothers Inc. ('Lehman Brothers'),
which is a wholly owned subsidiary of Lehman Brothers Holdings
Inc. ('Holdings'). None of Lehman Brothers, LCPI, Holdings, the
Depositor, the Servicer, the Trustee or the Seller, nor any
other affiliate of the foregoing, has guaranteed or is otherwise
obligated with respect to the Certificates of any Series. See
'THE DEPOSITOR.'
INTEREST PAYMENTS............................ Interest payments on the Certificates of a Series entitled by
their terms to receive interest will be made on each Payment Date,
to the extent set forth in, and at the applicable rate specified
in (or determined in the manner set forth in), the related
Prospectus Supplement. The interest rate on Certificates of a
Series may be variable or change with changes in the rates of
interest on the pool of receivables (collectively, the
'Receivables') generated or to be generated from time to time in
the ordinary course of business in a portfolio of accounts
(collectively, the 'Accounts') underlying or comprising the
Primary Assets and/or as early amortizations or prepayments
occur with respect to any CABS Securities underlying or
comprising the Primary Assets. Interest Only Certificates may be
assigned a 'Notional Amount' set forth in the related Prospectus
Supplement which issued solely for convenience in expressing the
calculation of interest and for certain other purposes and does
not represent the right to receive any distributions allocable
to principal. Principal Only Certificates may not be entitled to
receive any interest payments or may be entitled to receive only
nominal interest payments. Interest payable on the Certificates
of a Series on a Payment Date will include all interest accrued
during the period specified in the related Prospectus
Supplement. See 'DESCRIPTION OF THE CERTIFICATES--Payments of
Interest.'
PRINCIPAL PAYMENTS........................... All payments of principal of a Series of Certificates will be made
in an aggregate amount determined as set forth in the related
Prospectus Supplement and will be paid at the times and will be
allocated among the Classes of such Series in the order and
amounts, and will be applied either on a pro rata or a random
lot basis among all Certificates of any such Class, all as
specified in the related Prospectus Supplement.
FINAL SCHEDULED PAYMENT DATE
OF THE CERTIFICATES........................ The Final Scheduled Payment Date for each Class of Certificates
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
of a Series is the date after which no Certificates of such
Class are expected to remain outstanding, calculated on the
basis of the assumptions applicable to such Series described in
the related Prospectus Supplement. The Final Scheduled Payment
Date of a Class may equal the maturity date of the Primary Asset
in the related Trust which has the latest stated maturity or
will be determined as described herein and in the related
Prospectus Supplement.
The actual final Payment Date of the Certificates of a Series will
depend primarily upon the rate of payment (including early
amortization, prepayments and repurchases) of the Receivables
underlying or comprising the Primary Assets in the related
Trust. Unless otherwise specified in the related Prospectus
Supplement, the actual final Payment Date of any Certificate is
likely to occur earlier and may occur substantially earlier than
its Final Scheduled Payment Date as a result of the application
of prepayments to the reduction of the principal balances of
Certificates or if an early amortization occurs with respect to
the Primary Assets, or may occur later than its Final Scheduled
Payment Date. See 'RISK FACTORS' and 'DESCRIPTION OF THE
CERTIFICATES' herein for a more detailed description of factors
that may affect the timing of principal payments on the
Certificates.
OPTIONAL TERMINATION......................... One or more Classes of Certificates of any Series may be
repurchased in whole, but not in part, at the Depositor's or the
related Seller's option, at such time and under the
circumstances specified in the related Prospectus Supplement, at
the redemption price set forth therein. If so specified in the
related Prospectus Supplement for a Series of Certificates, the
Depositor, the Servicer, the related Seller or such other entity
that is specified in the related Prospectus Supplement may, at
its option, cause an early termination of the related Trust by
repurchasing all of the Primary Assets remaining in the Trust on
or after a specified date, or on or after such time as the
aggregate principal balance of the Certificates of the Series or
the Primary Assets relating to such Series, as specified in the
related Prospectus Supplement, is less than the amount or
percentage specified in the related Prospectus Supplement. See
'DESCRIPTION OF THE CERTIFICATES--Optional Purchase or
Termination.'
In addition, the Prospectus Supplement may provide other
circumstances under which holders of Certificates of a Series
could be fully paid significantly earlier than would otherwise
be the case if payments or distributions were solely based on
the activity of the related Primary Assets.
TRUST ASSETS................................. The Trust for a Series of Certificates will consist of one or more
of the assets described below, as described in the related
Prospectus Supplement.
A. PRIMARY ASSETS.......................... The Primary Assets for a Series may consist of any combination of
the following assets, to the extent and as specified in the
related Prospectus Supplement. The Primary Assets will be
purchased from the Seller or may be purchased by the
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Depositor in secondary market transactions, not from the issuer
of such CABS Securities or an affiliate thereof, or, in the case
of the Receivables, in privately negotiated transactions,
including transactions with entities affiliated with the
Depositor.
The assets of the Trust created with respect to any Series may
include a pool of Receivables arising under the Accounts
included in such Trust from time to time, funds collected or to
be collected from cardholders in respect of the Receivables, the
right to receive certain Interchange fees attributed to
cardholder charges for merchandise and services in the Accounts,
monies on deposit in certain accounts of the Trust, funds
collected or to be collected from Participations, if any, and
any Enhancement issued with respect to a particular Series (the
drawing on or payment of any Enhancement for the benefit of a
Series or class of investor certificates will not be available
to the investor certificateholders of any other Series or
class).
The designated Accounts will meet the criteria provided in each
Agreement applied as of the applicable Cut-off Date. The
Accounts will consist of the Initial Accounts and any Additional
Accounts but will not include any Removed Accounts. In addition,
pursuant to each Agreement, each Seller may (subject to certain
limitations and conditions), and in some circumstances, will be
obligated to designate Additional Accounts, the Receivables in
which will be included in the Trust or, in lieu thereof or in
addition thereto, to include Participations in the Trust.
Pursuant to each Agreement, a Seller will have the right (subject
to certain limitations and conditions), but not the obligation,
to remove the Receivables in certain Accounts from the Trust
('Removed Accounts').
(1) THE RECEIVABLES
(A) CREDIT CARD
RECEIVABLES..................... Credit Card Receivables consist of periodic finance charges,
annual membership fees, cash advance fees, late charges on
amounts charged for merchandise and services, certain other
designated fees ('Finance Charge Receivables') and all amounts
charged by cardholders for merchandise and services, amounts
advanced to cardholders as cash advances and all other fees
billed to cardholders on the Accounts ('Principal Receivables').
In addition, certain Interchange attributed to cardholder
charges for merchandise and services in the Accounts may be
treated as Finance Charge Receivables. Recoveries of charged-off
Finance Charge Receivables will be treated as collections of
Finance Charge Receivables and recoveries of charged-off
Principal Receivables will be applied against charge-offs of
Principal Receivables. From time to time, subject to certain
conditions, certain of the amounts described above which are
included in Principal Receivables may be treated as Finance
Charge Receivables. 'Interchange' consists of certain fees
received by a credit card-issuing bank
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
from the VISA USA, Inc. ('VISA'1) and MasterCard International
Incorporated ('MasterCard International'1) associations as
partial compensation for taking credit risk, absorbing fraud
losses and funding receivables for a limited period prior to
initial billing.
(B) CHARGE CARD
RECEIVABLES................... Charge Card Receivables consist of amounts charged on the
designated Accounts for merchandise and services, and annual
membership fees and certain other administrative fees billed to
the designated Accounts. Receivables originated under charge
card accounts are not subject to a monthly finance charge and,
therefore, it will be necessary to treat a portion of the
collections on the Charge Card Receivables as 'yield'. The
remainder of such collections will be treated as principal
collections.
(C) GENERAL.......................... All new Receivables arising in the designated Accounts (including
in any Additional Accounts) during the term of the Trust will be
the property of the Trust. Accordingly, the amount of
Receivables will fluctuate as new Receivables are generated and
an existing Receivables are collected, charged off as
uncollectible or otherwise adjusted. Receivables may be payable
in U.S. dollars or in any foreign currency.
(2) CABS SECURITIES..................... Primary Assets for a Series may consist, in whole or in part, of
card assetbacked securities ('CABS Securities') which include
certificates representing undivided interests in, or notes or
loans secured by, Receivables generated in Accounts (as
described above). Such certificates, notes or loans will have
previously been (a) offered and distributed to the public
pursuant to an effective registration statement or are being
registered under the Securities Act of 1933 in connection with
the offering of a Series of Securities or (b) purchased in a
transaction not involving any public offering from a person who
is not an affiliate of the issuer of such securities at the time
of sale (nor an affiliate thereof at any time during the three
preceding months); provided a period of three years has elapsed
since the later of the date the securities were acquired from
the issuer or an affiliate thereof See 'THE TRUST ASSETS--CABS
Securities.' Unless otherwise specified in the Prospectus
Supplement relating to a Series of Securities, payments on the
CABS Securities will be distributed directly to the Trustee as
registered owner of such CABS Securities.
The related Prospectus Supplement for a Series will specify (such
disclosure may be on an approximate basis), to the extent
relevant and to the extent such information is reasonably
available to the Depositor and the Depositor reasonably believes
such information to be reliable, (i) the aggregate approximate
principal amount and type of any CABS Securities to be included
in the Trust for such Series; (ii) certain characteristics of
the Receivables which comprise
</TABLE>
- ------------------
1 VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
7
<PAGE>
<TABLE>
<S> <C>
the underlying assets for the CABS Securities; (iii) the
expected maturity and the final maturity of the CABS Securities;
(iv) the certificate rate for the CABS Securities; (v) the
issuer or issuers of the CABS Securities (the 'CABS Issuer'),
the servicer or servicers of the CABS Securities (the 'CABS
Servicer') and the trustee or trustees of the Securities (the
'CABS Trustee'); (vi) certain characteristics of enhancement, if
any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to such CABS Securities; (vii) any
early amortization events applicable to the CABS Securities;
(viii) the terms on which underlying Receivables for such CABS
Securities may, or are required to, be repurchased prior to
stated maturity; and (ix) the terms on which substitute
Receivables may be delivered to replace those initially
deposited with the CABS Trustee. See 'THE TRUST ASSETS' herein.
B. COLLECTION, DISTRIBUTION,
PRE-FUNDING AND OTHER
TRUST ACCOUNTS........................ Unless otherwise provided in the related Prospectus Supplement,
all payments on or with respect to the Primary Assets for a
Series will be remitted directly to an account (the 'Collection
Account') to be established for such Series with the Trustee, or
the Servicer in the name of the Trustee. Unless otherwise
provided in the related Prospectus Supplement the Trustee shall
be required to apply a portion of the amount in the Collection
Account, together with reinvestment earnings thereon at the rate
or rates specified in the related Prospectus Supplement, to the
payment, if and as provided in the related Prospectus
Supplement, of certain amounts payable to the Servicer under the
related Agreement and any other person specified in the related
Prospectus Supplement, and to deposit a portion of the amount in
the Collection Account into a separate account (the
'Distribution Account') to be established for such Series, each
in the manner and at the times established in the related
Prospectus Supplement. All amounts deposited in such
Distribution Account will be available unless otherwise
specified in the related Prospectus Supplement, for (i)
application to the payment of principal of and interest on such
Series of Certificates on the next Payment Date, (ii) the making
of adequate provision for future payments on certain Classes of
Certificates and (iii) any other purpose specified in the
related Prospectus Supplement. After applying the funds in the
Collection Account as described above, any funds remaining in
the Collection Account may be paid over to the Servicer, the
Depositor, any provider of Enhancement with respect to such
Series (an 'Enhancer') or any other person entitled thereto in
the manner and at the times established in the related
Prospectus Supplement. From time to time, various accounts,
including Pre-Funding Accounts, may be created under the terms
of the documents related to a specific Series.
In addition, a Prospectus Supplement may provide that the assets
of a Trust will include a Pre-Funding Account (the 'Pre-Funding
Account'). To the extent provided in the related
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Prospectus Supplement, the Depositor will be obligated (subject
only to the availability thereof) to deposit, and the related
Trust will be obligated to accept (subject to the satisfaction
of certain conditions described in the applicable Sale and
Servicing Agreement), additional Receivables (the 'Subsequent
Receivables') from time to time (as frequently as daily) during
the Funding Period specified in the related Prospectus
Supplement having an aggregate principal balance approximately
equal to the amount on deposit in the Pre-Funding Account (the
'Pre-Funded Amount') on the related Closing Date.
ENHANCEMENT.................................. If stated in the Prospectus Supplement relating to a Series,
enhancement may be provided with respect to one or more Classes
of the Certificates of such Series. Enhancement may be in the
form of the subordination of one or more Classes of the
Certificates of such Series, a letter of credit, the
establishment of a cash collateral guaranty or account, a surety
bond, insurance, the use of cross support features or another
method of Enhancement described in the related Prospectus
Supplement, or any combination of the foregoing. Series
Enhancement may also include any type of derivative arrangement,
including a guaranteed rate agreement, maturity liquidity
facility, tax protection agreement, interest rate cap or floor
agreement, interest rate or currency swap agreement or other
similar arrangement. The Enhancement will support the payments
on the Certificates and may be used for other purposes, to the
extent and under the conditions specified in such related
Prospectus Supplement. See 'ENHANCEMENT' herein.
Enhancement for a Series may include one or more of the following
types of Enhancement, or such other type of Enhancement
specified in the related Prospectus Supplement.
The type, characteristics and amount of the Enhancement will be
determined based on several factors, including the
characteristics of the Receivables and Accounts underlying or
comprising the portfolio as of the relevant Closing Date with
respect to any Series, and will be established on the basis of
requirements of each Rating Agency rating the Certificates of
such Series. If so specified in the related Prospectus
Supplement, any such Enhancement may apply only in the event of
certain types of losses and the protection against losses
provided by such Enhancement will be limited.
(A) SUBORDINATION.......................... A Series of Certificates may include one or more Classes of
Certificates which are subordinate to one or more other Classes
of such Series. The rights of the holders of any such
subordinated Certificates to receive distributions on any
Payment Date for such Series will be subordinate in right and
priority to the rights of the holders of Certificates which are
senior to such subordinated Certificates, but only to the extent
set forth in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, subordination may apply
only in the event of certain types of losses not covered by
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another Enhancement. The related Prospectus Supplement will also
set forth information concerning the amount of subordination of
a Class or Classes of subordinated Certificates in a Series, the
circumstances in which such subordination will be applicable,
the manner, if any, in which the amount subordinated will
decrease over time, and the conditions under which amounts
available from payments that would otherwise be made to holders
of such subordinated Certificates will be distributed to holders
of Certificates which are senior to such subordinated
Certificates. If cash flows otherwise distributable to holders
of a subordinated Class of a Series will be used as support for
a Class of another Series, the related Prospectus Supplement
will specify the manner and conditions for applying such
across-support feature. See 'ENHANCEMENT--Subordination.'
(B) LETTER OF CREDIT....................... If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes of a Series may be provided by one
or more letters of credit. A letter of credit may provide
limited protection against certain losses in addition to or in
lieu of another Enhancement. The issuer of the letter of credit
(the'L/C Bank') will be obligated to honor demands with respect
to such letter of credit, to the extent of the amount available
thereunder, to provide funds under the circumstances and subject
to such conditions as are specified in the related Prospectus
Supplement. The liability of the L/C Bank under its letter of
credit may be reduced by the amount of unreimbursed payments
thereunder. The maximum liability of an L/C Bank under its
letter of credit will generally be an amount equal to a
percentage specified in the related Prospectus Supplement of the
initial amount of a Series or a Class of such Series. The
maximum amount available at any time to be paid under a letter
of credit will be determined in the manner specified therein and
in the related Prospectus Supplement. See 'ENHANCEMENT--Letter
of Credit.'
(C) CASH COLLATERAL
GUARANTY OR ACCOUNT.................. If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes of a Series may be provided by a
guaranty (the 'Cash Collateral Guaranty') secured by the deposit
of cash or certain permitted investments in an account the 'Cash
Collateral Account') reserved for the beneficiaries of the Cash
Collateral Guaranty or by a Cash Collateral Account alone. The
amount available pursuant to the Cash Collateral Guaranty or the
Cash Collateral Account will be the lesser of amounts on deposit
in the Cash Collateral Account and an amount specified in the
related Prospectus Supplement. The related Prospectus Supplement
will set forth the circumstances under which payments are made
to beneficiaries of the Cash Collateral Guaranty from the Cash
Collateral Account or from the Cash Collateral Account directly.
(D) RESERVE FUND........................... If so specified in the related Prospectus Supplement, the
Depositor may deposit cash, a letter or letters of credit,
short-term investments, or other instruments acceptable to the
Rating Agency in one or more reserve funds to be established in
the
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name of the Trustee (each, a 'Reserve Fund'), which will be
used, as specified in such Prospectus Supplement, by the Trustee
to make required payments of principal of or interest on the
Certificates of such Series, to make adequate provision for
future payments on such Certificates or for any other purpose
specified in the Agreement, with respect to such Series, to the
extent that funds are not otherwise available. In the
alternative or in addition to such deposit, a Reserve Fund for a
Series may be funded through application of all or a portion of
the excess cash flow from the Primary Assets for such Series, to
the extent described in the related Prospectus Supplement.
(E) SURETY BOND OR
INSURANCE POLICY..................... If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes of a Series may be provided by the
posting of a surety bond or the issuance of insurance by an
insurance company, in each instance designed to assure the
distribution of interest or principal on the Certificates of
such Class or Series in the manner and amount specified in the
related Prospectus Supplement.
(F) SPREAD ACCOUNT..................... If so specified in the related Prospectus Supplement, support for
a Series or one or more Classes of a Series may be provided by the
periodic deposit of certain available excess cash flow from the
Trust assets into an account (the 'Spread Account') intended to
assure the subsequent distribution of interest or principal on
the Certificates of such Class or Series in the manner specified
in the related Prospectus Supplement.
(G) DERIVATIVE PRODUCTS................ If so specified in the related Prospectus Supplement, the
Depositor may enter into any type of derivative arrangement with
respect to the Certificates of any Class or Series. Such
derivative arrangement may include a guaranteed rate agreement,
a maturity liquidity facility, a tax protection agreement, an
interest rate cap or floor agreement, an interest rate or
currency swap agreement or any other similar arrangement.
SERVICING.............................. The Servicer will be responsible for servicing, managing and
making collections on the Receivables for a Series. The Servicer
may perform such functions alone, through subservicers or in
conjunction with a Master Servicer. In performing these
functions, the Servicer will exercise the same degree of skill
and care that it customarily exercises with respect to similar
receivables owned or serviced by it. Under certain limited
circumstances, the Servicer may resignor be removed, in which
event either the Trustee or a third-party servicer will be
appointed as successor servicer. The Servicer will receive a
periodic fee as servicing compensation and may, as specified
herein and in the related Prospectus Supplement, receive certain
additional compensation. See 'SERVICING OF RECEIVABLES' herein.
FEDERAL INCOME
TAX CONSIDERATIONS................... Except as set forth in the related Prospectus Supplement, it is
anticipated that Special Tax Counsel to the Depositor will be
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of the opinion that, under existing law, the Trust will be
classified as either a grantor trust under the Internal Revenue
Code of 1986, as amended (the 'Code'), and not as an association
taxable as a corporation or as an owner trust and the Notes will
be treated as debt instruments for Federal, state and local
income and franchise tax purposes as of the Closing Date. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' for additional
information concerning the application of Federal income tax
laws.
ERISA CONSIDERATIONS................... A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or
the Internal Revenue Code of 1986, as amended (the 'Code'),
should carefully review with its own legal advisors whether the
purchase or holding of Certificates could give rise to a
transaction prohibited or otherwise impermissible under ERISA or
the Code. See 'ERISA CONSIDERATIONS.'
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 constitute
legal investments for them.
USE OF PROCEEDS........................ The Depositor will use the net proceeds from the sale of each
Series for one or more of the following purposes: (i) to
purchase the related Primary Assets, (ii) to repay indebtedness
which has been incurred to obtain funds to acquire such Primary
Assets, (iii) to establish a Pre-Funding Account for such
Series, (iv) to establish any Reserve Funds or Cash Collateral
Accounts described in the related Prospectus Supplement, (v) to
provide enhancement for any other Series or for securities
issued by another issuer, and (vi) to pay costs of structuring
and issuing such Certificates, including the costs of obtaining
Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may
be effected by an exchange of Certificates with the Seller of
such Primary Assets. See 'USE OF PROCEEDS.'
RATINGS................................ It will be a requirement for issuance of any Series that the
Certificates offered by this Prospectus and the related
Prospectus Supplement be rated by at least one Rating Agency in
one of its four highest applicable rating categories. The rating
or ratings applicable to Certificates of each Series offered
hereby and by the related Prospectus Supplement will be as set
forth in the related Prospectus Supplement. A securities rating
should be evaluated independently of similar ratings on
different types of securities.
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RISK FACTORS
Limited Liquidity. There can be no assurance that a secondary market for
the Certificates of any Series will develop or, if it does develop, that such
market will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Certificates of such Series. The Underwriters
presently expect to make a secondary market in the Certificates offered hereby
and pursuant to any Prospectus Supplement, but have no obligation to do so.
Certain Legal Aspects. Each Seller will warrant in its Pooling and
Servicing Agreement, Master Pooling and Servicing Agreement, Sale and Servicing
Agreement or Trust Agreement (collectively, an 'Agreement') that the transfer of
the Receivables by it to the Trust is and will be either a valid transfer and
assignment of all right, title and interest in the Receivables and all proceeds
thereof to the Trust or the grant to the Trust of a security interest in the
Receivables. The Seller has taken and will take certain actions required to
perfect the Trust's interest in the Receivables. The Seller has warranted that
if the transfer by it to the Trust is deemed to be a grant to the Trust of a
security interest in the Receivables, the Trustee will have a first priority
perfected security interest therein. If the transfer of the Receivables and all
proceeds thereof to the Trust is deemed to create a security interest therein, a
tax or government lien on property of the Seller arising before Receivables come
into existence may have priority over the Trust's interest in such Receivables.
See 'CERTAIN LEGAL ASPECTS OF THE RECEIVABLES--Transfer of Receivables.'
If any Seller is a regulated financial institution, to the extent that a
Seller grants a security interest in the Receivables to the Trust and that
security interest is validly perfected before any insolvency of the Seller and
is not granted or taken in contemplation of insolvency or with the intent to
hinder, delay or defraud the Seller or its creditors, that security interest
should not be subject to avoidance in the event of insolvency and receivership,
and payments to the Trust with respect to the Receivables should not be subject
to recovery by a conservator or receiver for the Seller. If, however, the
conservator or receiver were to assert a contrary position, or were to require
the Trustee to establish its right to those payments by submitting to and
completing the administrative claims procedure established under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ('FIRREA'), or the
conservator or receiver were to request a stay of proceedings with respect to
the Seller as provided under FIRREA, delays in payments on the Certificates and
possible reductions in the amount of those payments could occur. In the event of
a Servicer Default, if a conservator or receiver is appointed for the Servicer,
and no Servicer Default other than such conservatorship or receivership or
insolvency of the Servicer exists, the conservator or receiver may have the
power to prevent either the Trustee or the majority of the Certificateholders
from effecting a transfer of servicing to a successor Servicer. If a conservator
or receiver were appointed for the Seller pursuant to the Agreement, new
Principal Receivables would not be transferred to the Trust and the Trustee
would sell the portion of the Receivables allocable in accordance with the
Agreement to each Series (unless Certificateholders representing more than 50%
of the Investor Amount of each Series, or if any such Series has more than one
Class of each Class of such Series, instruct otherwise), thereby causing early
termination of the Trust and a loss to the Certificateholders if the net
proceeds of such sale were insufficient to pay Certificates in full. Upon the
occurrence of a Liquidation Event, if a conservator or receiver was appointed
for the Seller and no Liquidation Event other than such conservatorship,
receivership or insolvency of the Seller existed, the conservator or receiver
may have the power to prevent the early sale, liquidation or disposition of the
Receivables and the commencement of the Rapid Amortization Period. In addition,
a conservator or receiver for the Seller may have the power to cause early
payment of the Certificates. See 'CERTAIN LEGAL ASPECTS OF THE
RECEIVABLES--Certain Matters Relating to Receivership.'
The Accounts and the Receivables are subject to numerous Federal and state
consumer protection laws which impose requirements on the making and collection
of consumer loans. Such laws, as well as any new laws or rulings which may be
adopted, may adversely affect the Servicer's ability to collect on the
Receivables or maintain previous levels of finance charges, annual cardholder
fees and other fees, and failure by the Seller or the Servicer to comply with
such requirements also could adversely affect the Servicer's ability to collect
on the Receivables. Pursuant to the Agreement, the Depositor covenants to accept
the transfer of all Receivables in an Account if any Receivable in such Account
does not comply with all requirements of law, if any Receivable is charged off
as uncollectible or if the proceeds of any Receivable in such Account are not
available to the Trust. The Depositor also makes certain other representations
and warranties relating to the validity and enforceability of the Accounts and
the Receivables. However, the Trustee will not make any examination of the
Receivables or
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the records relating thereto for the purpose of establishing the presence or
absence of defects, compliance with such representations and warranties, or for
any other purpose. The sole remedy if any such representation or warranty is
breached and such breach continues beyond the applicable cure period, if any, is
that the Depositor or the Servicer, as the case may be, will generally be
obligated to accept the transfer of all Receivables in the Account affected
thereby. In addition, in the event of a breach of certain representations and
warranties, the Depositor may be obligated to accept the reassignment and
transfer of the interest in the Trust of the holders of all Series.
Application of Federal and state bankruptcy and debtor relief laws would
affect the interests of the Certificateholders in the Receivables, if such laws
result in any Receivables being written off as uncollectible.
Certain Legal Concerns Applicable to Accounts. In November 1991, the
United States Senate voted to amend a then-proposed Senate banking bill to
include an amendment to the Federal Truth-in-Lending Act which would have
limited the annual percentage rate charged on credit card accounts to a rate not
exceeding four percentage points over the rate charged by the IRS on
underpayments of federal taxes. Based on the then-current IRS rate, such
amendment would have limited the maximum annual percentage rate for all credit
card accounts to 14%. Although the amendment was not approved by the House of
Representatives, the Depositor cannot predict whether Congress will pass a
similar bill in the future or if such a bill would be signed by the President.
The potential effect of any legislation which limits the amount of finance
charges that may be charged on credit card balances could be to reduce the Net
Portfolio Yield of a Series. If such Net Portfolio Yield for such Series is
reduced, a Liquidation Event may occur, and the Rapid Amortization Period for
such Series could commence prior to the Scheduled Amortization Date for such
Series. In addition, during the past year, there has been increased consumer
awareness of the level of finance charges and fees and other practices of card
issuers. As a result of these developments and other factors, there can be no
assurance as to whether any federal or state legislation will be promulgated
which would impose additional limitations on the monthly periodic finance
charges or fees relating to the Accounts.
Since October 1991, a number of lawsuits and administrative actions have
been filed in several states against out-of-state banks (both federally insured
state-chartered banks and federally insured national banks) which issue cards.
These actions challenge various fees and charges (such as late fees,
over-the-limit fees, returned payment check fees and annual membership fees)
assessed against residents of the states in which such suits were filed, based
on restrictions or prohibitions under such states' laws alleged to be applicable
to the out-of-state cards issuers. There can be no assurance that one of the
Sellers will not be named as a defendant in similar lawsuits or other
administrative actions. In December 1994, the Superior Court of Pennsylvania
reinstated a class-action law suit, stating that not all of Pennsylvania's
consumer protection laws which purport to prohibit credit card fees and
contingent default charges have been preempted by federal law. This case has
been appealed to the Pennsylvania Supreme Court. The Supreme Courts of
California, Colorado and New Jersey have also recently handed down decisions in
similar actions. The California and Colorado Supreme Courts opined that federal
law governs late fees and found for the defendant credit card issuers, while the
New Jersey Supreme Court found that late payment fees are not interest and that,
therefore, state law is not preempted by federal law with respect to such fees.
On January 19, 1996, the United States Supreme Court accepted an appeal from the
California Supreme Court's decision, which found that the charge in question was
governed by federal law and was, therefore, proper. Such actions and similar
actions which may be brought in other states as a result of such actions, if
resolved adversely to card issuers, could have the effect of limiting certain
charges, other than periodic finance charges, that could be assessed on accounts
of residents of such states and could require card issuers to pay refunds and
civil penalties with respect to charges previously imposed on cardholders in
such states. Consequently, such actions could have an adverse impact on a
Seller's card operations. One potential effect of any such litigation involving
a Seller, if successful, would be to reduce the Net Portfolio Yield for a
Series. If such a reduction occurs, a Liquidation Event may occur.
Competition. The credit card and charge card industry is highly
competitive. There is increased competitive use of advertising, target marketing
and pricing competition in interest rates and annual cardholder fees as both
traditional and new credit card and charge card issuers seek to expand or to
enter the market. As a result of this competition, certain major credit card and
charge card issuers assess finance charges for selected portions of their
portfolios at rates lower than the rates currently being assessed on the
Accounts. A Seller's ability to compete in the credit card and charge card
industry will affect its ability to generate new Receivables.
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Payments and Maturity. The Receivables in the Trust may be paid at any
time and there is no assurance that there will be additional Receivables created
in the Accounts the Receivables of which are designated for inclusion in the
Trust or that any particular pattern of cardholder repayments will occur. The
continuation of the Revolving Period of a Series will be dependent upon the
continued generation of new Receivables for the Trust. A significant decline in
the amount of Receivables generated in the Accounts could result in the
occurrence of a Liquidation Event for one or more Series and the commencement of
the Rapid Amortization Period for each such Series. A decrease in the rate of
payment by cardholders could delay the return of principal to the
Certificateholders during the Amortization Periods for each Series. See
'Receivable Yield Considerations' in the related Prospectus Supplement. Each
Agreement will provide that the Depositor or the related Seller may, or will be
required to, designate Additional Accounts, the Receivables of which will be
added to the Trust in the event that the amount of the Principal Receivables is
not maintained at a certain minimum amount. If Additional Accounts are not
designated by the Depositor or the related Seller when required, a Liquidation
Event for one or more Series may occur and result in the commencement of a Rapid
Amortization Period for such Series. See the related Prospectus Supplement for a
discussion of other events which might lead to the commencement of the Rapid
Amortization Period for a Series.
Basis Risk. If so specified in the related Prospectus Supplement, a
portion of the Accounts in a Trust will have finance charges set at a variable
rate above a designated prime rate or other designated index. A Series of
Certificates issued by such Trust may bear interest at a fixed rate or at a
floating rate based on an index other than the prime rate or other designated
index. If there is a decline in the prime rate or other designated index, the
amount of collections of Finance Charge Receivables on such Accounts may be
reduced, whereas the amounts payable as Monthly Interest on such Series of
Certificates and other amounts required to be funded out of Finance Charge
Receivables with respect to such Series may not be similarly reduced.
Social, Geographic and Economic Factors. Changes in card use, payment
patterns and the rate of defaults by cardholders may result from a variety of
social, economic and geographic factors. Social factors include the public's
perceptions of the use of credit cards. Legal factors include any charges in the
current legal structure affecting the relative balance of power between credit
card issuers and the obligors under credit card accounts. Economic factors
include the rate of inflation and relative interest rates offered for various
types of loans. Adverse changes in economic conditions in any states where
cardholders are located could have a direct impact on the timing and amount of
payments on the Certificates of any Series. The Depositor is unable to determine
and has no basis to predict whether, or to what extent, economic, social or
geographic factors will affect future card use or repayment patterns. New credit
card issuers have been entering the market while other issuers have been seeking
to expand market share through increased advertising, target marketing and
pricing competition. Additionally, the use of incentive or affinity programs
(e.g., gift awards for card usage) may affect card usage patterns.
In 1992, a jury in Federal court in Utah held that the VISA association
violated antitrust laws when it denied membership in VISA to a subsidiary of
Sears Roebuck & Co., on the basis that another Sears subsidiary is the issuer of
the Discover Card, a competitor of the VISA credit card. In September 1994, the
United States Court of Appeals reversed the trial court's decision upholding the
verdict, and held VISA's conduct did not violate the antitrust laws. The United
States Court of Appeals denied Dean Witter, Discover and Co.'s motion for a
rehearing en banc, and in June 1995, the United Stated Supreme Court refused to
review the decision of the Court of Appeals. While the United Stated Supreme
Court refused to review the Court of Appeals decision with regard to Dean
Witter, Discover & Co.'s antitrust claims, the case is continuing on Dean
Witter, Discover & Co.'s state law claims and VISA's counterclaims.
A Seller's Ability to Change Terms of the Receivables. Any Seller may have
the right to determine the finance charges and the other fees and charges which
will be applicable from time to time on its Accounts, to alter the minimum
monthly payment required under the Accounts and to change various other terms of
its agreement with cardholders with respect to the Accounts. A decrease in the
finance charges and the other fees and charges assessed on the Accounts would
decrease the effective yield on the Accounts and could result in the occurrence
of a Liquidation Event for one or more Series and commencement of the Rapid
Amortization Period for each such Series. Under an Agreement a Seller may agree
that, unless required by law or as is otherwise necessary, in its good faith
judgment, to maintain its credit card business on a competitive basis, it will
not reduce the annual percentage rate at which finance charges are assessed on
the Receivables or the other fees and charges
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assessed on the Accounts, if, as a result of such reduction, the Net Portfolio
Yield for any Series (as defined below under 'Maturity Assumptions') as of such
date would be less than the Base Rate for such Series. The terms 'Base Rate' and
'Net Portfolio Yield' for each Series have the meanings set forth in the
Prospectus Supplement relating to each such Series. The Seller may also covenant
that it will change the terms relating to the Accounts only if the change is
made applicable to the comparable segment of the accounts owned and serviced by
the Seller with characteristics the same as or substantially similar to the
Accounts, except as otherwise restricted by the terms of the applicable
cardholder agreement. In servicing Accounts, a Servicer will be required to
exercise the same care and apply the same policies that it exercises in handling
similar matters for its own comparable accounts. Except as set forth above, the
Agreement does not contain any restrictions on the ability of a Seller to change
the terms of the Accounts or the Receivables. There can be no assurance that
changes in applicable law, changes in the marketplace or prudent business
practice might not result in a determination by a Seller to decrease finance
charges or other fees and charges for existing accounts, or take actions which
would otherwise change the terms of the Accounts.
Limited Nature of Rating. Any rating assigned to the Certificates of a
Series or a Class of a Series by a Rating Agency will reflect such Rating
Agency's assessment solely of the likelihood that Certificateholders will
receive the payments of interest and principal required to be made under the
Agreement and will be based primarily on the value of the Primary Assets in the
Trust and the availability of any Enhancement with respect to such Series or
Class of such Series. The rating will not be a recommendation to purchase, hold
or sell Certificates of such Series or Class of such Series, and such rating
will not comment as to the marketability of such Certificates, any market price
or suitability for a particular investor. There is no assurance that any rating
will remain for any given period of time or that any rating will not be lowered
or withdrawn entirely by a Rating Agency if in such Rating Agency's judgment
circumstances so warrant.
Book-Entry Certificates. Issuance of the Certificates in book-entry form
may reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Certificates for which they cannot
obtain physical certificates. See 'DESCRIPTION OF THE CERTIFICATES--Book-Entry
Registration' herein.
Because transactions in the Certificates can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system, or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing the Certificates. See 'DESCRIPTION
OF THE CERTIFICATES-- Book-Entry Registration' herein.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates because such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See 'DESCRIPTION OF THE
CERTIFICATES--Book-Entry Registration' herein.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in Series pursuant to separate Pooling and
Servicing Agreements, Master Pooling and Servicing Agreements, Sale and
Servicing Agreements or Trust Agreements (collectively, an 'Agreement') between
the Depositor, the Servicer and the Trustee for the related Series identified in
the related Prospectus Supplement. A form of Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
Agreement relating to each Series of Certificates will be filed as an exhibit to
a report on Form 8-K to be filed with the Commission within 15 days following
the issuance of such Series of Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of
Certificates.
The following summaries describe certain provisions in the Agreements which
are anticipated to be common to each Series of Certificates. The summaries do
not purport to be complete and are subject to, and are
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qualified in their entirety by reference to, the provisions of the Agreement and
the Prospectus Supplement relating to each Series of Certificates. Where
particular provisions or terms used in the Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated herein by reference
as part of such summaries.
The Certificates are issuable in Series. Each Series will consist of one or
more Classes of Certificates, one or more of which may be Variable Interest
Certificates, Zero Coupon Certificates, Principal Only Certificates, Interest
Only Certificates or other types of Certificates as described in the related
Prospectus Supplement. A Series may also include one or more Classes of
Subordinate Certificates. The Certificates of each Series will be issued only in
fully registered form, without coupons, in the authorized denominations for each
Class specified in the related Prospectus Supplement. Upon satisfaction of the
conditions, if any, applicable to a Class of a Series, as described in the
related Prospectus Supplement, the transfer of the Certificates may be
registered and the Certificates may be exchanged at the office of the Trustee
specified in the related Prospectus Supplement without the payment of any
service charge other than any tax or governmental charge payable in connection
with such registration of transfer or exchange. If specified in the related
Prospectus Supplement, one or more Classes of a Series may be available in
book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Certificates will be made on the
Payment Dates specified in the Prospectus Supplement relating to such Series by
check mailed to Certificateholders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Payment Dates at their addresses appearing on the
certificate register, except that (a) payments may be made by wire transfer (at
the expense of the Certificateholder requesting payment by wire transfer) in
certain circumstances described in the related Prospectus Supplement and (b)
final payments of principal in retirement of each Certificate will be made only
upon presentation and surrender of such Certificate at the office of the Trustee
specified in the related Prospectus Supplement. Notice of the final payment on a
Certificate will be mailed to the holder of such certificate before the Payment
Date on which the final principal payment on any Certificate is expected to be
made to the holder of such Certificate.
Payments of principal of and interest on the Certificates will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, all payments with respect to the Primary Assets for a
Series, together with reinvestment income thereon, amounts withdrawn from any
Reserve Fund, and amounts available pursuant to any other Enhancement will be
deposited directly into the Collection Account and, net, if and as provided in
the related Prospectus Supplement, of certain amounts payable to the Series
under the related Agreement and any other person specified in the related
Prospectus Supplement, will thereafter be deposited into the Distribution
Account and will be available to make payments on Certificates of such Series on
the next Payment Date, as the case may be. See 'THE TRUST ASSETS--Collection and
Distribution Accounts.'
PAYMENTS OF INTEREST
The Certificates of each Class which by their terms are entitled to receive
interest will bear interest (calculated, unless otherwise specified in the
related Prospectus Supplement, on the basis of a 360-day year of twelve 30-day
months) from the date and at the rate per annum specified, or calculated in the
method described in the related Prospectus Supplement. Interest on such
Certificates of a Series will be payable on the Payment Date specified in the
related Prospectus Supplement. The rate of interest on Certificates of a Series
may be floating. Principal Only Certificates may not be entitled to receive any
interest distributions or may be entitled to receive only nominal interest
distributions. Any interest on Zero Coupon Certificates that is not paid on the
related Payment Date will accrue and be added to the principal thereof on such
Payment Date.
Interest payable on the Certificates on a Payment Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Payment Date the effective yield to Certificateholders will be reduced from the
yield that would otherwise be obtainable if interest payable on the Certificates
were to accrue through the day immediately preceding such Payment Date.
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PAYMENTS OF PRINCIPAL
On each Payment Date for a Series, principal payments will be made to the
holders of the Certificates of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED PAYMENT DATE
The Final Scheduled Payment Date of each Class of a Series of Certificates
will be specified in the related Prospectus Supplement and will be the date
(calculated on the basis of the assumptions applicable to such Series described
therein) on which the entire aggregate principal balance of such Class is
expected to be reduced to zero. Because payments on the Primary Assets will be
used to make distributions in reduction of the outstanding principal amount of
the Certificates, it is likely that the actual final Payment Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Payment Date.
COMPANION SERIES
If so specified in the related Prospectus Supplement, a Series of
Certificates may be paired with another Series issued by the related Trust (a
'Companion Series') on or prior to the commencement of an Accumulation Period or
Amortization Period for such Series. As the Investor Interest of the Series
having a Companion Series is reduced, the Investor Interest of the Companion
Series will increase by an equal amount. Upon payment in full of such Series,
the Investor Interest of the Companion Series will be equal to the amount of the
Investor Interest paid to Certificateholders of such Series.
OPTIONAL PURCHASE OR TERMINATION
The Depositor may, at its option, purchase a Class of Certificates of any
Series, on any Payment Date under the circumstances, if any, specified in the
Prospectus Supplement relating to such Series. Alternatively, if so specified in
the related Prospectus Supplement for a Series of Certificates, the Depositor,
the Servicer, or another entity designated in the related Prospectus Supplement
may, at its option, cause an early termination of a Trust by repurchasing all of
the Primary Assets from such Trust on or after a date specified in the related
Prospectus Supplement, or on or after such time as the aggregate outstanding
principal amount of the Certificates or Primary Assets, as specified in the
related Prospectus Supplement, is less than the amount or percentage specified
in the related Prospectus Supplement. Notice of such purchase or termination
must be given by the Depositor or the Trustee prior to the related date. The
purchase or repurchase price will be set forth in the related Prospectus
Supplement.
In addition, the related Prospectus Supplement may provide other
circumstances under which holders of Certificates of a Series could be fully
paid significantly earlier than would otherwise be the case as a result of the
occurrence of an Early Amortization Event.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, Certificateholders
may hold their Certificates through DTC (in the United States) or CEDEL or
Euroclear (in Europe) if they are participants of such systems, or indirectly
through organizations which are participants in such systems.
Cede, as nominee for DTC, will hold one or more global Certificates. Unless
and until Definitive Certificates are issued under the limited circumstances
described in the related Prospectus Supplement, all references herein or in such
Prospectus Supplement to actions by Certificateholders shall refer to actions
taken by DTC upon instructions from its participating organizations (the
'Participants') and all references herein to distributions, notices, reports and
statements to Certificateholders shall refer to distributions, notices, reports
and statements to DTC or Cede, as the registered holder of the Certificates, as
the case may be, for distribution to Certificateholders in accordance with DTC
procedures.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
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Citibank, N.A. will act as depositary for CEDEL and Morgan Guaranty Trust
Company of New York will act as depositary for Euroclear (in such capacities,
the 'Depositaries').
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC rules. Transfers between CEDEL Participants and Euroclear
Participants will occur in the ordinary way in accordance with their applicable
rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL or
Euroclear participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for sameday
funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a DTC participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL participant on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
or a Euroclear Participant to a DTC participant will be received with value on
the DTC settlement date but will be available in the relevant CEDEL or Euroclear
cash account only as of the business day following settlement in DTC. For
additional information regarding clearance and settlement procedures for the
Certificates, see Annex I hereto and for information with respect to tax
documentation procedures relating to the Certificates, see Annex I hereto and
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Foreign Investors.'
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the New York UCC, and a 'clearing agency'
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations (including the Underwriters).
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodian
relationship with a Participant, either directly or indirectly (the 'Indirect
Participants').
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Certificates may do so only through Participants and Indirect Participants.
In addition, Certificateholders will receive all distributions of principal of
and interest on the Certificates from the Trustee, as paying agent, or its
successor in such capacity (the 'Paying Agent'), through the Participants who in
turn will receive them from DTC. Under a book-entry format, Certificateholders
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Paying Agent to Cede, as nominee for DTC. DTC will forward
such payments to its Participants which thereafter will forward them to Indirect
Participants or Certificateholders. It is anticipated that the only
'Certificateholder' for a Series may be Cede, as nominee of DTC.
Certificateholders would not then be recognized by the Trustee as
Certificateholders, as such term is used in the Agreement, and
Certificateholders would only be permitted to exercise the rights of
Certificateholders indirectly through the Participants who in turn will exercise
the rights of Certificateholders through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective
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Certificateholders. Accordingly, although Certificateholders will not possess
Certificates, Certificateholders will receive payments and will be able to
transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC will take any action permitted to be taken by a Certificateholder under
the Agreement only at the direction of one or more Participants to whose account
with DTC the Certificates are credited. Additionally, DTC will take such actions
with respect to specified percentages of the Certificateholders' interests only
at the direction of and on behalf of Participants whose holdings include
undivided interests that satisfy such specified percentages. 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.
Centrale de Livraison de Valeurs Mobilieres S.A. ('CEDEL') is incorporated
under the laws of Luxembourg as a professional depositary. CEDEL holds
securities for its participating organizations ('CEDEL Participants') and
facilitates the clearance and settlement of securities transactions between
CEDEL Participants through electronic book-entry changes in accounts of CEDEL
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its Participants, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. CEDEL
interfaces with domestic markets in several countries. As a professional
depositary, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Cedel Participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations and may include the
Underwriters. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for its
participants ('Euroclear Participants') and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating both the need for physical
movement of certificates and the risk resulting from transfers of securities and
cash that are not simultaneous.
The System has subsequently been extended to clear and settle transactions
between Euroclear Participants and counterparties both in CEDEL and in many
domestic securities markets. Transactions may be settled in any of 32 settlement
currencies, including United States dollars. In addition to safekeeping
(custody) and securities clearance and settlement, the Euroclear System includes
securities lending and borrowing and money transfer services. The Euroclear
System is operated by the Brussels, Belgium, office of Morgan Guaranty Trust
Company of New York (the 'Euroclear Operator'), under contract with Euroclear
Clearance System S.C., a Belgian cooperative corporation that establishes policy
on behalf of Euroclear Participants. The Euroclear Operator is the Belgian
branch of a New York banking corporation which is a member bank of the Federal
Reserve System. As such, it is regulated and examined by the Board of Governors
of the Federal Reserve System and the New York State Banking Department, as well
as the Belgian Banking Commission.
All operations are conducted by the Euroclear Operator and all Euroclear
securities clearance accounts and cash accounts are accounts with the Euroclear
Operator. They are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System, and
applicable Belgian law (collectively, the 'Terms and Conditions'). The Terms and
Conditions govern all transfers of securities and cash, both within the System
and receipts and withdrawals of securities and cash. All securities in the
Euroclear System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries and may
include the Underwriters. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
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Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See 'Certain Federal Income Tax Considerations.' The CEDEL or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Certificateholder under the Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
The Certificates of any Series will be issued in fully registered,
certificated form to Certificateholders or their respective nominees
('Definitive Certificates'), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
Certificates, and the Trustee or the Depositor are unable to locate a qualified
successor, (ii) the Depositor, at its option, elects to terminate the book-entry
system through DTC or (iii) after the occurrence of a Servicer Default,
Certificateholders of the related series evidencing not less than 50% of the
aggregate unpaid principal amount of the Certificates advise the Trustee and DTC
through Participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of the
Certificateholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive certificates representing the Certificates, and instructions for
re-registration, the Trustee will issue such Certificates in the form of
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders, under the Agreement and
the Series Supplement ('Holders').
If Definitive Certificates are issued, distribution of principal and
interest on the Definitive Certificates will be made by the Paying Agent or the
Trustee directly to the Holders in whose names the Definitive Certificates were
registered on the related Record Date in accordance with the procedures set
forth herein and in the Agreement and the Series Supplement. Distributions will
be made by check mailed to the address of each Holder as it appears on the
register maintained by the Trustee, except that the final payment on any
Definitive Certificate will be made only upon presentation and surrender of such
Definitive Certificate on the date for such final payment at such office or
agency as is specified in the notice of final distribution to Holders. The
Trustee will provide such notice to Holders not later than the fifth day of the
month of the final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar, which shall initially be Citibank.
No service charge will be imposed for any registration of transfer or exchange,
but the Transfer Agent and Registrar may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
Each series of Securities may include one or more classes of Notes, which
will be issued pursuant to an Indenture between the Trust and the Indenture
Trustee (as amended and supplemented from time to time, an 'Indenture'). The
terms of any Notes will be set forth in the Prospectus Supplement relating to
such Notes.
All discussions in this Prospectus of the Certificates, the terms thereof
as well as any investment considerations related thereto will be generally
applicable to any Notes.
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TRUST ASSETS
GENERAL
The Trust for each Series of Certificates will be composed of certain
assets delivered, assigned and transferred to the Trustee by the Depositor, in
each case consisting, unless otherwise specified in the related Prospectus
Supplement, of (i) the Primary Assets, (ii) any Enhancement, (iii) the amount,
if any, initially deposited in the Collection Account, Distribution Account or
Pre-Funding Account for a Series as specified in the related Prospectus
Supplement.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in secondary market transactions, not from the
issuer of such CABS Securities or an affiliate thereof, or, in the case of the
Receivables, in privately negotiated transactions, which may include
transactions with affiliates. Receivables relating to a Series will be serviced
by the Servicer, which may be the Seller, specified in the related Prospectus
Supplement, either pursuant to a Pooling and Servicing Agreement or, if serviced
by the Seller, a Sale and Servicing Agreement (any of the Pooling and Servicing
Agreements or the Sale and Servicing Agreements are referred to herein
individually as an 'Agreement').
Primary Assets included in the Trust for a Series may consist of any
combination of Receivables and CABS Securities, to the extent and as specified
in the related Prospectus Supplement.
The following is a brief description of the Primary Assets expected to be
included in the Trusts. Specific information regarding the Primary Assets will
be provided in the related Prospectus Supplement and, to the extent not
contained in the related Prospectus Supplement, in a report on Form 8-K to be
filed with the Securities and Exchange Commission within fifteen days after the
initial issuance of such Certificate. A copy of the Agreement with respect to
each Series of Certificates, or the Indenture with respect to each Series of
Notes, will be attached to the Form 8-K and will be available for inspection at
the corporate trust office of the Trustee specified in the related Prospectus
Supplement.
THE RECEIVABLES
General. The Primary Assets for a Series may consist, in whole or in part,
of consumer, corporate, revolving credit card, charge card or debit card
receivables (collectively, the 'Receivables') generated from time to time in the
ordinary course of business in a portfolio of consumer, corporate, revolving
credit card, charge card or debit card accounts (collectively, the 'Accounts').
The Accounts will consist of the Initial Accounts sold by a Seller, as well as
any Additional Accounts added from time to time, but will not include any
Removed Accounts. Each Seller will convey to the Trust all Receivables existing
on the Cut-off Date in certain consumer, revolving credit card, charge card or
debit card accounts (the 'Initial Accounts') and all Receivables arising in the
Initial Accounts from time to time thereafter until the termination of the
Trust. The Receivables may be payable in U.S. dollars or in any other foreign
currency. After the Cut-off Date, the Seller will convey to the Trust the
Receivables in certain New Accounts and the Receivables in certain other
Accounts included in certain Lump Sum Additions, in each case in accordance with
the provisions of the Agreement. In addition, pursuant to the Agreement, the
Seller in some circumstances will be obligated to designate Additional Accounts
the Receivables in which will be included in the Trust or, in lieu thereof or in
addition thereto, to include Participations in the Trust. Additional Accounts
will consist of New Accounts and accounts relating to any Lump Sum Additions.
The Seller will convey to the Trust all Receivables in Additional Accounts,
whether such Receivables are then existing or thereafter created. The addition
to the Trust of Receivables in Additional Accounts or Participations will be
subject to certain conditions.
Pursuant to the Agreement, the Seller will have the right (subject to
certain limitations and conditions), but not the obligation, to remove the
Receivables in certain Accounts from the Trust ('Removed Accounts'). If so
specified in the related Prospectus Supplement, the Seller will be able to
include in the related Trust, participations representing undivided interests in
a pool of assets primarily consisting of revolving credit card accounts or other
revolving credit accounts owned by the Seller or any affiliate thereof and
collections thereon ('Participations').
Credit Card Accounts and Receivables. The Credit Card Receivables consist
of periodic finance charges, annual membership fees, cash advance fees and late
charges on amounts charged for merchandise and services and certain other fees
designated by the Seller ('Finance Charge Receivables') and all amounts charged
by
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cardholders for merchandise and services, amounts advanced to cardholders as
cash advances and all other fees billed to cardholders on the Accounts
('Principal Receivables'). In addition, certain Interchange attributed to
cardholder charges for merchandise and services in the Accounts may be treated
as Finance Charge Receivables. Recoveries of charged-off Finance Charge
Receivables will be treated as collections of Finance Charge Receivables and
recoveries of charged-off Principal Receivables will be applied against
charge-offs of Principal Receivables. From time to time, subject to certain
conditions, certain of the amounts described above which are included in
Principal Receivables may be treated as Finance Charge Receivables. The amount
of Receivables will fluctuate from day to day as new Receivables are generated
or added to the Trust and as existing Receivables are collected, charged-off as
uncollectible or otherwise adjusted. 'Interchange' consists of certain fees
received by a credit card-issuing bank from the VISA and MasterCard
International associations as partial compensation for taking credit risk,
absorbing fraud losses and funding receivables for a limited period prior to
initial billing. Under the VISA and MasterCard International systems, a portion
of the Interchange in connection with cardholder charges for merchandise and
services is passed from banks which clear the transactions for merchants to
credit card-issuing banks. VISA and MasterCard International may from time to
time change the amount of Interchange reimbursed to banks issuing their credit
cards.
Charge Card Accounts and Receivables. Charge Card Receivables consist of
amounts charged on designated Accounts for merchandise and services, and all
annual membership fees and certain other administrative fees billed to the
designated Accounts. Receivables originated under Charge Card Accounts are not
subject to a monthly finance charge.
There are distinctions between the Credit Card Accounts and the Charge Card
Accounts. The Credit Card Accounts offer revolving credit plans to their
customers. Charge Card Accounts generally have no pre-set spending limit and are
designed for use as a convenient method of payment for the purchase of
merchandise and services. Charge Card Accounts generally cannot be used as a
means of financing such purchases. Accordingly, the full balance of a month's
purchases is billed to cardmembers and is due upon receipt of the billing
statement. By contrast, revolving credit plans allow customers to make a minimum
monthly payment and to borrow the remaining outstanding balance from the credit
issuer up to a predetermined limit. As a result of these payment requirement
differences, the Charge Card Accounts have a high monthly payment rate and
balances which turn over rapidly relative to their charge volume when compared
to Credit Card Accounts.
Another distinction between Charge Card Accounts and Credit Card Accounts
is that Charge Card Account balances are generally not subject to monthly
finance charges. As described above, the full Account balance is billed monthly
and is due upon receipt of the billing statement. Cardmembers do not have the
option of using their Charge Card Accounts to extend payment and to pay a
finance charge on the remaining outstanding balance. Credit Card Accounts, by
contrast, do allow customers to pay a specified minimum portion of an
outstanding amount and to finance the balance at a finance charge rate
determined by the credit card issuer. (Because Charge Card Account balances are
not assessed finance charges, for the purpose of providing yield to the Trust a
portion of Collections on Receivables in Accounts received in any Due Period
equal to the product of Collections and the Yield Factor will generally be
treated as Yield Collections.) Each related Prospectus Supplement, where
applicable, will describe the Yield Calculation for a specific portfolio of
Charge Card Accounts.
ADDITIONAL INFORMATION RELATING TO RECEIVABLES
The related Prospectus Supplement for each Series will provide information
with respect to the Receivables that are Primary Assets as of the Cut-off Date,
including, among other things, the aggregate principal balance of the
Receivables and whether the Receivables are Credit Card Receivables or Charge
Card Receivables.
The eligibility criteria which shall apply with respect to the Primary
Assets will be specified in the related Prospectus Supplement. The related
Prospectus Supplement will provide information, including, among other things,
(a) underwriting criteria; (b) the loss and delinquency experience for the
portfolio of Receivables; (c) the composition of the portfolio by account
balance; and (d) the geographic distribution of Accounts and Receivables. The
related Prospectus Supplement will also specify any other limitations on the
types or characteristics of Receivables for a Series.
If information of the nature described above respecting the Receivables is
not known to the Seller at the time the Certificates are initially offered,
approximate or more general information of the nature described above will be
provided in the related Prospectus Supplement and additional information will be
set forth in a Current Report
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on Form 8-K to be available to investors on the date of issuance of the related
Series and to be filed with the Commission within 15 days after the initial
issuance of such Certificates.
CABS SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
CABS Securities which include certificates evidencing an undivided interest in,
or notes or loans secured by, Receivables generated in Accounts. Such
certificates, notes or loans will have previously been (a) offered and
distributed to the public pursuant to an effective registration statement or are
being registered under the Securities Act of 1933 in connection with the
offering of a Series of Securities or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years has
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. CABS Securities will have been issued pursuant to a
Pooling and Servicing Agreement, a Master Pooling and Servicing Agreement, a
Sale and Servicing Agreement, a Trust Agreement, Indenture or similar agreement
(a 'CABS Agreement'). The seller/servicer of the underlying Receivables will
have entered into the CABS Agreement with the trustee under such CABS Agreement
(the 'CABS Trustee'). Receivables underlying a CABS Security will be serviced by
a servicer (the 'CABS Servicer') directly or by one or more sub-servicers who
may be subject to the supervision of the CABS Servicer.
All purchases of CABS Securities for a Series by the Seller or the
Depositor will be made in secondary market transactions, not from the issuer of
such CABS Securities or any affiliate thereof. As a result, no such purchases of
CABS Securities offered and distributed to the public pursuant to an effective
registration statement will be made by the Seller or Depositor for at least
ninety days after the initial issuance of such CABS Securities. The issuer of
the CABS Securities (the 'CABS Issuer') will be a financial institution,
corporation, or other entity engaged generally in the business of issuing credit
or charge cards; any form of store or merchandiser that issues credit or charge
cards; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling receivables to such
trusts, and selling beneficial interests in such trusts; or one of such trusts.
If so specified in the related Prospectus Supplement, the CABS Issuer may be an
affiliate of the Depositor. The obligations of the CABS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the CABS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the CABS Securities issued under
the CABS Agreement.
Distributions of principal and interest will be made on the CABS Securities
on the dates specified in the related Prospectus Supplement. The CABS Securities
may be entitled to receive nominal or no principal distributions or nominal or
no interest distributions. Principal and interest distributions will be made on
the CABS Securities by the CABS Trustee or the CABS Servicer. The CABS Issuer or
the CABS Servicer may have the right to repurchase assets underlying the CABS
Securities after a certain date or under other circumstances specified in the
related Prospectus Supplement.
Underlying Receivables. The Receivables underlying the CABS Securities may
consist of Credit Card Receivables or Charge Card Receivables.
Enhancement Relating to CABS Securities. Enhancement in the form of
reserve funds, subordination of other CABS issued under the CABS Agreement,
guarantees, letters of credit, cash collateral accounts, insurance policies or
other types of Enhancement may be provided with respect to the Receivables
underlying the CABS Securities or with respect to the CABS Securities
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 CABS Securities on the basis of requirements
of the rating agencies.
Additional Information. The related Prospectus Supplement for a Series for
which the Primary Assets includes CABS Securities will specify, to the extent
relevant and to the extent such information is reasonably available to the
Depositor and the Depositor reasonably believes such information to be reliable,
(i) the aggregate approximate principal amount and type of the CABS Securities
to be included in the Primary Assets; (ii) certain characteristics of the
Receivables which comprise the underlying assets for the CABS Securities
including, (A) whether such Receivables are Credit Card Receivables or Charge
Card Receivables, (B) the fees and charges associated with such Receivables and
(C) the servicing fee or range of servicing fees with respect to the
Receivables; (iii) the expected and final maturity of the CABS Securities; (iv)
the interest rate of the CABS
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Securities; (v) the CABS Issuer, the CABS Servicer (if other than the CABS
Issuer) and the CABS Trustee for such CABS Securities; (vi) certain
characteristics of Enhancement, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the Receivables underlying
the CABS Securities or to such CABS Securities themselves; (vii) the terms on
which the underlying Receivables for such CABS Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
CABS Securities; and (viii) the terms on which Receivables may be substituted
for those originally underlying the CABS Securities.
If information of the nature described above representing the CABS
Securities is not known to the Depositor at the time the Certificates are
initially offered, approximate or more general information of the nature
described above will be provided in the related Prospectus Supplement and the
additional information, if available, will be set forth in a Current Report on
Form 8-K to be available to investors on the date of issuance of the related
Series and to be filed with the Commission within 15 days of the initial
issuance of such Certificates.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Certificates for
receipt of the amount of cash, if any, specified in the related Prospectus
Supplement to be initially deposited therein by the Depositor, all amounts
received on or with respect to the Primary Assets and, unless otherwise
specified in the related Prospectus Supplement, income earned thereon. Certain
amounts on deposit in such Collection Account and certain amounts available
pursuant to any Enhancement, as provided in the related Prospectus Supplement,
will be deposited in a related Distribution Account, which will also be
established by the Trustee for each such Series of Certificates, for
distribution to the related Certificateholders. The Trustee will invest the
funds in the Collection and Distribution Accounts in Eligible Investments
maturing, with certain exceptions, not later, in the case of funds in the
Collection Account, than the day preceding the date such funds are due to be
deposited in the Distribution Account or otherwise distributed and, in the case
of funds in the Distribution Account, than the day preceding the next Payment
Date for the related Series of Certificates. Eligible Investments include, among
other investments, obligations of the United States and certain agencies
thereof, federal funds, certificates of deposit, commercial paper, demand and
time deposits and banker's acceptances, certain repurchase agreements of United
States government securities and certain guaranteed investment contracts, in
each case, acceptable to the Rating Agency.
From time to time, various accounts including Pre-Funding Accounts may be
created under the terms of the documents related to a specific Series.
ENHANCEMENT
GENERAL
For any Series, Enhancement may be provided with respect to one or more
Classes thereof. Enhancement may be in the form of the subordination of one or
more Classes of the Certificates of such Series, a letter of credit, the
establishment of a cash collateral guaranty or account, a surety bond,
insurance, the use of cross support features or another method of Enhancement
described in the related Prospectus Supplement, or any combination of the
foregoing. Enhancement may also include any type of derivative product or
arrangement. If so specified in the related Prospectus Supplement, any form of
Enhancement may be structured so as to be drawn upon by more than one Class to
the extent described therein.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the Enhancement will not provide protection against all risks of loss
and will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon. If losses occur which exceed the amount
covered by the Enhancement or which are not covered by the Enhancement,
certificateholders will bear their allocable share of deficiencies.
If Enhancement is provided with respect to a Series, the related Prospectus
Supplement will include a description of (a) the amount payable under such
Enhancement, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount payable under such
Enhancement may be reduced and under which such Enhancement may be terminated or
replaced and (d) any material provisions of any agreement relating to such
Enhancement. Additionally, the related Prospectus Supplement may set forth
certain information with respect to the issuer of any third-party Enhancement,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, place of incorporation and the
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jurisdiction under which it is chartered or licensed to do business, (iii) if
applicable the identity of regulatory agencies which exercise primary
jurisdiction over the conduct of its business and (iv) its total assets, and its
stockholders' or policyholders' surplus, if applicable, as of the date specified
in the related Prospectus Supplement.
SUBORDINATION
If so specified in the related Prospectus Supplement, one or more Classes
of a Series may be subordinated to one or more other Classes of a Series. If so
specified in the related Prospectus Supplement, the rights of the holders of the
subordinated Certificates to receive distributions of principal and/or interest
on any Payment Date will be subordinated to such rights of the holders of the
Certificates which are senior to such subordinated Certificates to the extent
set forth in the related Prospectus Supplement. The amount of subordination will
decrease whenever amounts otherwise payable to the holders of subordinated
Certificates are paid to the holders of the Certificates which are senior to
such subordinated Certificates.
LETTER OF CREDIT
If so specified in the related Prospectus Supplement, a letter of credit
with respect to a Series or Class of Certificates may be issued by the bank or
financial institution specified in the related Prospectus Supplement (the 'L/C
Bank'). Under the letter of credit, the L/C Bank will be obligated to honor
drawings thereunder in an aggregate fixed dollar amount, net of unreimbursed
payments thereunder, equal to the amount described in the related Prospectus
Supplement. The amount available under the letter of credit will be reduced to
the extent of the unreimbursed payments thereunder.
CASH COLLATERAL GUARANTY OR ACCOUNT
If specified in the related Prospectus Supplement, the Certificates of any
Class or Series may have the benefit of a Cash Collateral Guaranty issued
pursuant to a trust agreement between a cash collateral depositor, a cash
collateral trustee and the Seller and Servicer or a Cash Collateral Account
directly. The Cash Collateral Guaranty will generally be an obligation of the
cash collateral trust and not of the cash collateral depositor, the cash
collateral trustee (except to the extent of amounts on deposit in the cash
collateral account), the Trustee or the Seller or the Servicer.
The Servicer will determine on each Determination Date with respect to the
Series enhanced by the Cash Collateral Guaranty or the Cash Collateral Account
whether a deficiency exists with respect to the payment of interest and/or
principal on the Certificates so enhanced. If the Servicer determines that a
deficiency exists, it shall instruct the Trustee for such Series to draw an
amount equal to such deficiency from the Cash Collateral Guaranty or the Cash
Collateral Account, up to the maximum amount available thereunder.
RESERVE FUND
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor will deposit into one or more funds to be
established with the Trustee as part of the Trust for such Series or for the
benefit of any Enhancer with respect to such Series (the 'Reserve Fund') cash, a
letter or letters of credit, Eligible Investments, or other instruments meeting
the criteria of the Rating Agency rating any Series of the Certificates in the
amount specified in such Prospectus Supplement. In the alternative or in
addition to such deposit, a Reserve Fund for a Series may be funded over time
through application of all or a portion of the excess cash flow from the Primary
Assets for such Series, to the extent described in the related Prospectus
Supplement. If applicable, the initial amount of the Reserve Fund and the
Reserve Fund maintenance requirements for a Series of Certificates will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Certificates of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
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SURETY BOND OR INSURANCE POLICY
If so specified in the related Prospectus Supplement, insurance with
respect to a Series or Class of Certificates may be provided by one or more
insurance companies. Such insurance will guarantee, with respect to one or more
Classes of the related Series, distributions of interest or principal in the
manner and amount specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a surety bond may be
purchased for the benefit of the holders of any Series or Class of such Series
to assure distributions of interest or principal with respect to such Series or
Class of Certificates in the manner and amount specified in the related
Prospectus Supplement.
SPREAD ACCOUNT
If so specified in the related Prospectus Supplement, support for a Series
or one or more Classes of a Series may be provided by the periodic deposit of
certain available excess cash flow from the Trust assets into an account (the
'Spread Account') intended to assure the subsequent distribution of interest and
principal on the Certificates of such Class or Series in the manner specified in
the related Prospectus Supplement.
DERIVATIVE PRODUCTS
If so specified in the related Prospectus Supplement, the Depositor may
enter into a derivative arrangement with respect to the Certificates of any
Class or Series. Such derivative arrangement may include a guaranteed rate
agreement, a maturity liquidity facility, a tax protection agreement, an
interest rate cap or floor agreement, an interest rate or currency swap
agreement or any other similar arrangement.
SERVICING OF RECEIVABLES
GENERAL
Customary servicing functions with respect to Receivables comprising or
underlying the Primary Assets in the Trust will be provided by the Servicer
directly pursuant to an Agreement.
COLLECTION PROCEDURES
The Servicer will make reasonable efforts to collect all payments required
to be made under the Accounts and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable receivables held in its own
portfolio.
DEPOSITS TO THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will establish a separate account (the 'Collection Account') in the
name of the Trustee. Unless otherwise indicated in the related Prospectus
Supplement, the Collection Account will be an account maintained (i) at a
depository institution, the long-term unsecured debt obligations of which at the
time of any deposit herein are rated as described in the related Prospectus
Supplement and as specified by each Rating Agency rating the Certificates of
such Series or (ii) in an account or accounts the deposits in which are insured
to the maximum extent available by the FDIC or which are secured in a manner
meeting requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Seller, the Trustee or the Depositor, as appropriate, will deposit
into the Collection Account for each Series, within two business days after the
date of receipt thereof, the following payments and collections received or made
by it:
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest or finance charges on such
Primary Assets after deducting therefrom, at the discretion of the Servicer
but only to the extent of the amount permitted to be withdrawn or
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withheld from the Collection Account in accordance with the applicable
Agreement, the Servicing Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets other than amounts required to be paid or
refunded to the obligor pursuant to the terms of the applicable documents
or otherwise pursuant to law ('Liquidation Proceeds'), exclusive of, in the
discretion of the Servicer, but only to the extent of the amount permitted
to be withdrawn from the Collection Account in accordance with the related
Agreement, the Servicing Fee, if any, in respect of the related Primary
Asset;
(iv) All amounts required to be deposited therein from any applicable
Enhancement for such Series pursuant to the related Trust Agreement;
(v) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Seller or the Servicer pursuant to the related
Agreement;
(vi) Any amounts payable to the applicable person with respect to each
Primary Asset acquired that has been repurchased or removed from the Trust
by the Depositor, the Servicer or the Seller pursuant to the related
Agreement, all amounts received thereon and not distributed as of the date
on which the related repurchase price was determined;
(vii) All amounts payable to the Trustee of such Series for deposit
into the Distribution Account, if any, or for remittance to the
Certificateholders of such series as provided for in the related Trust
Agreement; and
(viii) All amounts necessary to clear and terminate the Collection
Account pursuant to the related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a servicing fee in an amount to be determined as
specified in the related Prospectus Supplement. The servicing fee may be fixed
or variable, as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Receivables including, without limitation, the payment of the fees and
expenses of the Trustee and independent accountants, payment of the cost of
Enhancement, if any, and payment of expenses incurred in preparation of reports
to Certificateholders.
The rights of the Servicer to receive funds from the Collection Account for
a Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of expenses or otherwise, may be subordinate to the rights of
Certificateholders of such Series.
EVIDENCE AS TO COMPLIANCE
The Agreement for each Series may provide that, each year, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that such firm has examined certain documents and records relating to the
servicing of the Receivables by the Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with the Agreement, except for (i) such exceptions as such firm
believes to be immaterial and (ii) such other exceptions as are set forth in
such statement.
The Agreement for each Series will provide for delivery to the Trustee for
such Series of an annual statement signed by an officer of the Servicer to the
effect that the Servicer has fulfilled its obligations under the Agreement
throughout the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Seller and may have other
business relationships with the Depositor and its affiliates.
If an event of default occurs with respect to the Servicer under an
Agreement, the Servicer may be replaced by the Trustee or a successor Servicer.
Unless otherwise specified in the related Prospectus Supplement, Servicer
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events of default and the rights of the Trustee upon such a default under the
Agreement for the related Series will be substantially similar to those
described under 'THE AGREEMENTS--Events of Default' and '--Rights upon Events of
Default' herein.
Unless otherwise provided in the related Prospectus Supplement, the
Servicer may not resign from its obligations and duties under the Agreement,
except (a) upon determination that (i) the performance of its duties under the
Agreement is no longer permissible under applicable law and (ii) there is no
reasonable action which the Servicer could take to make the performance of its
duties hereunder permissible under applicable law, (b) in connection with a
conveyance, consolidation or merger by the Servicer with any corporation, or
conveyance or transfer of its properties or assets substantially as an entirety
to any other person permitted under the Agreement or (c) upon the satisfaction
of the following conditions: (i) the acceptance and assumption, by an agreement
supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, of the obligations and duties of the Servicer
thereunder by a proposed successor Servicer, (ii) the Servicer having given
written notice to each Rating Agency of such transfer and such Rating Agency
having notified the Servicer in writing to the effect that its then current
rating of Certificates of any Series will not be reduced or withdrawn as a
result of such transfer, (iii) the written consent of any provider of
Enhancement (such consent not to be unreasonably withheld) and (iv) the proposed
successor Servicer being an Eligible Servicer (as defined below).
Notwithstanding anything in the Agreement to the contrary, any successor
Servicer appointed under clause (c) will be deemed to be a successor Servicer.
Any such determination permitting the resignation of the Servicer will be
evidenced as to clause (a) above by an opinion of counsel to such effect
delivered to the Trustee. No such resignation will become effective until the
Trustee or a successor Servicer shall have assumed the responsibilities and
obligations of the Servicer in accordance with the Agreement.
'Eligible Servicer' means the Trustee or an entity which, at the time of
its appointment as Servicer, (i) is an established financial institution having
capital or a net worth of not less than $100,000,000, (ii) is servicing a
portfolio of consumer credit card or charge card accounts, (iii) is legally
qualified and has the capacity to service the Accounts, (iv) has demonstrated
the ability to professionally and completely service a portfolio of similar
accounts in accordance with standards of skill and care customary in the
industry and (v) is qualified to use the software that is then currently being
used to service the Accounts or obtains the right to use or has its own software
which is adequate to perform its duties under the Agreement.
INDEMNIFICATION
Except to the extent otherwise provided therein, each Agreement will
provide that the Servicer will indemnify the Trust, the Trustee and the
Certificateholders of all series from and against any loss, liability, expense,
damage or injury suffered or sustained by reason of any acts, omissions or
alleged acts or omissions arising out of activities of the Servicer with respect
to the Trust or the Trustee or any co-trustee pursuant to this Agreement,
including those arising from acts or omissions of the Servicer pursuant to the
Agreement, including but not limited to any judgment, award, settlement,
reasonable attorneys' fees and other costs or expenses incurred in connection
with the defense of any actual or threatened action, proceeding or claim;
provided, however, that the Servicer shall not indemnify: (i) the Trust or the
Trustee if such acts, omissions or alleged acts or omissions constitute fraud,
gross negligence, breach of fiduciary duty or misconduct by the Trustee; (ii)
the Trust, the Trustee or the Certificateholders of any series for any
liability, cost or expense of the Trust with respect to any action taken by the
Trust at the request of the Certificateholders of a Series in accordance with
the Agreement nor with respect to any Federal, state or local income or
franchise taxes (or any interest or penalties with respect thereto) required to
be paid by the Trust or the Certificateholders of a Series in connection
herewith to any taxing authority; or (iii) the Trust or Certificateholders for
any losses incurred by any of them as a result of defaulted Receivables or
Receivables which are written off as uncollectible unless such write-off is
caused by a breach of the Agreement by the Servicer. Subject to certain
exceptions in the Agreement, any indemnification pursuant to the Agreement will
be only from the assets of the Servicer.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the Agreements.
ASSIGNMENT OF PRIMARY ASSETS
Receivables; Pre-Funding Accounts. On the Closing Date specified with
respect to any given Trust in the related Prospectus Supplement (the 'Closing
Date'), the Seller will transfer and assign to the applicable Trustee, without
recourse, its entire interest in the Initial Receivables of the related
receivables pool. Each such Receivable will be identified at such time of
transfer. The Applicable Trustee will, concurrently with such transfer and
assignment, execute and deliver the related Certificates. Unless otherwise
provided in the related Prospectus Supplement, the net proceeds received from
the sale of the Certificates of a given series will be applied to the purchase
of the related CABS Securities from the Seller and, to the extent specified in
the related Prospectus Supplement, to the deposit of the Pre-Funded Amount into
the Pre-Funding Account. The related Prospectus Supplement for a given Trust
will specify whether, and the terms, conditions and manner under which,
Subsequent CABS will be sold by the Seller to the applicable Trust from time to
time during the Funding Period on each date specified as a transfer date in the
related Prospectus Supplement (each, a 'Subsequent Transfer Date').
General. In connection with any transfer of the Initial Receivables and
any transfer of Subsequent Receivables and CABS Securities pursuant to an
Agreement each Seller will annotate and indicate in its computer files that the
Receivables and CAB Securities have been conveyed to the Trust. In addition, the
Seller will provide to the Trustee a computer file or a microfiche list
containing a true and complete list showing each Account, the Receivables of
which have been designated for inclusion in the Trust, identified by account
number, collection status, the amount of Receivables outstanding and the amount
of Principal Receivables as of the Cut-off Date. The Seller will not deliver to
the Trustee any other records or agreements relating to such Account or the
Receivables. The records and agreements relating to such Accounts and the
Receivables maintained by the Seller or the Servicer will not be segregated by
the Seller or the Servicer from other documents and agreements relating to other
Accounts and Receivables and will not be stamped or marked to reflect the
transfer of the Receivables to the Trust. Each Seller will file the UCC
financing statements meeting the requirements of applicable state law with
respect to the Receivables. See 'RISK FACTORS--Certain Legal Aspects' and
'CERTAIN LEGAL ASPECTS OF THE RECEIVABLES.'
Assignment of CABS Securities; Pre-Funding Accounts. The Depositor will
cause CABS Securities to be registered in the name of the Trustee (or its
nominee or correspondent). The Trustee (or its agent or correspondent) will have
possession of any certificated CABS Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a CABS Security. See 'THE
TRUST ASSETS--CABS Securities' herein. Each CABS Security will be identified in
a schedule appearing as an exhibit to the related Agreement (the 'CABS
Schedule'), which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each CABS Security conveyed to the Trustee. In the
Agreement, the Depositor will represent and warrant to the Trustee regarding the
CABS Securities: (i) that the information contained in the CABS Schedule is true
and correct in all material respects; (ii) that, immediately prior to the
conveyance of the CABS Securities, the Depositor had good title thereto, and was
the sole owner thereof; (iii) that there has been no other sale by it of such
CABS Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance on such CABS Securities. Unless otherwise provided
in the related Prospectus Supplement, the net proceeds received from the sale of
the Certificates of a given series will be applied to the purchase of the
related CABS Securities from the Seller and, to the extent specified in the
related Prospectus Supplement, to the deposit of the Pre-Funded Amount into the
Pre-Funding Account. The related Prospectus Supplement for a given Trust will
specify whether, and the terms, conditions and manner under which, Subsequent
CABS will be sold by the Seller to the applicable Trust from time to time during
the Funding Period on each date specified as a transfer date in the related
Prospectus Supplement (each, a 'Subsequent Transfer Date').
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Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee is
found by the Trustee within 45 days of the execution of the related Agreement
(or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) to be defective in any material respect and
the Depositor does not cure such defect within 90 days, or within such other
period specified in the related Prospectus Supplement, the Depositor will, not
later than 90 days or within such other period specified in the related
Prospectus Supplement, after the Trustee's notice to the Depositor or the
Servicer, as the case may be, of the defect, repurchase the related Primary
Asset from the Trustee at a price equal to (a) the outstanding principal balance
of such Primary Asset and (b) accrued and unpaid interest to the date of the
next scheduled payment on such Primary Asset at the rate set forth in the
related Agreement.
If provided in the related Prospectus Supplement, the Depositor may, rather
than repurchase the Primary Asset as described above, remove such Primary Asset
from the Trust (the 'Deleted Primary Asset') and substitute in its place one or
more other Primary Assets (each, a 'Qualifying Substitute Primary Asset').
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Payments due in the
month of substitution, at least equal to the outstanding principal balance of
the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Certificate Account in the month of substitution for distribution to
Certificateholders), (ii) an interest rate not less than the interest rate of
the Deleted Primary Asset, (iii) a remaining term-to-stated maturity not greater
than (and not more than two years less than) that of the Deleted Primary Asset,
and will comply with all of the representations and warranties set forth in the
applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Certificateholders or the Trustee for a material
defect in a document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary Asset,
the Depositor or such entity is obligated to repurchase the affected Primary
Asset or, if provided in the related Prospectus Supplement, provide a Qualifying
Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations of
the responsible originator or seller of such Primary Assets. See 'RISK FACTORS.'
REPORTS TO HOLDERS
The Trustee will prepare and forward to each Certificateholder on each
Payment Date, or as soon thereafter as is practicable, a statement setting
forth, to the extent applicable to any Series, among other things:
(i) with respect to a Series, the amount of such distribution
allocable to interest or finance charges on the Primary Assets;
(ii) with respect to a Series the amount of such distribution
allocable to principal on the Primary Assets;
(iii) the amount of servicing compensation with respect to the Primary
Assets paid during the period commencing on the Due Date to which such
distribution relates and the amount of servicing compensation during such
period attributable to penalties and fees;
(iv) the aggregate outstanding principal balance of the Primary Assets
as of the opening of business on the Due Date, after giving effect to
distributions allocated to principal and reported under (i) above;
(v) the aggregate outstanding principal amount of the Certificates of
such Series as of the Due Date after giving effect to distributions
allocated to principal reported under (ii) above;
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(vi) with respect to Certificates that are Compound Interest
Certificates or Zero Coupon Certificates, the amount of interest accrued on
such Certificates during the related interest accrual period and added to
the Compound Value thereof;
(vii) in the case of Certificates that are Variable Interest
Certificates, the rate applicable to the distribution being made;
(viii) if applicable, the amount of any shortfall (i.e., the
difference between the aggregate amounts of principal and interest which
Certificateholders would have received if there were sufficient eligible
funds in the Distribution Account and the amounts actually distributed);
(ix) if applicable, the number and aggregate principal balances of
Primary Assets delinquent for (A) two consecutive payments and (B) three or
more consecutive payments, as of the close of business on the Determination
Date to which such distribution relates;
(x) in the case of any Enhancement described in the related Prospectus
Supplement, the amount of coverage of such Enhancement as of the close of
business on the applicable Payment Date;
(xi) in the case of any Series which includes a Class of Subordinate
Certificates, the subordinated amount, if any, determined as of the related
Determination Date and if the distribution to the Senior Certificateholders
is less than their required distribution, the amount of the shortfall;
(xii) the amount of any withdrawal from any applicable Reserve Fund
included in amounts actually distributed to Certificateholders and the
remaining balance of each Reserve Fund, if any, on such Payment Date, after
giving effect to distributions made on such date;
(xiii) for each such date during the Funding Period (if any), the
remaining Pre-Funded Amount;
(xiv) for the first such date that is on or immediately following the
end of the Funding Period (if any), the amount of any remaining Pre-Funded
Amount that has not been used to fund the purchase of Subsequent
Receivables and that is being passed through as payments on the
Certificates of the related Series; and
(xv) such other information as is specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each holder of record at any time during such
calendar year: (a) the aggregate of amounts reported pursuant to (i) through
(iv), (vi) and (viii) above for such calendar year and (b) such information
specified in the Agreement to enable holders to prepare their tax returns
including, without limitation, the amount of original issue discount accrued on
the Certificates, if applicable. Information in the Payment Date reports and the
annual reports provided to the holders will not have been examined and reported
upon by an independent public accountant. However, each Servicer will provide to
the Trustee an annual report by independent public accountants with respect to
the Servicer's servicing of the Receivables. See 'SERVICING OF
RECEIVABLES--Evidence as to Compliance' herein.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under the Agreement for each Series include (i) any failure by the
Servicer to deposit amounts in the Collection Account and Distribution Account
to enable the Trustee to distribute to Certificateholders of such Series any
required payment, which failure continues unremedied for five days after the
giving of written notice of such failure to the Servicer by the Trustee for such
Series, or to the Servicer and the Trustee by the holders of Certificates of
such Series evidencing not less than 25% of the aggregate voting rights of the
Certificates for such Series, (ii) any failure by the Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Agreement which continues unremedied for 30 days after the giving of written
notice of such failure to the Servicer by the Trustee, or to the Servicer and
the Trustee by the holders of Certificates of such Series evidencing not less
than 25% of the aggregate voting rights of the Certificates and (iii) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
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RIGHTS UPON EVENTS OF DEFAULT
So long as an Event of Default remains unremedied under the Agreement for a
Series, the Trustee for such Series or holder of Certificates of such Series
evidencing not less than 51% of the aggregate principal amount of the
Certificates for such Series may terminate all of the rights and obligations of
the Servicer as servicer under the Agreement and in and to the Receivables,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Agreement and will be entitled to
reasonable servicing compensation not to exceed the applicable servicing fee,
together with other servicing compensation in the form of assumption fees, late
payment charges, or otherwise as provided in the Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth of at least
$15,000,000 to act as successor Servicer under the provisions of such Agreement
relating to the servicing of the Receivables. The successor Servicer would be
entitled to reasonable servicing compensation in an amount not to exceed the
Servicing Fee as set forth in the related Prospectus Supplement, together with
the other servicing compensation in the form of assumption fees, late payment
charges or otherwise, as provided in the Agreement.
During the continuance of any Event of Default under the Agreement for a
Series, the Trustee for such Series will have the right to take action to
enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of such Series, and holders of Certificates
evidencing not less than 51% of the aggregate voting rights of the Certificates
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Certificateholders have offered the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred by
the Trustee therein or thereby. Also, the Trustee may decline to follow any such
direction if the Trustee determines that the action or proceeding so directed
may not lawfully be taken or would involve it in personal liability or be
unjustly prejudiced to the nonassenting Certificateholders.
No Certificateholder of a Series, solely by virtue of such holder's status
as a Certificateholder, will have any right under the Agreement for such Series
to institute any proceeding with respect to the Agreement, unless such holder
previously has given to the Trustee for such Series written notice of default
and unless the Holders of Certificates evidencing not less than 51% of the
aggregate voting rights of the Certificates for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Certificates will be set forth
in the related Prospectus Supplement. The entity serving as Trustee may have
normal banking relationships with the Depositor or the Servicer. In addition,
for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust relating to a Series of
Certificates. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Agreement relating to
such Series will be conferred or imposed upon the Trustee and each such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee may also appoint agents to perform any of the responsibilities of the
Trustee, which agents shall have any or all of the rights, powers, duties and
obligations of the Trustee conferred on them by such appointment; provided that
the Trustee shall continue to be responsible for its duties and obligations
under the Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Certificates or of any Primary Asset or related documents. If
no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement.
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Upon receipt of the various certificates, statements, reports or other
instruments required to be furnished to it, the Trustee is required to examine
them to determine whether they are in the form required by the related
Agreement; however, the Trustee will not be responsible for the accuracy or
content of any such documents furnished by it or the Certificateholders to the
Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the
Certificateholders in an Event of Default. See '--Rights Upon Events of Default'
above. The Trustee is not required to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties under an
Agreement, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) by the Depositor, if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
holders of Certificates evidencing more than 50% of the aggregate voting rights
of the Certificates in the Trust upon 30 days' advance written notice to the
Trustee and to the Depositor. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
AMENDMENT OF THE AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Certificates may be amended by the Depositor, the Servicer, and
the Trustee with respect to such Series, without notice to or consent of the
Certificateholders (i) to cure any ambiguity, (ii) to correct any defective
provisions or to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to add to the duties of the
Depositor or Servicer, (iv) to add any other provisions with respect to matters
or questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Certificates, or (vi) to comply with
any requirements imposed by the Code; provided that any such amendment pursuant
to clause (iv) above will not adversely affect in any material respect the
interests of any Certificateholders of such Series, as evidenced by an opinion
of counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Certificateholder if the Trustee receives written confirmation
from each Rating Agency rating such Certificates that such amendment will not
cause such Rating Agency to reduce the then current rating thereof. The
Agreement for each Series may also be amended by the Trustee, the Servicer and
the Depositor with respect to such Series with the consent of the holders
possessing not less than 66 2/3% of the aggregate outstanding principal amount
of the Certificates of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such Agreement or modifying in any manner the rights of
Certificateholders of such Series; provided, however, that no such amendment may
(a) reduce the amount or delay the timing of payments on any Certificate without
the consent of the holder of such Certificate; or (b) reduce the aforesaid
percentage of aggregate outstanding principal amount of Certificates of each
Class, the holders of which are required to consent to any such amendment
without the consent of the holders of 100% of the aggregate outstanding
principal amount of each Class of Certificates affected thereby.
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VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series, if other than set forth
herein.
LIST OF CERTIFICATEHOLDERS
Upon written request of three or more Certificateholders of record of a
Series for purposes of communicating with other Certificateholders with respect
to their rights under the Agreement or under the Certificates for such Series,
which request is accompanied by a copy of the communication which such
Certificateholders propose to transmit, the Trustee will afford such
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Certificateholders.
TERMINATION
The obligations created by the Agreement for a Series will terminate upon
the distribution to Certificateholders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the final payment or other
liquidation of the last Primary Asset remaining in the Trust for such Series or
(ii) the repurchase, as described below, by the Servicer from the Trustee for
such Series of all Primary Assets and other property at that time subject to the
Agreement. The Agreement for each Series permits, but does not require, the
Servicer to repurchase from the Trust for such Series all remaining Primary
Assets at a price equal to 100% of the aggregate Principal Balance of such
Primary Assets plus, with respect to any property acquired in respect of a
Primary Asset, if any, the outstanding Principal Balance of the related Primary
Asset, and unreimbursed expenses (that are reimbursable pursuant to the terms of
the Agreement), plus accrued interest thereon at the weighted average rate on
the related Primary Assets through the last day of the Due Period in which such
repurchase occurs. The exercise of such right will effect early retirement of
the Certificates of such Series, but the Servicer's right to so purchase is
subject to the aggregate Principal Balance of the Primary Assets at the time of
repurchase being less than a fixed percentage, to be set forth in the related
Prospectus Supplement, of the Cut-off Date aggregate Principal Balance. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the last survivor of certain persons
identified therein. For each Series, the Servicer or the Trustee, as applicable,
will give written notice of termination of the Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency specified in the
notice of termination. If so provided in the related Prospectus Supplement for a
Series, the Depositor or another entity may effect an optional termination of
the Trust under the circumstances described in such related Prospectus
Supplement. See 'DESCRIPTION OF THE CERTIFICATES--Optional Purchase or
Termination' herein.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
The following discussion contains summaries of certain legal aspects of
credit, charge and debit card receivables which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor to
reflect the laws of any particular state, nor to encompass the laws of all
states in which Receivables originate. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Receivables.
TRANSFER OF RECEIVABLES
Each Seller will warrant in the applicable Agreement that the transfer of
the Receivables by it to the Depositor constitutes either a valid transfer and
assignment to the Depositor of all right, title and interest of the Seller in
and to the Receivables free and clear from liens arising from or through the
Seller, except, to the extent specified in the related Prospectus Supplement,
for certain potential tax liens, any interest of the Seller as holder of the
Exchangeable Transferor's Certificate and the Depositor's right to receive
interest and investment earnings (net of losses and investment expenses) in
respect of the Collection Account, or a valid grant to the Depositor of a
security interest in the Receivables. The Seller will also warrant in the
Agreement that, in the event the transfer of the Receivables by the Seller to
the Depositor is deemed to create a security interest under the Uniform
Commercial Code (the 'UCC') as in effect in the state in which its principal
office is located, there will exist a
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valid, subsisting and enforceable first priority perfected security interest in
the Receivables in favor of the Depositor and a valid, subsisting and
enforceable first priority perfected security interest in the Receivables
created thereafter in favor of the Depositor on and after their creation, except
for certain liens as described in the Agreement.
The Receivables are generally considered to be 'accounts' for purposes of
the UCC. Both the transfer of accounts and the transfer of accounts as security
for an obligation are treated under Article 9 of the UCC as creating a security
interest therein and are subject to its provisions, and the filing of
appropriate financing statements is required to perfect the security interest of
the Depositor. Financing statements covering the Receivables will be filed with
the appropriate governmental authority to protect the interest of the Depositor
in the Receivables.
There are certain limited circumstances under the UCC in which a prior or
subsequent transferee of Receivables coming into existence after the date on
which such Receivables are transferred to the Depositor could have an interest
in such Receivables with priority over the Depositor's interest. Under the
Agreement, however, the Seller will warrant that it has transferred the
Receivables to the Depositor free and clear of the lien of any third party,
except for certain tax and other governmental liens. In addition, the Seller
will covenant that, except as permitted by the Agreement, it will not sell,
pledge, assign, transfer or grant any lien on any Receivable (or any interest
therein) other than to the Depositor. A tax or other government lien on property
of the Seller arising prior to the time a Receivable comes into existence may
also have priority over the interest of the Depositor in such Receivable. In
addition, if a Seller is a Bank, if the FDIC were appointed as receiver of the
Bank, certain administrative expenses of the receiver may also have priority
over the interest of the Depositor in such Receivables.
A case recently decided by the United States Court of Appeals for the Tenth
Circuit contains language to the effect that accounts sold by an entity which
subsequently became bankrupt remained property of the debtor's bankruptcy
estate. If a Seller were to become a debtor under the federal bankruptcy code
and a court were to follow the reasoning of the Tenth Circuit,
Certificateholders could experience a delay or reduction in distributions.
CERTAIN MATTERS RELATING TO RECEIVERSHIP
It is likely that many of the Sellers to the Depositor will be banking
institutions. The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ('FIRREA'), which became effective August 9, 1989, sets forth certain
powers that the FDIC could exercise if it were appointed as receiver of a Seller
which is a national bank.
Subject to clarification by FDIC regulations or interpretations, it would
appear from the positions taken by the FDIC before the passage of FIRREA that
the FDIC in its capacity as receiver for the Seller would not interfere with the
timely transfer to the Depositor of payments collected on the Receivables or
interfere with the timely liquidation of Receivables as described below. To the
extent that the Seller granted a security interest in the Receivables to the
Depositor, and that interest was validly perfected before the Seller's
insolvency and was not taken or granted in contemplation of insolvency or with
the intent to hinder, delay or defraud the Seller or its creditors, that
security interest should not be subject to avoidance, and payments to the
Depositor with respect to the Receivables should not be subject to recovery by
the FDIC as receiver of the Seller. If, however, the FDIC were to assert a
contrary position, or were to require the Trustee to establish its right to
those payments by submitting to and completing the administrative claims
procedure established under FIRREA, delays in payments on the Certificates of
any Series relating to such Seller outstanding at such time and possible
reductions in the amount of those payments could occur.
Each Agreement as to which a Bank is the Seller will provide that, upon the
appointment of a receiver for the Seller, the Seller will promptly give notice
thereof to the Trustee, and a Liquidation Event will occur. Under the Agreement,
no new Principal Receivables will be transferred to the Trust and, unless
otherwise instructed within a specified period by the holders of Certificates
representing undivided interests aggregating more than 50% of the Investor
Amount of each Series (or if any such Series has more than one Class, of each
Class of such Series) or unless otherwise prohibited by law, the Trustee will
proceed to sell, dispose of or otherwise liquidate the Receivables in a
commercially reasonable manner and on commercially reasonable terms. The
proceeds from the sale of the Receivables would then be treated by the Trustee
as collections on the Receivables. This procedure
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could be delayed as described above. The net proceeds of any such sale will
first be treated by the Trustee as collections on the Finance Charge
Receivables, if any. Upon the occurrence of a Liquidation Event, if a
conservator or receiver is appointed for the Seller and no Liquidation Event
other than such conservatorship or receivership or insolvency of the Seller
exists, the conservator or receiver may have the power to prevent the early
sale, liquidation or disposition of Receivables and the commencement of a Rapid
Amortization Period with respect to any outstanding Series. In addition, a
conservator or receiver for the Seller may have the power to cause early payment
of the Certificates.
If the Seller Bank is servicing its Receivables and a conservator or
receiver is appointed for the Servicer, and no Servicer Default other than such
conservatorship or receivership or insolvency of the Servicer exists, the
conservator or receiver may have the power to prevent either the Trustee or the
majority in interest of the Certificateholders from effecting a transfer of
servicing to a successor Servicer.
CONSUMER PROTECTION LAWS
The relationship of cardholder and card issuer is extensively regulated by
Federal and state consumer protection laws. The most significant of these laws
include the Federal Truth-in-Lending Act, Equal Credit Opportunity Act, Fair
Credit Reporting Act, Electronic Funds Transfer Act and, to the extent that the
Seller is a bank, the National Bank Act (if such Seller is a national banking
association), as well as the banking statutes of the state in which the bank is
located, and comparable statutes in the states in which cardholders reside.
These statutes impose disclosure requirements when an account is advertised,
when it is opened, at the end of monthly billing cycles, upon account renewal
for accounts on which annual fees are assessed, and at year end and, in
addition, limit cardholder liability for unauthorized use, prohibit certain
discriminatory practices in extending credit, and impose certain limitations on
the type of account-related charges that may be assessed. Newly adopted Federal
legislation requires card issuers to disclose to consumers the interest rates,
annual cardholder fees, grace periods, and balance calculation methods
associated with their accounts. Cardholders are entitled under current law to
have payments and credits applied to the account promptly, to receive prescribed
notices and to have billing errors resolved promptly.
Various proposed laws and amendments to existing laws have been introduced
in Congress and certain state and local legislatures that, if enacted, would
further regulate the credit card industry. Certain such laws would, among other
things, impose a ceiling of the rate at which a financial institution may assess
finance charges on credit card accounts that would be substantially below the
rates of the finance charges currently assessed by most Sellers on their
accounts. A proposed bill of this nature was defeated in the United States House
of Representatives in 1987, and on November 14, 1991, the United States Senate
approved by a vote of 74 to 19 a measure which could have established, if it
were enacted as law, a ceiling on credit card interest rates of 4% above the
rate that the IRS charges on the underpayment of taxes. Such a law would, in
effect, reduce all interest rates on credit cards to 14% per annum until the IRS
calculates the new rate, which is currently done on a quarterly basis. Although
this proposed legislation was not passed by Congress, the issue of federal
regulation of interest rates on credit cards continues to be debated, and there
can be no assurance that such a bill will not become law in the future. The
potential effect of any legislation which limits the amount of finance charges
that may be charged on credit cards could be to reduce the Net Portfolio Yield
of each Series. If such Net Portfolio Yield of a Series is reduced, a
Liquidation Event for such Series may occur, and the Rapid Amortization Period
for such Series would commence.
In October 1991, the United States District Court for the State of
Massachusetts held that Greenwood Trust Company (a federally-insured,
Delaware-chartered bank that issues the Discover credit card) was prohibited by
Massachusetts law from assessing late charges on credit card accounts of
Massachusetts residents. On August 6, 1992, that decision was reversed by the
United States Court of Appeals for the First Circuit, which held that the
Massachusetts law was preempted by federal law permitting the charges in
question. In November 1992, the Commonwealth of Massachusetts petitioned the
United States Supreme Court to accept the case. On January 11, 1993, the U.S.
Supreme Court denied the petition of the Commonwealth to review the decision of
the First Circuit. Since October 1991, a number of lawsuits and administrative
actions have been filed in several states against out-of-state banks (both
federally insured state-chartered banks and federally insured national banks)
which issue cards. These actions challenge various fees and charges (such as
late fees, overlimit fees, returned payment check fees and annual membership
fees) assessed against residents of the states in which such suits were
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filed, based on restrictions or prohibitions under such states' laws alleged to
be applicable to the out-of-state card issuers. The California Supreme Court in
March 1992 refused to review a lower court's determination that the practice by
Wells Fargo Bank of charging its cardholders over-the-limit and late payment
fees violated California laws that require banks to limit such charges to their
costs. Such actions and similar actions which may be brought in other states as
a result of such actions, if resolved adversely to card issuers, could have the
effect of limiting certain charges, other than periodic finance charges, that
could be assessed on accounts of residents of such states and could require card
issuers to pay refunds and civil penalties with respect to charges previously
imposed on cardholders in such states.
The Depositor may be liable for certain violations of consumer protection
laws that apply to the Receivables, either as assignee of the Seller with
respect to obligations arising before transfer of the Receivables to the
Depositor or as a party directly responsible for obligations arising after the
transfer. In addition, a cardholder may be entitled to assert such violations by
way of set-off against his obligation to pay the amount of Receivables owing.
Each Seller will covenant in the Agreement to accept the transfer of all
Receivables in an Account if any Receivable in such Account has not been created
in compliance with the requirements of such laws.
Application of Federal and state bankruptcy and debtor relief laws would
adversely affect the interests of the Certificateholders if such laws result in
any Receivables being written off as uncollectible.
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware on January 29,
1988. As of January 4, 1993, the Depositor is a wholly owned subsidiary of LCPI,
which is a wholly owned subsidiary of Lehman Brothers, a wholly owned subsidiary
of Holdings. The Depositor's principal executive offices are located at Three
World Financial Center, New York, New York 10285. Its telephone number is (212)
526-7000.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ('Depositor Securities') collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass-through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
(i) the sale or lease of automobiles, trucks or other motor vehicles, equipment,
merchandise and other personal property, (ii) credit card purchases or cash
advances, (iii) the sale, licensing or other commercial provision of services,
rights, intellectual properties and other intangibles, (iv) trade financings,
(v) loans secured by certain first or junior mortgages on real estate, (vi)
loans to employee stock ownership plans and (vii) all other commercial
transactions and commercial, sovereign, student or consumer loans or
indebtedness and, in connection therewith or otherwise, purchasing, acquiring,
owning, holding, transferring, conveying, servicing, selling, pledging,
assigning, financing and otherwise dealing with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the Depositor's Certificate of Incorporation limits
the Depositor's activities to the above activities and certain related
activities, such as Enhancement with respect to such Depositor Securities, and
to any activities incidental to and necessary or convenient for the
accomplishment of such purposes. The Certificate of Incorporation of the
Depositor provides that any Depositor Securities, except for subordinated
Depositor Securities, must be rated in one of the four highest categories by a
nationally recognized rating agency.
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USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Certificates offered hereby and by the related
Prospectus Supplement for one or more of the following purposes: (i) to purchase
the related Primary Assets, (ii) to repay indebtedness which has been incurred
to obtain funds to acquire such Primary Assets, (iii) to establish a Pre-Funding
Account for such Series, (iv) to establish any Reserve Funds or Cash Collateral
Accounts described in the related Prospectus Supplement, (v) to provide
enhancement for any other Series or for securities issued by another issuer and
(vi) to pay costs of structuring and issuing such Certificates, including the
costs of obtaining Enhancement, if any. If so specified in the related
Prospectus Supplement, the purchase of the Primary Assets for a Series may be
effected by an exchange of Certificates with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a discussion of certain U.S. federal income tax
consequences of the purchase, ownership and disposition of the Securities. This
discussion does not purport to deal with all aspects of federal income taxation
that may be relevant to holders of the Securities in light of their personal
investment circumstances, nor to certain types of holders subject to special
treatment under the U.S. federal income tax laws (for example, banks, life
insurance companies and tax-exempt organizations). Prospective investors are
advised to consult their own tax advisors with regard to the U.S. federal income
tax consequences of holding and disposing of the Securities, as well as the tax
consequences arising under the laws of any state, foreign country or other
jurisdiction. This discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the 'Code'), the regulations promulgated
thereunder, and judicial or ruling authority, all of which are subject to
change, which change may be retroactive. No ruling on any of the issues
discussed below will be sought from the Internal Revenue Service (the 'IRS').
The Securities of a Series may be classified for U.S. federal income tax
purposes as (i) indebtedness, (ii) an ownership interest in some or all of the
assets included in the Trust for a Series, or (iii) otherwise specified in the
Prospectus Supplement for a Series.
TREATMENT OF THE NOTES AS INDEBTEDNESS
The Seller will agree, and the Noteholders will agree by their purchase of
Notes, to treat the Notes as debt for federal income tax purposes. If so
specified in the Prospectus Supplement for a Series, Tax Counsel will advise the
Trust that the Notes of a Series will be classified as debt for federal income
tax purposes. The discussion below assumes this characterization of the Notes is
correct. If, contrary to the opinion of Special Tax Counsel, the IRS
successfully asserted that one or more of the Notes did not represent debt for
federal income tax purposes, the Notes might be treated as equity interests in
the Trust. If so treated, the Trust might be taxable as a corporation or,
alternatively, as a publicly traded partnership.
TAXATION OF DEBT SECURITIES
Interest Income to Securityholders. Assuming the Securities are debt
obligations for U.S. federal income tax purposes, interest thereon will be
taxable as ordinary income for U.S. federal income tax purposes when received by
Securityholders utilizing the cash basis method of accounting and when accrued
by Securityholders utilizing the accrual method of accounting. Interest received
on the Securities may also constitute 'investment income' for purposes of
certain limitations of the Code concerning the deductibility of investment
interest expense. In addition, a Securityholder who buys a Security for less
than its principal amount (assuming the Security is issued without OID) will be
subject to the 'market discount' rules of the Code, and a Securityholder who
buys a Security for more than its principal amount will be subject to the
premium amortization rules of the Code. See 'Original Issue Discount' below for
a description of the U.S. federal income tax consequences if the Securities are
issued with OID.
The Trustee will be required to report annually to the IRS, and to each
Securityholder of record, the amount of interest paid (and OID accrued, if any)
on the Securities (and the amount of interest withheld for U.S. federal income
taxes, if any) for each calendar year, except as to exempt holders. See 'Backup
Withholding' herein.
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The Code currently provides for a top marginal tax rate applicable to
ordinary income of individuals of 39.6% while maintaining a maximum marginal
rate for the long-term capital gains of individuals of 28%.
Original Issue Discount. The following summary is a general discussion of
the United States federal income tax consequences to Securityholders who are
United States persons owning Securities issued with original issue discount
('OID Securities' and 'OID', respectively). It is based upon income tax
regulations (the 'OID Regulations') finalized on January 27, 1994 under Code
Sections 1271 through 1273 and 1275.
In general, the OID with respect to any OID Security will equal the
difference between the principal amount of the Security and its issue price
(defined as the initial offering price to the public at which price a
substantial amount of the OID Securities have been sold), if such excess is
0.25% or more of the OID Security's principal amount multiplied by the number of
complete years to its maturity (the 'de minimis amount'). Even if such excess is
less than the de minimis amount, if a failure to pay interest currently on the
Securities is not a default it is possible that all stated interest could be
treated as principal for this purpose (and for purposes of the computations
described below) with the result that the Securities could be viewed as OID
Securities. Holders of OID Securities must include OID in income for United
States federal income tax purposes as it accrues under a method that takes
account of the compounding of interest, in advance of receipt of the related
cash payments.
In general, each Securityholder of an OID Security, whether such
Securityholder uses the cash or accrual method of accounting for tax purposes,
will be required to include in ordinary gross income the sum of the 'daily
portions' of OID on the Security for each day during the taxable year that the
Securityholder owns the Security. The daily portion of OID on an OID Security is
determined by allocating to each day in any 'accrual period' a ratable portion
of the original issue discount allocable to that accrual period. In the case of
an initial Securityholder, the amount of original issue discount on an OID
Security allocable to each accrual period is determined by (i) multiplying the
'adjusted issue price' (as defined below) of the Security by a fraction, the
numerator of which is the annual yield to maturity of such Security and the
denominator of which is the number of accrual periods in a year, and (ii)
subtracting from the product the amount of interest paid during that accrual
period. The 'adjusted issue price' of an OID Security at the beginning of any
accrual period will be the sum of its issue price and the amount of OID
allocable to all prior accrual periods, minus the amount of all payments (other
than payments of qualified stated interest) previously made with respect to the
OID Security. As a result of such 'constant yield' method of including OID
income, the amounts so includible in income are lower in the early years and
greater in the later years than the amounts that would be includible on a
straightline basis.
In the event that a Securityholder purchases an OID Security at an
'acquisition premium,' i.e., at a price in excess of the issue price, plus the
OID accrued prior to acquisition and minus any principal payments made with
respect to the OID Security prior to acquisition, the amount includible in
income in each taxable year as OID will be reduced by that portion of the
premium properly allocable to such year. Moreover, a Securityholder who
purchases an OID Security at a price less than the price described in the
preceding sentence will be subject to the market discount rules of the Code.
A Securityholder's tax basis in an OID Security generally will be the
Securityholder's cost increased by any OID included in income (and market
discount, if any, if the Securityholder has elected to include accrued market
discount in income on a current basis) and decreased by the amount of any
principal payment received with respect to the OID Security. Gain or loss on the
sale, exchange or redemption of an OID Security generally will be long-term
capital gain or loss if the OID Security has been held for more than a year
except to the extent that such gain represents accrued market discount not
previously included in the Securityholder's income.
If an Early Amortization Event or Asset Composition Event occurs, the early
payments of principal as a result of either such event could result in
acceleration of income corresponding to a portion of the unaccrued OID.
Effects of Defaults and Delinquencies. Holders of Securities that are
treated as Debt Securities for U.S. federal income tax purposes will be required
to report income with respect to such Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Primary Assets, except possibly to the extent that
it can be established that such amounts are uncollectible. As a result, the
amount of income (including OID) reported by a holder of such a Security in any
period could significantly exceed the amount of cash distributed to such holder
in that period. The holder will eventually be
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allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Primary Asset default. However, the timing and character of
such losses or reductions in income are uncertain and, accordingly, holders of
Securities should consult their own tax advisors on this point.
Sale or Exchange. A Securityholder's tax basis in its Security is the
price such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be a capital gain or loss, assuming that the Security is held as
a capital asset.
A portion of any gain from the sale of a Security that might otherwise be
capital gain may be treated as ordinary income to the extent such Security is
held as part of a 'conversion transaction' within the meaning of new Section
1258 of the Code. A conversion transaction generally is one in which the
taxpayer has taken two or more positions in Securities or similar property that
reduce or eliminate market risk, if substantially all of the taxpayer's return
is attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain realized in a conversion transaction that may be
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment in such
transaction at 120% of the appropriate 'applicable Federal rate' (which rate is
computed and published monthly by the IRS), subject to appropriate reduction (to
the extent provided in regulations to be issued) to reflect prior inclusion of
interest or other ordinary income items from the transaction.
Foreign Investors. If so specified in the Prospectus Supplement for a
Series, Tax Counsel will give its opinion that the Securities of a Series of
Securities will properly be classified as debt for U.S. federal income tax
purposes. If the Securities are treated as debt:
(a) interest paid to a nonresident alien or foreign corporation or
partnership would be exempt from U.S. withholding taxes (including backup
withholding taxes), provided the holder complies with applicable
identification requirements (and does not actually or constructively own
10% or more of the voting stock of the Depositor and is not a controlled
foreign corporation with respect to the Depositor). Applicable
identification requirements will be satisfied if there is delivered to a
securities clearing organization (or bank or other financial institution
that holds the Securities on behalf of the customer in the ordinary course
of its trade or business) (i) IRS Form W-8 signed under penalties of
perjury by the beneficial owner of such Securities stating that the holder
is not a U.S. Person and providing such holder's name and address, (ii) IRS
Form 1001 signed by the beneficial owner of such Securities or such owner's
agent claiming exemption from withholding under an applicable tax treaty,
or (iii) IRS Form 4224 signed by the beneficial owner of such Securities of
such owner's agent claiming exemption from withholding of tax on income
connected with the conduct of a trade or business in the United States;
provided in any such case (x) the applicable form is delivered pursuant to
applicable procedures and is properly transmitted to the United States
entity otherwise required to withhold tax and (y) none of the entities
receiving the form has actual knowledge that the holder is a U.S. person or
that any certification on the form is false;
(b) a holder of a Security who is a nonresident alien or foreign
corporation will not be subject to United States federal income tax on gain
realized on the sale, exchange or redemption of such Security, provided
that (i) such gain is not effectively connected to a trade or business
carried on by the holder in the United States, (ii) in the case of a holder
that is an individual, such holder is not present in the United States for
183 days or more during the taxable year in which such sale, exchange or
redemption occurs and (iii) in the case of gain representing accrued
interest, the conditions described in clause (a) are satisfied; and
(c) a Security held by an individual who at the time of death is a
nonresident alien will not be subject to United States federal estate tax
as a result of such individual's death if, immediately before his death,
(i) the individual did not actually or constructively own 10% or more of
the voting stock of the Depositor and (ii) the holding of such Security was
not effectively connected with the conduct by the decedent of a trade or
business in the United States.
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Interest and OID of Securityholders who are foreign persons are not subject
to withholding if they are effectively connected with a United States business
conducted by the Securityholder. They will, however, generally be subject to the
regular United States income tax.
If the IRS were to contend successfully that a Series of Securities are
interests in a partnership (not taxable as a corporation), a Securityholder that
is a nonresident alien or foreign corporation might be required to file a U.S.
individual or corporate income tax return and pay tax on its share of
partnership income at regular U.S. rates, including, in the case of a
corporation, the branch profits tax (and would be subject to withholding tax on
its share of partnership income). If the Securities are recharacterized as
interests in an association taxable as a corporation or a 'publicly traded
partnership' taxable as a corporation, to the extent distributions on the
Securities were treated as dividends, a nonresident alien individual or foreign
corporation would generally be taxed on the gross amount of such dividends (and
subject to withholding) at a rate of 30% unless such rate were reduced by an
applicable treaty.
Backup Withholding. A Securityholder may, under certain circumstances, be
subject to 'backup withholding' at a rate of 31% with respect to distributions
or the proceeds of a sale of Securities to or through brokers that represent
interest or OID on the Securities. This withholding generally applies if the
holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ('TIN'); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other 'reportable
payments' as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Securityholders, including payments to certain exempt recipients (generally,
holders that are corporations, tax-exempt organizations, qualified pension and
profit-sharing trusts, individual retirement accounts, or nonresident aliens who
provide certification as to their status as nonresidents) and to certain
Nonresidents (as defined below). Each nonexempt Securityholder will be required
to provide, under penalties of perjury, a certificate on IRS Form W-9 containing
such holder's name, address, federal taxpayer identification number and a
statement that such holder is not subject to backup withholding. Should a
nonexempt Securityholder fail to provide the required certification, the Trustee
will be required to withhold (or cause to be withheld) 31% of the interest (and
principal) otherwise payable to the holder, and remit the withheld amounts to
the IRS as credit against the holder's federal income tax liability. Holders of
the Securities should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining the exemption.
The Trustee will report to the Securityholders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities. The
Trustee will furnish or make available, within a reasonable time after the end
of each calendar year, to each Securityholder or each person holding a Security
on behalf of a Securityholder at any time during such year, such information as
the Trustee deems necessary or desirable to assist Securityholders in preparing
their federal income tax returns.
TAX STATUS AS A GRANTOR TRUST
General. If specified in the related Prospectus Supplement, in the opinion
of Brown & Wood LLP, special counsel to the Depositor, the Trust Fund relating
to a Series of Certificates will be classified for U.S. federal income tax
purposes as a grantor trust under Subpart E, Part 1 of Subchapter J of the Code
and not as an association taxable as a corporation (the Certificates of such
Series, 'Pass-Through Securities'). In some Series there will be no separation
of the principal and interest payments on the Securities. In such circumstances,
a Certificateholder will be considered to have purchased a pro rata undivided
interest in the Securities. In other cases ('Stripped Securities'), sale of the
Certificates will produce a separation in the ownership of all or a portion of
the principal payments from all or a portion of the interest payments on the
Securities.
Each Certificateholder must report on its U.S. federal income tax return
its share of the gross income derived from the Securities (not reduced by the
amount payable as fees to the Trustee and the Servicer and similar fees
(collectively, the 'Servicing Fee')), at the same time and in the same manner as
such items would have been reported under the Certificateholder's tax accounting
method had it held its interest in the Securities directly,
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received directly its share of the amounts received with respect to the
Securities, and paid directly its share of the servicing fees. In the case of
Pass-Through Securities other than Stripped Securities, such income will consist
of a pro rata share of all of the income derived from all of the Securities and,
in the case of Stripped Securities, such income will consist of a pro rata share
of the income derived from each stripped bond or stripped coupon in which the
Certificateholder owns an interest. The Certificateholder will generally be
entitled to deduct servicing fees under Section 162 or Section 212 of the Code
to the extent that such servicing fees represent 'reasonable' compensation for
the services rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, servicing fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year.
The Code currently provides for a top marginal tax rate applicable to
ordinary income of individuals of 39.6% while maintaining a maximum marginal
rate for the long-term capital gains of Individuals of 28%.
Discount or Premium on Pass-Through Securities. Discount on a Pass-Through
Security represents OID or market discount. In the case of a CABS Security with
OID in excess of a prescribed de minimis amount or a Stripped Security, a holder
of a Certificate will be required to report as interest income in each taxable
year its share of the amount of OID that accrues during the year.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on a CABS Security (a 'Stripped
Coupon'), a right to receive only principal payments on a CABS Security or a
right to receive certain payments of both interest and principal (a 'Stripped
Bond'). Pursuant to Section 1286 of the Code, the separation of ownership of the
right to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments results
in the creation of 'stripped bonds' with respect to principal payments and
'stripped coupons' with respect to interest payments. Section 1286 of the Code
applies the OID rules to stripped bonds and stripped coupons. For purposes of
computing OID, a Stripped Bond or a Stripped Coupon is treated as a debt
instrument issued on the date that such stripped interest is purchased with an
issue price equal to its purchase price or, if more than one stripped interest
is purchased, the ratable share of the purchase price allocable to such stripped
interest.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and OID rules are to apply to Stripped Securities.
Although the tax treatment of Stripped Securities is not entirely clear, based
on recent guidance by the Internal Revenue Service (the 'IRS'), a Stripped Bond
Certificate generally should be treated as a single debt instrument issued on
the day it is purchased for purposes of calculating any OID. Generally, under
Treasury regulations issued on December 28, 1992 (the 'Section 1286 Treasury
Regulations'), if the discount on a Stripped Bond Certificate is larger than a
de minimis amount (as calculated for purposes of the OID rules of the Code) such
Stripped Bond Certificate will be considered to have been issued with OID. Based
on the preamble to the Section 1286 Treasury Regulations, it appears that stated
interest on a Stripped Bond Certificate will be treated as 'qualified stated
interest' within the meaning of the Section 1286 Treasury Regulations and such
income will be so treated in the Trustee's tax information reporting.
Under the foregoing rules, it is anticipated that Stripped Bond
Certificates will be considered to be issued with de minimis OID, which will
therefore be considered to be zero and Stripped Coupon Certificates will be
issued with OID. If Stripped Bond Certificates are issued with OID, the rules
described in this paragraph would apply. Generally, the owner of a Stripped
Security issued or acquired with OID must include in gross income the sum of the
'daily portions,' as defined below, of the OID on such Stripped Security for
each day on which it owns a Stripped Security, including the date of purchase
but excluding the date of disposition. In the case of an original Stripped
Security holder, the daily portions of OID with respect to a Stripped Security
generally would be determined as follows. A calculation will be made of the
portion of OID that accrues on the Stripped Security during each successive
monthly accrual period (or shorter period in respect of the date of original
issue or the final Distribution Date) that ends on the earlier to occur of the
day in the calendar year corresponding to each
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Distribution Date or the last day of the related accrual period. This will be
done, in the case of each full monthly accrual period, by adding (i) the present
value of all remaining payments to be received on the Stripped Security and (ii)
any payments received during such accrual period, and subtracting from that
total the 'adjusted issued price' of the Stripped Security at the beginning of
such accrual period. The 'adjusted issue price' of a Stripped Security at the
beginning of the first accrual period is its issue price (as determined for
purposes of the original issue discount rules of the Code) and the 'adjusted
issue price' of a Stripped Security at the beginning of a subsequent accrual
period is the 'adjusted issued price' at the beginning of the immediately
preceding accrual period plus the amount of OID allocable to that accrual period
and reduced by the amount of any payment made at the end of or during that
accrual period. The OID accruing during such accrual period will then be divided
by the number of days in the period to determine the daily portion of OID for
each day in the period. With respect to an initial accrual period shorter than a
full monthly accrual period, the daily portions of OID must be determined
according to an appropriate allocation under either an exact or approximate
method set forth in proposed Treasury regulations with respect to OID, or some
other reasonable method, provided that such method is consistent with the method
used to determine the yield to maturity of the Stripped Security.
Sale or Exchange. A Certificateholder's tax basis in its Certificate is
the price such holder pays for a Certificate, plus amounts of original issue or
market discount included in income and reduced by any payments received (other
than qualified stated interest payments) and any amortized premium.
Gain or loss recognized on a sale, exchange, or redemption of a
Certificate, measured by the difference between the amount realized and the
Certificate's basis as so adjusted, will generally be capital gain or loss,
assuming that the Certificate is held as a capital asset. Gain or loss from the
sale of a Grantor Trust Certificate that might otherwise be capital gain may be
treated as ordinary income to the extent such Certificate is held as part of a
'conversion transaction' within the meaning of new Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in Certificates or similar property that reduce or eliminate
market risk, if substantially all of the taxpayer's return is attributable to
the time value of the taxpayer's net investment in such transaction. The amount
of gain realized in a conversion transaction that may be recharacterized as
ordinary income generally will not exceed the amount of interest that would have
accrued on the taxpayer's net investment in such transaction at 120% of the
appropriate 'applicable Federal rate' (which rate is computed and published
monthly by the IRS), subject to appropriate reduction (to the extent provided in
regulations to be issued) to reflect prior inclusion of interest or other
ordinary income items from the transaction.
Foreign Investors. Under the Code, unless interest (including OID) paid on
a Certificate is considered to be 'effectively connected' with a trade or
business conducted in the United States by a nonresident alien individual,
foreign partnership or foreign corporation ('Nonresidents'), such interest will
normally qualify as portfolio interest (except where (i) the recipient is a
holder, directly or by attribution, of 10% or more of the capital or profits
interest in the issuer of the Securities, or (ii) the recipient is a controlled
foreign corporation to which the issuer of the Securities is a related person)
and will be exempt from U.S. federal income tax. Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of obligations to
withhold tax from such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate (unless such rate were reduced or
eliminated by an applicable tax treaty) on, among other things, interest and
other fixed or determinable, annual or periodic income paid to Nonresidents.
Holders of Pass-Through Securities and Stripped Securities, however, may be
subject to withholding to the extent that the Securities were originated on or
before July 18, 1984.
Interest and original issue discount of Certificateholders who are foreign
persons are not subject to withholding if they are effectively connected with a
United States business conducted by the Certificateholder. They will, however,
generally be subject to the regular United States income tax.
STATE TAX CONSIDERATIONS
In addition to the U.S. federal income tax consequences described in
'Certain Federal Income Tax Considerations,' potential investors should consider
the state income tax consequences of the acquisition, ownership and disposition
of the Securities. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state.
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Therefore, potential investors should consult their own tax advisors with
respect to the various state tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain restrictions on employee benefit plans ('Plans') subject to
ERISA and persons who have certain specified relationships to such Plans
('Parties in Interest'). ERISA also imposes certain duties on persons who are
fiduciaries of Plans subject to ERISA and prohibits certain transactions between
a Plan and Parties in Interest with respect to such Plans ('Prohibited
Transactions'). Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is considered
to be a fiduciary of such Plan (subject to certain exceptions not here
relevant). Similar restrictions also apply to Plans that are subject to the
Code.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Certificates or Notes through Lehman
Brothers or one or more other firms that may be designated at the time of each
offering of such Certificates of Notes. The participation of Lehman Brothers in
any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Certificates or Notes will set forth the specific terms of the
offering of such Series of Certificates or Notes and of each Class within such
Series, the names of the underwriters, the purchase price of the Certificates or
Notes, the proceeds to the Depositor from such sale, any securities exchange on
which the Certificates or Notes may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to certain dealers. The place
and time of delivery of each Series of Certificates or Notes will also be set
forth in the Prospectus Supplement relating to such Series.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates and the Notes will be passed
upon for the Depositor and for the underwriters by Brown & Wood LLP, New York,
New York.
ADDITIONAL INFORMATION
The Prospectus does not contain all the information set forth in the
Registration Statement (of which this Prospectus is a part) and exhibits
relating thereto which the Depositor has filed with the Commission in
Washington, D.C. Copies of the information and the exhibits are on file at the
offices of the Commission and may be obtained, upon payment of the fee
prescribed by the Commission, or may be examined without charge at the offices
of the Commission.
Neither Lehman Brothers Inc. nor any of its affiliates, including the
Depositor, are obligated with respect to the Certificates or the Notes.
Accordingly, the Depositor has determined that financial statements of Lehman
Brothers and its affiliates including the Depositor are not material to the
offering made hereby.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a 'Supplemental Glossary' in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
complete definition of such terms.
'Accrual Termination Date' means, with respect to a Class of Compound
Interest Certificates, the Payment Date specified in the related Prospectus
Supplement.
'Accounts' means with respect to the Primary Assets of a Series, portfolios
of revolving credit, charge and debit card accounts.
'Advance' means a cash advance by the Servicer in respect of delinquent
payments of principal of and interest on an Account, and for any other purposes
specified in the related Prospectus Supplement.
'Agreement' means a Master Pooling and Servicing Agreement, Pooling and
Servicing Agreement, Sale and Servicing Agreement or Trust Agreement entered
into among the Seller, the Servicer, the Depositor and the Trustee with respect
to the issuance of a CABS Security.
'Asset Group' means, with respect to the Primary Assets of a Series, a
group of such Primary Assets having the characteristics described in the related
Prospectus Supplement.
'Asset Value' means, for any Primary Asset, the amount set forth in or
determined in accordance with the related Prospectus Supplement.
'Assumed Reinvestment Rate' means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the 'Assumed Reinvestment Rate' for funds held in any fund
or account for the Series.
'Bankruptcy Code' means the federal bankruptcy code, Title 11 United States
Code Section 101 et seq., and related rules and regulations promulgated
thereunder.
'Business Day' means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
'CABS Agreement' means a Pooling and Servicing Agreement, a Master Pooling
and Servicing Agreement, a Sale and Servicing Agreement, a Trust Agreement or
similar agreement.
'CABS Issuer' means the issuer or issuers of the CABS.
'CABS' or 'CABS Security' means a certificate evidencing an undivided
interest in, or a note or loan secured by Receivables generated in Accounts.
CABS or CABS Security may also include a certificate evidencing an undivided
interest in, or a note or a loan secured by CABS.
'CABS Servicer' means the servicer or servicers of the CABS.
'CABS Trustee' means the trustee or trustees of the Securities.
'Cash Collateral Account' see 'Reserve Fund.'
'Cash Collateral Guaranty' means the guaranty that provides support for a
Series or one or more Classes of a Series if so specified in the related
Prospectus Supplement.
'Cedel' means Cedel Bank, societe anonyme.
'Cedel Participants' means Cedel's participating organizations.
'Certificateholder' means a holder of a Certificate.
'Certificates' means the Asset Backed Certificates.
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<PAGE>
'Certificate Schedule' means a schedule appearing as an exhibit to the
related Agreement identifying each CABS Security.
'Citibank' means Citibank, N.A.
'Class' means a Class of Certificates or Notes of a Series.
'Closing Date' means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Certificates of such Series
are first issued.
'Code' means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
'Collection Account' means, with respect to a Series, the account
established with the Trustee or the Servicer in the name of the Trustee for the
deposit by the Servicer of payments received from the Primary Assets.
'Commission' means the Securities and Exchange Commission.
'Compound Interest Certificate' means any Certificate of a Series on which
all or a portion of the interest accrued thereon is added to the principal
balance of such Certificate on each Payment Date, through the Accrual
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Certificates, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Certificates.
'Cooperative' means Euroclear Clearance System S.C., a Belgian cooperative
corporation.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Certificates or Notes characterized as indebtedness
for federal income tax purposes.
'Definitive Certificates' means Certificates of any Series issued in fully
registered, certificated form.
'Deleted Primary Asset' means a Primary Asset removed from the Trust.
'de minimis amount' is equal to .25% or more of the OID Certificate's
principal amount multiplied by the number of complete years to its maturity.
'Depositor' means Lehman ABS Corporation.
'Depositor Securities' means Depositor's bonds, notes, debt or equity
securities, obligations and other securities and instruments.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381 (a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
'DTC' means The Depository Trust Company.
'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described as such in the related Agreement.
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<PAGE>
'Eligible Servicer' means the Trustee or an entity which, at the time of
its appointment as Servicer, (i) is an established financial institution having
capital or a net worth of not less than $100,000,000, (ii) is servicing a
portfolio of consumer credit card or charge card accounts, (iii) is legally
qualified and has the capacity to service the Accounts, (iv) has demonstrated
the ability to professionally and completely service a portfolio of similar
accounts in accordance with standards of skill and care customary in the
industry and (v) is qualified to use the software that is then currently being
used to service the Accounts or obtains the right to use or has its own software
which is adequate to perform its duties under the Agreement.
'Enhancement' means the Enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Euroclear' or 'Euroclear Operator' means Morgan Guaranty Trust Company of
New York, Brussels, Belgium office.
'Euroclear Participants' means participants of the Euroclear system.
'Final Scheduled Payment Date' means, with respect to a Class of a Series
of Certificates, the date after which no Certificates of such Class will remain
outstanding based on the assumptions set forth in the related Prospectus
Supplement.
'Finance Charge Receivables' means all periodic finance charges, annual
membership fees, cash advance fees and late charges on amounts charged for
merchandise and services and certain other fees designated in the related
Prospectus Supplement.
'FIRREA' means the Financial Institutions Reform, Recovery and Enforcement
Act of 1987.
'Global Securities' means the globally offered Certificates.
'Holders' or 'holders' means holders of any Certificates or any Notes.
'Holdings' means Lehman Brothers Holdings Inc.
'Indirect Participants' consist of banks, brokers, dealers and trust
companies that clear through or maintain a custodian relationship with a
Participant either directly or indirectly.
'Initial Accounts' means Receivables existing on the Cut-Off Date in
certain consumer, corporate, revolving credit card, charge card or debit card
accounts.
'Interest Only Certificates' means a Class of Certificates entitled solely
or primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'Issuer' means, with respect to Securities, the issuer, depositor or
seller/servicer under an Agreement.
'Investor Interest' means a specific undivided interest in the assets of
the Trust allocated to the Certificates.
'L/C Bank' means the issuer of the letter of credit.
'LCPI' means Lehman Commercial Paper Inc.
'Lehman Brothers' means Lehman Brothers Inc.
'Liquidation Proceeds' means all amounts received by the Servicer in
connection with the liquidation of Primary Assets other than amounts required to
be paid or refunded to the obligor pursuant to the terms of the applicable
documents or otherwise pursuant to law.
'Mastercard International' means Mastercard International Incorporated.
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<PAGE>
'Modification' means a change in any term of a Receivable.
'Morgan' means Morgan Guaranty Trust Company of New York.
'1986 Act' means the Tax Reform Act of 1986.
'1992 Form 10-K' means the Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.
'Nonresidents' means a nonresident alien individual, foreign partnership or
foreign corporation.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Certificates used solely for convenience
in expressing the calculation of interest and does not represent the right to
receive distributions allocable to principal.
'OID' means original issue discount.
'OID Securities' means Securities issued with OID.
'Participants' means organizations participating in the Prospectus
Supplement.
'Participating Certificates' means Certificates entitled to receive
payments of principal and interest and an additional return on investment as
described in the related Prospectus Supplement.
'Participations' means participations representing undivided interests in a
pool of assets primarily consisting of revolving charge card accounts or other
revolving credit accounts owned by the Depositor or any affiliate thereof and
collections thereon.
'Parties in Interest' means persons who have certain specified
relationships to such plans.
'Pass-Through Securities' means classified certificates of a grantor trust
under Subpart E, Part 1 of Subchapter J of the Code.
'Paying Agent' means the Trustee, or its successor in such capacity.
'Payment Date' means, with respect to a Series or Class of Certificates,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
'Payments' means the payments of principal and finance charges to be made
by obligors on Securities or by Cardholders.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Plans' means employee benefit plans.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer and the
Trustee.
'Pre-Funding Account' means the Pre-Funding Account which may be deemed
necessary by a Prospectus Supplement.
'Pre-Funded Amount' means the amount on deposit in the Pre-Funded Account.
'Primary Assets' means one or more pools of Receivables arising under
Accounts purchased from the Seller specified in the related Prospectus
Supplement and Securities which are included in the Trust Fund for such Series.
A Primary Asset refers to a specific Receivable or CABS Security, as the case
may be.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by (i) all payments,
both scheduled or otherwise, received on such Primary Asset prior to such Due
Date and applied to principal in accordance with the terms of the Primary Asset,
(ii) the principal portion of the purchase price of any Primary Asset removed
from the Trust Fund and (iii) the principal portion of any liquidation proceeds.
49
<PAGE>
'Principal Only Certificates' means a Class of Certificates entitled solely
or primarily to distributions of Principal and identified as such in the
Prospectus Supplement.
'Principal Receivables' means all amounts charged by cardholders for
merchandise and services, amounts advanced and certain other fees billed to
cardholders on the Accounts.
'Prohibited Transactions' means certain transactions between a Plan and
Parties in Interest with respect to such Plans prohibited by ERISA.
'Proposed OID Regulations' means proposed income tax regulations.
'Qualifying Substitute Primary Asset' means Primary Assets substituted for
a Deleted Primary Asset.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Certificates upon the original issuance thereof.
'Receivables' may consist of, with respect to the Primary Series, consumer,
corporate, revolving credit card, charge card or debit card receivables.
'Removed Account' means receivables removed from certain Accounts from the
Trust.
'Reserve Fund' means, with respect to a Series, any Reserve Fund
established pursuant to the Pooling and Servicing Agreement.
'Revolving Period' means the period during which Primary Assets will be
continuously purchased and no principal will be paid to the Certificateholders.
'Sale and Servicing Agreement' means, in the case of a Series in which
Receivables are serviced by the Seller, the agreement among the Depositor, the
Seller and the Trustee for the sale and servicing of the Mortgage Loans.
'Section 1286 Treasury Regulations' means Treasury Regulations issued on
December 28, 1992.
'Securityholder' means a holder of a Security.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinated Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Certificates or Notes sold pursuant to
this Prospectus and the related Prospectus Supplement.
'Servicer' means, with respect to a Series secured by Receivables, the
Person, if any, designated in the related Prospectus Supplement to service
Receivables for that Series, or the successors or assigns of such Person.
'Servicing Agreement' means, in the case of a Series which includes
Receivables not serviced by the Seller, the agreement among the Depositor, the
Trustee and the Servicer for the servicing of such Receivables.
'Servicing Fee' means the amount payable as fees to the Trustee and the
Servicer.
'Spread Account' means an Account which supports a Series or one or more
Classes of Series by assuring the subsequent distribution of interest or
principal on the Certificates of such Class or Series.
'Stripped Coupon' means a right to receive only a portion of the interest
payments on a CABS Security.
'Stripped Securities' means Certificates whose sale produces a separation
in the ownership of all or a portion of the principal payments from all or a
portion of the interest payments on the Securities.
'Subordinated Securityholder' means a holder of a Subordinated Security.
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be
50
<PAGE>
allocated losses and shortfalls prior to the allocation thereof to other Classes
of Securities, to the extent and under the circumstances specified in the
related Prospectus Supplement.
'Subsequent Receivables' means additional receivables which the related
Trust may be required to purchase.
'Subsequent Transfer Date' means the transfer dates on which Subsequent
Receivables will be sold from time to time during the Funding Period.
'Terms and Conditions' means Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System.
'Trust' means, with respect to any Series of Certificates, all money,
instruments, securities and other property, including all proceeds thereof,
which are held for the benefit of the Certificateholders by the Trustee under
the Agreement, including, without limitation, the Primary Assets, all amounts in
the Distribution Account, Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees, if any), and reinvestment earnings on
such net distributions and any Enhancement and all other property and interests
held by the Trustee pursuant to the Trust Agreement for such Series.
'Trustee' means the trustee under an Agreement and its successors.
'UCC' means the Uniform Commercial Code.
'Variable Interest Certificate' means a Certificate on which interest
accrues at a rate that is adjusted, based upon a predetermined index, at fixed
periodic intervals, all as set forth in the related Prospectus Supplement.
'VISA' means VISA U.S.A., Inc.
'Zero Coupon Certificate' means a Certificate entitling the holder to
receive only payments of principal as specified in the related Prospectus
Supplement.
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52
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or Lehman Brothers. This Prospectus Supplement and the Prospectus do
not constitute an offer of any securities other than those to which they relate
or an offer to sell, or a solicitation of an offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be unlawful. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to their
respective dates.
------------------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary......................................... S-2
Risk Factors.................................... S-11
The Trust....................................... S-12
Description of The Class A1 Notes............... S-13
Calculation of The Pay Down Amount.............. S-15
Prepayment and Additional Structuring
Assumptions and Decrement Table............... S-20
Description of The Class A2 Certificates........ S-21
Description of The CABS......................... S-22
The Depositor................................... S-23
The Indenture................................... S-23
The Trust Agreement............................. S-28
The Swap Agreement.............................. S-30
The Market Agent Agreement...................... S-32
The Administration Agreement.................... S-33
The Indenture Trustee........................... S-33
The Owner Trustee............................... S-33
Use of Proceeds................................. S-33
Certain Federal Income Tax Consequences......... S-34
State Tax Consequences.......................... S-37
ERISA Considerations............................ S-37
Legal Investment Considerations................. S-39
Underwriting.................................... S-39
Legal Matters................................... S-40
Rating.......................................... S-40
Index of Defined Terms.......................... S-41
Prospectus
Prospectus Supplement........................... 2
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 2
Reports to Holders.............................. 2
Summary of Terms................................ 3
Risk Factors.................................... 13
Description of the Certificates................. 16
Trust Assets.................................... 22
Enhancement..................................... 25
Servicing of Receivables........................ 27
The Agreements.................................. 30
Certain Legal Aspects of the Receivables........ 35
The Depositor................................... 38
Use of Proceeds................................. 39
Certain Federal Income Tax Considerations....... 39
State Tax Considerations........................ 44
ERISA Considerations............................ 45
Plan of Distribution............................ 45
Legal Matters................................... 45
Additional Information.......................... 45
</TABLE>
================================================================================
================================================================================
Mortgage Index
Amortizing Trust
1997-1
$250,000,000
% Fixed Rate
Asset Backed Notes, Class A1
Lehman ABS Corporation
(Depositor)
------------------------
PROSPECTUS SUPPLEMENT
September , 1997
------------------------
LEHMAN BROTHERS
================================================================================
