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 and has become effective. This 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 such State.
SUBJECT TO COMPLETION
DATED AUGUST 22, 1997
PRELIMINARY PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 2, 1994)
- --------------------------------------------------------------------------------
$210,000,000 (APPROXIMATE)
FIRST SIERRA EQUIPMENT CONTRACT TRUST 1997-1
% EQUIPMENT CONTRACT BACKED NOTES, CLASS A
FIRST SIERRA FINANCIAL, INC.
ORIGINATOR AND SERVICER
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
DEPOSITOR
- --------------------------------------------------------------------------------
The Class A Equipment Contract Backed Notes (the "Class A Notes") hereby offered
by Prudential Securities Secured Financing Corporation represent the right to
receive repayment of the Initial Class A Note Principal Balance ($210,000,000
(approximate)) of the Class A Notes and monthly interest at a rate of ___% per
annum on the unpaid portion of such principal amount. The Class A Notes are
backed solely by a pledge of the assets of the First Sierra Equipment Contract
Trust 1997-1 (the "Trust") formed pursuant to a Trust Agreement (the "Trust
Agreement"), dated as of September 1, 1997, among First Sierra Receivables IV,
Inc. (the "Transferor"), Prudential Securities Secured Financing Corporation
(the "Depositor") and [Delaware Trust Company], as the owner trustee (the "Owner
Trustee"). The Class A Notes will be issued by the Trust pursuant to an
indenture of trust dated as of September 1, 1997 (the "Indenture") between the
Trust and Bankers Trust Company, as the indenture trustee (the "Indenture
Trustee"). The assets of the Trust will consist of certain operating and finance
leases and commercial loans (collectively, the "Contracts"), the security
interest of the Originator or its affiliate, which was acquired by the
Originator or such affiliate at the time of its origination or purchase of the
related Contracts in the underlying equipment or other property securing such
contracts (collectively, the "Equipment," together with the Contracts, the
"Receivables") and certain other property.
Principal and interest will be paid to the holders of the Class A Notes (the
"Class A Noteholders") monthly on the 10th day (or, if such day is not a
Business Day, on the next succeeding Business Day thereafter) of each month,
commencing on October 10, 1997 (each, a "Payment Date"), as further described
herein. Interest will accrue on the Class A Notes from Payment Date to Payment
Date, or with respect to the initial Payment Date, from September 10, 1997. The
final payment of principal and interest on the Class A notes is expected to be
made on the _________ Payment Date (the "Expected Final Payment Date") but, in
any event, shall be made no later than the ________ Payment Date.
-------------------------
DRESDNER KLEINWORT BENSON
-------------------------
Dresdner Bank, AG, New York Branch
ADVISOR
The Class A Notes will be unconditionally and irrevocably guaranteed as to the
payment of scheduled interest and ultimate principal thereon pursuant to the
terms of a note insurance policy (the "Note Insurance Policy") to be issued by
MBIA [LOGO]
(COVER CONTINUED ON NEXT PAGE)
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT INTERESTS
IN OR OBLIGATIONS OF THE DEPOSITOR, THE ORIGINATOR, THE SERVICER, ANY SUCCESSOR
SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE SECURITIES NOR THE
UNDERLYING RECEIVABLES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY THE DEPOSITOR, THE ORIGINATOR OR THE SERVICER. SEE ALSO
"RISK FACTORS" HEREIN AND "SPECIAL CONSIDERATIONS" IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
ON PAGE S-18 HEREOF AND "SPECIAL CONSIDERATIONS" BEGINNING ON PAGE 15 IN THE
PROSPECTUS.
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds To
Offering Price(1) Discount Depositor (2)
----------------- ------------ -------------
<S> <C> <C> <C>
Per Class A Equipment Contract Backed Note.......... % % %
Total............................................... $ $ $
</TABLE>
- ------------------
(1) Plus accrued interest from September ___, 1997.
(2) Before deducting expenses, estimated to be [$______].
----------------------
The Class A Notes are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and withdraw, cancel, or modify any order without notice. It
is expected that the Class A Notes will be made in book-entry form through the
facilities of The Depository Trust Company on or about September ___, 1997.
PRUDENTIAL SECURITIES INCORPORATED FIRST UNION CAPITAL MARKETS CORP.
September ___, 1997
<PAGE>
(cover page continued)
First Sierra Financial, Inc., a financial services and asset management
company ("First Sierra" or the "Originator"), together with certain affiliates
and certain trusts sponsored by the Originator or its affiliates, will transfer
the Receivables to First Sierra Receivables IV, Inc. (the "Transferor") pursuant
to one or more Receivables Transfer Agreements (the "Receivables Transfer
Agreements"). The Transferor will, in turn, transfer the Receivables to the
Depositor pursuant to the Depositor Transfer Agreement (the "Depositor Transfer
Agreement" together with the Receivables Transfer Agreements, the "Transfer
Agreements") dated as of September 1, 1997 among the Transferor, First Sierra
and Prudential Securities Secured Financing Corporation (the "Depositor"), which
will deposit the Receivables into the Trust. The Trust will pledge the
Receivables to the Indenture Trustee (i) for the benefit of the Noteholders and
the Note Insurer pursuant to the Indenture and (ii) solely to the extent of the
Class B-2 credit provider's right to receive its fee and reimbursement of any
amounts drawn on the letter of credit supporting the Class B-2 Notes, for the
benefit of the Class B-2 credit provider. First Sierra, in its capacity as
servicer (the "Servicer") will service the Receivables pursuant to the Servicing
Agreement dated as of September 1, 1997 (the "Servicing Agreement") among the
Servicer, the Back-up Servicer, the Trust and the Indenture Trustee.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE CLASS A NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CLASS A NOTES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
-----------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE CLASS A NOTES
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-----------------------
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Class A Notes offered pursuant to this Prospectus
Supplement. This Prospectus Supplement and the related Prospectus, which form a
part of the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement can be inspected and copied at the Public Reference
Room at the Commission at 450 Fifth Street, N.W., Washington, D.C. and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York, 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a site on the World Wide Web containing reports, proxy materials,
information statements and other items. The address is http://www.sec.gov.
-----------------------
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, periodic and annual unaudited
reports containing information concerning the Receivables will be prepared by
the Servicer and sent on behalf of the Trust only to Cede & Company ("Cede"), as
nominee of The Depository Trust Company ("DTC ") and registered holders of the
Notes (as defined herein). See "Description of the Securities -- Reports to
Securityholders" in the accompanying Prospectus (the "Prospectus"). Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. The Depositor will cause to be filed with the
Commission such periodic reports as are required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder and as are otherwise agreed to by the Commission. Copies of such
periodic reports may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
S-2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus. Certain
capitalized terms used herein are defined elsewhere in this Prospectus
Supplement on the pages indicated in the "Index of Terms" or, to the extent not
defined herein, have the meanings assigned to such terms in the Prospectus.
The Trust......................... First Sierra Equipment Contract Trust
1997-1 (the "Trust"), a business trust
organized under the laws of the state of
Delaware. The principal executive offices
of the Trust are in Wilmington, Delaware,
in care of the Owner Trustee, at the
address of the Owner Trustee specified
below. The activities of the Trust will be
limited by the terms of the Trust Agreement
to acquiring, holding and managing the
Receivables, issuing and making payments on
the Notes and the Trust Certificate and
other activities related thereto.
Depositor......................... Prudential Securities Secured Financing
Corporation (the "Depositor"), a Delaware
corporation. The Depositor will acquire the
Receivables from the Transferor pursuant to
the Depositor Transfer Agreement, whereupon
the Depositor will then transfer the
Receivables to the Trust. See "The
Depositor" in the Prospectus.
Transferor........................ First Sierra Receivables IV, Inc., a
Delaware corporation (the "Transferor").
The Transferor is a wholly-owned
special-purpose subsidiary of First Sierra.
Servicer.......................... First Sierra Financial, Inc. (the
"Servicer"). See "The Servicer" herein and
"Description of the Trust Agreements --
Servicing Procedures" in the Prospectus.
Indenture Trustee................. Bankers Trust Company (the "Indenture
Trustee" or "Bankers Trust Company"), a New
York banking corporation. The corporate
trust offices of the Indenture Trustee are
located at Four Albany Street, New York,
New York 10006 and its telephone number is
(212) 250-4237.
Owner Trustee..................... [Delaware Trust Company (the "Owner
Trustee"), a Delaware banking corporation.
The corporate trust offices of the Owner
Trustee are located at
[_________________________________],
Wilmington, Delaware, [_____] Attention:
_____________________, and the telephone
number is _______________.]
Back-up Servicer.................. Bankers Trust Company (in such capacity,
the "Back-up Servicer").
Cut-Off Date...................... The close of business on September 1, 1997
(the "Cut-off Date").
Closing Date...................... On or about September ___, 1997 (the
"Closing Date").
Statistic Calculation Date........ The close of business on August 1, 1997
(the "Statistic Calculation Date").
Collection Periods,
Payment Dates
and Record Dates.................. Collection Periods are the periods from and
including the opening of business on the
second day of each calendar month to and
including the close of business on the
first day of the following calendar month
(each such period, a "Collection Period").
Payment Dates will be on the 10th
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
day of each month, or the next succeeding
Business Day, commencing October 10, 1997
(each, a "Payment Date"). Record Dates are
the last calendar day of each Collection
Period (each, a "Record Date").
The Class A
Notes............................. The ___% Class A Equipment Contract Backed
Notes (the "Class A Notes") in the initial
principal amount of $210,000,000
(approximate) (the "Initial Class A Note
Principal Balance") will be issued pursuant
to the Indenture. The Initial Class A Note
Principal Balance to be issued hereunder is
equal to approximately 92% (the "Class A
Percentage") of the initial Aggregate
Discounted Contract Principal Balance (as
defined below) of the Contracts. The Class
A Notes will initially be issued in
book-entry form only in minimum
denominations of $1,000 and integral
multiples thereof. The holder or holders of
the Class A Notes shall be referred to
herein as the "Class A Noteholders."
The Class A Notes are available in
book-entry form only, through the
facilities of DTC.
The Trust will also issue three classes of
subordinate notes, the ___% Class B-1
Equipment Contract Backed Notes (the "Class
B-1 Notes"), the ___% Class B-2 Equipment
Contract Backed Notes (the "Class B-2
Notes"), the ___% Class B-3 Equipment
Contract Backed Notes (the "Class B-3
Notes," and collectively with the Class B-1
Notes and the Class B-2 Notes, the "Class B
Notes", and collectively with the Class A
Notes, the "Notes"), and the Trust
Certificate (the "Trust Certificate,"
together with the Class B Notes, the
"Subordinate Securities," and collectively
with the Notes, the "Securities"). The
Subordinate Securities are not offered
hereby. The Class B Notes are expected to
be privately placed with one or more
qualified institutional investors. The
Transferor expects to retain the Trust
Certificate. The holder or holders of the
Class B-1 Notes shall be referred to herein
as the "Class B-1 Noteholders," the holder
or holders of the Class B-2 Notes shall be
referred to herein as the "Class B-2
Noteholders," the holder or holders of the
Class B-3 Notes shall be referred to herein
as the "Class B-3 Noteholders" (the Class
B-1 Noteholders, the Class B-2 Noteholders
and the Class B-3 Noteholders,
collectively, the "Class B Noteholders,"
and, together with the Class A Noteholders,
the "Noteholders") and the holder of the
Trust Certificate shall be referred to
herein as the "Residual Holder."
The Trust Assets.................. The assets of the Trust (the "Trust
Assets") will consist of a segregated pool
of operating leases, direct finance leases
and commercial loans (collectively, the
"Contracts"), together with all monies
received relating thereto on or after the
Cut-Off Date, the security interest of the
Originator or its affiliate, which was
acquired by the Originator or such
affiliate at the time of its purchase of
the related Contract, in the equipment or
other property securing such Contracts and
the proceeds thereof (the "Equipment,"
together with the Contracts, the
"Receivables"), all funds on deposit in the
Lockbox Account relating to the Receivables
and the Collection Account and certain
other property, all as more fully described
below. Any security deposits received by
First Sierra with respect to the Contracts
will be retained by First Sierra, and such
amounts will not be available to the Trust
in the event of the liquidation of the
related Contracts. The Trust Assets also
will include the Note Insurance Policy,
certain of the Originator's rights under
certain insurance policies relating to the
Receivables, the purchase option payments,
if any, and any amounts deposited from
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
time to time in certain collection and
distribution accounts as described herein.
See "The Trust Funds" in the Prospectus.
The Originator, in its capacity as such,
will make certain representations and
warranties with respect to, among other
things, the Equipment and the Contracts,
which representations and warranties will
be assigned to the Indenture Trustee under
the Indenture.
The Receivables................... Each Contract was previously originated by
either (i) a third-party unaffiliated with
First Sierra (each, a "Source") and
acquired by First Sierra through its
Private Label Program, or (ii) First Sierra
directly through its Vendor or Broker
Program. Each Private Label Contract has
been acquired by First Sierra pursuant to
an agreement between First Sierra and the
related Source under which First Sierra has
acquired all right, title and interest of
such Source in and to the related Contract,
together with a security interest in such
Source's right, title and interest in and
to the related Equipment (each such
agreement, a "Source Agreement"). The
Transferor will also acquire 464 Contracts
representing 3.91% of the Initial Aggregate
Discounted Principal Balance of the pool
from Heritage Finance Corp. I, an affiliate
of First Sierra, in connection with the
redemption of its Lease-Backed Notes.
The Receivables consist of the Contracts
and a security interest in the underlying
Equipment. As of the Statistic Calculation
Date, the Contracts will have an Aggregate
Discounted Contract Principal Balance
(calculated using an assumed discount rate
of 7.25% (the "Statistical Discount Rate"))
of approximately $229,728,292.98 (the
"Statistical Discounted Contract Principal
Balance"). The statistical information
concerning the pool of Receivables set
forth herein is based upon information as
of the close of business on the Statistic
Calculation Date and the Statistical
Discount Rate. The actual discount rate is
___% (the "Discount Rate") and was
calculated using the actual Class A Note
Rate of ___% (the "Class A Note Rate"), the
actual Class B-1 Note Rate of ___% (the
"Class B-1 Note Rate"), the actual Class
B-2 Note Rate of ___% (the "Class B-2 Note
Rate") and the actual Class B-3 Note Rate
of ___% (the "Class B-3 Note Rate"), as
well as the Servicing Fee Rate, the Back-up
Servicing Fee Rate, the rate payable to the
Note Insurer (the "Premium Rate") pursuant
to that certain insurance agreement among
the Note Insurer, the Indenture Trustee,
the Trust, the Transferor, the Depositor
and First Sierra, as Originator and as
Servicer (the "Insurance Agreement"), the
rate payable to the Indenture Trustee
pursuant to the Indenture and the rate
payable to the Class B-2 credit provider
and shall be utilized to calculate the
actual discount rate set forth in the
Indenture, the actual Initial Class A Note
Principal Balance and the actual Initial
Aggregate Discounted Contract Principal
Balance of the Contracts. The Initial
Aggregate Discounted Contract Principal
Balance as of the Cut-Off Date calculated
using the Discount Rate equals $__________.
Between the Statistic Calculation Date and
the Closing Date some amortization of the
pool is expected to occur. In addition,
certain Contracts included in the pool as
of the Statistic Calculation Date may be
determined not to meet the eligibility
requirements for the final pool, and may
not be included in the final pool. While
the statistical distribution of the
characteristics for the final Receivables
pool as of the Closing Date will vary
somewhat from the statistical distribution
of such characteristics as of the Statistic
Calculation Date as presented in this
Prospectus Supplement, such variance will
not be material.
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
The "Discounted Contract Principal Balance"
with respect to any Contract, on any
Determination Date, is the sum of the
present value of all of the remaining
Scheduled Payments becoming due under such
Contract after the end of the prior
Collection Period, discounted monthly at
the Discount Rate in the manner described
below; provided, however, that except to
the extent expressly provided in the
Indenture, the Discounted Contract
Principal Balance of any Defaulted
Contract, Early Termination Contract, or
Expired Contract or Contract assigned back
to First Sierra pursuant to the Servicing
Agreement shall be equal to zero.
In connection with all calculations
required to be made pursuant to the Trust
Agreement, the Indenture, the Transfer
Agreements, the Servicing Agreement and the
Insurance Agreement (collectively, the
"Transaction Documents"), as applicable,
with respect to the determination of
Discounted Contract Principal Balances, for
any Determination Date the Discounted
Contract Principal Balance for each
Contract shall be calculated assuming:
(i) Scheduled Payments are due on the
last day of each Collection Period;
(ii) Scheduled Payments are discounted
on a monthly basis using a 30 day month and
a 360 day year; and
(iii) Scheduled Payments are
discounted to the last day of the
Collection Period prior to the
Determination Date.
The "Aggregate Discounted Contract
Principal Balance" as determined from time
to time is the sum of the Discounted
Contract Principal Balances of all
Contracts.
All of the Contracts require the periodic,
scheduled payment of rent or other payments
on a monthly, quarterly, semi-annual, or
annual basis, in arrears or in advance.
Such periodic payments are referred to
herein as "Scheduled Payments." All of the
Contracts require that the obligor under
any Contract (the "Obligor") assumes all
responsibility with respect to the related
Equipment, including the obligation to pay
all costs relating to its operation,
maintenance, repair and, with certain
exceptions described herein, insurance or
self insurance. All of the Contracts also
contain "hell or high water" provisions,
which unconditionally obligate the Obligor
to make all Scheduled Payments without
setoff.
As of the Cut-Off Date, not more than 1% of
the Initial Aggregate Discounted Contract
Principal Balance will be comprised of
Contracts which are treated as "true
leases" for tax purposes where the Trust is
not transferred ownership of the Equipment.
The average original equipment cost of the
Equipment is an amount less than or equal
to $20,000; the maximum concentration per
Obligor will be a percentage less than or
equal to 0.50% of the Initial Aggregate
Discounted Contract Principal Balance; the
top ten Obligors will comprise a percentage
less than or equal to 5.0% of the Initial
Aggregate Discounted Contract Principal
Balance; the maximum concentration per
Source will be a percentage less than or
equal to 10% of the Initial Aggregate
Discounted Contract Principal Balance,
except for a single Source which shall not
exceed 35%; the maximum concentration per
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
State will be less than or equal to 10% of
the Initial Aggregate Discounted Contract
Principal Balance, except that with respect
to the State of California, the
concentration shall be limited to 30%.
The terms of the Contracts generally range
from 4 to 85 months. The final scheduled
payment date on the Contract with the
latest maturity is August 10, 2004. As of
the Statistic Calculation Date, all of the
Contracts had (i) original terms to
maturity of 4 months to 85 months, with a
weighted average original term to maturity
of approximately 57 months and (ii) a
remaining term to maturity of not less than
2 months and not more than 85 months with a
weighted average remaining term to maturity
of approximately 53 months.
See "The Receivables" herein and in the
Prospectus.
Flow of Funds..................... The Servicing Agreement will require that
the Servicer establish an account to which
the Obligors shall be directed to make
payments (the "Lockbox Account"). In
addition, the Servicing Agreement will
require that the Servicer establish an
account to be maintained by the Indenture
Trustee (the "Collection Account") and that
the Servicer deposit to the Collection
Account all collections deposited in the
Lockbox Account on an "as collected" basis
(other than Advance Payments which will be
retained in the Lockbox Account until the
last day of the Collection Period in which
such Advance Payment or portion thereof is
due in accordance with the provisions of
the related Contract) and all collections
received by the Servicer on the Contracts
no later than two Business Days following
the Servicer's determination that such
amounts relate to the Contracts or the
Equipment.
On each Payment Date, the Indenture Trustee
will be required to make the following
payments from the Available Funds then on
deposit in the Collection Account, in the
following order of priority (to the extent
funds are available therefor):
(i) to the Servicer, an amount
equal to any unreimbursed
Servicer Advances (other than
Servicer Advances for the
related Collection Period);
(ii) to the Servicer, an amount
equal to the Servicer Fee then
due, together with any accrued
and unpaid Servicer Fees from
prior Collection Periods;
(iii) to the Servicer, any Servicing
Charges, if any, deposited in
the Collection Account;
(iv) to the Back-up Servicer, an
amount equal to the Back-up
Servicer Fee then due, together
with any accrued and unpaid
Back-up Servicer Fees from
prior Collection Periods;
(v) to the Note Insurer, an amount
equal to the Premium Amount
then due, together with any
accrued and unpaid Premium
Amounts from prior Collection
Periods;
(vi) to the Indenture Trustee, the
Indenture Trustee Fees then
due, together with any
Indenture Trustee Fees from
prior Collection Periods;
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
(vii) to the Indenture Trustee, the
Indenture Trustee Expenses then
due, together with any
Indenture Trustee Expenses from
prior Collection Periods, in an
amount not to exceed in the
aggregate $75,000;
(viii) to the Class A Noteholders, the
Class A Note Interest;
(ix) to the Class B-1 Noteholders,
the Class B-1 Note Interest for
the related Collection Period
(to the extent the disbursement
of the Class B-1 Note Interest
will not result in an Available
Funds Shortfall );
(x) to the Class B-2 credit
provider, the fees of the Class
B-2 credit provider;
(xi) to the Class B-2 Noteholders,
the Class B-2 Note Interest for
the related Collection Period
(to the extent the disbursement
of the Class B-2 Note Interest
will not result in an Available
Funds Shortfall);
(xii) until the Class A Note
Principal Balance has been
reduced to zero, to the Class A
Noteholders, the sum of (a) the
Class A Base Principal
Distribution Amount for such
Payment Date, and (b) any Class
A Overdue Principal;
(xiii) to the Note Insurer, the unpaid
Reimbursement Amount, if any;
(xiv) until the Class B-1 Note
Principal Balance has been
reduced to zero, to the Class
B-1 Noteholders, from the
Available Funds then remaining
in the Collection Account, the
sum of (a) the Class B-1 Base
Principal Distribution Amount
for such Payment Date, and (b)
any Class B-1 Overdue
Principal; provided, however,
that if a Restricting Event
exists on such Payment Date and
the Class A Note Principal
Balance on such Payment Date
(after giving effect to all
prior payments of principal to
the Class A Noteholders made on
such Payment Date) exceeds
zero, the amount otherwise
required to be paid to the
Class B-1 Noteholders under
this clause (xiv), shall
instead be paid to the Class A
Noteholders pursuant to this
clause (xiv) during such time
as a Restricting Event is
continuing as an additional
reduction of the Class A Note
Principal Balance up to the
amount necessary to reduce the
Class A Note Principal Balance
to zero;
(xv) until the Class B-2 Note
Principal Balance has been
reduced to zero, to the Class
B-2 Noteholders, from the
Available Funds then remaining
in the Collection Account, the
sum of (a) the Class B-2 Base
Principal Distribution Amount
for such Payment Date, and (b)
any Class B-2 Overdue
Principal; provided, however,
that if a Restricting Event
exists on such Payment Date,
the amount otherwise required
to be paid to the Class B-2
Noteholders under this clause
(xv) shall instead be paid (x)
if the Class A Note Principal
Balance on such Payment Date
(after giving effect to all
prior payments of
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
principal to the Class A
Noteholders made on such
Payment Date) exceeds zero, to
the Class A Noteholders
pursuant to this clause (xv)
during such time as a
Restricting Event is continuing
as an additional reduction of
the Class A Note Principal
Balance up to the amount
necessary to reduce such
balance to zero, and (y) if the
Class A Note Principal Balance
is zero, but the Class B-1 Note
Principal Balance on such
Payment Date (after giving
effect to all prior payments of
principal to the Class B-1
Noteholders made on such
Payment Date) exceeds zero, the
amount otherwise required to be
paid to the Class B-2
Noteholders under this clause
(xv) shall instead be paid to
the Class B-1 Noteholders
during such time as a
Restricting Event is continuing
as an additional reduction of
the Class B-1 Note Principal
Balance up to the amount
necessary to reduce such
balance to zero;
(xvi) to the Class B-2 credit
provider, all amounts
previously advanced by it for
the benefit of the Class B-2
Noteholders pursuant to the
letter of credit;
(xvii) to the Class B-3 Noteholders,
the Class B-3 Note Interest for
the related Collection Period;
(xviii)to the Class B-3 Noteholders,
until the Class B-3 Note
Principal Balance has been
reduced to zero, from the
Available Funds then remaining
in the Collection Account, the
sum of (a) the Class B-3 Base
Principal Distribution Amount
for such Payment Date, and (b)
any Class B-3 Overdue
Principal; provided, however,
that if a Restricting Event
exists on such Payment Date,
the amount otherwise required
to be paid to the Class B-3
Noteholders under this clause
(xviii) shall instead be paid
(x) if the Class A Note
Principal Balance on such
Payment Date (after giving
effect to all prior payments of
principal to the Class A
Noteholders made on such
Payment Date) exceeds zero, to
the Class A Noteholders
pursuant to this clause (xviii)
during such time as a
Restricting Event is continuing
as an additional reduction of
the Class A Note Principal
Balance up to the amount
necessary to reduce such
balance to zero, (y) if the
Class A Note Principal Balance
is zero, but the Class B-1 Note
Principal Balance on such
Payment Date (after giving
effect to all prior payments of
principal to the Class B-1
Noteholders made on such
Payment Date) exceeds zero, the
amount otherwise required to be
paid to the Class B-3
Noteholders under this clause
(xviii) shall instead be paid
to the Class B-1 Noteholders
pursuant to this clause (xviii)
during such time as a
Restricting Event is continuing
as an additional reduction of
the Class B-1 Note Principal
Balance up to the amount
necessary to reduce such
balance to zero, and (z) if the
Class A Note Balance and the
Class B-1 Note Balance are both
zero, but the Class B-2 Note
Principal Balance on such
Payment Date (after giving
effect to all prior payments of
principal to the Class B-2
Noteholders made on such
Payment Date) exceeds zero, the
amount otherwise
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S-9
<PAGE>
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required to be paid to the
Class B-3 Noteholders under
this clause (xviii) shall
instead be paid to the Class
B-2 Noteholders pursuant to
this clause (xviii) during such
time as a Restricting Event is
continuing as an additional
reduction of the Class B-2 Note
Principal Balance up to the
amount necessary to reduce such
balance to zero;
(xix) to the Indenture Trustee, the
Indenture Trustee Expenses then
due, together with any
Indenture Trustee Expenses from
prior Collection Periods, in
excess of the $75,000
limitation set forth in clause
(vii);
(xx) to the Servicer, any other
amounts due the Servicer as
expressly provided in the
Servicing Agreement; and
(xxi) to the Residual Holder, any
remaining amounts; provided,
however, that
(I) if a Restricting Event
does not exist on such
Payment Date, but if any
payment of funds to the
Residual Holder on such
Payment Date would result
in the excess of (i) the
Aggregate Discounted
Contract Principal Balance
as of the end of the
immediately preceding
Collection Period, over
(ii) the sum of (w) the
Class A Note Principal
Balance, (x) the Class B-1
Note Principal Balance,
(y) the Class B-2 Note
Principal Balance and (z)
the Class B-3 Note
Principal Balance
(calculated with respect
to clauses (w), (x), (y)
and (z) after giving
effect to all payments of
principal to be made on
such Payment Date) being
less than 2% of the
Initial Aggregate
Discounted Contract
Principal Balance such
amount shall not be paid
to the Residual Holder but
shall instead be paid
pursuant to this clause
(xxi) to the Class A
Noteholders, the Class B-1
Noteholders, the Class B-2
Noteholders and the Class
B-3 Noteholders as an
additional payment of
principal in an amount
with respect to each such
Class equal to the product
of (A) a fraction, the
numerator of which is the
Class A Percentage, the
Class B-1 Percentage, the
Class B-2 Percentage, or
the Class B-3 Percentage,
as the case may be, and
the denominator of which
is the sum of the Class A
Percentage, the Class B-1
Percentage, the Class B-2
Percentage and the Class
B-3 Percentage and (B) the
amount that would
otherwise be paid to the
Residual Holder pursuant
to this clause (xxi); and
(II) if a Restricting Event
exists on such Payment
Date, the amount otherwise
required to be paid to the
Residual Holder under this
clause (xxi) shall instead
be paid (w) if the Class A
Note Principal Balance on
such Payment Date (after
giving effect to all prior
payments of principal to
the Class A Noteholders
made on such Payment Date)
exceeds zero, to the Class
A Noteholders pursuant to
this clause (xxi) during
such time as a Restricting
Event is continuing as an
additional reduction of
the Class A Note Principal
Balance up to the amount
necessary to
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S-10
<PAGE>
- --------------------------------------------------------------------------------
reduce such balance to
zero; (x) if the Class A
Note Principal Balance is
zero, but the Class B-1
Note Principal Balance on
such Payment Date (after
giving effect to all prior
payments of principal to
the Class B-1 Noteholders
made on such Payment Date)
exceeds zero, the amount
otherwise required to be
paid to the Residual
Holder under this clause
(xxi) shall instead be
paid to the Class B-1
Noteholders pursuant to
this clause (xxi) during
such time as a Restricting
Event is continuing as an
additional reduction of
the Class B-1 Note
Principal Balance up to
the amount necessary to
reduce such balance to
zero, (y) if the Class A
Note Balance and the Class
B-1 Note Balance are both
zero, but the Class B-2
Note Principal Balance on
such Payment Date (after
giving effect to all prior
payments of principal to
the Class B-2 Noteholders
made on such Payment Date)
exceeds zero, the amount
otherwise required to be
paid to the Residual
Holder under this clause
(xxi) shall instead be
paid to the Class B-2
Noteholders pursuant to
this clause (xxi) during
such time as a Restricting
Event is continuing as an
additional reduction of
the Class B-2 Note
Principal Balance up to
the amount necessary to
reduce such balance to
zero; and (z) if each of
the Class A Note Principal
Balance, the Class B-1
Note Principal Balance and
the Class B-2 Note
Principal Balance are
zero, but the Class B-3
Note Principal Balance on
such Payment Date (after
giving effect to all prior
payments of principal to
the Class B-3 Noteholders
made on such Payment Date)
exceeds zero, the amount
otherwise required to be
paid to the Residual
Holder under this clause
(xxi) shall instead be
paid to the Class B-3
Noteholders pursuant to
this clause (xxi) during
such time as a Restricting
Event is continuing as an
additional reduction of
the Class B-3 Note
Principal Balance up to
the amount necessary to
reduce such balance to
zero.
Available Funds, with respect to a Payment
Date, means all amounts (including proceeds
of Servicer Advances) held in the
Collection Account on the related
Determination Date, after taking into
account all deposits required to be made on
such Determination Date, other than any
such amounts which relate to any subsequent
Collection Period.
See "Description of the Notes - Flow of
Funds" in this Prospectus Supplement for
the definitions of certain defined terms
used above.
Subordination
Provisions........................ The credit enhancement available for the
benefit of the Class A Noteholders is
provided by the Class B Notes and the Trust
Certificate. In addition, the Class A
Noteholders will have the benefit of the
Note Insurance Policy. See "The Note
Insurance Policy and the Note Insurer"
herein. The credit enhancement available to
the Class B-1 Notes is provided by the
Class B-2 Notes, the Class B-3 Notes and
the Trust Certificate, the credit
enhancement available to the Class B-2
Notes is provided by the Class B-3 Notes
and the Trust Certificate. In addition, the
Class B-2 Noteholders will have the benefit
of a letter of
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S-11
<PAGE>
- --------------------------------------------------------------------------------
credit provided by the Class B-2 credit
provider. The credit enhancement available
to the Class B-3 Notes is provided by the
Trust Certificate.
On each Payment Date, with respect to
amounts due to the Noteholders, the
Indenture first requires funding of
interest payments to the Class A
Noteholders, second, the funding of
interest payments to the Class B-1
Noteholders (to the extent that the funding
of current interest payments will not
result in an Available Funds Shortfall),
third, the funding of interest payments to
the Class B-2 Noteholders (to the extent
that the funding of current interest
payments will not result in an Available
Funds Shortfall), fourth, the funding of
principal payments to the Class A
Noteholders, fifth, the funding of
principal payments to the Class B-1
Noteholders, sixth, the funding of
principal payments to the Class B-2
Noteholders, and seventh, the funding of
interest and principal payments to the
Class B-3 Noteholders, as further described
herein.
The amount to be allocated as a payment of
principal is generally equal to the Base
Principal Amount. The Base Principal
Amount, with respect to any Payment Date,
is generally equal to the decrease in the
Aggregate Discounted Contract Principal
Balance from the end of the Collection
Period related to the previous Payment Date
to the end of the Collection Period related
to such Payment Date. This decrease will
generally be an amount equal to the sum of
actual principal collections during the
Collection Period related to such Payment
Date, Repurchase Amounts delivered to the
Indenture Trustee in connection with the
removal of Contracts, plus the Discounted
Contract Principal Balance of any Contract
which became a Defaulted Contract during
such Collection Period. A Contract becomes
a "Defaulted Contract" at the earlier of
the date on which (i) the Servicer has
determined in its sole discretion, in
accordance with the Servicing Standard and
its customary servicing procedures that
such Contract is not collectible, (ii) all
or part of a Scheduled Payment thereunder
is more than 180 days delinquent, (iii) the
Servicer elected not to make a Servicer
Advance or for which the Servicer has
determined that a prior Servicer Advance is
not recoverable or (iv) that was
repurchased by a Source pursuant to a
Source Agreement.
On each Payment Date, the Class A
Percentage of the Base Principal Amount
will be due to the Class A Noteholders as
the "Class A Base Principal Distribution
Amount" until the Class A Note Principal
Balance has been reduced to zero.
Approximately ___% (the "Class B-1
Percentage") of the Base Principal Amount
will be due to the Class B-1 Noteholders as
the "Class B-1 Base Principal Distribution
Amount" until the Class B-1 Note Principal
Balance has been reduced to zero,
approximately ___% (the "Class B-2
Percentage ") of the Base Principal Amount
will be due to the Class B-2 Noteholders as
the "Class B-2 Base Principal Distribution
Amount" until the Class B-2 Note Principal
Balance has been reduced to zero, and
approximately ___% (the "Class B-3
Percentage") of the Base Principal Amount
will be due to the Class B-3 Noteholders as
the "Class B-3 Base Principal Distribution
Amount" until the Class B-3 Note Principal
Balance has been reduced to zero. The Class
A Percentage, the Class B-1 Percentage, the
Class B-2 Percentage and the Class B-3
Percentage shall be referred to herein as
the "Principal Payment Percentage" with
respect to the Class A Notes, the Class B-1
Notes, the Class B-2 Notes and the Class
B-3 Notes, respectively.
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S-12
<PAGE>
- --------------------------------------------------------------------------------
Since the Available Funds on any Payment
Date are applied in the order of priority
described above under "Flow of Funds" until
such Available Funds are exhausted, the
effect of (x) including deemed losses
(i.e., the Discounted Contract Principal
Balance of any Defaulted Contract) in the
Base Principal Amount and (y) assigning
payment of the Class A Base Principal
Distribution Amount a higher priority than
any of (i) the Class B-1 Base Principal
Amount , (ii) the Class B-2 Base Principal
Amount, (iii) the Class B-3 Base Principal
Amount, or (iv) payments to the Residual
Holder is to allocate losses first, to the
Residual Holder, second, to the Class B-3
Noteholders, third, to the Class B-2 Class
Noteholders and fourth, to the Class B-1
Class Noteholders.
Through the operation of the "Class A
Overdue Principal," the "Class B-1 Overdue
Principal" the "Class B-2 Overdue
Principal" and the "Class B-3 Overdue
Principal" provisions, the Class A
Noteholders, the Class B-1 Noteholders, the
Class B-2 Noteholders and Class B-3
Noteholders are entitled to receive the
ultimate payment of the aggregate,
cumulative shortfalls of Class A Base
Principal Amounts, Class B-1 Base Principal
Amounts, Class B-2 Base Principal Amounts
and Class B-3 Base Principal Amounts not
paid on prior Payment Dates.
In addition, upon the occurrence of a
Restricting Event, amounts otherwise
payable to the Class B Noteholders and the
Residual Holder will be suspended and shall
be disbursed to the Class A Noteholders as
a further reduction of the outstanding
Class A Note Principal Balance.
Note Insurer...................... MBIA Insurance Corporation (the "Note
Insurer").
Note Insurance
Policy............................ The Transferor will obtain the Note
Insurance Policy, which is non-cancelable,
in favor of the Indenture Trustee on behalf
of the Class A Noteholders (the "Note
Insurance Policy"). Pursuant to the Note
Insurance Policy, the Note Insurer is
required to make available to the Indenture
Trustee, on each Payment Date, the amount
by which the Class A Insured Distribution
Amount for such Payment Date exceeds the
Available Distribution Amount for such
Payment Date (any such amount, an
"Available Funds Shortfall"). The Note
Insurance Policy does not guarantee any
specified rate of prepayments. See "The
Note Insurance Policy and the Note Insurer"
herein.
Servicing......................... The Servicer will be responsible for
servicing, managing and administering the
Transferred Property and enforcing and
making collections on the Contracts. The
Servicer will be required to exercise the
degree of skill and care in performing
these functions that it customarily
exercises with respect to similar property
owned or serviced by the Servicer. The
Servicer will be entitled to receive (a) a
monthly fee (the "Servicer Fee") equal to
the product of (i) one-twelfth of 0.50%
(the "Servicing Fee Rate") and (ii) the
Aggregate Discounted Contract Principal
Balance of all Contracts as of the
beginning of the previous Collection
Period, payable out of the Collection
Account, (b) late payment fees and (c)
certain other fees paid by the Obligors
("Servicing Charges"), as compensation for
acting as Servicer.
Under certain limited circumstances, the
Servicer may resign or be removed, in which
event either the Indenture Trustee or a
third party
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S-13
<PAGE>
- --------------------------------------------------------------------------------
meeting the requirements set forth in the
Servicing Agreement will be appointed as
successor Servicer. See "Description of the
Notes -- Events of Servicing Termination"
herein.
The Servicer will be required to make
advances for Scheduled Payments and Final
Scheduled Payments not received during the
related Collection Period, but only to the
extent it determines in its sole discretion
that such advances will be recoverable in
future periods. See "Description of the
Notes -- Servicer Advances" herein.
Back-up Servicer.................. Pursuant to the Servicing Agreement, the
Back-up Servicer agrees to reconcile the
monthly Servicer reports. In addition,
following the resignation or removal of the
Servicer, the Back-up Servicer shall assume
the duties of the Servicer as the Successor
Servicer under the Servicing Agreement. The
Back-up Servicer will be required to
exercise the degree of skill and care in
performing these functions that it
customarily exercises with respect to
similar property owned or serviced by the
Back-up Servicer. The Back-up Servicer will
be entitled to receive (a) a monthly fee
(the "Back-up Servicer Fee") equal to the
product of (i) one-twelfth of ___% (the
"Back-up Servicing Fee Rate") and (ii) the
Aggregate Discounted Contract Principal
Balance of all Contracts as of the
beginning of the previous Collection
Period, payable out of the Collection
Account, as compensation for acting as
Back-up Servicer.
Substitution and
Modifications..................... The Servicing Agreement permits the
Transferor, subject to certain
requirements, to transfer to the Trust
Substitute Contracts in exchange for
Defaulted Contracts, Early Termination
Contracts, or Contracts as to which a
Warranty Event or Casualty Loss has
occurred, provided that the following
conditions are met:
(I) on a cumulative basis from the
Cut-Off Date, the sum of the
Discounted Contract Principal Balance
(as of the related Substitute
Contract Cut-Off Date) of such
Substitute Contracts would not exceed
10% of the Aggregate Discounted
Contract Principal Balance of all
Contracts as of the Cut-Off Date;
(II) as of the related Substitute Contract
Cut-Off Date, the Substitute
Contracts then being transferred have
a Discounted Contract Principal
Balance that is not less than the
Discounted Contract Principal Balance
of the Contracts being replaced; and
(III) no substitution shall be permitted
if, as a result thereof, (X) the sum
of the Scheduled Payments on all
Contracts due in any Collection
Period thereafter would be less than
or increase the amount by which it is
less than (Y) the sum of the
Scheduled Payments which would
otherwise be due in such Collection
Period.
See "Description of the Notes--Flow of
Funds" herein.
The Servicer may waive, modify or vary any
term of a Contract if the Servicer, in its
reasonable and prudent judgment, determines
that it will not be materially adverse to
the Noteholders. However, the Servicer will
covenant in the Servicing Agreement that
(i) it will not forgive any payment of
rent, principal or interest, (ii) unless an
Obligor is in default, it will not permit
any modification with respect to a Contract
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S-14
<PAGE>
- --------------------------------------------------------------------------------
which would defer the payment of any
principal or interest or any Scheduled
Payment or change the final maturity date
on any Contract; provided, however, that no
change in the final maturity date of any
Contract shall be permitted under any
circumstances if such new maturity date is
later than the latest maturity date of any
other Contract then held by the --------
------- Trust, and (iii) the Servicer may
accept Prepayment in part or in full;
provided, further, that (1) in the event of
Prepayment in full, the Servicer may
consent to such Prepayment only in an
amount not less than the Prepayment Amount
and (2) in the event of a -------- -------
partial Prepayment, the Servicer may
consent to such partial Prepayment only if
(x) following such partial Prepayment there
are no delinquent amounts then due from the
Obligor and (y) such partial Prepayment
will not reduce the Discounted Contract
Principal Balance by more than an amount
equal to (I) the amount of such partial
Prepayment, minus (II) unpaid interest at
the Discount Rate, accrued through the end
of the Collection Period immediately
following such partial Prepayment on the
outstanding Discounted Contract Principal
Balance prior to such partial Prepayment.
In the case of a partial Prepayment, the
Servicer is required to recalculate the
Discounted Contract Principal Balance, and
the allocation of Scheduled Payments to
principal and interest.
Advances.......................... Subject to the limitations described
herein, in the event that any Obligor fails
to remit its full Scheduled Payment due in
a Collection Period by the Determination
Date related to such Collection Period, the
Servicer is required to make an advance
from its own funds of an amount equal to
such unpaid Scheduled Payment (a "Servicer
Advance") if the Servicer, in its sole
discretion, determines that eventual
repayment of such Servicer Advance is
likely from collections from or on behalf
of the related Obligor. The Indenture
provides for the reimbursement of the
Servicer for such Servicer Advances from
funds available for distribution in the
Collection Account on each subsequent
Payment Date before the required payments
to Noteholders have been made as set forth
below in "Flow of Funds." See "Description
of the Notes -- Events of Servicer
Advances" herein.
Optional Redemption............... The Transferor will have the option,
subject to certain conditions set forth in
the Indenture, including the deposit of the
sum specified therein and the consent of
the Note Insurer, to cause the early
retirement of the Notes as of any Payment
Date following the date on which the
Aggregate Outstanding Principal Balance of
the Notes of all classes is less than 10%
of the Aggregate Initial Note Principal
Balance. In the event of such a redemption,
the entire outstanding Class A Note
Principal Balance, the Class B-1 Note
Principal Balance, the Class B-2 Note
Principal Balance and the Class B-3 Note
Principal Balance, together with accrued
interest thereon at the related Note Rate,
will be required to be paid to the Class A
Noteholders, the Class B-1 Noteholders, the
Class B-2 Noteholders and the Class B-3
Noteholders, respectively, on such Payment
Date and all amounts owed to the Note
Insurer and the Class B-2 credit provider
will be paid to the Note Insurer and the
Class B-2 credit provider, respectively, on
such Payment Date.
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S-15
<PAGE>
- --------------------------------------------------------------------------------
Repurchase for
Certain Breaches
of Representations
and Warranties ................... First Sierra will be obligated to accept
the reconveyance of a Receivable from the
Indenture Trustee and to deposit the
Repurchase Amount if the interest of the
Trust by the Depositor in any of the
related Equipment, the related Contract, or
the related Contract File is materially
adversely affected by a breach of a
representation or warranty made by such
party with respect to such Contract and if
such breach has not been cured within
thirty days of discovery of such breach.
Certain Legal
Aspects of the
Contracts......................... The Depositor will warrant that the
transfer by the Depositor to the Trust of
the Receivables is a valid transfer and
assignment of the Receivables. The
Depositor will warrant that if the transfer
by the Depositor to the Trust is deemed to
be a grant to the Trust of a security
interest in the Receivables, then the Trust
will have a first priority perfected
security interest therein, except for
certain liens which have priority over
previously perfected security interests by
operation of law, and, with certain
exceptions, in the proceeds thereof. The
Servicer will be required to take such
action as is required to perfect the
Trust's interest in the Receivables except
as discussed below with respect to the
Equipment. If the Originator, the
Transferor, the Depositor, the Servicer or
the Indenture Trustee, while in possession
of an item of Receivables, sells or pledges
and delivers such Receivables to another
party, in violation of the Indenture and
the Servicing Agreement, there is a risk
that the purchaser could acquire an
interest in such Receivables having
priority over the Trust's interest.
First Sierra, the Transferor, the Depositor
and the Trust will file financing
statements in accordance with the Uniform
Commercial Code as in effect in the
applicable jurisdiction (the "UCC")
evidencing the pledge of the Trust Assets
to the Indenture Trustee as follows: (i) a
UCC-1 financing statement with respect to
the assignment of all Contracts to the
Trust pursuant to the Depositor Transfer
Agreement, (ii) a UCC-1 financing statement
with respect to the pledge of all Contracts
by the Trust to the Indenture Trustee and
(iii) with respect to each Contract which
is a finance lease for which First Sierra
has filed a UCC-1 with respect to the
related Equipment, a UCC-3 financing
statement assigning First Sierra's lien on
the related Equipment to the Indenture
Trustee on behalf of the Trust. Subject to
certain limitations, First Sierra has
represented that it has filed UCC-1
financing statements with respect to
Contracts as to which the related Equipment
had an original cost of $75,000 or more.
Except as described in the immediately
preceding paragraph, because of the
administrative burden and expense that
would be entailed in so doing, none of
First Sierra, the Transferor, the Depositor
nor the Servicer has filed or will be
required to file UCC financing statements
in favor of the Indenture Trustee
identifying the Equipment as collateral
pledged to the Indenture Trustee on behalf
of the Trust. In the absence of such
filings any security interest in the
related Equipment will not be perfected in
favor of the Indenture Trustee and the
Indenture Trustee shall have no liability
with respect to such lack of
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S-16
<PAGE>
- --------------------------------------------------------------------------------
perfection. Upon request of the Note
Insurer, the Servicer will be required to
make such filings with respect to Defaulted
Contracts.
Tax Status........................ Tax Counsel is of the opinion that under
existing law the Class A Notes will be
characterized as indebtedness for federal
income tax purposes. Under the Transaction
Documents, the Depositor, the Servicer, the
Noteholders and other parties will agree to
treat the Class A Notes as debt for all
income tax purposes. See "Certain Federal
Income Tax Consequences" herein for
additional information concerning the
application of federal income tax laws.
Rating of the
Class A Notes..................... It is a condition to the issuance of the
Class A Notes that they be rated at least
"AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill
Companies ("S&P") and "Aaa" by Moody's
Investors Service ("Moody's") (each, a
"Rating Agency").
ERISA
Considerations.................... As described herein, the Class A Notes may
be purchased by Benefit Plans (as
hereinafter defined) that are subject to
the Employee Retirement Income Security Act
of 1974 ("ERISA") or entities using assets
of such Benefit Plans. Any Benefit Plan
should consult its tax and/or legal
advisors in determining whether all
required conditions have been satisfied.
Risk Factors...................... For a discussion of certain factors that
should be considered by prospective
Investors in the Class A Notes, see "Risk
Factors" herein and "Special
Considerations" in the Prospectus.
Legal Matters..................... Certain legal matters relating to the Notes
will be passed upon by Dewey Ballantine,
New York, New York. Certain federal income
tax matters will be passed upon for the
Trust by Dewey Ballantine, New York, New
York. Certain legal matters relating to the
Note Insurer will be passed upon for the
Note Insurer by Kutak Rock, Omaha,
Nebraska.
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S-17
<PAGE>
RISK FACTORS
In addition to the Special Considerations discussed in the Prospectus,
prospective Class A Noteholders should consider, among other things, the
following additional factors in connection with the purchase of the Class A
Notes:
Risk of Downgrade of Initial Ratings Assigned to Notes. It is a condition
to the issuance of the Class A Notes that they be rated "AAA" by S&P and "Aaa"
by Moody's. A rating is not a recommendation to purchase, hold or sell Class A
Notes, inasmuch as such rating does not comment as to market price or
suitability for a particular investor. The rating of the Class A Notes addresses
the likelihood of the timely payment of interest on and the ultimate repayment
of principal of the Class A Notes pursuant to their terms. There is 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 the Rating Agency if in its judgment
circumstances in the future so warrant. The rating of the Class A Notes is based
primarily on the Rating Agencies' analysis of the Contracts and the Equipment,
overcollateralization and the subordination provided by the Class B Notes and
the Trust Certificate and the Note Insurance Policy.
Transfer of Servicing May Delay Payments. If First Sierra were to cease
acting as Servicer, delays in processing payments on the Receivables and
information in respect thereof could occur and result in delays in payments to
the Class A Noteholders.
Risks Associated with Inability Of First Sierra to Reacquire Receivables.
First Sierra will make representations and warranties with respect to certain
matters relating to the Receivables. In certain circumstances, First Sierra will
be required to reacquire from the Trust Receivables with respect to which such
representations and warranties have been breached. In the event that First
Sierra is incapable of complying with its reacquire obligations and no other
party is obligated to perform or satisfy such obligations, the Class A
Noteholders may be subject to delays in receiving payments and suffer loss of
their investment in the Securities.
Geographic Concentrations of Receivables. As of the Statistic Calculation
Date, Obligors with respect to approximately 26.84%, 9.70% and 7.47% of the
Receivables (based on the Aggregate Discounted Contract Principal Balance as of
the Statistic Calculation Date and mailing addresses) were located in the States
of California, Florida and Texas, respectively. See the "Receivables Pool"
herein. Accordingly, adverse economic conditions or other factors particularly
affecting these States could adversely affect the delinquency, loan loss or
repossession experience of the Trust with respect to the Receivables.
THE RECEIVABLES
The Receivables consist of the Contracts and a security interest in the
Equipment.
The Equipment.
The Equipment subject to the Contracts consists of small to medium sized
equipment used in a wide variety of business consistent with small ticket
equipment leasing. The equipment and other property underlying the Contracts may
include, but is not limited to, the following: equipment utilized in the offices
and clinics of dentists, medical doctors, chiropractors and other professional
service providers, equipment utilized in the offices and clinics of
veterinarians, restaurant equipment, point of sale equipment, computer
equipment, copier and facsimile equipment, telecommunications equipment,
automobile servicing equipment and other similar general use equipment in the
service sector.
The Contracts
The Contracts consist of small ticket leases, and commercial loans and
security interests in the related equipment or other property (i) acquired by
First Sierra from small independent leasing companies on an on-going basis
through the Private Label Program or (ii) originated directly by First Sierra
through the Broker Program or the Vendor Program. See "First Sierra" herein. The
Transferor will also acquire 464 Contracts representing
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<PAGE>
3.91% of the Statistical Discounted Principal Balance of the pool from Heritage
Finance Corp. I, an affiliate of First Sierra, in connection with the redemption
of its Lease-Backed Notes.
The Receivables consist of the Contracts and a security interest in the
Equipment. As of the Statistic Calculation Date, the Contracts had an Aggregate
Discounted Contract Principal Balance (calculated using an assumed discount rate
of 7.25% the "Statistical Discount Rate")) of approximately $229,728,292.98 (the
"Statistical Discounted Contract Principal Balance"). The statistical
information concerning the pool of Receivables set forth herein is based upon
information as of the Statistic Calculation Date and using the Statistical
Discount Rate. The actual discount rate of ___% (the "Discount Rate") has been
calculated using the actual levels of fees payable by the Trust and the actual
Note Rates borne by the Notes of each class, and shall be used to calculate the
actual Initial Class A Note Principal Balance and the actual Initial Aggregate
Discounted Contract Principal Balance of the Contracts. The Initial Aggregate
Discounted Contract Principal Balance of the Contracts as of the Cut-Off Date
calculated using the Discount Rate is $__________. Between the Statistic
Calculation Date and the Closing Date some amortization of the pool is expected
to occur. In addition, certain Contracts included in the pool as of the
Statistic Calculation Date may be determined not to meet the eligibility
requirements for the final pool, and may not be included in the final pool.
While the statistical distribution of the characteristics as of the Closing Date
for the final Receivables pool and calculated at the Discount Rate will vary
somewhat from the statistical distribution of such characteristics as of the
Statistic Calculation Date and calculated at the assumed Discount Rate as
presented in this Prospectus Supplement, such variance will not be material.
The "Discounted Contract Principal Balance" with respect to any Contract,
on any Determination Date, is the sum of the present value of all of the
remaining Scheduled Payments becoming due under such Contract after the end of
the prior Collection Period, discounted monthly at the Discount Rate in the
manner described below; provided, however, that except to the extent expressly
provided in the Servicing Agreement, the Discounted Contract Principal Balance
of any Defaulted Contract, Early Termination Contract, or Expired Contract or
Contract repurchased by First Sierra or the Servicer pursuant to the Servicing
Agreement shall be equal to zero.
In connection with all calculations required to be made pursuant to the
Transaction Documents with respect to the determination of Discounted Contract
Principal Balances, on any Determination Date the Discounted Contract Principal
Balance for each Contract shall be calculated assuming:
(i) Scheduled Payments are due on the last day of each Collection Period;
(ii) Scheduled Payments are discounted on a monthly basis using a 30 day
month and a 360 day year; and
(iii) Scheduled Payments are discounted to the last day of the Collection
Period prior to the Determination Date.
The "Aggregate Discounted Contract Principal Balance" as determined from
time to time is the sum of the Discounted Contract Principal Balances of all
Contracts.
All of the Contracts require the periodic, scheduled payment of rent or
other payments on a monthly, quarterly, semi-annual or annual basis, in arrears
or in advance. Such periodic payments are referred to herein as "Scheduled
Payments."
The Contracts have the characteristics specified in the Transfer Agreements
and described herein, and the Contracts eligible to be designated as Substitute
Contracts will conform to the characteristics specified in the Transfer
Agreements and herein.
The terms of the Contracts generally range from 4 to 85 months. The final
scheduled payment date on the Contract with the latest maturity is August 10,
2004. As of the Statistic Calculation Date, all of the Contracts had (i)
original terms to maturity of 4 months to 85 months, with a weighted average
original term to maturity of approximately 57 months; and (ii) a remaining term
to maturity of not less than 2 months and not more than 85 months, with a
weighted average remaining term to maturity of approximately 53 months.
S-19
<PAGE>
References herein to percentages of Obligors refer in each case to the
percentage of the Statistical Discounted Contract Principal Balance of the
Contracts as of the Statistic Calculation Date.
As of the Statistic Calculation Date, the Discounted Contract Principal
Balances of the Contracts ranged from $75.32 to $658,759.30. No more than 0.39%
of the Statistical Discounted Contract Principal Balance is attributable to any
one Obligor, and the average Discounted Contract Principal Balance is
approximately $19,979.85.
Under the Servicing Agreement, the Servicer is permitted to allow an
Obligor to prepay a Contract in an amount not less than the related Prepayment
Amount. In addition, in the event that an Obligor requests an upgrade or
trade-in of Equipment, the Servicer may remove such Equipment and related
Contract from the Trust Assets, but only upon payment of an amount equal to the
sum of (i) the Discounted Contract Principal Balance as of the first day of the
Collection Period preceding such removal, (ii) one month's interest thereon at
the Discount Rate, and (iii) any Scheduled Payments due and outstanding under
such Contract that have not been paid by the Obligor (collectively, the
"Repurchase Amount").
Substitutions and Modifications
Pursuant to the Servicing Agreement, the Transferor, with the consent of
the Note Insurer, may substitute one or more Contracts and the related Equipment
for and replace Contracts and the related Equipment that (i) becomes a Defaulted
Contract, a Prepayment or an Early Termination Contract or (ii) are required to
be repurchased by First Sierra pursuant to the Servicing Agreement.
Each Substitute Contract shall be a Contract, which satisfies certain
representations and warranties set forth in the Servicing Agreement (a
"Substitute Contract") as of the related Substitute Contract Cut-Off Date. In
addition, the following conditions must be satisfied:
(i) on a cumulative basis from the Cut-Off Date, the sum of the
Discounted Contract Principal Balance (as of the related Substitute
Contract Cut-Off Date) of such Substitute Contracts would not exceed 10% of
the Initial Aggregate Discounted Contract Principal Balance of all Contrac
as of the Cut-Off Date;
(ii) as of the related Substitute Contract Cut-Off Date, the
Substitute Contracts then being transferred have a Discounted Contract
Principal Balance that is not less than the Discounted Contract Principal
Balance of the Contracts being replaced; and
(iii) no substitution shall be permitted if, as a result thereof, (X)
the sum of the Scheduled Payments on all Contracts due in any Collection
Period thereafter would be less than or increase the amount by which it is
less than (Y) the sum of the Scheduled Payments which would otherwise be
due in such Collection Period.
The Servicer may waive, modify or vary any term of a Contract if the
Servicer, in its reasonable and prudent judgment, determines that it will not be
materially adverse to the Noteholders or the Note Insurer. However, the Servicer
will covenant in the Servicing Agreement that (i) it will not forgive any
payment of rent, principal or interest, (ii) unless an Obligor is in default, it
will not permit any modification with respect to a Contract which would defer
the payment of any principal or interest or any Scheduled Payment or change the
final maturity date on any Contract; provided, however, that no change in the
final maturity date of any Contract shall be permitted under any circumstances
if such new maturity date is later than the latest maturity date of any other
Contract then held by the Trust, and (iii) the Servicer may accept Prepayment in
part or in full; provided, further, that (1) in the event of Prepayment in full,
the Servicer may consent to such Prepayment only in an amount not less than the
Prepayment Amount and (2) in the event of a partial Prepayment, the Servicer may
consent to such partial Prepayment only if (x) following such partial Prepayment
there are no delinquent amounts then due from the Obligor and (y) such partial
Prepayment will not reduce the Discounted Contract Principal Balance by more
than an amount equal to (I) the amount of such partial Prepayment, minus (II)
unpaid interest at the Discount Rate, accrued through the end of the Collection
Period immediately following such partial Prepayment on the outstanding
Discounted Contract Principal Balance prior to such partial Prepayment. In the
case of a partial Prepayment, the
S-20
<PAGE>
Servicer is required to accurately recalculate the Discounted Contract Principal
Balance, and the allocation of Scheduled Payments to principal and interest.
Pursuant to the Servicing Agreement, the Servicer will manage, administer,
service and make collections on the Contracts, in accordance with the terms of
the Servicing Agreement, the Contracts, the Servicer's current credit and
collection policies and applicable law and, to the extent consistent with such
terms, in the same manner in which, and with the same care, skill, prudence and
diligence with which, it services and administers leases of similar credit
quality for itself or others, if any, giving due consideration to customary and
usual standards of practice of prudent institutional small ticket equipment
finance lease servicers and, in each case, taking into account its other
obligations under the Servicing Agreement (collectively, the "Servicing
Standard"). The Servicer shall use commercially reasonable best efforts
consistent with the Servicing Standard and its customary servicing procedures,
to repossess or otherwise comparably convert the ownership of any Equipment that
it has reasonably determined should be repossessed or otherwise converted
following a default under the Contract remarket, either through sale or release,
the Equipment upon the expiration of the term of the related Contract and act as
sales and processing agent for Equipment which it repossesses. The Servicer
shall follow such practices and procedures as are consistent with the Servicing
Standard and as it shall deem necessary or advisable and as shall be customary
and usual in its servicing of equipment leases and other actions by the Servicer
in order to realize upon such a Contract, which may include reasonable efforts
to enforce any recourse obligations of Obligors and repossessing and selling the
Equipment at public or private sale. The foregoing is subject to the provision
that, in any case in which the Equipment shall have suffered damage, the
Servicer shall not be required to expend funds in connection with any repair or
towards the repossession of such Equipment unless it shall determine in its
discretion that such repair and/or repossession will increase the proceeds and
recoveries on such Equipment by an amount greater than the amount of such
expenses.
Following is certain statistical information relating to the Receivables
pool, calculated as of the Statistic Calculation Date and assuming a statistical
Discount Rate of 7.25%. Certain columns may not total 100% due to rounding.
S-21
<PAGE>
DISTRIBUTION OF THE CONTRACTS BY DISCOUNTED CONTRACT PRINCIPAL BALANCE
Percentage of
Statistical Statistical
Discounted Discounted
Discounted Contract Number of Contract Contract Principal
Principal Balance Contracts Principal Balance Balance
----------------- --------- ----------------- -------
Greater Less Than or
Than Equal to
---- --------
$ 1 $ 5,000 5,106 $ 7,665,210.30 3.34%
5,000 10,000 1,214 8,426,077.55 3.67
10,000 15,000 856 10,560,968.03 4.60
15,000 20,000 777 13,649,888.18 5.94
20,000 25,000 656 14,587,182.50 6.35
25,000 30,000 522 14,355,854.51 6.25
30,000 35,000 458 14,843,335.23 6.46
35,000 40,000 303 11,286,998.78 4.91
40,000 45,000 199 8,440,294.06 3.67
45,000 50,000 178 8,434,605.45 3.67
50,000 55,000 178 9,311,428.76 4.05
55,000 60,000 153 8,764,410.68 3.82
60,000 65,000 166 10,376,900.57 4.52
65,000 70,000 115 7,732,273.91 3.37
70,000 75,000 62 4,502,558.48 1.96
75,000 80,000 62 4,811,932.38 2.09
80,000 85,000 48 3,967,456.12 1.73
85,000 90,000 39 3,409,955.65 1.48
90,000 95,000 27 2,497,439.27 1.09
95,000 100,000 34 3,319,856.21 1.45
100,000 150,000 181 21,772,433.94 9.48
150,000 200,000 107 18,327,546.65 7.98
200,000 250,000 22 4,883,357.53 2.13
250,000 300,000 11 3,057,851.17 1.33
300,000 350,000 8 2,619,021.00 1.14
350,000 400,000 2 776,254.79 0.34
400,000 450,000 3 1,313,811.38 0.57
450,000 500,000 4 1,878,083.38 0.82
500,000 600,000 5 2,858,576.27 1.24
600,000 750,000 2 1,296,730.23 0.56
- --------------------------------------------------------------------------------
Total.................... 11,498 $229,728,292.98 100.00%
================================================================================
S-22
<PAGE>
DISTRIBUTION OF THE CONTRACTS BY DEFINED OBLIGOR INDUSTRY (Top 25)
<TABLE>
<CAPTION>
Percentage
Number Statistical of Statistical
of Discounted Contract Discounted Contract
Industry Type Contracts Principal Balance Principal Balance ct
------------- --------- ----------------- --------------------
<S> <C> <C> <C>
Offices and Clinics of Dentists 1,202 $ 75,270,395.39 32.76%
Offices and Clinics of Medical Doctors 364 11,064,912.56 4.82
Veterinary Services 165 7,004,024.84 3.05
Eating Places 430 6,214,183.08 2.71
Automotive Dealers, NEC 291 5,610,553.70 2.44
Business Services, NEC 519 4,773,026.59 2.08
Offices and Clinics of Chiropractors 107 3,631,754.79 1.58
Eating and Drinking Places 297 3,572,142.24 1.55
Hotels and Motels 146 2,835,569.49 1.23
Gasoline Service Stations 330 2,634,995.19 1.15
Lawn and Garden Services 101 2,093,868.18 0.91
Local Trucking, Without Storage 69 2,046,880.27 0.89
Offices and Clinics of Optometrists 49 1,901,412.20 0.83
Veterinary Services for Livestock 28 1,630,152.47 0.71
Grocery Stores 128 1,514,007.90 0.66
Commercial Printing, Lithographic 46 1,481,634.42 0.64
Equipment Rental & Leasing 76 1,475,895.77 0.64
Miscellaneous Retail Stores 324 1,428,403.66 0.62
Miscellaneous Food Stores 127 1,182,195.30 0.51
Drug Stores and Proprietaries 101 1,117,385.59 0.49
Landscape and Horticulture 67 1,113,751.44 0.48
Home Health Care Services 41 1,070,914.13 0.47
Engineering Services 40 1,037,299.68 0.45
Computer Related Services 78 1,028,437.92 0.45
Top & Body Repair Painting 45 1,015,171.44 0.44
- ---------------------------------------------------------------------------------------------------------
Total (Top 25 Defined Industries) ......... 5,171 $143,748,968.24 62.57%
- ---------------------------------------------------------------------------------------------------------
All Others................................. 6,327 $85,979,324.74 37.43%
- ---------------------------------------------------------------------------------------------------------
Total ................................... 11,498 $229,728,292.98 100.00%
=========================================================================================================
</TABLE>
S-23
<PAGE>
DISTRIBUTION OF THE CONTRACTS BY OBLIGOR BILLING ADDRESS
Percentage
Statistical of Statistical
Number of Discounted Contract Discounted Contract
State Contracts Principal Balance Principal Balance
----- --------- ----------------- -------------------
Alabama 175 $ 2,576,736.16 1.12%
Alaska 14 360,203.15 0.16
Arizona 212 5,717,504.71 2.49
Arkansas 53 765,135.09 0.33
California 2,029 61,663,539.65 26.84
Colorado 133 3,119,008.29 1.36
Connecticut 150 3,481,485.74 1.52
Delaware 23 1,005,315.02 0.44
Florida 1,201 22,279,344.75 9.70
Georgia 439 7,481,479.24 3.26
Hawaii 19 389,316.47 0.17
Idaho 25 428,758.38 0.19
Illinois 449 6,068,798.07 2.64
Indiana 130 2,139,297.84 0.93
Iowa 49 583,560.23 0.25
Kansas 87 1,200,878.69 0.52
Kentucky 72 1,643,601.20 0.72
Louisiana 85 1,575,591.76 0.69
Maine 16 746,199.56 0.32
Maryland 342 4,314,338.42 1.88
Massachusetts 292 5,520,483.85 2.40
Michigan 422 5,362,357.15 2.33
Minnesota 79 1,814,222.79 0.79
Mississippi 40 892,771.03 0.39
Missouri 180 1,973,376.58 0.86
Montana 22 784,783.07 0.34
Nebraska 51 1,099,361.03 0.48
Nevada 68 2,280,970.96 0.99
New Hampshire 41 999,672.12 0.44
New Jersey 498 9,059,159.28 3.94
New Mexico 42 650,013.45 0.28
New York 1,037 16,042,980.99 6.98
North Carolina 237 4,968,484.98 2.16
North Dakota 2 43,900.60 0.02
Ohio 261 5,046,311.45 2.20
Oklahoma 91 1,333,901.84 0.58
Oregon 76 2,905,413.49 1.26
Pennsylvania 356 7,172,645.50 3.12
Rhode Island 42 809,299.86 0.35
South Carolina 95 1,560,584.10 0.68
South Dakota 10 333,651.98 0.15
Tennessee 148 2,070,485.29 0.90
Texas 987 17,172,181.47 7.47
Utah 45 1,637,333.54 0.71
Vermont 13 133,643.36 0.06
Virginia 311 4,624,271.59 2.01
Washington 127 3,377,352.75 1.47
Washington, D.C. 40 376,139.54 0.16
West Virginia 26 506,338.04 0.22
Wisconsin 146 1,522,048.63 0.66
Wyoming 10 114,060.26 0.05
- --------------------------------------------------------------------------------
Total.................. 11,498 $229,728,292.98 100.00%
================================================================================
S-24
<PAGE>
DISTRIBUTION OF THE CONTRACTS BY REMAINING TERM TO MATURITY
- --------------------------------------------------------------------------------
Remaining Term in Months
- --------------------------------------------------------------------------------
Percentage
Statistical of Statistical
Greater Less Than Number Discounted Contract Discounted Contract
Than or Equal to of Contracts Principal Balance Principal Balance
----- ----------- ------------ ----------------- -------------------
1 12 184 $ 905,478.88 0.39%
12 24 736 8,703,969.00 3.79
24 36 4,584 44,853,392.82 19.52
36 48 2,952 31,283,822.78 13.62
48 60 2,270 77,247,471.32 33.63
60 72 254 19,281,188.54 8.39
72 84 517 47,361,207.42 20.62
84 96 1 91,762.22 0.04
- --------------------------------------------------------------------------------
Total ................ 11,498 $229,728,292.98 100.00%
================================================================================
DISTRIBUTION OF THE CONTRACTS BY ORIGINAL TERM TO MATURITY
- --------------------------------------------------------------------------------
Original Term in Months
- --------------------------------------------------------------------------------
Percentage
Statistical of Statistical
Greater Less Than Number Discounted Contract Discounted Contract
Than or Equal to of Contracts Principal Balance Principal Balance
----- ----------- ------------ ----------------- -------------------
1 12 114 $ 540,984.45 0.24%
12 24 577 6,645,160.41 2.89
24 36 2,829 40,819,449.29 17.77
36 48 4,729 31,354,457.50 13.65
48 60 2,268 75,174,288.16 32.72
60 72 407 22,460,768.20 9.78
72 84 515 48,882,208.58 21.28
84 96 59 3,850,976.40 1.68
- --------------------------------------------------------------------------------
Total ................ 11,498 $229,728,292.98 100.00%
================================================================================
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<PAGE>
THE TRANSFEROR
First Sierra Receivables IV, Inc. (the "Transferor") is a limited purpose
corporation organized under the laws of the State of Delaware. The Transferor's
principal executive offices are located at 1061 E. Indiantown Road, Suite 204,
Jupiter, Florida, 33477.
The Transferor does not intend to engage in any business or investment
activities other than acquiring, owning, leasing, transferring, receiving or
pledging the assets transferred to the Transferor. The Transferor's certificate
of incorporation (the "Certificate of Incorporation ") limits the Transferor's
business and investment activities to the above purposes and to any activities
necessary, suitable or convenient to accomplish the foregoing or incidental
thereto. Pursuant to the Transferor's Certificate of Incorporation, the
limitations so imposed on the Transferor's business may only be altered upon
unanimous affirmative vote of all of the Transferor's directors, including the
Independent Director. The Transferor's Certificate of Incorporation requires the
Transferor, at all times, to have at least one Independent Director. An
"Independent Director" is not permitted to be a director, officer or employee of
any direct or ultimate parent or affiliate of the Originator, provided, however,
that such Independent Director may serve in similar capacities for other limited
purpose corporations which are affiliated with the Originator. The Transferor's
Certificate of Incorporation further prohibits the Transferor, without the
unanimous affirmative vote of the directors, including the Independent Director,
from (1) instituting or consenting to the institution of bankruptcy or
insolvency proceedings, (2) merging or consolidating with another corporation,
(3) incurring, assuming or guaranteeing any indebtedness other than as otherwise
provided in the Certificate of Incorporation, or (4) engaging in certain other
actions that would have a negative impact upon whether the separate legal
identities of the Transferor and the Originator will be respected.
The Transferor has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary petition
for relief by First Sierra under any Insolvency Law will not result in
consolidation of the assets and liabilities of the Transferor with those of
First Sierra.. These steps include the creation of the Transferor as a separate,
limited purpose corporation having a restrictive Certificate of Incorporation as
described above.
The Transferor will not acquire any assets other than the Receivables and
other property related thereto. Because the Transferor does not have any
operating history and will not engage in any business activity other than as
described above, there has not been included herein any historical or current
financial information with respect to the Transferor.
The Originator or its affiliates, as applicable, will warrant to the
Transferor in the Receivables Transfer Agreements that the transfer of the
related Receivables to the Transferor is a valid transfer of the Receivables to
the Transferor. In addition, the Originator and its affiliates and the
Transferor will treat the transactions described herein as an absolute
conveyance of the Receivables to the Transferor and the Transferor will take all
actions that are required to perfect the Transferor's ownership interest in the
Receivables. Notwithstanding the foregoing, if First Sierra were to become a
debtor in a bankruptcy case and a creditor or trustee-in-bankruptcy of such
debtor or such debtor itself were to take the position that the transfer of the
Receivables to the Transferor should be recharacterized as a pledge of such
Receivables to secure a borrowing of such debtor, then delays in payments of
collections of Receivables to the Transferor could occur or (should the court
rule in favor of any such trustee, debtor or creditor) reductions in the amount
of such payments could result. If the transfer of Receivables to the Transferor
is recharacterized as a pledge, then a tax or government lien on the property of
First Sierra arising before the transfer of Receivables to the Transferor may
have priority over the Transferor's interest in such Receivables. If the
transfer of Receivables to the Transferor is treated as a sale, the Receivables
would not be part of First Sierra's bankruptcy estate and would not be available
to First Sierra's creditors.
FIRST SIERRA
First Sierra is a specialized finance company that acquires and originates,
sells and services equipment contracts. The underlying contracts financed by
First Sierra relate to a wide range of equipment, including computers and
peripherals, computer software, medical, dental and diagnostic,
telecommunications,
S-26
<PAGE>
office, automotive servicing, hotel security, food services, tree service and
industrial, as well as specialty vehicles. The equipment generally has a
purchase price of less than $250,000 (with an average of approximately $17,000),
and thus First Sierra's contracts are commonly referred to as "small ticket
contracts."
First Sierra has established strategic alliances with a network of
independent leasing companies, contract brokers and equipment vendors, each of
which acts as a source from which First Sierra obtains access to equipment
contracts. First Sierra customizes contract financing products to meet the
specific equipment financing needs of its customers and in many cases provides
such customers with servicing and technological support via on-line connections
to First Sierra's state-of-the-art computer system.
First Sierra commenced operations in June 1994 and initially developed a
program to purchase contracts from leasing companies which had the ability to
originate significant contract volumes and were willing and able to provide
credit protection to First Sierra (through recourse and purchase price holdback
features) and perform certain servicing functions on an ongoing basis with
respect to such contracts. This program, referred to by First Sierra as its
"Private Label" program (and the companies that participate in the Private
Program are "Sources"), was designed to provide First Sierra with access to high
volumes of contracts eligible for the securitization market, while minimizing
the risk of loss to First Sierra. First Sierra has experienced significant
growth in its Private Label program since inception, with the volume of
contracts purchased increasing from $4.5 million in 1994, to $65.2 million in
1995, to $161.1 million in 1996.
Private Label Program
General
The Private Label Program was designed to provide financing to small ticket
Sources which were typically financed by local commercial banks. Each Private
Label transaction generally contains one or more of the following types of loss
protection: (a) recourse to the Source which requires the Source to repurchase
contracts that are typically 90 days past due up to an aggregate amount that is
10% to 20% of the total purchase price of the contracts acquired from such
Source, (b) remarketing of the equipment that is subject to a defaulted contract
and (c) maintenance of a reserve fund funded by holdbacks of a portion of the
purchase price owing to the Source, such reserve funds typically range from 1%
to 10% of the purchase price of the related contracts. However, some Private
Label transactions contain none of the foregoing protections and are
non-recourse to the Source (although such Sources are obligated to repurchase
contracts as to which a breach of representation or warranty occurs).
The Private Label Program utilizes three separate forms of agreements that
utilize the above types of loss protection. Under the first, First Sierra has
recourse to the Source in an amount ranging from 10% to 20% of the aggregate
purchase price of the contracts acquired from such Source for defaulted
contracts. Under the second form of agreement, in addition to the aforementioned
recourse to the Source, First Sierra has the benefit of a funded cash reserve
account which generally ranges from 1% to 10% of the total purchase price of the
contracts acquired from such Source. Such amount is funded by the retention of a
specified percentage of the purchase price for each contract as a reserve. Under
the third option, First Sierra has recourse only to the cash reserve account for
credit losses.
Underwriting Procedures
In order to qualify for participation in the Private Label Program, a
Source must satisfy certain criteria, which generally require that the majority
of the Source's business be small ticket contracts ($5,000 - $250,000), generate
a minimum volume of contracts, have been in business a minimum of five years,
have established a track record in business and personal credit, and have
sufficient staff and financial resources. The specific requirements vary
depending upon such things as transaction size, and type and location of
equipment financed.
First Sierra's underwriting guidelines with respect to Obligors contain
specific requirements which vary according to the nature of the Obligor's
business, the size of the transaction, and the type of program under which the
Source is seeking approval. In underwriting the Obligor, First Sierra considers,
among other things, time in business, bank, credit and trade references, credit
bureau reports on all officers, Dun & Bradstreet reports, confirmation of
ownership, complete financial package, personal guarantees, maximum exposure per
Obligor,
S-27
<PAGE>
verification of a personal medical license, where applicable, and historical
financial statements or tax returns for commercial exposures greater than
$50,000.
The Private Label Source typically closes the contract transaction prior to
sale to First Sierra. The Source will have performed all the necessary credit
inquiries and documentation, and will submit this information to First Sierra
for review. Each contract submitted for funding from any approved Source is
individually underwritten and approved by First Sierra. Individual contract
underwriting procedures generally include review of credit bureau reports and
verification of bank references, trade references, and licenses. For commercial
exposures greater than $50,000, First Sierra reviews personal financial
statements, business financial statements, and tax returns with an emphasis on
cash flow and the ability to service the contract payments and debt. For each
contract application First Sierra receives, the credit department reviews all
documentation and credit reviews. First Sierra performs periodic verification on
all acquired contracts on a random basis. Through June 30, 1997, First Sierra
had incurred net charge-offs of $25,000 from contracts funded pursuant to the
Private Label program. There can be no assurance that First Sierra's Private
Label Sources will continue to meet their repurchase obligations or that the
amounts withheld under the purchase price holdback feature of the Private Label
program, together with any amounts realized upon disposal of the underlying
equipment, will be sufficient to fully offset any losses which might be incurred
upon default of Obligors in the future.
Broker Program
First Sierra's Broker program is designed to fund equipment contracts from
small ticket contract brokers that are unwilling or unable to provide the credit
protection and perform the servicing functions necessary to participate in First
Sierra's Private Label program. In a typical Broker transaction, First Sierra
originates contracts referred to it by the Broker and pays the Source a referral
fee. Contracts originated under the Broker program are structured on a
non-recourse basis, with risk of loss in the event of default by the Obligor
residing with First Sierra. First Sierra owns or (in the case of a contract
intended as security) has a security interest in the underlying equipment
covered by a Broker contract and, in certain cases, retains a residual interest
in such underlying equipment. All servicing functions are performed by First
Sierra.
First Sierra also provides a variety of value-added services to
participants in its Broker program, including consulting on the structuring of
financing transactions with equipment purchasers, timely and efficient credit
approvals and preparation and completion of standardized contract documents.
Although First Sierra enters into a brokerage agreement with each of the
participants in its Broker program, such agreements are not exclusive and can be
terminated by either party.
First Sierra's yields on contracts originated under its Broker program are
higher than those acquired under its Private Label program because of the risk
of loss and servicing responsibilities assumed by First Sierra in the Broker
program.
Vendor Program
First Sierra's Vendor program focuses on establishing formal and informal
relationships with equipment vendors in order to establish First Sierra as the
provider of financing recommended by such vendors to their equipment purchasers.
By assisting such vendors in providing timely, convenient and competitive
financing for their equipment sales and offering vendors a variety of
value-added services, First Sierra simultaneously promotes the vendor's
equipment sales and the utilization of First Sierra as the equipment finance
provider.
In a typical vendor arrangement, First Sierra originates all contracts
referred to it by the Vendor. Contracts originated under the Vendor program are
structured on a non-recourse basis, with risk of loss in the event of a default
by the Obligor residing with First Sierra. First Sierra owns or (in the case of
a contract intended as security) has a security interest in the underlying
equipment covered by a vendor contract and, in certain cases, retains a residual
interest in such equipment. All servicing functions are performed by First
Sierra under the Vendor program.
The Vendor program provides for customized financing arrangements to
respond to the needs of a particular vendor and its equipment purchasers. The
value-added services offered by First Sierra to participants in
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its Vendor program include consulting with vendors on structuring financing
transactions with equipment purchasers, training the vendor's sales and
management staffs to understand and market First Sierra's various financing
alternatives, customizing financial products to encourage product sales, and
preparation and completion of standardized contract documents. In most cases,
First Sierra's sales representatives also work directly with the vendor's
equipment purchasers, providing them with the guidance necessary to complete the
equipment financing transaction. First Sierra also may participate actively in
the vendor's sale sand marketing efforts, including advertising, promotions,
trade show activities and sales meetings.
First Sierra generally obtains higher yields on contracts funded under the
Vendor program than those in the Broker program due to additional services
provided by First Sierra under the Vendor program.
THE SERVICER
General
First Sierra Financial, Inc., a Delaware corporation (the "Servicer"), was
founded in June 1994. Its principal office is located at 600 Travis Street,
Suite 7050, Houston, Texas 77002. Since its incorporation, First Sierra has
acquired over $390 million of contracts for equipment and other property. First
Sierra, is a publicly traded company and its common stock is listed on the
Nasdaq National Market System under the symbol "FSFH".
As of May 1997, First Sierra had 120 full time employees, of which 34 were
engaged in credit and collection activities, 37 were engaged in servicing and
general administration activities and 49 were engaged in marketing activities.
Delinquency and Loss Experience
The table set forth below present certain information regarding the
delinquency experience of the Servicer's portfolio of contracts for equipment
and other property for the periods indicated. There can be no assurance that the
levels of delinquency experience reflected in the following table are indicative
of the performance of the Contracts. Through June 30, 1997, the Servicer had
incurred net charge-offs of $25,000.
Delinquency Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
As of December 31, 1996 As of March 31, 1997
Private Private
Label Broker Vendor Total Label Broker Vendor Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Remaining Contract
Receivable $244,049 $9,715 $3,470 $257,234 $280,036 $23,407 $10,518 $313,961
31 - 60 days past due 2.46% 1.69% 0.00% 2.40% 2.21% 0.73% 0.17% 2.03%
61 - 90 days past due 0.81 0.29 0.00 0.78 0.81 0.17 0.00 0.74
Over 90 days past due 0.35 0.00 0.00 0.33 0.48 0.00 0.00 0.43
--------------------------------------------------------------------------------------------
Total 3.62% 1.98% 0.00% 3.51% 3.50% 0.90% 0.17% 3.20%
</TABLE>
While the above delinquency experiences are typical of First Sierra's
experiences at the date for the period indicated, there can be no assurance that
the delinquency experiences on the Contracts will be similar. Accordingly, the
information should not be considered to reflect the credit quality of the
Contracts included in the Trust, or as a basis of assessing the likelihood,
amount or severity of losses on the Contracts. The statistical data in the table
is based on all of the contracts in First Sierra's servicing portfolio. The
Contracts, in general, are likely to have characteristics which distinguish them
from the majority of the contracts in First Sierra's servicing portfolio.
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Collection Policies
On a day-to-day basis, the billing and collection process is handled by
First Sierra's automated billing system. Day-to-day collections are processed
through Texas Commerce Bank's cash management operations, which utilize optical
code reading technology to scan the invoices and earmark payments to the
specific pool where the contract is funded.
For Private Label Programs, the First Sierra relies on the Source to
undertake the initial collection efforts with respect to the Obligors. First
Sierra monitors contract receipts and aging results on a daily basis. First
Sierra provides delinquency status to Sources at least twice monthly. Many
Sources are connected to First Sierra's delinquency reporting systems and can
receive delinquency performance on daily basis. First Sierra monitors the
Source's progress, and is in regular contact with the Source regarding
collection activity, and actions to prevent the delinquency from worsening.
After 60 days, First Sierra contacts the Source directly to notify it that it
has 30 days to ensure the account is brought current. After 90 days, First
Sierra notifies the Source that it has 60 days to repurchase the contract it was
purchased pursuant to a recourse program, or to re-market the equipment. After
150 days, First Sierra charges-off the account.
With respect to Broker/Vendor programs, First Sierra's automated billing
cues collectors to initiate contact with Obligors if payment is not received by
the 11th day after due date. If payment has not been received by the 25th, a
general demand letter is sent to the Obligor. If no contact is made within 45
days, a letter is sent which gives the Obligor five days to bring the account
current. If no payment is received, the collector, in conjunction with senior
credit personnel, determines the appropriate course of subsequent actions
appropriate for the circumstances. If collection activities do not rectify the
account, First Sierra typically charges off the account at 120 days.
FORMATION OF THE TRUST
General
The Trust, First Sierra Equipment Contract Trust 1997-1, is a business
trust formed in accordance with the laws of the State of Delaware, pursuant to
the Trust Agreement, solely for the purpose of effectuating the transactions
described herein. Prior to formation, the Trust will have had no assets or
obligations and no operating history. Upon formation, the Trust will not engage
in any business activity other than (i) acquiring and holding the Receivables,
(ii) issuing the Notes and the Trust Certificate and (iii) distributing payments
thereon. As described under "Description of the Notes - Servicing Compensation
and Payment of Expenses," a portion of the monthly collections with respect to
the Contracts will be paid to the Servicer as servicing compensation and to the
Note Insurer, the Class B-2 credit provider, the Back-up Servicer, and the
Indenture Trustee as fees. All other expenses of the Trust will be paid on
behalf of the Residual Holder by the Servicer as provided in the Servicing
Agreement.
The Owner Trustee
[Delaware Trust Company,] the Owner Trustee under the Trust Agreement, is a
Delaware banking corporation and its principal offices are located at
[_________________________________________.] The Owner Trustee will perform
limited administrative functions under the Trust Agreement. The Owner Trustee's
duties in connection with the issuance and sale of the Trust Certificate and the
Notes is limited solely to the express obligations of the Owner Trustee set
forth in the Trust Agreement.
The Indenture Trustee
Bankers Trust Company is the Indenture Trustee under the Indenture. Bankers
Trust Company is a New York banking corporation, the principal offices of which
are located at Four Albany Street, New York, New York. The Indenture Trustee's
duties in connection with the Notes is limited solely to its express obligations
under the Indenture and the Servicing Agreement.
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The Trust Assets
The Trust Assets will consist of the Equipment, the Contracts and any
Scheduled Payments, Final Scheduled Payments, Residual Receipts and Defaulted
Contract Recoveries to be made by Obligors (but not including any payments due
on or prior to the Cut-Off Date); any guaranties of an Obligor's obligations
under a Contract; with respect to any Contract, copies of the Contract, any UCC
financing statement and other original documents related to the Contract, the
application of the related Obligor, documentation evidencing the information
with respect to such Contract input into the computerized electronic contract
management system maintained by the Servicer for all Contracts and other
agreements similar to the Contracts, and any other information required by the
Servicer pursuant to its customary policies and procedures or the Note Insurer
(the "Contract Files"); the insurance policies maintained by the Obligors with
respect to the Equipment (the "Insurance Policies") and the proceeds of such
Insurance Policies; any rights of the Depositor under the Depositor Transferor's
Agreement (including the right to instruct First Sierra to exercise any
unassignable rights of enforcement under the Contracts and any guaranties
thereof); funds from time to time deposited in the Collection Account; and any
and all income and proceeds of foregoing. The Trust Assets will not include any
security deposits received by First Sierra with respect to the Contracts.
Because the Trust does not have any operating history and will not engage in any
business activity other than owning the Trust Assets, issuing the Notes and
making distributions thereon, there has not been included any historical or pro
forma ratio of earnings to fixed charges with respect to the Trust.
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the Indenture to be entered into by
the Servicer, the Trust and the Indenture Trustee. The Servicer will provide a
copy of the Indenture to subsequent Noteholders without charge on written
request addressed to it at Texas Commerce Tower, 600 Travis Street, 70th Floor,
Houston, Texas 77002.
The following summary describes certain terms of the Transfer Agreements
and the Indenture, does not purport to be complete and is subject to and
qualified in its entirety by reference to the Transfer Agreements and the
Indenture. Wherever provisions of the Transfer Agreements and the Indenture are
referred to, such provisions are hereby incorporated herein by reference.
General
The obligations evidenced by the Notes are recourse to the assets of the
Trust only and are not recourse to the Depositor, the Transferor, First Sierra,
the Servicer, the Indenture Trustee, or any other Person.
The Trust will agree in the Indenture and in the Class A Notes to pay to
the Class A Noteholders (i) an amount of principal equal to the Initial Class A
Note Principal Amount and (ii) Class A Note Interest in each case at the times,
from the sources and on the terms and conditions set forth in the Indenture and
in the Class A Notes.
The ___% Class A Equipment Contract Backed Notes (the "Class A Notes") in
the initial principal amount of $__________ (the "Initial Class A Note Principal
Balance") will be issued pursuant to the Indenture. The Initial Class A Note
Principal Balance to be issued hereunder is equal to approximately __________%
(the "Class A Percentage") of the Initial Aggregate Discounted Contract
Principal Balance of the Contracts. The Class A Notes will initially be issued
in book-entry form only through DTC in minimum denominations of $1,000 and
integral multiples thereof. Payments on the Class A Notes are required to be
made by the Indenture Trustee on each Payment Date.
The first Payment Date for distributions to the Class A Noteholders will be
October 10, 1997. Payments are required to be made by the Indenture Trustee, by
check mailed or, if requested by the Noteholder, by wire transfer of immediately
available funds, to Noteholders entitled thereto at the address appearing on the
certificate register on the Record Date, which, for so long as the Class A Notes
are in book-entry form through DTC, will be Cede & Co.
The following table sets forth the expected repayment of principal to the
Class A Noteholders assuming, among other things, (i) the Modeling Assumptions
and (ii) there are no prepayments on the Contracts.
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<PAGE>
EXPECTED AMORTIZATION OF CLASS A NOTE PRINCIPAL BALANCE
Class A Note Expected Principal
Payment Date Principal Balance Repayment Amount
------------ ----------------- ----------------
Closing Date $ $
October 10, 1997
November 10, 1997
December 10, 1997
January 10, 1998
February 10, 1998
March 10, 1998
April 10, 1998
May 10, 1998
June 10, 1998
July 10, 1998
August 10, 1998
September 10, 1998
October 10, 1998
November 10, 1998
December 10, 1998
January 10, 1999
February 10, 1999
March 10, 1999
April 10, 1999
May 10, 1999
June 10, 1999
July 10, 1999
August 10, 1999
September 10, 1999
October 10, 1999
November 10, 1999
December 10, 1999
January 10, 2000
February 10, 2000
March 10, 2000
April 10, 2000
May 10, 2000
June 10, 2000
July 10, 2000
August 10, 2000
September 10, 2000
October 10, 2000
November 10, 2000
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<PAGE>
Class A Note Expected Principal
Payment Date Principal Balance Repayment Amount
------------ ----------------- ----------------
December 10, 2000
January 10, 2001
February 10, 2001
March 10, 2001
April 10, 2001
May 10, 2001
June 10, 2001
July 10, 2001
August 10, 2001
September 10, 2001
October 10, 2001
November 10, 2001
December 10, 2001
January 10, 2002
February 10, 2002
March 10, 2002
April 10, 2002
May 10, 2002
June 10, 2002
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<PAGE>
In addition to the Class A Notes, the Trust will also issue four classes of
subordinate securities, the ___% Class B-1 Equipment Contract Backed Notes (the
"Class B-1 Notes"), the ___% Class B-2 Equipment Contract Backed Notes (the
"Class B-2 Notes"), the ___% Class B-3 Equipment Contract Backed Notes (the
"Class B-3 Notes," and collectively with the Class B-1 Notes and the Class B-2
Notes, the "Class B Notes") and the Trust Certificate (the "Trust Certificate"
together with the Class B Notes, the "Subordinate Securities," and collectively
with the Class B Notes and the Class A Notes, the "Securities").
The Subordinate Securities are not offered hereby, and will be issued
initially to the Transferor. The Transferor expects that some of the Class B
Notes will be privately placed with one or more qualified institutional
investors. The Transferor expects to retain the Class B Notes which are not
privately placed and the Trust Certificate.
One-hundred percent of the Class A Insured Distribution Amount due to the
Class A Noteholders on each Payment Date is insured by the Note Insurer pursuant
to the Note Insurance Policy. See "The Note Insurance Policy and the Note
Insurer" herein.
Conveyance of Receivables
On the Closing Date, the Trust will acquire from the Transferor, by means
of an assignment directed by the Depositor, all the right, title, and interest
of the Transferor in and to (a)(i) any Equipment that is owned by the Transferor
and any and all income and proceeds from such Equipment, but subject to the
rights of the Obligor to quiet enjoyment of such Equipment under the related
Contract and (ii) any security interest of the Transferor in any of the
Equipment that is not owned by the Transferor, (b) the Contracts, including,
without limitation, all Scheduled Payments, Residual Receipts, Defaulted
Contract Recoveries and any other payments due or made with respect to the
Contracts after the Cut-Off Date relating to such Contracts, (c) any guarantees
of an Obligor's obligations under an Contract, (d) all other documents in the
Contract Files relating to the Contracts, including, without limitation, any UCC
financing statements related to the Contracts or the Equipment, (e) any
Insurance Policies and Insurance Proceeds with respect to the Contracts, (f) all
of the Transferor's right, title and interest in and to, and rights under, the
Transfer Agreement executed and delivered in accordance therewith, (g) the Note
Insurance Policy, (h) all amounts on deposit in the Collection Account; and (i)
any and all income and proceeds of any of the foregoing; provided, however, that
the transfer shall not include the Initial Unpaid Amounts relating thereto
(collectively, the "Receivables").
The Indenture Trustee will have possession of the Contracts and the
Contract Files, and the Servicer will retain copies of any other documents which
relate to the Receivables, any related evidence of insurance and payment,
delinquency and related reports maintained by the Servicer in the ordinary
course of business with respect to each Receivable. Prior to transfer of the
Receivables to the Trust, the Servicer will cause its electronic ledger to be
marked to show that such Receivables have been transferred to the Transferor and
then to the Depositor and then to the Trust, and the Transferor and the
Depositor will file UCC financing statements reflecting the transfer and
assignment of the Receivables in certain jurisdictions, as required by the
Transfer Agreements and the Servicing Agreement. See "Certain Legal Aspects of
the Receivables" in the Prospectus.
Representations and Warranties of First Sierra
First Sierra will make certain warranties in the Servicing Agreement (as of
the Closing Date with respect to the Contracts and, with respect to a Substitute
Contract, as of the date on which the Trust acquires such Substitute Contract
(each, a "Transfer Date"), the benefits of which will be assigned to the Trust
and then to the Indenture Trustee, including that: (i) no provision of any
Contract has been waived, altered or modified in any respect, except by
instrument or documents contained in its Contract File and identified by First
Sierra and no modification or amendment of any Contract would individually or in
the aggregate materially and adversely affect the Indenture Trustee's rights
thereunder or has reduced the amount of any Scheduled Payment (or the aggregate
Scheduled Payments) owing thereunder or extended the expiration date thereof;
(ii) each Contract is a valid and binding payment obligation of the related
Obligor and is enforceable in accordance with its terms (except as may be
limited by applicable insolvency, bankruptcy, moratorium, reorganization, or
other similar laws affecting enforceability of creditors' rights generally and
the availability of equitable remedies) and is in full force and effect;
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<PAGE>
(iii) each Contract contains a "hell or high water" clause under which the
Obligor's obligations are non-cancelable and unconditional and not subject to
any right of set-off, defense, abatement, counterclaim, reduction or recoupment;
no Contract is or will be subject to rights of rescission, set-off, counterclaim
or defense, and each Contract provides for acceleration of the Scheduled
Payments upon default by the Obligor; (iv) the Contracts, at the time they were
made, did not violate the laws of any applicable state or of the United States,
including, without limitation, usury, truth-in-lending and equal credit
opportunities laws applicable to such Contract; (v) no Contract permits the
prepayment or early termination thereof at the option of the Obligor for an
amount that is less than the Prepayment Amount related to such Contract; (vi) no
Contract provides for the substitution, addition or exchange of any item of
Equipment which would result in any reduction of payments due under such
Contract; (vii) all of the Contracts require the Obligor to maintain the
Equipment in good working order, to bear all the costs of operating the
Equipment, including taxes and insurance relating thereto; (viii) the Contract
provides for periodic Scheduled Payments, which are principally due and payable
on a monthly, quarterly, semi-annual, or annual basis; (ix) in an event of a
Casualty Loss, such Contract requires the Obligor, at the Obligor's expense, to
(a) replace the Equipment with like equipment in good repair, or (b) pay the sum
of all unpaid rent and other payments due under the Contract, all accelerated
future payments due under the Contract (discounted to present value payoff
amount) and the booked residual value of the Equipment; (x) under the terms of
the Contract the Obligor may not elect to utilize its security deposit to offset
any Scheduled Payment; (xi) if obtained during the original approval, the
Contracts provide a personal guarantee of the Obligor; (xii) all of the
Contracts permit the Source to accelerate Scheduled Payments if an Obligor is in
default under the Contract; (xiii) all the Contracts meet the Originator's
credit and collections policies and procedures; (xiv) each Source has entered
into valid sale and assignment of each Contract; (xv) each Contract conveyed
includes only the remaining, in the event the Contract does not include all
original Scheduled Payments under the Contract, non-cancelable Scheduled
Payments (provided that such remaining Scheduled Payments do not exceed an
amount greater than 84); (xvi) the right, title and interest of the Originator
or its affiliates in and to each Contract and the related Equipment have not
been sold, transferred, assigned or pledged by such entities to any other Person
(or any such pledge has been released as evidenced by releases of collateral)
and at the time of the conveyance of such Contract to the Trust, the Trust will
be the sole owner of such Contract and the rights thereunder in and to the
related Equipment and will have good and marketable title to each Contract and
will have the power to convey such Contract and assign its interest in the
related Equipment free and clear of any liens; (xvii) as of the Closing Date,
all action required by the Transfer Agreements and the Servicing Agreement shall
have been taken by the Originator or its affiliates to convey all of its right,
title and interest in and to the Contracts and the related Equipment to the
Trust; (xviii) all filings (including UCC filings) necessary to evidence the
conveyance of the Contracts to the Trust and to perfect the first perfected
priority security interest of the Indenture Trustee in the Contracts and the
Originator's interest in related Equipment in accordance with the filing
requirements of the Transfer Agreements and the Servicing Agreement have been
made in all appropriate jurisdictions and are in full force and effect; (xix) as
of the Cut-Off Date, no Obligor will have been released, in whole or in part,
from any of its obligations in respect of any such Contract; no such Contract
will have been satisfied, canceled, extended or subordinated, in whole or in
part, or rescinded, and no Equipment covered by any such Contract will have been
released from such Contract, in whole or in part, nor will any instrument have
been executed that would effect any such satisfaction, release, cancellation,
subordination or rescission; and (xx) as of the initial Cut-Off Date (in each
case calculated using the statistical discount rate of 7.25%), no one Obligor is
the Obligor under Contracts for which the sum of the Statistical Discounted
Contract Principal Balances exceeds $902,286.19; no more than $6,200,631.58 of
the Statistical Discounted Contract Principal Balance is attributable to any 10
Obligors, the average original cost (based on GAAP) of the Equipment subject to
the Contracts shall not exceed $100,000.
First Sierra will make similar representations and warranties with respect
to Substitute Contracts as of the date of the related transfer of such
Substitute Contracts. Such representations and warranties will survive the
transfer of the Substitute Contracts to the Trust.
Under the terms of the Servicing Agreement, First Sierra will be obligated
to accept the reconveyance of any Receivables and deposit the Repurchase Amount
on or before the end of the calendar month following the month of its discovery
or receipt of notice of a breach of a representation or warranty that materially
adversely affects such item of Receivables, which breach has not been cured or
waived in all material respects. This obligation to accept the reconveyance of
the Receivables and remit the Repurchase Amount will constitute the sole remedy
against First Sierra available to the Transferor, the Depositor, the Trust, the
Indenture Trustee and the Noteholders for a breach of a representation or
warranty made by First Sierra with respect to the required characteristics of
the Receivables.
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<PAGE>
Indemnification
The Servicing Agreement will provide that First Sierra will defend and
indemnify the Servicer, the Note Insurer, the Class B-2 credit provider, the
Depositor, the Indenture Trustee, the Trust and the Noteholders against any and
all losses, claims, damages and liabilities to the extent, but only to the
extent, that the same have been suffered by any such party by virtue of (i) a
breach by First Sierra of its obligations (other than breach of First Sierra's
representations and warranties, with respect to which the sole remedy is
expressly limited to First Sierra's acceptance of the reconveyance of the
affected Receivables and the remittance of the Repurchase Amount by First Sierra
as discussed above) under the Servicing Agreement or (ii) in the case of the
Indenture Trustee, its performance of its duties hereunder, except to the extent
that such loss, claim, damage or liability resulted from the Indenture Trustee's
gross negligence or willful misconduct.
The Servicing Agreement will also provide that the Servicer will defend and
indemnify the Depositor, First Sierra, the Indenture Trustee, the Note Insurer,
the Class B-2 credit provider, the Trust and the Noteholders against any and all
costs, expenses, losses, damages, claims and liabilities, including reasonable
fees and expenses of counsel and expenses of litigation, reasonably incurred,
arising out of or resulting from (i) the use, repossession or operation by the
Servicer or any affiliate thereof of any Equipment and (ii) (A) the failure of
the Servicer to perform its duties under the Servicing Agreement or (B) in the
case of the Indenture Trustee, its performance of its duties hereunder, except
to the extent that such cost, expense, loss, damage, claim or liability resulted
from the Indenture Trustee's gross negligence or willful misconduct. First
Sierra's obligations, as Servicer, to indemnify the Trust, the Note Insurer, the
Class B-2 credit provider, and the Noteholders for acts or omissions of First
Sierra as Servicer will survive the removal of the Servicer but will not apply
to any acts or omissions of a successor Servicer. Such indemnification does not
extend to indirect, incidental, special or consequential damages.
The Accounts
The Servicer is required to establish and maintain in accordance with the
Servicing Agreement two accounts: the Lockbox Account and the Collection
Account. The Collection Account is to be held by the Indenture Trustee in the
name of the Trust and for the benefit of Noteholders, the Note Insurer, the
Class B-2 credit provider, (as their interests may appear). The Collection
Account will be one or more segregated trust accounts. The Lockbox Account will
be a demand deposit account maintained at Texas Commerce Bank, National
Association (the "Lockbox Bank").
"Advance Payments" are amounts paid by an Obligor during a Collection
Period with respect to amounts due from such Obligor in subsequent Collection
Periods. Advance Payments will be retained in the Lockbox Account until the
Determination Date relating to the Collection Period in which such Advance
Payment (or portion thereof) is due in accordance with the provisions of the
related Contract.
The Servicing Agreement permits the Servicer to direct the investment of
amounts in the Collection Account in certain eligible investments that mature
not later than the Business Day prior to the next succeeding Payment Date.
Generally, the Residual Holder shall be entitled to any income from such
investments.
Servicer Advances
In the event that any Obligor fails to remit the full Scheduled Payment due
from it with respect to a Collection Period by the Determination Date related to
such Collection Period, the Servicer is required to make an advance from its own
funds of an amount equal to such unpaid Scheduled Payment (a "Servicer Advance")
if the Servicer, in its sole discretion, determines that eventual repayment of
such Servicer Advance is likely from collections from or on behalf of the
related Obligor. The Servicing Agreement provides for the reimbursement of the
Servicer for such Servicer Advances from funds available for distribution in the
Collection Account on each subsequent Payment Date before the required payments
to Noteholders have been made as set forth below in "Flow of Funds". With
respect to any Delinquent Contract, whenever the Servicer shall have determined
that it will be unable to recover a Servicer Advance or a portion thereof on
such Delinquent Contract, the Servicer will not be required to make such
Servicer Advance or portion thereof, but will be required to enforce its
remedies (including acceleration) under such Contract. Furthermore, if at any
time First Sierra or an affiliate is no longer the Servicer, no Servicer
Advances will be required. The Servicing Agreement shall provide that, in the
event that the Servicer determines that
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<PAGE>
any Servicer Advances previously made are not recoverable from the related
Obligor, or any Delinquent Contracts for which the Servicer has made a Servicer
Advance in respect thereof become Defaulted Contracts, the Indenture Trustee
shall draw on the Collection Account to repay such Servicer Advances in
accordance with the provisions of the Indenture.
Flow of Funds
On each Determination Date, the Servicer is required to deliver to the
Indenture Trustee, the Class B-2 credit provider, the Note Insurer and each
Rating Agency a certificate (the "Servicer's Certificate") setting forth the
information needed to make payments on the upcoming Payment Date.
See "Subordination Provisions" in the Summary of Terms to this Prospectus
Supplement for a description of the operation and effect of the "Flow of Funds"
mechanics with respect to the various classes of Notes.
On each Payment Date, the Indenture Trustee will be required to make the
following payments from the Available Funds then on deposit in the Collection
Account, in the following order of priority (to the extent funds are available
therefor):
(i) to the Servicer, an amount equal to any unreimbursed Servicer
Advances (other than Servicer Advances for the related Collection Period);
(ii) to the Servicer, an amount equal to the Servicer Fee then due,
together with any accrued and unpaid Servicer Fees from prior Collection
Periods;
(iii) to the Servicer, any Servicing Charges, if any, deposited in the
Collection Account;
(iv) to the Back-up Servicer, an amount equal to the Back-up Servicer
Fee then due, together with any accrued and unpaid Back-up Servicer Fees
from prior Collection Periods;
(v) to the Note Insurer, an amount equal to the Premium Amount then
due, together with any accrued and unpaid Premium Amounts from prior
Collection Periods;
(vi) to the Indenture Trustee, the Indenture Trustee Fees then due,
together with any Indenture Trustee Fees from prior Collection Periods;
(vii) to the Indenture Trustee, the Indenture Trustee Expenses then
due, together with any Indenture Trustee Expenses from prior Collection
Periods, in an amount not to exceed in the aggregate $75,000;
(viii) to the Class A Noteholders, the Class A Note Interest;
(ix) to the Class B-1 Noteholders, the Class B-1 Note Interest for the
related Collection Period (to the extent the disbursement of the Class B-1
Note Interest will not result in an Available Funds Shortfall);
(x) to the Class B-2 credit provider, the fees of the Class B-2 credit
provider;
(xi) to the Class B-2 Noteholders, the Class B-2 Note Interest for the
related Collection Period (to the extent the disbursement of the Class B-2
Note Interest will not result in an Available Funds Shortfall);
(xii) until the Class A Note Principal Balance has been reduced to
zero, to the Class A Noteholders, the sum of (a) the Class A Base Principal
Distribution Amount for such Payment Date, and (b) any Class A Overdue
Principal;
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(xiii) to the Note Insurer, the unpaid Reimbursement Amount , if any;
(xiv) until the Class B-1 Note Principal Balance has been reduced to
zero, to the Class B-1 Noteholders, from the Available Funds then remaining
in the Collection Account, the sum of (a) the Class B-1 Base Principal
Distribution Amount for such Payment Date, and (b) any Class B-1 Overdue
Principal; provided, however, that if a Restricting Event exists on such
Payment Date and the Class A Note Principal Balance on such Payment Date
(after giving effect to all prior payments of principal to the Class A
Noteholders made on such Payment Date) exceeds zero, the amount otherwise
required to be paid to the Class B-1 Noteholders under this clause (xiv),
shall instead be paid to the Class A Noteholders pursuant to this clause
(xiv) during such time as a Restricting Event is continuing as an
additional reduction of the Class A Note Principal Balance up to the amount
necessary to reduce the Class A Note Principal Balance to zero;
(xv) until the Class B-2 Note Principal Balance has been reduced to
zero, to the Class B-2 Noteholders, from the Available Funds then remaining
in the Collection Account, the sum of (a) the Class B-2 Base Principal
Distribution Amount for such Payment Date, and (b) any Class B-2 Overdue
Principal; provided, however, that if a Restricting Event exists on such
Payment Date, the amount otherwise required to be paid to the Class B-2
Noteholders under this clause (xv) shall instead be paid (x) if the Class A
Note Principal Balance on such Payment Date (after giving effect to all
prior payments of principal to the Class A Noteholders made on such Payment
Date) exceeds zero, to the Class A Noteholders pursuant to this clause (xv)
during such time as a Restricting Event is continuing as an additional
reduction of the Class A Note Principal Balance up to the amount necessary
to reduce such balance to zero, and (y) if the Class A Note Principal
Balance is zero, but the Class B-1 Note Principal Balance on such Payment
Date (after giving effect to all prior payments of principal to the Class
B-1 Noteholders made on such Payment Date) exceeds zero, the amount
otherwise required to be paid to the Class B-2 Noteholders under this
clause (xv) shall instead be paid to the Class B-1 Noteholders during such
time as a Restricting Event is continuing as an additional reduction of the
Class B-1 Note Principal Balance up to the amount necessary to reduce such
balance to zero;
(xvi) to the Class B-2 credit provider, all amounts previously
advanced by it for the benefit of the Class B-2 Noteholders pursuant to the
letter of credit.
(xvii) to the Class B-3 Noteholders, the Class B-3 Note Interest for
the related Collection Period;
(xviii) until the Class B-3 Note Principal Balance has been reduced to
zero, to the Class B-3 Noteholders, from the Available Funds then remaining
in the Collection Account, the sum of (a) the Class B-3 Base Principal
Distribution Amount for such Payment Date, and (b) any Class B-3 Overdue
Principal; provided, however, that if a Restricting Event exists on such
Payment Date, the amount otherwise required to be paid to the Class B-3
Noteholders under this clause (xviii) shall instead be paid (x) if the
Class A Note Principal Balance on such Payment Date (after giving effect to
all prior payments of principal to the Class A Noteholders made on such
Payment Date) exceeds zero, to the Class A Noteholders pursuant to this
clause (xviii) during such time as a Restricting Event is continuing as an
additional reduction of the Class A Note Principal Balance up to the amount
necessary to reduce such balance to zero, (y) if the Class A Note Principal
Balance is zero, but the Class B-1 Note Principal Balance on such Payment
Date (after giving effect to all prior payments of principal to the Class
B-1 Noteholders made on such Payment Date) exceeds zero, the amount
otherwise required to be paid to the Class B-3 Noteholders under this
clause (xviii) shall instead be paid to the Class B-1 Noteholders pursuant
to this clause (xviii) during such time as a Restricting Event is
continuing as an additional reduction of the Class B-1 Note Principal
Balance up to the amount necessary to reduce such balance to zero, and (z)
if the Class A Note Principal Balance and the Class B-1 Note Principal
Balance are both zero, but the Class B-2 Note Principal Balance on such
Payment Date (after giving effect to all prior payments of principal to the
Class B-2 Noteholders made on such Payment Date) exceeds zero, the amount
otherwise required to be paid to the Class B-3 Noteholders under this
clause (xviii) shall instead be paid to the Class B-2 Noteholders pursuant
to this clause (xviii) during such time as a Restricting Event is
continuing as an additional reduction of the Class B-2 Note Principal
Balance up to the amount necessary to reduce such balance to zero;
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(xix) to the Indenture Trustee, the Indenture Trustee Expenses then
due, together with any Indenture Trustee Expenses from prior Collection
Periods, in excess of the $75,000 limitation set forth in clause (vii);
(xx) to the Servicer, any other amounts due the Servicer as expressly
provided in the Servicing Agreement; and
(xxi) to the Residual Holder, any remaining amounts; provided,
however, that
(I) if a Restricting Event does not exist on such Payment Date,
but if any payment of funds to the Residual Holder on such
Payment Date would result in the excess of (i) the Aggregate
Discounted Contract Principal Balance as of the end of the
immediately preceding Collection Period, over (ii) the sum
of (w) the Class A Note Principal Balance, (x) the Class B-1
Note Principal Balance, (y) the Class B-2 Note Principal
Balance and (z) the Class B-3 Note Principal Balance
(calculated with respect to clauses (w), (x), (y) and (z)
after giving effect to all payments of principal to be made
on such Payment Date) being less than 2% of the Initial
Aggregate Discounted Contract Principal Balance such amount
shall not be paid to the Residual Holder but shall instead
be paid pursuant to this clause (xxi) to the Class A
Noteholders, the Class B-1 Noteholders, the Class B-2
Noteholders and the Class B-3 Noteholders as an additional
payment of principal in an amount with respect to each such
Class equal to the product of (A) a fraction, the numerator
of which is the Class A Percentage, the Class B-1
Percentage, the Class B-2 Percentage, or the Class B-3
Percentage, as the case may be, and the denominator of which
is the sum of the Class A Percentage, the Class B-1
Percentage, the Class B-2 Percentage and the Class B-3
Percentage and (B) the amount that would otherwise be paid
to the Residual Holder pursuant to this clause (xxi); and
(II)if a Restricting Event exists on such Payment Date, the
amount otherwise required to be paid to the Residual Holder
under this clause (xxi) shall instead be paid (w) if the
Class A Note Principal Balance on such Payment Date (after
giving effect to all prior payments of principal to the
Class A Noteholders made on such Payment Date) exceeds zero,
to the Class A Noteholders pursuant to this clause (xxi)
during such time as a Restricting Event is continuing as an
additional reduction of the Class A Note Principal Balance
up to the amount necessary to reduce such balance to zero;
(x) if the Class A Note Principal Balance is zero, but the
Class B-1 Note Principal Balance on such Payment Date (after
giving effect to all prior payments of principal to the
Class B-1 Noteholders made on such Payment Date) exceeds
zero, the amount otherwise required to be paid to the
Residual Holder under this clause (xxi) shall instead be
paid to the Class B-1 Noteholders pursuant to this clause
(xxi) during such time as a Restricting Event is continuing
as an additional reduction of the Class B-1 Note Principal
Balance up to the amount necessary to reduce such balance to
zero, (y) if the Class A Note Balance and the Class B-1 Note
Balance are both zero, but the Class B-2 Note Principal
Balance on such Payment Date (after giving effect to all
prior payments of principal to the Class B-2 Noteholders
made on such Payment Date) exceeds zero, the amount
otherwise required to be paid to the Residual Holder under
this clause (xxi) shall instead be paid to the Class B-2
Noteholders pursuant to this clause (xxi) during such time
as a Restricting Event is continuing as an additional
reduction of the Class B-2 Note Principal Balance up to the
amount necessary to reduce such balance to zero; and (z) if
each of the Class A Note Principal Balance, the Class B- 1
Note Principal Balance and the Class B-2 Note Principal
Balance are zero, but the Class B-3 Note Principal Balance
on such Payment Date (after giving effect to all prior
payments of principal to the Class B-3 Noteholders made on
such Payment Date) exceeds zero, the amount otherwise
required to be paid to the Residual Holder under this clause
(xxi) shall instead be paid to the Class B-3 Noteholders
pursuant to this clause (xxi) during such time as a
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Restricting Event is continuing as an additional reduction
of the Class B-3 Note Principal Balance up to the amount
necessary to reduce such balance to zero.
As used in this Prospectus Supplement, the following terms have the following
meanings:
Advance Payment: With respect to a Contract and a Collection Period, any
Scheduled Payment, Final Scheduled Payment, Purchase Option Payment or portion
of either made by or on behalf of an Obligor and received by the Servicer during
such Collection Period, which Scheduled Payment, Final Scheduled Payment,
Purchase Option Payment or portion thereof does not become due until a
subsequent Collection Period.
Aggregate Initial Note Principal Balance: The aggregate of the Initial
Class A Note Principal Balance, the Initial Class B-1 Note Principal Balance,
the Initial Class B-2 Note Principal Balance and the Initial Class B-3 Note
Principal Balance.
Available Distribution Amount: With respect to a Collection Period, the
total of (a) the Available Funds with respect to the related Collection Period,
minus (B) the Trust Operating Expenses.
Available Funds: With respect to a Payment Date, all amounts (including
proceeds of Servicer Advances) held in the Collection Account on the related
Determination Date, after taking into account all deposits required to be made
on such Determination Date, other than any such amounts which relate to any
subsequent Collection Period.
Available Funds Shortfall: An event which occurs on a Payment Date if the
Class A Insured Distribution Amount for such Payment Date exceeds the Available
Distribution Amount for such Payment Date.
Base Principal Amount: With respect to any Collection Period, an amount
equal to the excess of (x) the Aggregate Discounted Contract Principal Balances
of the Contracts as of the close of business on the last day of the second
preceding Collection Period over (y) the Aggregate Discounted Contract Principal
Balances of the Contracts as of the close of business on the last day of the
immediately preceding Collection Period.
Class A Base Principal Distribution Amount: (a) With respect to any
Collection Period prior to the Class B-1 Termination Date, the Class B-2
Termination Date or the Class B-3 Termination Date, the product of (i) the Class
A Percentage and (ii) the Base Principal Amount for such Collection Period; (b)
with respect to the Class B-1 Termination Date, the Class B-2 Termination Date
or the Class B-3 Termination Date, as the case may be, the amount described in
clause (a) above plus the portion of the Class B-1 Base Principal Distribution
Amount, the Class B-2 Base Principal Distribution Amount or the Class B-3 Base
Principal Distribution Amount, as applicable, not applied as a reduction of the
Class B-1 Note Principal Balance, the Class B-2 Note Principal Balance or the
Class B-3 Note Principal Balance, respectively, on such date; and (c) with
respect to any Collection Period following the Class B-1 Termination Date, the
Class B-2 Termination Date or the Class B-3 Termination Date, as the case may
be, the amount described in clause (a) above plus the Class B-1 Base Principal
Distribution Amount, the Class B-2 Base Principal Distribution Amount and/or the
Class B-3 Base Principal Distribution Amount, as the case may be, for such
Collection Period.
Class A Insured Distribution Amount: With respect to any Collection Period
(other than the final Collection Period), the sum of (i) Class A Note Interest,
(ii) Class A Overdue Interest for the related Interest Accrual Period, (iii) the
excess if any, of (a) the Class A Note Principal Balance over (b) the Aggregate
Discounted Contract Principal Balance of all Contracts other than Defaulted
Contracts; and for the Final Collection Period, the sum of (x) Class A Note
Interest, (y) Class A Overdue Interest for the related Interest Accrual Period
and (z) the Class A Note Principal Balance then outstanding.
Class A Maturity Date: : _________________
Class A Note Current Interest: With respect to any Collection Period, the
interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class A Note Rate and (y) the aggregate Class
A Note Principal Balance outstanding immediately prior to such Payment Date.
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Class A Note Interest: With respect to any Collection Period, the Class A
Note Current Interest and the Class A Overdue Interest.
Class A Note Principal Balance: At any time, the Initial Class A Note
Principal Amount minus all payments theretofore received by the Class A
Noteholders on account of principal.
Class A Overdue Interest: With respect to any Payment Date, the difference
between (a) the sum of (i) the excess, if any, of any Class A Note Interest due
on the immediately preceding Payment Date over the Class A Note Interest paid on
such immediately preceding Payment Date, (ii) without duplication of the amount
described in clause (i), the amount of the Class A Overdue Interest due and
unpaid as of the immediately preceding Payment Date and (iii) the product of (x)
the sum of clauses (i) and (ii) and (y) one-twelfth of the sum of the Class A
Note Rate plus 1%, and (b) any Class A Overdue Interest paid on such Payment
Date.
Class A Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class A Base Principal
Distribution Amounts due on all prior Payment Dates and (b) the aggregate amount
of the principal (from whatever source) actually distributed to Class A
Noteholders on all prior Payment Dates.
Class B-1 Base Principal Distribution Amount: With respect to any Payment
Date, the product of (a) the Class B-1 Percentage and (b) the Base Principal
Amount for such Payment Date.
Class B-1 Maturity Date: ___________________
Class B-1 Note Current Interest: With respect to any Payment Date, the
interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class B-1 Note Rate and (y) the aggregate
Class B-1 Note Principal Balance outstanding immediately prior to such Payment
Date.
Class B-1 Note Interest: With respect to any Payment Date, the Class B-1
Note Current Interest and the Class B-1 Overdue Interest.
Class B-1 Note Principal Balance: At any time, the Initial Class B-1 Note
Principal Amount minus all payments theretofore received by the Class B-1
Noteholders on account of principal.
Class B-1 Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class B-1 Note
Interest due on the immediately preceding Payment Date over the Class B-1 Note
Interest paid on such immediately preceding Payment Date, (ii) without
duplication of the amount described in clause (i), the amount of the Class B-1
Overdue Interest due and unpaid as of the immediately preceding Payment Date and
(iii) the product of (x) the sum of clauses (i) and (ii) and (y) one-twelfth of
the sum of the Class B-1 Note Rate plus 1%, and (b) any Class B-1 Overdue
Interest paid on such Payment Date.
Class B-1 Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class B-1 Base Principal
Distribution Amounts due on all prior Payment Dates and (b) the aggregate amount
of the principal (from whatever source) actually distributed to Class B-1
Noteholders on all prior Payment Dates.
Class B-1 Termination Date: The Payment Date on which the Class B-1 Note
Principal Balance is reduced to zero.
Class B-2 Base Principal Distribution Amount: With respect to any Payment
Date, the product of (a) the Class B-2 Percentage and (b) the Base Principal
Amount for such Payment Date.
Class B-2 Maturity Date: ______________________
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Class B-2 Note Current Interest: With respect to any Payment Date, the
interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class B-2 Note Rate and (y) the aggregate
Class B-2 Note Principal Balance outstanding immediately prior to such Payment
Date.
Class B-2 Note Interest: With respect to any Payment Date, the Class B-2
Note Current Interest and the Class B-2 Overdue Interest.
Class B-2 Note Principal Balance: At any time, the Initial Class B-2 Note
Principal Amount minus all payments theretofore received by the Class B-2
Noteholders on account of principal.
Class B-2 Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class B-2 Note
Interest due on the immediately preceding Payment Date over the Class B-2 Note
Interest paid on such immediately preceding Payment Date, (ii) without
duplication of the amount described in clause (i), the amount of the Class B-2
Overdue Interest due and unpaid as of the immediately preceding Payment Date and
(iii) the product of (x) the sum of clauses (i) and (ii) and (y) one-twelfth of
the sum of the Class B-2 Note Rate plus 1%, and (b) any Class B-2 Overdue
Interest paid on such Payment Date.
Class B-2 Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class B-2 Base Principal
Distribution Amounts due on all prior Payment Dates and (b) the aggregate amount
of the principal (from whatever source) actually distributed to Class B-2
Noteholders on all prior Payment Dates.
Class B-2 Termination Date: The Payment Date on which the Class B-2 Note
Principal Balance is reduced to zero.
Class B-3 Base Principal Distribution Amount: With respect to any Payment
Date, the product of (a) the Class B-3 Percentage and (b) the Base Principal
Amount for such Payment Date.
Class B-3 Maturity Date: ______________________
Class B-3 Note Current Interest: With respect to any Payment Date, the
interest accrued during the related Interest Accrual Period, equal to the
product of (x) one-twelfth of the Class B-3 Note Rate and (y) the aggregate
Class B-3 Note Principal Balance outstanding immediately prior to such Payment
Date.
Class B-3 Note Interest: With respect to any Payment Date, the Class B-3
Note Current Interest and the Class B-3 Overdue Interest.
Class B-3 Note Principal Balance: At any time, the Initial Class B-3 Note
Principal Amount minus all payments theretofore received by the Class B-3
Noteholders on account of principal.
Class B-3 Overdue Interest: With respect to any Payment Date, the
difference between (a) the sum of (i) the excess, if any, of any Class B-3 Note
Interest due on the immediately preceding Payment Date over the Class B-3 Note
Interest paid on such immediately preceding Payment Date, (ii) without
duplication of the amount described in clause (i), the amount of the Class B-3
Overdue Interest due and unpaid as of the immediately preceding Payment Date and
(iii) the product of (x) the sum of clauses (i) and (ii) and (y) one-twelfth of
the sum of the Class B-2 Note Rate plus 1%, and (b) any Class B-3 Overdue
Interest paid on such Payment Date.
Class B-3 Overdue Principal: With respect to any Payment Date, the
difference, if any, equal to (a) the aggregate of the Class B-3 Base Principal
Distribution Amounts due on all prior Payment Dates and (b) the aggregate amount
of the principal (from whatever source) actually distributed to Class B-3
Noteholders on all prior Payment Dates.
Class B-3 Termination Date: The Payment Date on which the Class B-3 Note
Principal Balance is reduced to zero.
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Defaulted Contract. A Contract becomes a "Defaulted Contract" at the
earlier of the date on which (i) the Servicer has determined in its sole
discretion, in accordance with the Servicing Standard and its customary
servicing procedures, that such Contract is not collectible, (ii) all or part of
a Scheduled Payment thereunder is more than 180 days delinquent, (iii) the
Servicer elected not to make a Servicer Advance or for which the Servicer has
determined that a prior Servicer Advance is not recoverable or (iv) that was
repurchased by a Source pursuant to a Source Agreement.
Defaulted Contract Recoveries: All proceeds of the sale of Equipment
related to Defaulted Contracts and any amounts collected as judgments against an
Obligor or others related to the failure of such Obligor to pay any required
amounts under the related Contract or to return the Equipment, in each case as
reduced by (i) any unreimbursed Servicer Advances with respect to such Contract
or such Equipment and (ii) any reasonably incurred out-of-pocket expenses
incurred by the Servicer in enforcing such Contract or in liquidating such
Equipment.
Delinquency Trigger Event: Exists on any Payment Date on which the average
of the Delinquency Trigger Ratios for such Payment Date and the two immediately
preceding Payment Dates exceeds 7.5%.
Delinquency Trigger Ratio: With respect to any Payment Date, the quotient,
expressed as a percentage of (a) the Aggregate Discounted Contract Principal
Balance of all Contracts as to which all or a portion of a Scheduled Payment
remained unpaid for more than 30 days from its due date, determined as of the
end of the immediately preceding calendar month, divided by (b) the Aggregate
Discounted Contract Principal Balance of all Contracts as of the last day of the
immediately preceding calendar month (including any Contracts which were
repossessed or substituted).
Delinquent Contract: As of any Determination Date, any Contract (other than
a Contract which became a Defaulted Contract prior to such Determination Date)
with respect to which all or a portion of any Scheduled Payment was not received
when due by the Servicer as of the close of business on the last day of the
month in which such payment was due.
Determination Date: With respect to a Payment Date, a date which is the
eighth day of the calendar month in the month in which such Payment Date occurs,
or if such day is not a Business Day, the immediately preceding Business Day;
provided, however, that in no event shall such Determination Date be later than
two Business Days prior to such Payment Date.
Discounted Contract Principal Balance: With respect to any Contract, on any
Determination Date, the sum of the present value of all of the remaining
Scheduled Payments becoming due under such Contract after the end of the prior
Collection Period, discounted monthly at the Discount Rate in the manner
described below; provided, however, that except to the extent expressly provided
in the Servicing Agreement, the Discounted Contract Principal Balance of any
Defaulted Contract, Early Termination Contract, or Expired Contract or Contract,
purchased by First Sierra pursuant to the Servicing Agreement, shall be equal to
zero.
In connection with all calculations required to be made pursuant to the
Transaction Documents with respect to the determination of Discounted Contract
Principal Balances, for any date of determination the "Discounted Contract
Principal Balance" for each Contract shall be calculated assuming:
(i) Scheduled Payments are due on the last day of each Collection
Period;
(ii) Scheduled Payments are discounted on a monthly basis using a 30
day month and a 360 day year; and
(iii) Scheduled Payments are discounted to the last day of the
Collection Period prior to the Determination Date.
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Early Termination Contract: Any Contract that has terminated pursuant to
the terms of such Contract prior to its scheduled expiration date, other than a
Defaulted Contract.
Excluded Amounts: Any payments received from an Obligor or a Source in
connection with any application fees, tax processing fees, wire transfer fees,
express mail fees, insurance premiums, late charges and other penalty amounts,
taxes, fees or other charges imposed by any governmental authority, any
indemnity payments made by an Obligor for the benefit of the obligee under the
related Contract or any payments collected from an Obligor or received from a
Source relating to servicing and/or maintenance payments pursuant to the related
Contract or maintenance agreement, as applicable, or any other non-rental
charges reimbursable to the Servicer in accordance with the Servicer's customary
policies and procedures plus any collections as to which the Servicer has made
an unreimbursed Servicer Advance.
Expired Contract: Any Contract that has terminated on its scheduled
expiration date.
Final Scheduled Payment: With respect to any Contract, any payment set
forth in such Contract other than the regular Scheduled Payment which is
required to be paid by the related Obligor at the maturity of such Contract.
Gross Charge-Off Event: Exists on any Payment Date on which the average of
the Gross Charge-Off Ratio for such Payment Date and the two immediately
preceding Payment Dates exceeds 2.5%.
Gross Charge-Off Ratio: With respect to any Payment Date, 12 times the
quotient, expressed as a percentage, of (a) the Aggregate Discounted Contract
Principal Balance of all Contracts that become Defaulted Contracts during the
immediately preceding calendar month less all recoveries received during the
immediately preceding calendar month, including, but not limited to, Source
buybacks, Source reserve fund payments, liquidation proceeds and residual
proceeds, divided by (b) the Aggregate Discounted Contract Principal Balance of
all Contracts as of the end of the immediately preceding calendar month. For the
purposes of the calculation of the Gross Charge-Off Ratio, the Discounted
Contract Principal Balance of any Contract which is a Defaulted Contract shall
not be zero, but shall instead be calculated as provided in the definition of
Discounted Contract Principal Balance without reference to the last proviso in
such definition.
Initial Class A Note Principal Balance: $___________.
Initial Class B-1 Note Principal Balance: $____________.
Initial Class B-2 Note Principal Balance: $__________.
Initial Class B-3 Note Principal Balance: $__________.
Initial Unpaid Amount: With respect to a Contract, the excess of (x) the
aggregate amount of all Scheduled Payments due prior to the Cut-Off Date over
(y) the aggregate of all Scheduled Payments made prior to the Cut-Off Date with
respect to such Contract.
Interest Accrual Period: With respect to any Payment Date, the period from
and including the prior Payment Date to but excluding such Payment Date and with
respect to the initial Payment Date, the period from and including September 10,
1997 to but excluding such Payment Date.
Majority Holders: The applicable Noteholders that together own Notes with
an aggregate Percentage Interest in excess of 50%.
Percentage Interest: With respect a Noteholder and a Class of Notes on any
date of determination, the percentage obtained by dividing the Note Principal
Balance of the Note held by such Noteholder by the related Note Principal
Balance of the related Class of Notes as of the Cut- Off Date.
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Premium Amount: With respect to any Payment Date, the product of (a)
one-twelfth, (b) the Premium Rate and (c) the Class A Note Principal Balance as
of the end of the immediately preceding Collection Period.
Prepayment: With respect to a Collection Period and a Contract (except a
Defaulted Contract), the amount received by the Servicer during such Collection
Period from or on behalf of an Obligor with respect to such Contract in excess
of the sum of (x) the Scheduled Payment and any Final Scheduled Payment due, or
any Purchase Option Payment made during such Collection Period, plus (y) the
aggregate of any overdue Scheduled Payments, Initial Unpaid Amounts and unpaid
Servicing Charges for such Contract, so long as such amount is designated by the
Obligor as a prepayment and the Servicer has consented to such prepayment.
Neither Residual Receipts nor Defaulted Contract Recoveries are Prepayments.
Prepayment Amount: With respect to a Payment Date and a Contract, an
amount, without duplication, equal to the sum of (i) the Discounted Contract
Principal Balance as of the close of business on the second preceding Collection
Period (without any deduction for any security deposit paid by an Obligor,
unless such security deposit has been deposited in the Collection Account
pursuant to the Servicing Agreement); (ii) the product of (x) such Contract's
Discounted Contract Principal Balance as of the immediately preceding Payment
Date and (y) one-twelfth of the Discount Rate; (iii) any Scheduled Payments
theretofore due and not paid by an Obligor; and (iv) any Final Scheduled Payment
or Purchase Option Payment due or to become due under the Contract.
Purchase Option Payment: With respect to a Contract, any payment set forth
in such Contract payable by the Obligor (including any security deposit applied
in respect thereof) upon the exercise of a purchase option for the Equipment
relating to such Contract, whether or not the Obligor actually exercises such
purchase option, or with respect to any Contract which does not set forth a
purchase option, any payment made by an Obligor to purchase the Equipment
relating to such Contract at the end of the term of such Contract.
Reimbursement Amount: As of any Payment Date, the sum of (x)(i) all Insured
Payments previously received by the Indenture Trustee from the Note Insurer and
not previously repaid to the Note Insurer pursuant to the Indenture plus (ii)
interest accrued on each such Insured Payment not previously repaid to the Note
Insurer from the date the Indenture Trustee received the related Insured Payment
to, but not including, such Payment Date and (y)(i) any amounts then due and
owing to the Note Insurer under the Insurance Agreement plus (ii) interest on
such amounts.
Repurchase Amount: With respect to a Payment Date and a Contract, the sum,
without duplication, of (i) the Discounted Contract Principal Balance as of the
close of business on the second preceding Collection Period (without any
deduction for any security deposit paid by an Obligor, unless such security
deposit has been deposited in the Collection Account pursuant to the Servicing
Agreement); (ii) the product of (x) such Contract's Discounted Contract
Principal Balance as of the beginning of the immediately preceding Collection
Period and (y) one-twelfth of the Discount Rate; (iii) any Scheduled Payments
theretofore due and not paid by an Obligor; and (iv) any Final Scheduled Payment
or Purchase Option Payment due or to become due under the Contract.
Residual Receipts: All Purchase Option Payments to the extent such proceeds
exceed any Scheduled Payments and Final Scheduled Payments remaining unpaid.
Restricting Event: An event which shall occur on a Payment Date on which
(a) an Event of Servicing Termination has occurred under the Servicing Agreement
and is not cured within the grace period set forth in the Servicing Agreement,
(b) the Note Insurer makes an Insured Payment, (c) a Gross Charge-Off Event
exists, or (d) a Delinquency Trigger Event exists.
Scheduled Payments: With respect to a Payment Date and a Contract, the
periodic payment (exclusive of any amounts in respect of insurance or taxes, and
reflecting any adjustment for partial Prepayments, and further reflecting the
effect of any permitted modification to such Contract) set forth in such
Contract due from the Obligor in the related Collection Period; provided,
however, that with respect to any Contract as to which First Sierra retained the
security deposit, Scheduled Payment shall not include the final payment or
payments to be made thereon equal to the amount of such security deposit..
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Substitute Contract Cut-Off Date: With respect to a Substitute Contract,
the close of business on the first day of the calendar month in which the
related Transfer Date occurs.
Trust Certificate Principal Balance: As of any Payment Date, the
difference, if any, between (i) the sum of (x) the Aggregate Discounted Contract
Principal Balances of all Contracts as of the end of the immediately preceding
Collection Period and (y) the Aggregate Discounted Contract Principal Balances
as of the day prior to such Payment Date of all Substitute Contracts to be
conveyed to the Trust on such Payment Date and (ii) the sum of (w) the
outstanding Class A Note Principal Balance, (x) the outstanding Class B-1 Note
Principal Balance, (y) the outstanding Class B- 2 Note Principal Balance and (z)
the outstanding Class B-3 Note Principal Balance, after taking into account any
distributions on such Payment Date.
Trust Operating Expenses: With respect to any Payment Date, an amount equal
to the amounts owing to the Servicer, the Back-up Servicer, the Note Insurer and
the Indenture Trustee pursuant to the Indenture and payable out of Available
Funds in priority to amounts owing the Noteholders.
Withholding
The Indenture Trustee is required to comply with all applicable federal
income tax withholding requirements respecting payments to Noteholders of
interest with respect to the Notes. The consent of Noteholders is not required
for such withholding. In the event the Noteholder is other than DTC, then in the
event that the Indenture Trustee does withhold or causes to be withheld any
amount from interest payments or advances thereof to any Noteholders pursuant to
federal income tax withholding requirements, the Indenture Trustee shall
indicate the amount withheld annually to such Noteholders.
Reports to Noteholders
On each Payment Date the Indenture Trustee will furnish or cause to be
furnished with each payment to Noteholders, a statement prepared by the Servicer
setting forth the following information (per $1,000 of Initial Note Principal
Amount as to (a) and (b) below):
a. With respect to a statement to a Class A Noteholder or a Class B
Noteholder, the amount of such payment allocable to such Noteholder's
required payment of the Base Principal Amount and Class A Overdue
Principal, Class B-1 Overdue Principal, Class B-2 Overdue Principal or
Class B-3 Overdue Principal;
b. With respect to a statement to a Class A Noteholder or a Class B
Noteholder, the amount of such payment allocable to Class A Note Current
Interest, Class B-1 Note Current Interest, Class B-2 Note Current Interest
or Class B-3 Note Current Interest and Class A, Class B-1, Class B-2 or
Class B-3 Overdue Interest;
c. The aggregate amount of fees and compensation received by the
Servicer pursuant to the Servicing Agreement for the Collection Period;
d. The aggregate Class A Note Principal Balance, the aggregate Class
B-1 Note Principal Balance, the aggregate Class B-2 Note Principal Balance,
the aggregate Class B-3 Note Principal Balance, the Class A Note Factor,
the Class B-1 Note Factor, the Class B-2 Note Factor, the Class B- 3 Note
Factor, the Pool Factor and the Aggregate Discounted Contract Principal
Balance, after taking into account all distributions made on such Payment
Date;
e. The total unreimbursed Servicer Advances with respect to the
related Collection Period;
f. The amount of Residual Receipts and Defaulted Contract Recoveries
for the related Collection Period and the Aggregate Discounted Contract
Principal Balances for all Contracts that became Defaulted Contracts during
the related Collection Period, calculated immediately prior to the time
such Contracts became Defaulted Contracts; and
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g. The total number of Contracts and the Aggregate Discounted Contract
Principal Balances thereof, together with the number and aggregate
Discounted Contract Principal Balances of all Contracts as to which the
Obligors, as of the related Calculation Date, were one, two, three or four
Scheduled Payments delinquent, and Delinquent Contracts reconveyed.
The "Class A Note Factor" is the seven digit decimal number that the
Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class A Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class A Note Principal Amount.
The "Class B-1 Note Factor" is the seven digit decimal number that the
Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class B-1 Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class B-1 Note Principal Amount.
The "Class B-2 Note Factor" is the seven digit decimal number that the
Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class B-2 Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class B-2 Note Principal Amount.
The "Class B-3 Note Factor" is the seven digit decimal number that the
Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class B-3 Note Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Initial Class B-3 Note Principal Amount.
The "Pool Factor" is the seven digit decimal number that the Servicer will
compute or cause to be computed for each Collection Period and will make
available on the related Determination Date representing the ratio of (x) the
Aggregate Discounted Contract Principal Balance as of the end of the immediately
preceding Collection Period to (y) the Aggregate Discounted Contract Principal
Balance as of the Cut-Off Date.
In addition, by January 31 of each calendar year following any year during
which the Notes are outstanding, commencing January 31, 1998, the Indenture
Trustee will furnish to each Noteholder of record at any time during such
preceding calendar year, information as to the aggregate of amounts reported
pursuant to items (a) and (b) above for such calendar year to enable Noteholders
to prepare their federal income tax returns.
Optional Redemption
The Indenture will provide that, subject to the consent of the Note Insurer
on any Payment Date, following the Record Date on which the Aggregate
Outstanding Principal Balance of the Notes is less than 10% of the Aggregate
Initial Note Principal Balance, Transferor will have the option to cause the
early retirement of the Notes. In the event of such a redemption, the entire
outstanding Class A Note Principal Balance, the Class B-1 Note Principal
Balance, the Class B-2 Note Principal Balance, the Class B-3 Note Principal
Balance, together with accrued interest thereon at the related Note Rate, will
be required to be paid to the Class A Noteholders, the Class B-1 Noteholders,
the Class B-2 Noteholders, and the Class B-3 Noteholders, respectively, on such
Payment Date and all amounts owed to the Note Insurer and the Class B-2 credit
provider will be paid to the Note Insurer and the Class B-2 credit provider,
respectively, on such Payment Date.
Remittance and Other Servicing Procedures
The Servicer has agreed to manage, administer and service the Receivables
and to enforce and make collections on the Receivables and any Insurance
Policies, exercising the degree of skill and care consistent
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with that which the Servicer customarily exercises with respect to similar
property owned, managed or serviced by it.
The Servicer may grant to an Obligor any rebate, refund or adjustment that
the Servicer in good faith believes is required, because of Prepayment in full
of a Contract. The Servicer may deduct the amount of any such rebate, refund or
adjustment from the amount otherwise payable by the Servicer into the Collection
Account; provided, however, that the Servicer will not permit any rescission or
cancellation of any Contract which would materially impair the rights of the
Trust, the Note Insurer, the Class B-2 credit provider or the Noteholders in the
Contracts or the proceeds thereof, nor will the prepayment price after giving
effect to any such rebate, refund or adjustment (and without any adjustment for
any security deposit previously paid by the Obligor) be less than the Prepayment
Amount. The Servicer may waive, modify or vary any term of a Contract if the
Servicer, in its reasonable and prudent judgment, determines that it will not be
materially adverse to the Noteholders, the Class B-2 credit provider or the Note
Insurer. However, the Servicer will covenant in the Servicing Agreement that (i)
it will not forgive any payment of rent, principal or interest, (ii) unless an
Obligor is in default, it will not permit any modification with respect to a
Contract which would defer the payment of any principal or interest or any
Scheduled Payment or change the final maturity date on any Contract; provided,
however, that no change in the final maturity date of any Contract shall be
permitted under any circumstances if such new maturity date is later than the
latest maturity date of any other Contract then held by the Trust, and (iii) the
Servicer may accept Prepayment in part or in full; provided, further, that (1)
in the event of Prepayment in full, the Servicer may consent to such Prepayment
only in an amount not less than the Prepayment Amount and (2) in the event of a
partial Prepayment, the Servicer may consent to such partial Prepayment only if
(x) following such partial Prepayment there are no delinquent amounts then due
from the Obligor and (y) such partial Prepayment will not reduce the Discounted
Contract Principal Balance by more than an amount equal to (I) the amount of
such partial Prepayment, minus (II) unpaid interest at the Discount Rate,
accrued through the end of the Collection Period immediately following such
partial Prepayment on the outstanding Discounted Contract Principal Balance
prior to such partial Prepayment. In the case of a partial Prepayment, the
Servicer is required to accurately recalculate the Discounted Contract Principal
Balance, and the allocation of Scheduled Payments to principal and interest.
Servicing Compensation and Payment of Expenses
For its servicing of the Contracts, the Servicer will receive servicing
compensation including the monthly Servicer Fee for each Collection Period
(payable on the next succeeding Payment Date) and Servicing Charges.
The servicing compensation will compensate the Servicer for customary
equipment contract servicing activities to be performed by the Servicer for the
Trust, additional administrative services performed by the Servicer on behalf of
the Trust and expenses paid by the Servicer on behalf of the Trust.
The Servicer, as an independent contractor on behalf of the Trust and for
the benefit of the Noteholders, the Note Insurer and the Class B-2 credit
provider (as their interests may appear) will be responsible for the managing,
servicing and administering the Receivables and enforcing and making collections
on the Contracts and any Insurance Policies and for the enforcing of any
security interest in any item of Equipment, all as set forth in the Servicing
Agreement. The Servicer's responsibilities will include collecting and posting
of all payments, responding to inquiries of Obligors, investigating
delinquencies, accounting for collections, furnishing monthly and annual
statements to the Indenture Trustee, the Class B-2 credit provider and the Note
Insurer with respect to distributions, making Servicer Advances, providing
appropriate federal income tax information for use in providing information to
Noteholders, collecting and remitting sales and property taxes on behalf of
taxing authorities and maintaining the perfected security interest of the Trust
in the Equipment and the Contracts.
Evidence as to Compliance
The Servicing Agreement requires that the Servicer cause an independent
accountant (who may also render other services to the Servicer) to prepare a
statement to the Indenture Trustee, the Note Insurer, the Class B-2 credit
provider and each Rating Agency dated not later than April 30, 1998, and
annually as of the same month thereafter, to the effect that the independent
accountant has examined the servicing procedures, manuals, guides and records of
the Servicer and the accounts and records of the Servicer relating to the
Receivables and the Contract
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Files (which procedures, manuals, guides and records shall be described in one
or more schedules to such statement), that such firm has compared the
information contained in the Servicer's Certificates delivered in the relevant
period with information contained in the accounts and records for such period
and that, on the basis of such examination and comparison, nothing has come to
the independent accountant's attention to indicate that the Servicer has not,
during the relevant period, serviced the Receivables in compliance with such
servicing procedures, manuals and guides and in the same manner required by the
Servicer's standards and with the same degree of skill and care consistent with
that which the Servicer customarily exercises with respect to similar property
owned by it, that such accounts and records have not been maintained in
accordance with the Servicing Agreement, that the information contained in the
Servicer's Certificates does not reconcile with the information contained in the
accounts and records or that such certificates, accounts and records have not
been properly prepared and maintained in all material respects, except in each
case for (a) such exceptions as the independent accountant shall believe to be
immaterial and (b) such other exceptions as shall be set forth in such
statement. On or before April 30 of each year, commencing on April 30, 1998, the
Servicer shall deliver to the Indenture Trustee, the Note Insurer and each
Rating Agency a copy of such statement.
The Servicing Agreement will also provide for annual delivery of a report
(the "Supplementary Report") by the Servicer to the Indenture Trustee, the Class
B-2 credit provider and the Note Insurer not later than 120 days after the end
of each fiscal year, signed by an authorized officer of the Servicer (a
"Servicing Officer") on behalf of the Servicer and dated as of the last day of
such fiscal year, stating that (a) a review of the activities of the Servicer
and the Servicer's performance under the Servicing Agreement for the previous
12-month period has been made under such Servicing Officer's supervision and (b)
nothing has come to such Servicing Officer's attention to indicate that an Event
of Servicing Termination has occurred, or, if such Event of Servicing
Termination has so occurred and is continuing, specifying each such event known
to the officer, the nature and status thereof and the steps necessary to remedy
such event.
The Servicing Agreement will provide that the Servicer, upon request of the
Indenture Trustee, will furnish to the Indenture Trustee such underlying data
necessary for administration of the Trust or enforcement actions as can be
generated by the Servicer's existing data processing system.
Certain Matters Relating to the Servicer
The Servicing Agreement will provide that the Servicer may not resign from
its obligations and duties as Servicer thereunder, except upon consent of the
Note Insurer or a determination that the Servicer's performance of such duties
is no longer permissible under applicable law. The Servicer can only be removed
pursuant to an Event of Servicing Termination as discussed below.
Events of Servicing Termination
An "Event of Servicing Termination" under the Servicing Agreement will
occur (a) if there occurs a change of "control" of the Servicer ("control"
having the meaning ascribed to it in the Rules and Regulations under the
Securities Exchange Act of 1934, as amended), unless the Note Insurer has
determined that such change in control does not have a material adverse effect
on the interests of the Note Insurer; (b) if the Servicer fails to make (i) any
Servicing Advance within three Business Days or (ii) any other payment or
deposit required under the Servicing Agreement within three Business Days but
not more than once in any Collection Period; (c) if the Servicer fails to submit
a Servicer's Certificate, within three Business Days following knowledge or
notice of non-receipt; (d) (i) if the Servicer fails to observe or perform in
any material respect any other covenant or agreement in the Servicing Agreement
or the Notes or (ii) if any representation or warranty of the Servicer in the
Servicing Agreement is incorrect, and such failure or breach materially and
adversely affects the rights of the Indenture Trustee, the Note Insurer, the
Class B-2 credit provider or the Noteholders and continues unremedied for 30
days after the earlier to occur of (x) written notice to the Servicer by the
Indenture Trustee or to the Indenture Trustee or the Servicer by any
Noteholders, the Note Insurer, the Class B-2 credit provider or (y) the date on
which any Servicing Officer or authorized officer of the Indenture Trustee
knows, or reasonably should have known, of such failure or of such breach; (e)
upon the filing of an involuntary petition in bankruptcy or the decree or order
of a court, agency or supervisory authority having jurisdiction over the
Servicer for the appointment of a conservator, receiver, trustee in bankruptcy
or liquidator in any bankruptcy, insolvency or similar proceedings, and the
continuance of any such petition, decree or order undismissed or unstayed and in
effect for a period of 60
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consecutive days; (f) upon the voluntary filing of such petition or assignment
for the benefit of creditors, the consent by the Servicer to any such
appointment, the admission in writing by the Servicer of its inability to pay
its debts as they become due or the determination by a court that the Servicer
is generally not paying its debts as they come due; (g) in the event that the
Servicer assigns or attempts to assign its rights and duties under the Servicing
Agreement except as specifically permitted therein; (h) a final judgment or
order shall be rendered against the Servicer for payment in excess of $500,000
and continues for 90 days without a stay; or (i) upon the occurrence of any
other event specified in the Insurance Agreement.
Rights Upon an Event of Servicing Termination
If an Event of Servicing Termination has occurred and is continuing, either
the Indenture Trustee shall at the direction of the Note Insurer or may with the
consent of the Note Insurer or the Majority Holders may with the consent of the
Note Insurer terminate all (but not less than all) of the Servicer's rights and
obligations under the Servicing Agreement. Upon such termination, the Back-up
Servicer will succeed to all the responsibilities, duties and liabilities of the
Servicer under the Servicing Agreement; provided, however, that the Indenture
Trustee shall not (i) assume any obligation to reacquire Receivables by reason
of misrepresentations or breaches of warranties, (ii) be required to make any
Servicer Advance if such Servicer Advance would be prohibited by applicable law
or if the Back-up Servicer determines that the Servicer Advance would not be
reimbursed or (iii) be liable for acts, omissions or breaches of representations
or warranties by the Servicer occurring prior to transfer of the servicing
functions. Notwithstanding such termination, the Servicer shall be entitled to
payment of certain amounts payable to it prior to such termination for services
rendered prior to such termination. The Back-up Servicer also may appoint, or
petition a court of competent jurisdiction for the appointment of, a successor
Servicer acceptable to the Note Insurer in accordance with the procedures set
forth in the Servicing Agreement.
Events of Default
Upon the occurrence of an Event of Default, the Indenture Trustee, upon the
direction of the Controlling Parties, shall declare the unpaid principal amount
of all the Notes to be due and payable together with all accrued and unpaid
interest thereon without presentment, demand, protest or other notice of any
kind, all of which are waived by the Trust. "Events of Default" wherever used
herein means any one of the following events:
(i) failure to distribute or cause to be distributed to the Indenture
Trustee, for the benefit of the Noteholders, all or part of any payment of
interest required to be made under the terms of such Notes or the Indenture when
due; or
(ii) failure to distribute or cause to be distributed (x) to the Indenture
Trustee, for the benefit of the Noteholders, on any Payment Date an amount equal
to the principal due on the outstanding Notes as of such Payment Date to the
extent that sufficient Available Funds are on deposit in the Collection Account
or (y) on the Class A Maturity Date, Class B-1 Maturity Date, Class B-2 Maturity
Date or the Class B-3 Maturity Date, as the case may be, any remaining principal
owed on the outstanding Class A Notes, Class B-1 Notes, Class B-2 Notes or Class
B-3 Notes, as the case may be.
"Controlling Parties" means: (i) with respect to an Event of Default
resulting only from the failure to make a required payment on the Class B-3
Notes, (a) Majority Holders of the Class B-1 Notes, the Class B-2 Notes and the
Class B-3 Notes, (b) the Note Insurer, but if the Note Insurer has defaulted on
its obligations under the Note Insurance Policy and such default is continuing,
the Majority Holders of the Class A Notes, and (c) the Class B-2 credit
provider, but only if the Class B-2 credit provider has not defaulted on its
obligations under the letter of credit supporting the Class B-2 Notes; (ii) with
respect to an Event of Default resulting only from the failure to make a
required payment on the Class B-2 Notes and the Class B-3 Notes, (a) the
Majority Holders of the Class B-1 Notes and the Class B-2 Notes, (b) the Note
Insurer, but if the Note Insurer has defaulted on its obligations under the Note
Insurance Policy and such default is continuing, the Majority Holders of the
Class A Notes, and (c) the Class B-2 credit provider, but only if the Class B-2
credit provider has not defaulted on its obligations under the letter of credit
supporting the Class B-2 Notes; (iii) with respect to
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an Event of Default resulting only from the failure to make a required payment
on the Class B-1 Notes, the Class B-2 and the Class B-3 Notes, (a) the Majority
Holders of the Class B-1 Notes and (b) the Note Insurer, but if the Note Insurer
has defaulted on its obligations under the Note Insurance Policy and such
default is continuing, the Majority Holders of the Class A Notes; and (iv) with
respect to an Event of Default resulting from the failure to make a required
payment on the Class A Notes, the Note Insurer, but if the Note Insurer has
defaulted on its obligations under the Note Insurance Policy and such default is
continuing, the Majority Holders of the Class A Notes.
Notwithstanding the foregoing, in the event that an Event of Default is
declared by the Controlling Parties without the consent of the Note Insurer,
during the occurrence and continuation of a default by the Note Insurer under
the Note Insurance Policy, and payments on the Class A Notes are accelerated,
such accelerated payments will not be covered by the Note Insurer under the Note
Insurance Policy and Insured Payments on the Class A Notes shall remain due and
payable by the Note Insurer in accordance with the original terms of the Note
Insurance Policy regardless of any such acceleration of the Class A Notes.
Termination of the Trust
The Trust and the Indenture will terminate, (i) at the option of the
Residual Holder, at any time which is 123 days after the payment to the Class A
Noteholders and the Class B Noteholders of all amounts required to be paid to
them pursuant to the Indenture, reducing the Class A Note Principal Balance, the
Class B-1 Note Principal Balance, the Class B-2 Note Principal Balance and the
Class B-3 Note Principal Balance to zero or (ii) after the 120th day following
the Expected Final Payment Date. Upon termination of the Trust and the reduction
of the Class A Note Principal Balance, the Class B-1 Note Principal Balance, the
Class B-2 Note Principal Balance and the Class B-3 Note Principal Balance to
zero and payment of any amounts then owing to the Note Insurer, the Class B-2
credit provider and the Indenture Trustee, any remaining property then held by
the Trust shall be distributed to the Residual Holder.
The respective representations, warranties and indemnities of First Sierra,
the Servicer and the Depositor will survive any termination of the Trust and the
Indenture.
Amendment
The Transaction Documents may be amended by agreement of the Indenture
Trustee, the Depositor and the Servicer at any time, without consent of the
Noteholders, but with the consent of the Note Insurer, to cure any ambiguity,
upon receipt of an opinion of counsel to the Servicer that such amendment will
not adversely affect in any respect the interests of any Noteholder.
The Transaction Documents may also be amended from time to time by the
Indenture Trustee, the Depositor, the Servicer, the Note Insurer and the
Majority Holders for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Transaction Documents or of
modifying in any manner the rights of the Noteholders; provided, however, that
no such amendment shall (a) increase or reduce in any manner the amount of, or
accelerate or delay the timing of, collections of payments on the Receivables or
distributions which are required to be made on any Note without the consent of
the holder of such Note or (b) reduce the aforesaid percentage of Noteholders
required to consent to any amendment, without unanimous consent of the
Noteholders; provided, further, that no such amendment shall materially and
adversely affect the interests of the Class B-2 credit provider without the
consent of the Class B-2 credit provider.
The Indenture Trustee is required under the Indenture to furnish
Noteholders and the Rating Agencies with written notice of the substance of any
such amendment to the Indenture promptly upon execution of such amendment.
THE INDENTURE TRUSTEE
General
The Indenture Trustee, Bankers Trust Company, has an office at Four Albany
Street, New York, New York 10006.
The Indenture Trustee may resign, subject to the conditions set forth
below, at any time upon written notice to the Depositor, the Note Insurer, the
Class B-2 credit provider and the Servicer, in which event
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the Servicer will be obligated to appoint a successor Indenture Trustee. If no
successor Indenture Trustee shall have been so appointed and have accepted such
appointment within 30 days after the giving of such notice of resignation, the
resigning Indenture Trustee may petition a court of competent jurisdiction for
the appointment of a successor Indenture Trustee. Any successor Indenture
Trustee shall be acceptable to the Note Insurer and shall meet the financial and
other standards for qualifying as a successor Indenture Trustee under the
Indenture. The Servicer may with the consent of the Note Insurer and shall at
the direction of the Note Insurer, or Noteholders of any Class evidencing more
than 25% of the Percentage Interests of such Class may, subject to consent of
the Note Insurer, also remove the Indenture Trustee if the Indenture Trustee
ceases to be eligible to continue as such under the Indenture and fails to
resign after written request therefor, or is legally unable to act, or if the
Indenture Trustee is adjudicated to be insolvent. In such circumstances, the
Servicer or such Noteholders will also be obligated to appoint a successor
Indenture Trustee (acceptable to the Note Insurer). The Note Insurer shall also
have the right to remove the Indenture Trustee for "cause" (as defined in the
Indenture). Any resignation or removal of the Indenture Trustee and appointment
of a successor Indenture Trustee will not become effective until acceptance of
the appointment by the successor Indenture Trustee.
Duties and Immunities of the Indenture Trustee
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Servicing Agreement, the Notes (other than the authentication
thereof) or of any Receivable or related document and will not be accountable
for the use or application by First Sierra or the Depositor of any funds paid to
the Depositor in consideration of the sale of any Notes. If no Event of
Servicing Termination has occurred, then the Indenture Trustee will be required
to perform only those duties specifically required of it under the Servicing
Agreement. However, upon receipt of the various resolutions, certificates,
statements, opinions, reports, documents, orders or other instruments required
to be furnished to it, the Indenture Trustee will be required to examine them to
determine whether they conform as to form to the requirements of the Servicing
Agreement.
No recourse is available based on any provision of the Servicing Agreement,
the Notes or any Receivable or assignment thereof against Bankers Trust Company,
in its individual capacity, and Bankers Trust Company shall not have any
personal obligation, liability or duty whatsoever to any Noteholder or any other
person with respect to any such claim and such claim shall be asserted solely
against the Trust Assets or any indemnitor, except for such liability as is
determined to have resulted from the Indenture Trustee's own negligence or
willful misconduct.
The Indenture Trustee will be entitled to receive, pursuant to the priority
set forth in the Indenture, (a) reasonable compensation for its services (the
"Indenture Trustee Fee"), (b) reimbursement for its reasonable expenses and (c)
indemnification for loss, liability or expense incurred without negligence or
bad faith on its part, arising out of performance of its duties thereunder ((b)
and (c) collectively, the "Indenture Trustee Expenses").
THE OWNER TRUSTEE
[Delaware Trust Company] will act as the Owner Trustee under the Trust
Agreement. [Delaware Trust Company is a Delaware banking corporation and its
principal offices are located at _____________________________.]
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on, and the weighted average life of, the
Class A Notes will be directly related to the rate of principal payments on the
underlying Contracts. If purchased at a price other than par, the yield to
maturity will also be affected by the rate of such principal payments. The
principal payments on such Contracts may be in the form of scheduled principal
payments or liquidations due to default, casualty, repurchases for breach and
the like. Any such payments will result in distributions to Class A Noteholders
of amounts which would otherwise have been distributed over the remaining term
of the Contracts. In general, the rate of such payments may be influenced by a
number of other factors, including general economic conditions. The rate of
payment of principal may also be affected by any removal of the Contracts from
the pool and the deposit of the related Prepayment Amount or Repurchase Amount
into the Collection Account.
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The Contracts generally do not provide for the right of the Obligor to
prepay. Under the Servicing Agreement, the Servicer will be permitted to allow
such Prepayments in full or in part, provided that no Prepayment of a Contract
will be allowed in an amount less than the Prepayment Amount.
The final scheduled Payment Date for the Class A Notes is __________, for
the Class B-1 Notes is __________, for the Class B-2 Notes is __________ and for
the Class B-3 Notes is __________. Such dates are the dates on which the related
Note Principal Balance would be reduced to zero, assuming, among other things,
(i) no Prepayments are received on any of the Contracts and (ii) the Modeling
Assumptions (as defined below) apply. The weighted average life of the Class A
Notes is likely to be shorter than would be the case if payments actually made
on the Contracts conformed to the foregoing assumptions, and the final Payment
Dates with respect to the Class A Notes could occur significantly earlier than
such final scheduled Payment Dates due to defaults, and because First Sierra is
obligated to repurchase Contracts in the event of breaches of representations
and warranties.
"Weighted average life" refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security will
be repaid to the investor. The weighted average lives of the Class A Notes will
be influenced by the rate at which principal payments (including scheduled
payments and prepayments) on the Contracts are made. Principal payments on
Contracts may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments and liquidations due to a
default or other dispositions of the Contracts). The weighted average lives of
the Class A Notes will also be influenced by delays associated with realizing on
Defaulted Contracts. The prepayment model used in this Prospectus Supplement,
the "Conditional Prepayment Rate" or "CPR", represents an assumed annualized
rate of prepayment relative to the then outstanding balance on a pool of
contracts. The CPR assumes that a fraction of the outstanding Contract Pool is
prepaid on each Payment Date, which implies that each Contract in the Contract
Pool is equally likely to prepay. This fraction, expressed as a percentage, is
annualized to arrive at the CPR for the Contract Pool. The CPR measures
prepayments based on the outstanding principal on the previous Payment Date. The
CPR further assumes that all Contracts are the same size and amortize at the
same rate and that each Contract will be either paid as scheduled or prepaid in
full.
Weighted Average Lives of the Class A Notes
For the purpose of the table below, it is assumed, among other things,
that: (i) the Closing Date for the Notes occurs on September ___, 1997, (ii)
distributions on the Notes are made on the 10th day of each month regardless of
the day on which the Payment Date actually occurs, commencing in October 1997 in
accordance with the priorities described herein, (iii) no delinquencies or
defaults in the payment of principal and interest on the Contracts are
experienced, (iv) no Contract is repurchased for breach of a representation and
warranty or otherwise, (v) the Discount Rate is ___% per annum, (vi) Prepayments
with respect to the Contracts are received on the last day of each Collection
Period, commencing on _________(vii) no Restricting Event occurs, (viii) the
Class A Note Rate is ___% per annum, the Class B-1 Note Rate is ___% per annum,
the Class B-2 Note Rate is ___% per annum, and the Class B-3 Note Rate is ___%
per annum, (ix) the Servicing Fee is 0.50% per annum and the sum of the
Indenture Trustee and Back-up Servicer Fees is ____% per annum, (x) the Contract
pool consists of a single contract with a Discounted Contract Principal Balance
equal to $__________ and (xi) Scheduled Payments on such contract are timely
received (collectively, the "Modeling Assumptions").
Since the table was prepared on the basis of the Modeling Assumptions,
there are discrepancies between the characteristics of the actual Contracts and
the characteristics of the Contracts assumed in preparing the table. Any such
discrepancies may have an effect upon the percentages of the Class A Note
Principal Balance outstanding and weighted average lives of the Class A Notes
set forth in the table. In addition, since the actual Contracts in the Trust
have characteristics which differ from those assumed in preparing the table set
forth below, the related weighted average life may be longer or shorter than as
indicated in the table.
The following table sets forth the percentages of the initial principal
amount of the Class A Notes that would be outstanding after each of the dates
shown, assuming a CPR of 0%, 1%, 2% and 3%, respectively.
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PERCENTAGE OF INITIAL NOTE
PRINCIPAL BALANCE OUTSTANDING
Class A Notes
Prepayment Speed (CPR)
Payment 0% 1% 2% 3%
Date
- --------------------------------------------------------------------------------
Closing Date % % % %
December 10, 1997 % % % %
March 10, 1998 % % % %
June 10, 1998 % % % %
September 10, 1998 % % % %
December 10, 1998 % % % %
March 10, 1999 % % % %
June 10, 1999 % % % %
September 10, 1999 % % % %
December 10, 1999 % % % %
March 10, 2000 % % % %
June 10, 2000 % % % %
September 10, 2000 % % % %
December 10, 2000 % % % %
March 10, 2001 % % % %
June 10, 2001 % % % %
September 10, 2001 % % % %
December 10, 2001 % % % %
March 10, 2002 % % % %
June 10, 2002 % % % %
September 10, 2002 % % % %
December 10, 2002 % % % %
March 10, 2003 % % % %
June 10, 2003 % % % %
September 10, 2003 % % % %
December 10, 2003 % % % %
- --------------------------------------------------------------------------------
Weighted Average
Life (years)
S-54
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The Contracts will not have the characteristics assumed above, and there
can be no assurance that (i) the Contracts will prepay at any of the rates shown
in the table or at any other particular rate or will prepay proportionately or
(ii) the weighted average lives of the Class A Notes will be as calculated
above. Because the rate of distributions of principal of the Class A Notes will
be a result of the actual amortization (including prepayments) of the Contracts,
which will include Contracts that have remaining terms to stated maturity
shorter or longer than those assumed, the weighted average lives of the Class A
Notes will differ from those set forth above, even if all of the Contracts
prepay at the indicated constant prepayment rates.
The effective yield to Class A Noteholders will depend upon, among other
things, the price at which such Class A Notes are purchased, and the amount of
and rate at which principal, including both scheduled and unscheduled payments
thereof, is paid to the Class A Noteholders. See "Risk Factors - Maturity and
Prepayment Considerations" in the Prospectus.
Due to the subordination provisions applicable to the Notes, it is likely
that the Class A Principal Balance will amortize more rapidly than will the
Initial Aggregate Discounted Contract Principal Balance. See "Summary of Terms
- -- Subordination Provisions" and "Description of Notes -- Flow of Funds" in this
Prospectus Supplement.
THE NOTE INSURANCE POLICY
AND THE NOTE INSURER
The following information has been supplied by the Note Insurer for
inclusion in this Prospectus Supplement.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Note Insurance Policy, thereby unconditionally and
irrevocably guarantees to any Owner (as defined below) that an amount equal to
each full and complete Insured Payment will be received by the Indenture
Trustee, or its successor, on behalf of the Owners from the Note Insurer for
distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of such Insured Payment. The Note Insurer's obligations
under the Note Insurance Policy with respect to a particular Insured Payment
shall be discharged to the extent funds equal to the applicable Insured Payment
are received by the Indenture Trustee, whether or not such funds are properly
applied by the Indenture Trustee. Insured Payments shall be made only at the
time set forth in the Note Insurance Policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the Class A Notes, unless such
acceleration is at the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Note Insurance Policy does not
cover shortfalls, if any, attributable to the liability of the Trust or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Note Insurer will pay any Insured Payment that is a Preference Amount
(as described below) on the Business Day following receipt on a Business Day by
the Fiscal Agent (as described below) of (i) a certified copy of the order
requiring the return of a preference payment, (ii) an opinion of counsel
satisfactory to the Note Insurer that such order is final and not subject to
appeal, (iii) an assignment in such form as is reasonably required by the Note
Insurer, irrevocably assigning to the Note Insurer all rights and claims of the
Owner relating to or arising under the Class A Notes against the debtor which
made such preference payment or otherwise with respect to such preference
payment and (iv) appropriate instruments to effect the appointment of the Note
Insurer as agent for such Owner in any legal proceeding related to such
preference payment, such instruments being in a form satisfactory to the Note
Insurer, provided that if such documents are received after 12:00 noon New York
City time on such Business Day, they will be deemed to be received on the
following Business Day. Such payments shall be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on the Class A Notes to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
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The Note Insurer will pay any other amount payable under the Note Insurance
Policy no later than 12:00 noon New York City time on the later of the Payment
Date on which the related Deficiency Amount is due or the second Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A. as Fiscal Agent for the Note Insurer or any successor
fiscal agent appointed by the Note Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon New
York City time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent is not
in proper form or is otherwise insufficient for the purpose of making a claim
under the Note Insurance Policy it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Note Insurer or the
Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee
and the Indenture Trustee may submit an amended Notice.
Insured Payments due under the Note Insurance Policy unless otherwise
stated in the Note Insurance Policy will be disbursed by the Fiscal Agent to the
Indenture Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Indenture Trustee
for the payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Note Insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the Note Insurance Policy.
Subject to the terms of the Indenture, the Note Insurer shall be subrogated
to the rights of each Owner to receive payments under the Class A Notes to the
extent of any payment by the Note Insurer under the Note Insurance Policy.
As used in the Note Insurance Policy, the following terms shall have the
following meanings:
"Business Day" means any day other than a Saturday, a Sunday or a day
on which the Note Insurer and banking institutions in New York City or in
the city in which the corporate trust office of the Indenture Trustee is
located are authorized or obligated by law or executive order to close.
"Deficiency Amount" means, as of any Payment Date, the Available Funds
Shortfall.
"Insured Payment" means (i) as of any Payment Date, any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of the exhibit
attached to the Note Insurance Policy, the original of which is
substantially delivered by registered or certified mail, from the Indenture
Trustee specifying the related Insured Payment which shall be due and owing
on the applicable Payment Date.
"Owner" means each holder of a Class A Note (other than the Depositor,
the Servicer or any subservicer) who, on the applicable Payment Date, is
entitled under the terms of the applicable Class A Note, to payment
thereunder.
"Preference Amount" means any amount previously distributed to
an Owner on the Class A Notes that is recoverable and sought to be
recovered as a avoidable preference by a trustee in bankruptcy pursuant
to the United States Bankruptcy Code (11 U.S.C. ss. 101 et seq.), as
amended from time to time (the "Bankruptcy Code"), in accordance with a
final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Note Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Indenture as
of the date of execution of the Note Insurance Policy, without giving effect to
any subsequent amendment or modification to the Indenture unless such amendment
or modification has been approved in writing by the Note Insurer.
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Any notice under the Note Insurance Policy or service of process on the
Fiscal Agent of the Note Insurer may be made at the address listed below for the
Fiscal Agent of the Note Insurer or such other address as the Note Insurer shall
specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Note Insurance Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
The insurance provided by the Note Insurance Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Note Insurance Policy is not cancelable for any reason. The premium on
the Note Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to the maturity of the Class A Notes.
The Note Insurer is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts
of or claims against the Note Insurer. The Note Insurer is domiciled in the
State of New York and licensed to do business in and is subject to regulation
under the laws of all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam. The Note Insurer has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the Note
Insurer, changes in control and transactions among affiliates. Additionally, the
Note Insurer is required to maintain contingency reserves on its liabilities in
certain amounts and for certain periods of time.
The consolidated financial statements of the Note Insurer, a wholly owned
subsidiary of MBIA Inc., 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 Annual
Report on Form 10-K of MBIA, Inc. for the year ended December 31, 1996, and the
consolidated financial statements of the Note Insurer and its subsidiaries for
the six months ended June 30, 1997 and for the periods ending June 30, 1997 and
June 30, 1996 included in the Quarterly Report on Form 10-Q of MBIA Inc. for the
period ending March 31, 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 by reference herein shall be modified or
superseded for purposes of this Prospectus Supplement to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated by reference herein 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 Note Insurer and its subsidiaries included
in documents filed by MBIA Inc. 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 Class
A Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Note Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
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SAP
----------------------------------------
December 31, June 30,
1996 1997
(Audited) (Unaudited)
---------------- ---------------
(In millions)
Admitted Assets $4,476 $4,824
Liabilities 3,009 3,259
Capital and Surplus 1,467 1,565
GAAP
----------------------------------------
December 31, June 30,
1996 1997
(Audited) (Unaudited)
---------------- ---------------
(In millions)
Assets $5,066 $5,408
Liabilities 2,262 2,412
Shareholder's Equity 2,804 2,996
Copies of the financial statements of the Note Insurer incorporated by
reference herein and copies of the Note Insurer's 1996 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Note Insurer is (914) 273-4545.
The Note Insurer does not accept any responsibility for the accuracy or
completeness of the Prospectus or this Prospectus Supplement or any information
or disclosure contained therein or herein, or omitted therefrom or heretofrom,
other than with respect to the accuracy of the information herein regarding the
Note Insurance Policy and Note Insurer set forth under the heading "The Note
Insurance Policy and the Note Insurer".
Moody's Investors Service ("Moody's") rates the claims paying ability of
the Note Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") rates the claims paying ability of the Note Insurer
"AAA."
Fitch Investors Service, L.P. ("Fitch") rates the claims paying ability of
the Note Insurer "AAA."
Each rating of the Note Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Notes, and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Class A Notes. The
Note Insurer does not guaranty the market price of the Class A Notes nor does it
guaranty that the ratings on the Class A Notes will not be revised or withdrawn.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated federal
income tax considerations to investors of the purchase, ownership and
disposition of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the securities.
Tax Characterization of the Trust
Dewey Ballantine, tax counsel to the Trust ("Tax Counsel"), is of the
opinion that, assuming compliance with the terms of the Trust Agreement and
related documents, the Trust will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The parties to the transaction
agree, and the Noteholders will agree by their purchase of Class A Notes, to
treat the Class A Notes as debt for all federal, state and local income tax
purposes. There are no regulations, published rulings or judicial decisions
involving the characterization for federal income tax purposes of securities
with terms substantially the same as the Class A Notes. In general, whether
instruments such as the Class A Notes constitute indebtedness for federal income
tax purposes is a question of fact, the resolution of which is based primarily
upon the economic substance of the instruments and the transaction pursuant to
which they are issued rather than merely upon the form of the transaction or the
manner in which the instruments are labeled. The Internal Revenue Service (the
"IRS") and the courts have set forth various factors to be taken into account in
determining, for federal income tax purposes, whether or not an instrument
constitutes indebtedness and whether a transfer of property is a sale because
the transferor has relinquished substantial incidents of ownership in the
property or whether such transfer is a borrowing secured by the property. On the
basis of its analysis of such factors as applied to the facts and its analysis
of the economic substance of the contemplated transaction, Tax Counsel is
expected to conclude that, for federal income tax purposes, the Class A Notes
will be treated as indebtedness of the Trust, and not as an ownership interest
in the Receivables, or an equity interest in the Trust or in a separate
association taxable as a corporation or other taxable entity.
If the Class A Notes are characterized as indebtedness, interest paid or
accrued on a Class A Note will be treated as ordinary income to the Noteholders
and principal payments on a Class A Note will be treated as a return of capital
to the extent of the Noteholder's basis in the Class A Note allocable thereto.
An accrual method taxpayer will be required to include in income interest on the
Class A Notes when earned, even if not paid, unless it is determined to be
uncollectible. The Trust will report to Noteholders of record and the IRS in
respect of the interest paid and original discount, if any, accrued on the Class
A Notes to the extent required by law.
Although, as described above, it is the opinion of Tax Counsel that, for
federal income tax purposes, the Class A Notes will be characterized as debt,
such opinion is not binding on the IRS and thus no assurance can be given that
such a characterization will prevail. If the IRS successfully asserted that the
Class A Notes did not represent debt for federal income tax purposes, holders of
the Class A Notes would likely be treated as owning an interest in a partnership
and not an interest in an association (or publicly traded partnership) taxable
as a corporation. If the Noteholders were treated as owning an equitable
interest in a partnership, the partnership itself would not be subject to
federal income tax; rather each partner would be taxed individually on their
respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount, timing and characterization of items of
income and deductions for a Noteholder would differ if the Notes were held to
constitute partnership interests, rather than indebtedness. Since the Trust will
treat the Class A Notes as indebtedness for federal income tax purposes, the
Servicer will not attempt to satisfy the tax reporting requirements that would
apply under this alternative characterization of the Class A Notes. Investors
that are foreign persons are strongly advised to consult their own tax advisors
in determining the federal, state, local and other tax consequences to them of
the purchase, ownership and disposition of the Class A Notes.
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<PAGE>
Original Issue Discount. It is anticipated that the Class A Notes will not
have any original issue discount ("OID") other than possibly OID of a de minimis
amount and that accordingly the provisions of sections 1271 through 1273 and
1275 of the Internal Revenue Code of 1986, as amended (the "Code"), generally
will not apply to the Class A Notes. OID will be considered de minimis if it is
less than 0.25% of the principal amount of a Note multiplied by its expected
weighted average life. The prepayment assumption will be used for purposes of
computing OID, if any, for federal income tax purposes is 100% of the CPR.
Market Discount. A subsequent purchaser who buys a Class A Note for less
than its principal amount may be subject to the "market discount" rules of
Section 1276 through 1278 of the Code. If a subsequent purchaser of a Class A
Note disposes of such Class A Note (including certain nontaxable dispositions
such as a gift), or receives a principal payment, any gain upon such sale or
other disposition will be recognized, or the amount of such principal payment
will be treated as ordinary income to the extent of any "market discount"
accrued for the period that such purchaser holds the Class A Note. Such holder
may instead elect to include market discount in income as it accrues with
respect to all debt instruments acquired in the year of acquisition of the Class
A Notes and thereafter. Market discount generally will equal the excess, if any,
of the then current unpaid principal balance of the Note over the purchaser's
basis in the Class A Note immediately after such purchaser acquired the Note. In
general, market discount on a Class A Note will be treated as accruing over the
term of such Class A Note in the ratio of interest for the current period over
the sum of such current interest and the expected amount of all remaining
interest payments, or at the election of the holder, under a constant yield
method (taking into account the CPR). At the request of a holder of a Class A
Note, information will be made available that will allow the holder to compute
the accrual of market discount under the first method described in the preceding
sentence.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Class A Note at a market discount may be
required to defer the deduction of all or a portion of the interest on such
indebtedness until the corresponding amount of market discount is included in
income.
Notwithstanding the above rules, market discount on a Class A Note will be
considered to be zero if it is less than a de minimis amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is de minimis, the actual
amount of discount must be allocated to the remaining principal distributions on
the Class A Notes and, when each such distribution is received, capital gain
equal to the discount allocated to such distribution will be recognized.
Market Premium. A subsequent purchaser who buys a Class A Note for more
than its principal amount generally will be considered to have purchased the
Class A Note at a premium. Such holder may amortize such premium, using a
constant yield method, over the remaining term of the Class A Note and, except
as future regulations may otherwise provide, may apply such amortized amounts to
reduce the amount of interest reportable with respect to such Class A Note over
the period from the purchase date to the date of maturity of the Class A Note.
Legislative history to the Tax Reform Act of 1986 indicates that the
amortization of such premium on an obligation that provides for partial
principal payments prior to maturity should be governed by the methods for
accrual of market discount on such an obligation (described above). Proposed
regulations implementing the provisions of the Tax Reform Act of 1986 provide
for the use of the constant yield method to determine the amortization of
premiums. Such proposed regulations will apply to bonds acquired on or after 60
days after the final regulations are published. A holder that elects to amortize
premium must reduce his tax basis in the related obligation by the amount of the
aggregate deductions (or interest offsets) allowable for amortizable premium. If
a debt instrument purchased at a premium is redeemed in full prior to its
maturity, a purchaser who has elected to amortize premium should be entitled to
a deduction for any remaining unamortized premium in the taxable year of
redemption.
Sale or Redemption of Notes. If a Class A Note is sold or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and such Holder's adjusted basis in the Class A Note. Such
adjusted basis generally will equal the cost of the Class A Note to the seller,
increased by any original issue discount included in the seller's gross income
in respect of the Class A Note (and by any market discount which the taxpayer
elected to include in income or was required to include in income), and reduced
by payments other than payments of qualified stated interest in respect of the
Class A Note received by the seller and by any amortized premium. Similarly, a
holder who receives a payment other than a payment of qualified stated interest
in respect of a Class A Note, either on the date on which such payment is
scheduled to be made or as a prepayment, will recognize gain equal to the
excess, if any, of the amount of the payment over his adjusted basis in the Note
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allocable thereto. A Noteholder who receives a final payment which is less than
his adjusted basis in the Class A Note will generally recognize a loss in the
amount of the shortfall on the last day of his taxable year. Generally, any such
gain or loss realized by an investor who holds a Note as a "capital asset"
within the meaning of Code Section 1221 should be capital gain or loss, except
as described above in respect of market discount and except that a loss
attributable to accrued but unpaid interest may be an ordinary loss.
Taxation of Certain Foreign Investors. Interest payments (including OID) on
the Class A Notes made to a Noteholder who is a nonresident alien individual,
foreign corporation or other non-United States person (a "foreign person")
generally will be "portfolio interest" which is not subject to United States tax
if such payments are not effectively connected with the conduct of a trade or
business in the United States by such foreign person and if the Trust (or other
person who would otherwise be required to withhold tax from such payments) is
provided with an appropriate statement that the beneficial owner of the Note
identified on the statement is a foreign person.
Backup Withholding. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Class A Notes, may be subject to
the "backup withholding tax" under Section 3406 of the Code at rate of 31% if
recipients of such distributions fail to furnish to the payer certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of distributions that is required to supply information
but that does not do so in the proper manner.
STATE AND LOCAL TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Class A Notes.
State and local income tax laws 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 or locality. Therefore, potential Noteholders
should consult their own tax advisors with respect to the various state and
local tax consequences of an investment in the Class A Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
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. 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). A violation of these "prohibited transaction"
rules may generate excise tax and other liabilities under ERISA and the Code for
such persons.
In addition to the matters described below, purchasers of Class A Notes
that are insurance companies should consult with their counsel with respect to
the United States Supreme Court case interpreting the fiduciary responsibility
rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank, 114 S.Ct. 517 (1993). 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. Prospective
purchasers should determine whether the decision affects their ability to make
purchases of the Class A Notes.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Trust were
deemed to be "plan assets" of an employee benefit plan subject to ERISA or the
Code, or an individual retirement account (an "IRA"), or any entity whose
underlying assets are deemed to be assets of an employee benefit plan or an IRA
by reason of such employee benefit plan's or such IRA's investment in such
entity (each a "Benefit Plan"). Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of the Trust
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquires an "equity interest" in the Trust and
none of the exceptions contained in the Plan Assets Regulation is applicable. An
equity interest is defined under the Plan
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<PAGE>
Assets Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. The Class A Notes should be treated as indebtedness without
substantial equity features for purposes of the Plan Assets Regulation. This
determination is based in part upon the traditional debt features of the Class A
Notes, including the reasonable expectation of purchasers of Class A Notes that
the Class A Notes will be repaid when due, as well as the absence of conversion
rights, warrants and other typical equity features. The debt treatment of the
Class A Notes for ERISA purposes could change if the Trust incurred losses.
However, without regard to whether the Class A Notes are treated as an equity
interest for such purposes, the acquisition or holding of Class A Notes by or on
behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust or any of its affiliates is or becomes, a party in
interest or disqualified person with respect to such Benefit Plan. In such case,
certain exemptions from the prohibited transaction rules could be applicable
depending on the type and circumstances of the plan fiduciary making the
decision to acquire a Class A Note. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding investments by
insurance company pooled separate accounts; PTCE 95-60, regarding investments by
insurance company general accounts; PTCE 96-23, regarding transactions by
in-house asset managers; and PTCE 84-14, regarding transactions by "qualified
professional assets managers." Each investor using the assets of a Benefit Plan
which acquires the Class A Notes, or to whom the Class A Notes are transferred,
will be deemed to have represented that the acquisition and continued holding of
the Class A Notes will be covered by a Department of Labor class exemption.
Employee plans that are government plans (as defined in Section 3(32) of
ERISA) and certain church plans (as defined in Section 3(53) of ERISA, are not
subject to ERISA; however, such plans may be subject to comparable state law
restrictions.
Any Benefit Plan fiduciary considering the purchase of a Class A Note
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment. Moreover, each Benefit Plan fiduciary
should determine whether, under the general fiduciary standards of investment
prudence and diversification, an investment in the Class A Notes is appropriate
for the Benefit Plan, taking into account the overall investment policy of the
Benefit Plan and the composition of the Benefit Plan's investment portfolio.
RATINGS
As a condition to the issuance of the Class A Notes, the Class A Notes must
be rated at least "AAA" by S&P and "Aaa" by Moody's. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. The ratings assigned to the Class A Notes addresses the
likelihood of the receipt by Class A Noteholders of all distributions to which
such Class A Noteholders are entitled. The rating assigned to the Class A Notes
does not represent any assessment of the likelihood that principal prepayments
might differ from those originally anticipated or address the possibility that
Class A Noteholders might suffer a lower than anticipated yield.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") for the sale of the Class A Notes dated August
__, 1997, the Depositor has agreed to sell and Prudential Securities
Incorporated ("Prudential") and First Union Capital Markets Corp. ("First Union"
together with Prudential, the "Underwriters") have agreed to purchase, the Class
A Notes. The Depositor is affiliated with Prudential. In addition, First Union
Corporation, the parent corporation of First Union, owns approximately 3.3% of
the outstanding common stock of First Sierra.
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein, to purchase all the Class A Notes offered hereby
if any of such Class A Notes are purchased.
The Underwriters have advised the Depositor that it proposes to offer the
Class A Notes purchased by the Underwriters for sale from time to time in one or
more negotiated transactions or otherwise, at market prices prevailing at the
time of sale, at prices related to such market prices or at negotiated prices.
The Underwriters may effect such transactions by selling such Class A Notes to
or through a dealer, and such dealer may receive
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<PAGE>
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriters or purchasers of the Class A Notes for whom they may act
as agent. Any dealers that participate with the Underwriters in the distribution
of the Class A Notes purchased by the Underwriters may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriters, and any profit on the resale of Class A Notes by them or the
Underwriters may be deemed to be underwriting discounts or commissions under the
Securities Act of 1933, as amended (the "Securities Act").
For further information regarding any offer or sale of the Class A Notes
pursuant to this Prospectus Supplement and the Prospectus, see "Methods of
Distribution" in the Prospectus.
The Transaction Documents and the Underwriting Agreement provides that the
Servicer and Depositor will indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
REPORT OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
subsidiaries as of December 31, 1996 and December 31, 1995 and for the three
years ended December 31, 1996 incorporated by reference into this Prospectus
Supplement have been audited by Coopers & Lybrand, L.L.P. ("Coopers"),
independent accountants, as set forth in their report thereon, and are
incorporated by reference herein in reliance upon the authority of such firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the Notes will be passed upon by Dewey
Ballantine, New York, New York. Certain Federal income tax matters will be
passed upon for the Trust by Dewey Ballantine, New York, New York. Certain legal
matters relating to the Note Insurer will be passed upon for the Note Insurer by
Kutak Rock, Omaha, Nebraska.
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<PAGE>
INDEX OF PRINCIPAL DEFINED TERMS
Page
----
Advance Payment ..............................................................40
Advance Payments .............................................................36
Aggregate Discounted Contract Principal Balance ...........................6, 19
Aggregate Initial Note Principal Balance .....................................40
Available Distribution Amount.................................................40
Available Funds...............................................................40
Available Funds Shortfall.................................................13, 40
Back-up Servicer...............................................................3
Back-up Servicer Fee..........................................................14
Back-up Servicing Fee Rate....................................................14
Bankers Trust Company..........................................................3
Base Principal Amount.........................................................40
Business Day..................................................................56
Cede...........................................................................2
Certificate of Incorporation..................................................26
Class A Base Principal Distribution Amount ...............................12, 40
Class A Insured Distribution Amount ..........................................40
Class A Maturity Date.........................................................40
Class A Note Current Interest.................................................40
Class A Note Factor...........................................................47
Class A Note Interest.........................................................41
Class A Note Principal Balance................................................41
Class A Note Rate..............................................................5
Class A Noteholders............................................................1
Class A Noteholders............................................................4
Class A Notes...........................................................1, 4, 31
Class A Overdue Interest......................................................41
Class A Overdue Principal.................................................13, 41
Class A Percentage.........................................................4, 31
Class B Noteholders............................................................4
Class B Notes..............................................................4, 34
Class B-1 Base Principal Distribution Amount .................................41
Class B-1 Maturity Date.......................................................41
Class B-1 Note Current Interest...............................................41
Class B-1 Note Factor.........................................................47
Class B-1 Note Interest.......................................................41
Class B-1 Note Principal Balance..............................................41
Class B-1 Note Rate............................................................5
Class B-1 Noteholders..........................................................4
Class B-1 Notes............................................................4, 34
Class B-1 Overdue Interest....................................................41
Class B-1 Overdue Principal...............................................13, 41
Class B-1 Percentage..........................................................12
Class B-1 Termination Date....................................................41
Class B-2 Base Principal Distribution Amount .............................12, 41
Class B-2 Maturity Date.......................................................41
Class B-2 Note Current Interest...............................................42
Class B-2 Note Factor.........................................................47
Class B-2 Note Interest.......................................................42
Class B-2 Note Principal Balance..............................................42
Class B-2 Note Rate............................................................5
Class B-2 Noteholders..........................................................4
Class B-2 Notes............................................................4, 34
Class B-2 Overdue Interest....................................................42
Class B-2 Overdue Principal...............................................13, 42
Class B-2 Percentage..........................................................12
Class B-2 Termination Date....................................................42
Class B-3 Base Principal Distribution Amount .............................12, 42
Class B-3 Maturity Date.......................................................42
Class B-3 Note Current Interest...............................................42
Class B-3 Note Factor.........................................................47
Class B-3 Note Interest.......................................................42
Class B-3 Note Principal Balance..............................................42
Class B-3 Note Rate............................................................5
Class B-3 Noteholders..........................................................4
Class B-3 Notes............................................................4, 34
Class B-3 Overdue Interest....................................................42
Class B-3 Overdue Principal...............................................13, 42
Class B-3 Percentage..........................................................12
Class B-3 Termination Date....................................................42
Closing Date...................................................................3
Collection Account.............................................................7
Collection Period..............................................................3
Commission.....................................................................2
Conditional Prepayment Rate...................................................53
Contract Files................................................................31
Contracts...................................................................1, 4
CPR...........................................................................53
Cut-Off Date...................................................................3
Defaulted Contract........................................................12, 43
Defaulted Contract Recoveries.................................................43
Deficiency Amount.............................................................56
Delinquency Trigger Event.....................................................43
Delinquency Trigger Ratio.....................................................43
Delinquent Contract...........................................................43
Depositor................................................................1, 2, 3
Depositor Transfer Agreement...................................................2
Determination Date............................................................43
Discount Rate..............................................................5, 19
Discounted Contract Principal Balance .................................6, 19, 43
DTC............................................................................2
Early Termination Contract....................................................44
Equipment...................................................................1, 4
ERISA.........................................................................17
Event of Servicing Termination................................................49
Events of Default.............................................................50
Exchange Act...................................................................2
Excluded Amounts..............................................................44
Expected Final Payment Date....................................................1
Expired Contract..............................................................44
Final Scheduled Payment.......................................................44
First Sierra...................................................................2
First Union...................................................................62
Fiscal Agent..................................................................56
Fitch.........................................................................58
Flow of Funds.................................................................13
GAAP..........................................................................57
Gross Charge-Off Event........................................................44
Gross Charge-Off Ratio........................................................44
Indenture......................................................................1
Indenture Trustee...........................................................1, 3
Indenture Trustee Expenses....................................................52
Indenture Trustee Fee.........................................................52
Independent Director..........................................................26
Initial Class A Note Principal Balance ................................4, 31, 44
Initial Class B-1 Note Principal Balance .....................................44
Initial Class B-2 Note Principal Balance .....................................44
Initial Class B-3 Note Principal Balance .....................................44
Initial Unpaid Amount.........................................................44
Insurance Agreement............................................................5
Insurance Policies............................................................31
Insured Payment...............................................................56
Interest Accrual Period.......................................................44
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<PAGE>
IRS...........................................................................59
Lockbox Account................................................................7
Lockbox Bank..................................................................36
Majority Holders..............................................................44
Modeling Assumptions..........................................................53
Moody's...................................................................17, 58
Note Insurance Policy......................................................1, 13
Noteholders....................................................................4
Notes..........................................................................4
Notice........................................................................56
Obligor........................................................................6
Originator.....................................................................2
Owner.........................................................................56
Owner Trustee...............................................................1, 3
Payment Date................................................................1, 4
Percentage Interest...........................................................44
Pool Factor...................................................................47
Preference Amount.............................................................56
Premium Amount................................................................45
Premium Rate...................................................................5
Prepayment....................................................................45
Prepayment Amount.............................................................45
Principal Payment Percentage..................................................12
Private Label.................................................................27
Prospectus.....................................................................2
Prudential....................................................................62
Purchase Option Payment.......................................................45
Rating Agency.................................................................17
Receivables.................................................................1, 4
Receivables Transfer Agreements................................................2
Record Date....................................................................4
Reimbursement Amount..........................................................45
Repurchase Amount.........................................................20, 45
Residual Holder................................................................4
Residual Receipts.............................................................45
Restricting Event.............................................................45
S&P.......................................................................17, 58
Scheduled Payments.....................................................6, 19, 45
Securities.................................................................4, 34
Securities Act................................................................63
Servicer................................................................2, 3, 29
Servicer Advance..........................................................15, 36
Servicer Fee..................................................................13
Servicer's Certificate........................................................37
Servicing Agreement............................................................2
Servicing Charges.............................................................13
Servicing Standard............................................................21
Source.........................................................................5
Source Agreement...............................................................5
Statistic Calculation Date.....................................................3
Statistical Discount Rate..................................................5, 19
Statistical Discounted Contract Principal Balance.................... .....5, 19
Subordinate Securities.....................................................4, 34
Substitute Contract...........................................................20
Substitute Contract Cut-Off Date..............................................46
Tax Counsel...................................................................59
Transaction Documents..........................................................6
Transfer Agreements............................................................2
Transfer Date.................................................................34
Transferor...........................................................1, 2, 3, 26
Trust.......................................................................1, 3
Trust Agreement................................................................1
Trust Assets...................................................................4
Trust Certificate..........................................................4, 34
Trust Certificate Principal Balance ..........................................46
Trust Operating Expenses......................................................46
UCC...........................................................................16
Underwriters..................................................................62
Underwriting Agreement........................................................62
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Equipment Lease Backed Securities Issuable in Series
PRUDENTIAL SECURITIES SECURED FINANCING
CORPORATION,
Depositor
This Prospectus describes certain Equipment Lease Backed Notes (the
"Notes") and Equipment Lease Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities") that 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 (each, a
"Prospectus Supplement"). Each series of Securities may include one or more
classes of Notes and one or more classes of Certificates, which will be issued
either by the Depositor, a Transferor (as hereinafter defined), or by a trust to
be formed by the Depositor for the purpose of issuing one or more series of such
Securities (each, a "Trust"). The Depositor, a Transferor or a Trust, as
appropriate, issuing Securities as described in this Prospectus and the related
Prospectus Supplement shall be referred to herein as the "Issuer."
Each class of Securities of any series will evidence beneficial ownership
in a segregated pool of assets.
Trust Fund (such Securities, "Notes"), as described herein and in the
related Prospectus Supplement. Each Trust Fund may consist of any combination of
operating leases, finance leases, installment sale contracts, loan contracts or
participation interests therein, together with all monies received relating
thereto (the "Contracts"). Each Trust Fund may also include the underlying
equipment and property relating thereto, together with the proceeds thereof (the
"Equipment" together with the Contracts, the "Receivables"). If and to the
extent specified in the related Prospectus Supplement, credit enhancement with
respect to a Trust Fund or any class of Securities may include any one or more
of the following: a financial guaranty insurance policy (a "Policy") issued by
an insurer specified in the related Prospectus Supplement, a reserve account,
letters of credit, credit or liquidity facilities, third party payments or other
support, cash deposits or other arrangements. In addition to or in lieu of the
foregoing, credit enhancement may be provided by means of subordination,
cross-support among the Receivables or over-collateralization. See "Description
of the Trust Agreement -- Credit and Cash Flow Enhancement." The Receivables in
the Trust Fund for a series will have been acquired by the Depositor from one or
more affiliates of the Depositor or from one or more entities which are
unaffiliated with the Depositor (any such affiliate or unaffiliated entity, an
"Originator"). Each Originator will be an entity, including Vendors, generally
in the business of originating or acquiring Receivables. The Depositor will
acquire the Receivables from the related Originator(s) on or prior to the date
of issuance of the related Securities, as described herein and in the related
Prospectus Supplement. The Receivables included in a Trust Fund will be serviced
by a servicer (the "Servicer") described in the related Prospectus Supplement.
Each series of Securities will include one or more classes (each, a
"Class"). A series may include one or more Classes of Securities entitled to
principal distributions, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no principal distributions. The rights of one or more Classes of Securities of
any series may be senior or subordinate to the rights of one or more of the
other Classes of Securities. A series may include two or more Classes of
Securities which differ as to the timing, sequential order, priority of payment,
interest rate or amount of distributions of principal or interest or both.
Information regarding each Class of Securities of a series, together with
certain characteristics of the related Receivables, will be set forth in the
related Prospectus Supplement. The rate of payment in respect of principal of
the Securities of any Class will depend on the priority of payment of such a
Class and the rate and timing of payments (including prepayments, defaults,
liquidations or repurchases of Receivables) on the related Receivables. A rate
of payment lower or higher than that anticipated may affect the weighted average
life of each Class of Securities in the manner described herein and in the
related Prospectus Supplement. See "Description of the Securities."
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "SPECIAL
CONSIDERATIONS" HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
THE NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO
NOT REPRESENT INTERESTS OF THE DEPOSITOR, ANY SERVICER, ANY ORIGINATOR OR ANY OF
THEIR RESPECTIVE AFFILIATES. THE CERTIFICATES OF A GIVEN SERIES REPRESENT
BENEFICIAL INTERESTS IN THE RELATED TRUST ONLY AND DO NOT REPRESENT INTERESTS IN
OR OBLIGATIONS OF THE DEPOSITOR, ANY TRANSFEROR, ANY SERVICER, ANY ORIGINATOR OR
ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE SECURITIES NOR THE UNDERLYING
RECEIVABLES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY ORIGINATOR, ANY TRUSTEE
OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT. SEE ALSO "SPECIAL CONSIDERATIONS."
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters as more fully described under "Method
of Distribution" herein and in the related Prospectus Supplement. Prior to
issuance, there will have been no market for the Securities of any series, and
there can be no assurance that a secondary market for the Securities will
develop, or if it does develop, it will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is December 2, 1994.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Securities to be offered
hereunder, among other things, will set forth with respect to such series of
Securities: (i) a description of the Class or Classes of such Securities, (ii)
the rate of interest, the "Pass-Through Rate" or "Interest Rate" or other
applicable rate (or the manner of determining such rate) and authorized
denominations of such Class of such Securities; (iii) certain information
concerning the Receivables and insurance polices, cash accounts, letters of
credit, financial guaranty insurance policies, third party guarantees or other
forms of credit enhancement, if any, relating to one or more pools of
Receivables or all or part of the related Securities; (iv) the specified
interest, if any, of each Class of Securities in, and manner and priority of,
the distributions from the Trust Fund; (v) information as to the nature and
extent of subordination with respect to such series of Securities, if any; (vi)
the payment date to Securityholders; (vii) information regarding the Servicer(s)
for the related Receivables; (viii) information regarding the Originator(s) for
the related Receivables and the underwriting guidelines employed by such
Originator(s) with respect to such Receivables, (ix) the circumstances, if any,
under which each Trust Fund may be subject to early termination; (x) information
regarding tax considerations; and (xi) additional information with respect to
the method of distribution of such Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered pursuant to this Prospectus. For further information,
reference is made to the Registration Statement which may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at 500 West Madison, 14th Floor, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby, nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Depositor with respect to the
Registration Statement, either on its own behalf or on behalf of a Trust,
relating to any series of Securities referred to in the accompanying Prospectus
Supplement, with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), after the
date of this Prospectus and prior to the termination of any offering of the
Securities issued by the Issuer, shall be deemed to be incorporated by reference
in this Prospectus and to be a part of this Prospectus from the date of the
filing of such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in the accompanying Prospectus Supplement) or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
2
<PAGE>
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning any Security and the related Trust
Fund will be provided to the Securityholders. See "Description of the Securities
- -- Reports to Securityholders." If the Securities of a series are to be issued
in book-entry form, such reports will be provided to the Securityholder of
record and beneficial owners of such Securities will have to rely on the
procedures described herein under "Description of Securities - Book-Entry
Registration."
The Depositor will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to: Prudential Securities
Secured Financing Corporation, 130 John Street, New York, New York 10038,
Attention: Timothy Mas.
3
<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 the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used in the summary
are defined elsewhere in the Prospectus on the pages indicated in the "Index of
Terms."
Issuer....................... With respect to each series of Securities, either
the Depositor, a special-purpose finance
subsidiary of the Depositor which may be
organized and established by the Depositor with
respect to one or more Trust Funds (each such
special-purpose finance subsidiary, a
"Transferor") or a trust (each, a "Trust") to be
formed by the Depositor. For purposes of this
Prospectus, the term "Depositor" includes the
term "Transferor". The Depositor, a Transferor or
a Trust issuing Securities pursuant to this
Prospectus and the related Prospectus Supplement
shall be referred to herein as the "Issuer" with
respect to the related Securities. See "The
Issuer."
Depositor.................... Prudential Securities Secured Financing
Corporation, formerly known as P-B Secured
Financing Corporation (the "Depositor"), a
Delaware corporation, a wholly-owned limited
purpose finance subsidiary of Prudential
Securities Group Inc. The Depositor's principal
executive offices are located at 130 John Street,
New York, New York 10038, and its telephone
number is (212) 214-7435. See "The Depositor."
Servicer..................... The Servicer for each Trust Fund will be
specified in the applicable Prospectus
Supplement. The Servicer will service the
Receivables comprising each Trust Fund and
administer each Trust Fund pursuant to the
related Servicing Agreement. The Servicer may
subcontract all or any portion of its obligations
as Servicer under each Servicing Agreement to
qualified subservicers (each, a "Sub-Servicer")
but the Servicer will not be relieved thereby of
its liability with respect thereto. See
"Servicing of the Receivables."
Originator(s)................ The Depositor will acquire the Receivables from
one or more affiliates of the Depositor or from
one or more entities which are unaffiliated with
the Depositor (any such affiliate or unaffiliated
entity, an "Originator"). The Receivables will be
either (i) originated by the related Originator,
(ii) originated by various manufacturers of
Equipment ("Vendors") and acquired by the related
Originator or (iii) acquired by the related
Originator from other originators or owners of
Receivables. In addition, to the extent that the
Depositor acquires Receivables directly from a
Vendor, such Vendor will be the Originator for
purposes of the related Receivables and this
Prospectus. See "The Originator and the
Servicer".
Trustee...................... The Trustee for each series of Securities will be
specified in the related Prospectus Supplement.
In addition, a Trust may separately enter into an
Indenture and may issue Notes pursuant to such
Indenture; in any such case the Trust and the
Indenture will be administered by separate,
independent trustees as required by the rules and
regulations under the Trust Indenture Act of 1939
and the
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Investment Company Act of 1940.
The Securities .............. Each Class of Securities of any series will
evidence beneficial ownership in a segregated
pool of assets (each, a "Trust Fund") (such
Securities, "Certificates") or will represent
indebtedness of the Issuer secured by the Trust
Fund (such Securities, "Notes"), as described
herein and in the related Prospectus Supplement.
Each Trust Fund may consist of any combination of
operating leases, finance leases, installment
sale contracts, loan contracts or participation
interests therein, together with all monies
received relating thereto (the "Contracts"). Each
Trust Fund also may include the underlying
equipment and property relating thereto, together
with the proceeds thereof (the "Equipment" and
together with the Contracts, the "Receivables").
The Equipment underlying the Receivables included
in each Trust Fund will be limited to personal
property which is leased or financed by the
related Originator to the Lessee pursuant to
Contracts which either are "chattel paper" (as
defined in the Uniform Commercial Code) or would
be "chattel paper" but for a technical
definitional matter, but in any event are not
treated materially differently from "chattel
paper" for purposes of title transfer, security
interests or remedies on default. The Equipment
will be further limited to personal property
which is subject to Uniform Commercial Code
provisions relating to title transfer, security
interests and remedies on default and further
limited to Equipment leased to the related Lessee
for use by such Lessee in the ordinary course of
business or for home use such as medical
equipment, restaurant equipment, film and video
production equipment, other industrial and
production equipment, data processing equipment,
telecommunications equipment, office equipment
and furniture.
No Trust Fund will include Receivables with
respect to which the related Contract or the
related Equipment is subject to federal or state
registration or titling requirements which (x)
differ materially from, or supplant, standard
Uniform Commercial Code provisions governing the
manner in which title or security interests in
"chattel paper" (as defined in the Uniform
Commercial Code) or the related equipment is
determined or perfected or (y) differ materially
from, or supplant, standard Uniform Commercial
Code provisions governing remedies on default. By
way of illustration of the foregoing, no Trust
Fund will include Receivables with respect to
which the underlying Contracts or Equipment
relate to motor vehicles, aircraft, ships or
boats, firearms or other weapons, railroad
rolling stock or facilities such as factories,
warehouses or plants subject to state laws
governing the manner in which title or security
interest in real property is determined or
perfected. However, the Receivables may generally
include Contracts and Equipment relating to
individual, discrete components of assets such as
the foregoing; for example a leased computer on
the ship may qualify as "Equipment" which may be
included in a Trust Fund, provided that both the
lease and the computer are generally within the
scope of the Uniform Commercial Code.
If and to the extent specified in the related
Prospectus Supplement, credit enhancement with
respect to a Trust Fund or any class of
Securities may include any one or more of the
following: a financial guaranty insurance policy
(a "Policy") issued by an insurer specified in
the related Prospectus Supplement, a reserve
account, letters of
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credit, credit or liquidity facilities, third
party payments or other support, cash deposits or
other arrangements. In addition to or in lieu of
the foregoing, credit enhancement may be provided
by means of subordination, cross-support among
the Receivables or over-collateralization. The
Depositor will acquire the Receivables from the
related Originator(s) on or prior to the date of
issuance of the related Securities, as described
herein and in the related Prospectus Supplement.
With respect to Securities issued by a Trust,
each Trust will be established pursuant to an
agreement (each, a "Pooling Agreement") by and
between the Depositor and the Trustee named
therein. Each Pooling Agreement will describe the
related pool of Receivables held by the Trust.
With respect to Securities that represent debt
issued by the Issuer, the Issuer will enter into
an indenture (each, an "Indenture") by and
between the Issuer and the trustee named on such
Indenture (the "Indenture Trustee"). Each
Indenture will describe the related pool of
Receivables comprising the Trust Fund and
securing the debt issued by the related Issuer.
The Receivables comprising each Trust Fund will
be serviced by the Servicer pursuant to a
servicing agreement (each, a "Servicing
Agreement") by and between the Servicer and the
related Issuer.
In the case of any individual Trust Fund, the
contractual arrangements relating to the
establishment of a Trust, if any, the servicing
of the related Receivables and the issuance of
the related Securities may be contained in a
single agreement, or in several agreements which
combine certain aspects of the Pooling Agreement,
the Servicing Agreement and the Indenture
described above (for example, a pooling and
servicing agreement, or a servicing and
collateral management agreement). For purposes of
this Prospectus, the term "Trust Agreement" as
used with respect to a Trust Fund means,
collectively, and except as otherwise described
in the related Prospectus Supplement, any and all
agreements relating to the establishment of a
Trust, if any, the servicing of the related
Receivables and the issuance of the related
Securities. The term "Trustee" means any and all
persons acting as a trustee pursuant to a Trust
Agreement.
SECURITIES WILL BE NON-RECOURSE.
The Securities will not be obligations, either
recourse or non-recourse (except for certain
non-recourse debt described under "Certain Tax
Considerations"), of the Depositor, the related
Servicer, the related Originator(s) or any person
other than the related Issuer. The Notes of a
given series represent obligations of the Issuer,
and the Certificates of a given series represent
beneficial interests in the related Trust only
and do not represent interests in or obligations
of the Depositor, the related Servicer, the
related Originator(s) or any of their respective
affiliates other than the related Trust. In the
case of Securities that represent beneficial
ownership interest in the related Trust, such
Securities will represent the beneficial
ownership interests in such Trust and the sole
source of payment will be the assets of such
Trust. In the case of Securities that represent
debt issued by the related Issuer, such
Securities will be secured by assets in the
related Trust Fund. Notwithstanding the
foregoing, and as to be described in the
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related Prospectus Supplement, certain types of
credit enhancement, such as a letter of credit,
financial guaranty insurance policy or reserve
fund may constitute a full recourse obligation of
the issuer of such credit enhancement.
GENERAL NATURE OF THE SECURITIES AS INVESTMENTS.
All of the Securities offered pursuant to this
Prospectus and the related Prospectus Supplement
will be rated in one of the four highest rating
categories by one or more Rating Agencies (as
defined herein).
Additionally, all of the Securities offered
pursuant to this Prospectus and the related
Prospectus Supplement will be of the fixed-income
type ("Fixed Income Securities"). Fixed Income
Securities will generally be styled as debt
instruments, having a principal balance and a
specified interest rate ("Interest Rate"). Fixed
Income Securities may either represent beneficial
ownership interests in the related Receivables
held by the related Trust or debt secured by
certain assets of the related Issuer.
Each series or Class of Fixed Income Securities
offered pursuant to this Prospectus may have a
different Interest Rate, which may be a fixed or
adjustable Interest Rate. The related Prospectus
Supplement will specify the Interest Rate for
each series or Class of Fixed Income Securities
described therein, or the initial Interest Rate
and the method for determining subsequent changes
to the Interest Rate.
A series may include one or more Classes of Fixed
Income Securities ("Strip Securities") entitled
(i) to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest distributions,
with disproportionate, nominal or no principal
distributions. In addition, a series of
Securities may include two or more Classes of
Fixed Income Securities that differ as to timing,
sequential order, priority of payment, Interest
Rate or amount of distribution of principal or
interest or both, or as to which distributions of
principal or interest or both on any Class may be
made upon the occurrence of specified events, in
accordance with a schedule or formula, or on the
basis of collections from designated portions of
the related pool of Receivables. Any such series
may include one or more Classes of Fixed Income
Securities ("Accrual Securities"), as to which
certain accrued interest will not be distributed
but rather will be added to the principal balance
(or nominal balance, in the case of Accrual
Securities which are also Strip Securities)
thereof on each Payment Date, as hereinafter
defined, or in the manner described in the
related Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series may include one or more
other Classes of Fixed Income Securities
(collectively, the "Senior Securities") that are
senior to one or more other Classes of Fixed
Income Securities (collectively, the "Subordinate
Securities") in respect of certain distributions
of principal and interest and allocations of
losses on Receivables.
In addition, certain Classes of Senior (or
Subordinate) Securities may be senior to other
Classes of Senior (or Subordinate) Securities in
respect of such distributions or losses.
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GENERAL PAYMENT TERMS OF SECURITIES.
As provided in the related Trust Agreement and as
described in the related Prospectus Supplement,
the holders of the Securities ("Securityholders")
will be entitled to receive payments on their
Securities on specified dates (each, a "Payment
Date"). Payment Dates with respect to Fixed
Income Securities will occur monthly, quarterly
or semi-annually, as described in the related
Prospectus Supplement.
The related Prospectus Supplement will describe a
date (the "Record Date") preceding such Payment
Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for
the purpose of receiving payments on the next
succeeding Payment Date. As described in the
related Prospectus Supplement, the Payment Date
will be a specified day of each month, commonly
the fifteenth or twenty-fifth day of each month
(or, in the case of quarterly-pay Securities, the
fifteenth or twenty-fifth day of every third
month; and in the case of semi-annual pay
Securities, the fifteenth or twenty-fifth day of
every sixth month) and the Record Date will be
the close of business as of the last day of the
calendar month that precedes the calendar month
in which such Payment Date occurs.
Each Trust Agreement will describe a period
(each, a "Remittance Period") preceding each
Payment Date (for example, in the case of
monthly-pay Securities, the calendar month
preceding the month in which a Payment Date
occurs). As more fully described in the related
Prospectus Supplement, collections received on or
with respect to the related Receivables
constituting a Trust Fund during a Remittance
Period will be required to be remitted by the
Servicer to the related Trustee prior to the
related Payment Date and will be used to fund
payments to Securityholders on such Payment Date.
As may be described in the related Prospectus
Supplement, the related Trust Agreement may
provide that all or a portion of the payments
collected on or with respect to the related
Receivables may be applied by the related Trustee
to the acquisition of additional Receivables
during a specified period (rather than be used to
fund payments of principal to Securityholders
during such period), with the result that the
related Securities will possess an interest-only
period, also commonly referred to as a revolving
period, which will be followed by an amortization
period. Any such interest only or revolving
period may, upon the occurrence of certain events
to be described in the related Prospectus
Supplement, terminate prior to the end of the
specified period and result in the earlier than
expected amortization of the related Securities.
In addition, and as may be described in the
related Prospectus Supplement, the related Trust
Agreement may provide that all or a portion of
such collected payments may be retained by the
Trustee (and held in certain temporary
investments, including Receivables) for a
specified period prior to being used to fund
payments of principal to Securityholders.
Such retention and temporary investment by the
Trustee of such collected payments may be
required by the related Trust Agreement for the
purpose of (a) slowing the amortization rate of
the related Securities relative to the rent
payment schedule of the related Receivables, or
(b) attempting to match the amortization rate of
the
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related Securities to an amortization schedule
established at the time such Securities are
issued. Any such feature applicable to any
Securities may terminate upon the occurrence of
events to be described in the related Prospectus
Supplement, resulting in distributions to the
specified Securityholders and an acceleration of
the amortization of such Securities.
As more fully specified in the related Prospectus
Supplement, neither the Securities nor the
underlying Receivables will be guaranteed or
insured by any governmental agency or
instrumentality or the Depositor, the related
Servicer, the related Originator, any Trustee, or
any of their affiliates.
No Investment Companies.... Neither the Depositor nor any Trust will register
as an "investment company" under the Investment
Company Act of 1940, as amended (the "Investment
Company Act").
The Equity Interest........ With respect to each Trust, the "Equity Interest"
at any time represents the rights to the related
Trust Fund in excess of the Securityholders'
interest of all series then outstanding that were
issued by such Trust. The Equity Interest in any
Trust Fund will fluctuate as the aggregate
Discounted Contract Balance of such Trust Fund
changes from time to time. In addition, the
Depositor may cause one or more of the Trusts
(such a Trust, a "Master Trust") to issue
additional series of Securities from time to time
and any such issuance will have the effect of
decreasing the Equity Interest in the related
Master Trust to the extent of the aggregate
principal amount of the Securities. See
"Description of Securities -- Master Trusts." A
portion of the Equity interest in any Trust may
be sold separately in one or more public or
private transactions.
Master Trusts; Issuance
of Additional Series........ As may be described in the related Prospectus
Supplement, a Trust Agreement may authorize the
Trustee to issue certificates (the "Equity
Certificates") evidencing the Equity Interest in
a Master Trust, and may provide that, pursuant to
any one or more supplements to such Trust
Agreement, the Depositor may cause the related
Trustee to issue one or more new series of
Securities and accordingly cause a reduction in
the related Equity Interest in such Master Trust
represented by the related Equity Certificate.
Under each such Trust Agreement (each, a "Master
Trust Agreement"), the Depositor may determine
the terms of any such new series. See
"Description of the Securities -- Master Trusts."
The Depositor may cause the related Trustee to
offer any such new series to the public or other
investors, in transactions either registered
under the Securities Act or exempt from
registration thereunder, directly or through one
or more underwriters or placement agents, in
fixed-price offerings or in negotiated
transactions or otherwise.
A new series to be issued by a Trust which has a
series outstanding may, unless otherwise
described in the related Prospectus Supplement,
only be issued upon satisfaction of the
conditions described herein under "Description of
the Securities -- Master Trusts", including,
among others, that such issuance will not effect
the rating given to any existing series issued by
such Master Trust. Securities secured by
Receivables held by a Master Trust shall be
entitled to moneys received relating to such
Receivables on a pari passu basis with other
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Securities issued pursuant to the other Trust
Agreements by such Master Trust.
Cross-Collateralization .... As described in the related Trust Agreement and
the related Prospectus Supplement, the source of
payment for Securities of each series will be the
assets of the related Trust Fund only.
However, as may be described in the related
Prospectus Supplement, a series or class of
Securities may include the right to receive
moneys from a common pool of credit enhancement
which may be available for more than one series
of Securities, such as a master reserve account,
master insurance policy or a master collateral
pool consisting of similar Receivables.
Notwithstanding the foregoing, and as described
in the related Prospectus Supplement, no payment
received on any Receivable held by any Trust may
be applied to the payment of Securities issued by
any other Trust (except to the limited extent
that certain collections in excess of the amounts
needed to pay the related Securities may be
deposited in a common master reserve account or
an overcollateralization account that provides
credit enhancement for more than one series of
Securities issued pursuant to the related Trust
Agreement).
Trust Fund.................. As specified in the related Prospectus
Supplement, each Trust Fund will consist of the
related Contracts, and may include the related
Equipment. If and to the extent specified in the
related Prospectus Supplement, credit enhancement
with respect to a Trust Fund or any class of
Securities may include any one or more of the
following: a Policy issued by an insurer
specified in the related Prospectus Supplement, a
reserve account, letters of credit, credit or
liquidity facilities, repurchase obligations,
third party payments or other support, cash
deposits or other arrangements. In addition to or
in lieu of the foregoing, credit enhancement may
be provided by means of subordination,
cross-support among the Receivables or
over-collateralization. See "Description of the
Trust Agreement -- Credit and Cash Flow
Enhancement." The Contracts are obligations for
the lease (a "Lease") or purchase of the
Equipment, or evidence borrowings used to acquire
the Equipment, entitling the obligor thereunder
(the "Lessor") to payments of rent and related
payments and to either the return of the
Equipment at the termination of the related
Contract or, with respect to certain of the
Contracts, the payment of a purchase price for
the Equipment at the election of the obligee
thereunder (the "Lessee").
The Leases will be of two general types,
operating leases and finance leases. "Operating
Leases" usually have a term of three years or
less, whereas "Finance Leases" usually have a
term greater than three years. In a Finance
Lease, the Lessor transfers substantially all
benefits and risks of ownership to the Lessee. In
accordance with Statement of Financial Accounting
Standards No. 13 ("FASB13"), a Lease is
classified as a Finance Lease if the
collectibility of lease payments are reasonably
certain and it meets one of the following
criteria: (1) the Lease transfers title and
ownership of the Equipment to the Lessee by the
end of the Lease term; (2) the Lease contains a
bargain purchase option; (3) the Lease term at
inception is at least 75% of the estimated life
of the Equipment; or (4) the present value of the
minimum Lease payments is at least 90% of the
fair market value of the Equipment at inception
of the Lease. All Leases which do not meet the
criteria of Finance Leases are classified, in
accordance with
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FASB 13, as Operating Leases. Installment sale
contracts and loan contracts (the "Purchase
Contracts") secured by the related Equipment
provide for scheduled payments which fully
amortize the amount financed by an obligor. The
related Prospectus Supplement will describe the
type and characteristics of the Contracts
included in each Trust Fund relating to the
Securities offered pursuant to this Prospectus
and the related Prospectus Supplement.
The Receivables comprising a Trust Fund will be
acquired by the Depositor from the related
Originator; such Receivables will have
theretofore been either (i) originated by such
Originator, (ii) originated by Vendors and
acquired by such Originator or (iii) acquired by
such Originator from other originators or owners
of Receivables.
With respect to the Receivables comprising each
Trust Fund, the Depositor and/or the related
Originator will acquire the related Receivables
from the Originator pursuant to a Receivables
Acquisition Agreement as defined herein. The
Depositor will either transfer such Receivables
to a Trust pursuant to a Pooling Agreement or
pledge the Depositor's right, title and interest
in and to such Receivables to a Trustee on behalf
of Securityholders pursuant to an Indenture. The
Contracts transferred to a Trust or pledged to a
Trustee shall have a Discounted Contract Balance
(as defined below) specified in the related
Prospectus Supplement. The rights and benefits of
the Depositor or Transferor under such
Receivables Acquisition Agreement will be
assigned to the Trustee on behalf of the related
Securityholders. The obligations of the
Depositor, the related Originator(s), the related
Servicer(s), the related Trustee and the related
Indenture Trustee, if any, under the related
Trust Agreement include those specified below and
in the related Prospectus Supplement.
The "Discounted Contract Balance" of a Contract
as of any Cut-Off Date is the present value of
all of the remaining payments scheduled to be
made with respect to such Contract, discounted at
a rate specified in the related Prospectus
Supplement and the Trust Agreement.
In addition, if so specified in the related
Prospectus Supplement, the Trust Fund will
include monies on deposit in a Pre-Funding
Account (the "Pre-Funding Account") to be
established with the Trustee, which will be used
to acquire Additional Receivables from time to
time during the "Pre-Funding Period" specified in
the related Prospectus Supplement.
If and to the extent provided in the related
Prospectus Supplement, the Depositor will be
obligated (subject only to the availability
thereof) to acquire from the related
Originator(s) and to either transfer to a Trust
or pledge to a Trustee on behalf of
Securityholders, additional Receivables (the
"Additional Receivables") from time to time
during any Pre-Funding Period specified in the
related Prospectus Supplement.
Registration of Securities Securities may be represented by global
securities registered in the name of Cede & Co.
("Cede"), as nominee of The Depository Trust
Company ("DTC"), or another nominee. In such
case, Securityholders will not be entitled to
receive definitive securities
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representing such Securityholders' interests,
except in certain circumstances described in the
related Prospectus Supplement. See "Description
of the Securities -- Book Entry Registration"
herein.
Credit and Cash Flow
Enhancement .............. If and to the extent specified in the related
Prospectus Supplement, credit enhancement with
respect to a Trust Fund or any class of
Securities may include any one or more of the
following: a Policy issued by an insurer
specified in the related Prospectus Supplement (a
"Security Insurer"), a reserve account, letters
of credit, credit or liquidity facilities, third
party payments or other support, cash deposits or
other arrangements. Any form of credit
enhancement will have certain limitations and
exclusions from coverage thereunder, which will
be described in the related Prospectus
Supplement. See "Description of the Trust
Agreement -- Credit and Cash Flow Enhancement."
Receivables Acquisition
Agreement................... As more fully described in the related Prospectus
Supplement, the Depositor and/or the related
Originator will be obligated to acquire from the
related Trust Fund any Receivable transferred
pursuant to a Pooling Agreement or pledged
pursuant to an Indenture if the interest of the
Securityholders therein is materially adversely
affected by a breach of any representation or
warranty made by the Depositor or the related
Originator with respect to such Receivable, which
breach has not been cured. To the extent that the
Depositor so acquires any Receivables, the
related Originator will be obligated to acquire
such Receivables from the Depositor pursuant to
the related Receivables Acquisition Agreement
contemporaneously with the Depositor's
acquisition of such Receivables from the
applicable Trust Fund. The obligation of the
Depositor to acquire any such Receivables with
respect to which the related Originator has
breached a representation or warranty is subject
to the related Originator's acquisition of such
Receivables from the Depositor. In addition, if
so specified in the related Prospectus
Supplement, the Depositor may from time to time
reacquire certain Receivables or substitute other
Receivables for such Receivable held by a Trust
Fund, subject to specified conditions set forth
in the related Trust Agreement and Receivables
Acquisition Agreement.
Servicer's Compensation..... The Servicer shall be entitled to receive a fee
for servicing the Contracts of each Trust Fund
equal to a specified percentage of the value of
the assets held in the related Trust Fund, as set
forth in the related Prospectus Supplement. See
"Description of the Trust Agreements--Servicing
Compensation" herein and in the related
Prospectus Supplement.
Certain Legal Aspects
of the Contracts........... With respect to the transfer of the Contracts to
the related Trust pursuant to a Pooling Agreement
or the pledge of the related Issuer's right,
title and interest in and to such Contracts on
behalf of Securityholders pursuant to an
Indenture, the Depositor will warrant, in each
case, that such transfer is either a valid
transfer and assignment of the Contracts to the
Trust or the grant of a security interest in the
Contracts. Each Prospectus Supplement will
specify what actions will be taken by which
parties as will be required to perfect either the
Issuer's or the Securityholders' security
interest in the Contracts. The Depositor may also
warrant that, if the transfer or pledge by it to
the Trust or to the Securityholders is deemed to
be a
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grant to the Trust or to the Securityholders of a
security interest in the Contracts, then the
related Issuer or the Securityholders will have a
first priority perfected security interest
therein, except for certain liens which have
priority over previously perfected security
interests by operation of law, and, with certain
exceptions, in the proceeds thereof. Similar
security interest and priority representations
and warranties, as described in the related
Prospectus Supplement, may also be made by the
Depositor with respect to the Equipment.
Each Prospectus Supplement will specify if the
related Originator or the Depositor has filed or
will be required to file UCC (as herein defined)
financing statements identifying the Equipment as
collateral pledged in favor of the related Trust
or Trustee on behalf of the Securityholders. In
the absence of such filings any security interest
in the Equipment will not be perfected in favor
of the related Trust or Trustee. See "Special
Considerations -- Certain Legal Aspects" and
"Interests in the Conveyed Property -- UCC and
Bankruptcy Considerations."
Optional Termination........ The related Servicer, the related Originator, the
Depositor, or, if specified in the related
Prospectus Supplement, certain other entities
may, at their respective options, effect early
retirement of a series of Securities under the
circumstances and in the manner set forth herein
under "The Trust Agreement - Termination;
Retirement of Securities" and in the related
Prospectus Supplement.
Mandatory Termination...... The Trustee, the related Servicer or certain
other entities specified in the related
Prospectus Supplement may be required to effect
early retirement of all or any portion of a
series of Securities by soliciting competitive
bids for the purchase of the related Trust Fund
or otherwise, under other circumstances and in
the manner specified in "The Trust Agreement -
Termination; Retirement of Securities" and in the
related Prospectus Supplement.
Tax Considerations......... Securities of each series offered hereby will,
for federal income tax purposes, constitute
either (i) interests in a Trust treated as a
grantor trust under applicable provisions of the
Code ("Grantor Trust Securities"), (ii) debt
issued by a Trust or by the Depositor ("Debt
Securities") or (iii)interests in a Trust which
is treated as a partnership ("Partnership
Interests").
The Prospectus Supplement for each series of
Securities will summarize, subject to the
limitations stated therein, federal income tax
considerations relevant to the purchase,
ownership and disposition of such Securities.
Investors are advised to consult their tax
advisors and to review "Certain Federal and State
Income Tax Consequences" in the related
Prospectus Supplement.
ERISA Considerations........ The Prospectus Supplement for each series of
Securities will summarize, subject to the
limitations discussed therein, considerations
under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), relevant to the
purchase of such Securities by employee benefit
plans and individual retirement accounts. See
"ERISA Considerations" in the related Prospectus
Supplement.
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Ratings.................... Each Class of Securities offered pursuant to this
Prospectus and the related Prospectus Supplement
will be rated in one of the four highest rating
categories by one or more "national statistical
rating organizations", as defined in the
Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and commonly referred to as
"Rating Agencies". Such ratings will address, in
the opinion of such Rating Agencies, the
likelihood that the Issuer will be able to make
timely payment of all amounts due on the related
Securities in accordance with the terms thereof.
Such ratings will neither address any prepayment
or yield considerations applicable to any
Securities nor constitute a recommendation to
buy, sell or hold any Securities.
The ratings expected to be received with respect
to any Securities will be set forth in the
related Prospectus Supplement.
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SPECIAL CONSIDERATIONS
Prospective Securityholders should consider, among other things, the
following factors in connection with the purchase of the Securities:
Limited Liquidity. There can be no assurance that a secondary market
for the Securities of any series or Class will develop or, if it does develop,
that it will provide Securityholders with liquidity of investment or that it
will continue for the life of such Securities. The Prospectus Supplement for any
series of Securities may indicate that an underwriter specified therein intends
to establish and maintain a secondary market in such Securities; however, no
underwriter will be obligated to do so. The Securities will not be listed on any
securities exchange.
Ownership of Contracts. In connection with the issuance of any series
of Securities, the related Originator(s) will transfer Contracts to the
Depositor. The related Originator(s) will warrant in a Receivables Acquisition
Agreement that the transfer of the Contracts by it to the Depositor is a valid
assignment, transfer and conveyance of such Contracts. The Depositor will
warrant in a Trust Agreement (a) if the Depositor or the related Originator(s)
retain title to the Contracts, that the Trustee for the benefit of
Securityholders has a valid security interest in such Contracts, or (b) if the
Depositor transfers such Contracts to a Trust, that the transfer of the
Contracts to such Trust is either a valid assignment, transfer and conveyance of
the Contracts to the Trust or the Trustee on behalf of the Securityholders has a
valid security interest in such Contracts. As to be described in the related
Prospectus Supplement, the related Trust Agreement will provide either that the
Trustee will be required to maintain possession of the original copies of all
Contracts that constitute chattel paper or that the Depositor, the related
Originator(s) or the related Servicer will retain possession of such Contracts;
provided that in case the Depositor or an Originator retains possession of the
related Contracts, the Servicer may take possession of such original copies as
necessary for the enforcement of any Contract. If any Contracts remain in the
possession of the Depositor or an Originator, the related Prospectus Supplement
may describe specific trigger events that will require delivery to the Trustee.
If the Depositor, the Servicer, the Trustee, an Originator or other third party,
while in possession of the Contracts, sells or pledges and delivers such
Contracts to another party, in violation of the Receivables Acquisition
Agreement or the Trust Agreement, there is a risk that such other party could
acquire an interest in such Contracts having a priority over the Issuer's
interest. Furthermore, if the Depositor, the Servicer, an Originator or a third
party, while in possession of the Contracts, is rendered insolvent, such event
of insolvency may result in competing claims to ownership or security interests
in the Contracts. Such an attempt, even if unsuccessful, could result in delays
in payments on the Securities. If successful, such attempt could result in
losses to the Securityholders or an acceleration of the repayment of the
Securities. The related Originator(s) and the Depositor will make certain
representations and warranties with respect to the ownership of the Contracts as
of the date of the transfer to the Depositor and the Trust, if any,
respectively. The related Originator will be obligated to acquire any Contract
from the related Trust Fund if there is a breach of such representations and
warranties that materially adversely affects the interests of the Depositor or
the Trust in such Contract and such breach has not been cured.
Security Interest in the Equipment. Unless otherwise described in the
related Prospectus Supplement, the related Originator will also contribute all
of its right, title and interest in and to the related Equipment to the
Depositor. If title to the Equipment is transferred, the Receivables Acquisition
Agreement shall require the Originator to make certain representations and
warranties with respect to the transfer of title and perfection and priority of
a security interest, if any, in the Equipment. The Depositor may also transfer
the Equipment to a Trust or may pledge all of its right, title and interest in
and to such Equipment to the Trust. Pursuant to a Trust Agreement, the Depositor
may warrant (a) if the Depositor transfers such Equipment to a Trust, that such
transfer is either a valid assignment, transfer and conveyance of such Equipment
to the Trust or it has granted to the Trust a security interest in such
Equipment, or (b) if the Depositor retains title, that it has granted to the
Trustee for the benefit of Securityholders a valid security interest in such
Equipment.
As specified herein and related Prospectus Supplement, because of the
administrative burden and expense that would be entailed in so doing, neither
the Originators nor the Depositor will file, or necessarily will be required to
file, UCC financing statements identifying the Equipment as collateral pledged
in favor of the related Trust or Trustee on behalf of the Securityholders. In
the absence of such filings any security interest in the Equipment will not be
perfected in favor of the related Trust or Trustee. As a result the Trust or
Trustee could lose priority of its
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security interest in such Equipment. Neither the Originators nor the Depositor
will have any obligation to reacquire Equipment as to which such aforementioned
occurrence results in the loss of lien priority after the date such Trust Fund
receives an interest in such Equipment unless otherwise obligated in the related
Prospectus Supplement.
Restrictions on Recoveries. Unless specific limitations are described
on the related Prospectus Supplement with respect to specific Contracts, all
Contracts will provide that the obligations of the Lessees thereunder are
absolute and unconditional, regardless of any defense, set-off or abatement
which the Lessee may have against the related Originator or any other person or
entity whatsoever. The Originators will warrant that no claims or defenses have
been asserted or threatened with respect to the Contracts and that all
requirements of applicable law with respect to the Contracts have been
satisfied.
In the event that the Depositor or the Trustee must rely on
repossession and disposition of Equipment to recover scheduled payments due on
Defaulted Contracts, the Issuer may not realize the full amount due on a
Contract (or may not realize the full amount on a timely basis). Other factors
that may affect the ability of the Issuer to realize the full amount due on a
Contract include whether financing statements to perfect the security interest
in the Equipment had been filed, depreciation, obsolescence, damage or loss of
any item of Equipment, and the application of Federal and state bankruptcy and
insolvency laws. As a result, the Securityholders may be subject to delays in
receiving payments and suffer loss of their investment in the Securities.
Insolvency and Bankruptcy Matters. The Depositor will take steps in
structuring the transactions contemplated hereby that are intended to ensure
that the voluntary or involuntary application for relief by the related
Originator or the Depositor (the Originators and the Depositors, collectively
for these purposes, "Debtors") under the United States Bankruptcy Code or
similar applicable state laws ("Insolvency Laws") will not result in the assets
of the related Trust Fund becoming property of the estate of a Debtor within the
meaning of such Insolvency Laws. Such steps will generally involve the creation
by the related Originator of a separate, limited-purpose subsidiary (each, a
"Finance Subsidiary") pursuant to articles of incorporation containing certain
limitations (including restrictions on the nature of such Finance Subsidiary's
business and a restriction on such Finance Subsidiary's ability to commence a
voluntary case or proceeding under any Insolvency Law without the prior
unanimous affirmative vote of all its directors). However, there can be no
assurance that the activities of any Finance Subsidiary would not result in a
court's concluding that the assets and liabilities of such Finance Subsidiary
should be consolidated with those of the related Originator in a proceeding
under any Insolvency Law.
Except to the extent otherwise described in the related Prospectus
Supplement, each Receivables Acquisition Agreement and each Trust Agreement will
generally require that the related Originator contribute the related Receivables
to a Finance Subsidiary, which will then transfer such Receivables to the
Depositor which in turn will transfer such Receivables to an Issuer. Except as
otherwise described in the related Prospectus Supplement, the Equity Interest in
a Trust Fund will be transferred to the related Finance Subsidiary.
With respect to each Trust Fund, the Trustee and all Securityholders
will covenant that they will not at any time institute against the Depositor or
the related Finance Subsidiary any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
For purposes of this Prospectus, the term "Originator" includes the
term "Finance Subsidiary." In addition, while an Originator is the Servicer,
cash collections held by such Originator may, subject to certain conditions, be
commingled and used for the benefit of such Originator prior to each Payment
Date and, in the event of the bankruptcy of such Originator, the Depositor, a
Trust or Trustee may not have a perfected interest in such collections.
The Depositor believes that the transfer of the Receivables by an
Originator or its Finance Subsidiary to the Depositor should be treated as a
valid assignment, transfer and conveyance of such Receivables. However, in the
event of an insolvency of such Originator, a court, among other remedies, could
attempt to recharacterize the transfer of the Receivables by such Originator to
the Depositor as a borrowing by the Originator from the Depositor or the related
Securityholders, secured by a pledge of such Receivables. Such an attempt, even
if unsuccessful, could result in delays in payments on the Securities. If such
an attempt were successful, a court, among other remedies, could elect to
accelerate payment of the Securities and liquidate the Receivables, with the
Securityholders
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entitled to the then outstanding principal amount thereof and interest thereon
at the applicable Security Interest Rate to the date of payment. Thus, the
Securityholders could lose the right to future payments of interest and might
incur reinvestment losses. As more fully described in the related Prospectus
Supplement, in the event the related Issuer is rendered insolvent, the Trustee
for a Trust, in accordance with the Trust Agreement, will promptly sell, dispose
of or otherwise liquidate the related Receivables in a commercially reasonable
manner on commercially reasonable terms. The proceeds from any such sale,
disposition or liquidation of such Receivables will be treated as collections on
such Receivables. If the proceeds from the liquidation of the Receivables and
any amount available from any credit enhancement, if any, are not sufficient to
pay Securities of the related series in full, the amount of principal returned
to such Securityholders will be reduced and such Securityholders will incur a
loss.
Lessees of the Equipment may be entitled to assert against the related
Originator, the Depositor, or the Trust, if any, claims and defenses which they
have against such Originator with respect to the Receivables. The Originator(s)
will warrant that no such claims or defenses have been asserted or threatened
with respect to the Receivables and that all requirements of applicable law with
respect to the Receivables have been satisfied.
Equipment Obsolescence. In the event a Contract becomes a Defaulted
Contract and the Lessee (and any guarantor) has insufficient assets available to
pay the Contract payments on the scheduled payment dates, the only other source
of moneys (other than the applicable credit enhancements, if any) for such
amounts will be the income and proceeds from the disposition of the related
Equipment. Because the market value of equipment generally declines with age and
may be subject to sudden, significant declines in value because of technological
advances, in the event of a repossession and sale of Equipment subject to a
Defaulted Contract, the Issuer may not recover the entire amount due on such
Contract. As a result, the Securityholders may be subject to delays in receiving
payments and suffer loss of their investment in the Securities.
Delinquencies. There can be no assurance that the historical levels of
delinquencies and losses experienced by the related Originator on its equipment
lease portfolio will be indicative of the performance of the Contracts included
in any Trust Fund or that such levels will continue in the future. Delinquencies
and losses could increase significantly for various reasons, including changes
in the federal income tax laws, changes in the local, regional or national
economies or due to other events.
Subordination; Limited Assets. To the extent specified in the related
Prospectus Supplement, distributions of interest and principal on one Class of
Securities of a series may be subordinated in priority of payment to interest
and principal due on other Classes of Securities of a related series. Moreover,
each Trust Fund will not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the related Receivables and,
to the extent provided in the related Prospectus Supplement, a Pre-Funding
Account, the related reserve account and any other credit enhancement. The
Securities represent obligations solely of the related Trust or debt secured by
the related Trust Fund, and will not represent a recourse obligation to other
assets of the related Originator(s) or of the Depositor. No Securities of any
series will be insured or guaranteed by any Originator, the Depositor, the
Servicer, or the applicable Trustee. Consequently, holders of the Securities of
any series must rely for repayment primarily upon payments on the Receivables
and, if and to the extent available, amounts on deposit in the Pre-Funding
Account, if any, the reserve account, if any, and any other credit enhancement,
all as specified in the related Prospectus Supplement.
Master Trusts. As may be described in the related Prospectus
Supplement, a Master Trust may issue from time to time more than one series.
While the terms of any additional series will be specified in a supplement to
the related Master Trust Agreement, the provisions of such supplement and,
therefore, the terms of any additional series, will not be subject to prior
review by, or consent of, holders of the Securities of any series previously
issued by such Master Trust. Such terms may include methods for determining
applicable investor percentages and allocating collections, provisions creating
different or additional security or credit enhancements and any other provisions
which are made applicable only to such series. The obligation of the related
Trustee to issue any new series is subject to the condition, among others, that
such issuance will not result in any Rating Agency reducing or withdrawing its
rating of the Securities of any outstanding series (any such reduction or
withdrawal is referred to herein as a "Ratings Effect"). There can be no
assurance, however, that the terms of any series might not have an impact on the
timing or amount of payments received by a Securityholder of another series
issued by the same Master Trust. See "Description of the Securities-Master
Trusts."
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Book-Entry Registration. Issuance of the Securities in book-entry form
may reduce the liquidity of such Securities in the secondary trading market
since investors may be unwilling to purchase Securities for which they cannot
obtain definitive physical securities representing such Securityholders'
interests, except in certain circumstances described in the related Prospectus
Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct Participants" or "Indirect Participants") or certain banks, the
ability of a Securityholder to pledge a Security to persons or entities that do
not participate in the DTC system, or otherwise to take actions in respect to
such Securities, may be limited due to lack of a physical security representing
the Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Trustee to DTC and, in such case, DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities -- Book Entry
Registration."
Security Rating. The rating of Securities credit enhanced by a letter
of credit, financial guaranty insurance policy, reserve fund, credit or
liquidity facilities, cash deposits or other forms of credit enhancement
(collectively "Credit Enhancement") will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer to honor its obligations pursuant to any
such Credit Enhancement below the rating initially given to the Securities would
likely result in a reduction in the rating of the Securities.
Maturity and Prepayment Considerations. Because the rate of payment of
principal on the Securities will depend, among other things, on the rate of
payment on the related Contracts, the rate of payment of principal on the
Securities cannot be predicted. Payments on the Contracts will include scheduled
payments as well as partial and full prepayments (to the extent not replaced
with substitute Contracts), payments upon the liquidation of Defaulted
Contracts, payments upon acquisitions by the related Originator, the related
Servicer or the Depositor of Contracts from the related Trust Fund on account of
a breach of certain representations and warranties in the related Trust
Agreement, payments upon an optional acquisition by the related Originator, the
related Servicer or the Depositor of Contracts from the related Trust Fund (any
such voluntary or involuntary prepayment or other early payment of a Contract, a
"Prepayment"), and residual payments. The rate of early terminations of
Contracts due to Prepayments and defaults may be influenced by a variety of
economic and other factors, including, among others, obsolescence, then current
economic conditions and tax considerations. The risk of reinvesting
distributions of the principal of the Securities will be borne by the
Securityholders. The yield to maturity on Strip Securities or Securities
purchased at premiums or discounts to par will be extremely sensitive to the
rate of Prepayments on the related Receivables. In addition, the yield to
maturity on certain other types of classes of Securities, including Strip
Securities, Accrual Securities or certain other Classes in a series including
more than one Class of Securities, may be relatively more sensitive to the rate
of prepayment of the related Contracts than other Classes of Securities.
The Depositor does not have available to it any statistics as to
prepayment rates historically experienced in the equipment leasing industry. The
rate of Prepayments of Contracts cannot be predicted and is influenced by a wide
variety of economic, social, and other factors, including prevailing interest
rates, the availability of alternate financing and local and regional economic
conditions. Therefore, no assurance can be given as to the level of Prepayments
that a Trust Fund will experience.
Securityholders should consider, in the case of Securities purchased at
a discount, the risk that a slower than anticipated rate of Prepayments on the
Receivables could result in an actual yield that is less than the anticipated
yield and, in the case of any Securities purchased at a premium, the risk that a
faster than anticipated rate of Prepayments on the Receivables could result in
an actual yield that is less than the anticipated yield.
Certain UCC Considerations. Certain states have adopted a version of
Article 2A of the Uniform Commercial Code ("Article 2A"). Article 2A purports to
codify many provisions of existing common law. Although there is little
precedent regarding how Article 2A will be interpreted, it may, among other
things, limit
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enforceability of any "unconscionable" lease or "unconscionable" provision in a
lease, provide a lessee with remedies, including the right to cancel the lease
contract, for certain lessor breaches or defaults, and may add to or modify the
terms of "consumer leases" and leases where the lessee is a "merchant lessee".
Article 2A, moreover, recognizes typical commercial lease "hell or high water"
rental payment clauses and validates reasonable liquidated damages provisions in
the event of lessor or lessee defaults. Article 2A also recognizes the concept
of freedom of contract and permits the parties in a commercial context a wide
degree of latitude to vary provisions of the law.
Contracts Related to Software and Services. Certain Contracts, as
described in the related Prospectus Supplement, may relate to software and
services that are not owned by the related Originator and in which no related
interest will be transferred to the Issuer. Accordingly, if any such Contract
becomes a Defaulted Contract, the Issuer will not realize any proceeds from the
related software and services from which to satisfy any unpaid payments under
such Contracts.
THE TRUST FUNDS
The property of each Trust Fund will include, as specified in the
related Prospectus Supplement, (i) a pool of Receivables, (ii) all moneys
(including accrued interest) due thereunder on or after the applicable Cut-off
Date, (iii) such amounts as from time to time may be held in one or more
accounts established and maintained by the Servicer pursuant to the related
Trust Agreement, as described below and in the related Prospectus Supplement,
(iv) the security interests, if any, in the Equipment relating to such pool of
Receivables, (v) the right to proceeds from claims on physical damage policies,
if any, covering such Equipment or the related Lessees, as the case may be, (vi)
the proceeds of any repossessed Equipment related to such pool of Receivables,
(vii) the rights of the Depositor under the related Receivables Acquisition
Agreement and (viii) interest earned on certain short-term investments held by
such Trust Fund, unless the related Prospectus Supplement specifies that such
earnings may be paid to the related Servicer or Originator(s). The Trust Fund
will also include, if so specified in the related Prospectus Supplement, monies
on deposit in a Pre-Funding Account, which will be used by the Trustee to
acquire or receive a security interest in Additional Receivables from time to
time during the Pre-Funding Period specified in the related Prospectus
Supplement. In addition, to the extent specified in the related Prospectus
Supplement, some combination of Credit Enhancements may be issued to or held by
the Trustee on behalf of the related Trust Fund for the benefit of the holders
of one ore more classes of Securities.
The Receivables comprising a Trust Fund will, as specifically described
in the related Prospectus Supplement, be either (i) originated by the related
Originator, (ii) originated by various Vendors and acquired by the related
Originator or (iii) acquired by the related Originator from originators or other
lessors of Receivables.
The Equipment underlying the Receivables included in each Trust Fund
will be limited to personal property which is leased or financed by the related
Originator to the Lessee pursuant to Contracts which either are "chattel paper"
(as defined in the Uniform Commercial Code) or would be "chattel paper" but for
a technical definitional matter, but in any event are not treated materially
differently from "chattel paper" for purposes of title transfer, security
interests or remedies on default. The Equipment will be further limited to
personal property which is subject to Uniform Commercial Code provisions
relating to title transfer, security interests and remedies on default and
further limited to Equipment leased to the related Lessee for use by such Lessee
in the ordinary course of business or for home use such as medical equipment,
restaurant equipment, film and video production equipment, other industrial and
production equipment, data processing equipment, telecommunications equipment,
office equipment and furniture.
No Trust Fund will include Receivables with respect to which the
related Contract or the related Equipment is subject to federal or state
registration or titling requirements which (x) differ materially from, or
supplant, standard Uniform Commercial Code provisions governing the manner in
which title or security interests in "chattel paper" (as defined in the Uniform
Commercial Code) or the related equipment is determined or perfected or (y)
differ materially from, or supplant, standard Uniform Commercial Code provisions
governing remedies on default. By way of illustration of the foregoing, no Trust
Fund will include Receivables with respect to which the underlying Contracts or
Equipment relate to motor vehicles, aircraft, ships or boats, firearms or other
weapons, railroad rolling stock or facilities such as factories, warehouses or
plants subject to state laws governing the manner in which title or
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security interest in real property is determined or perfected. However,
Receivables may include Contracts and Equipment relating to individual, discrete
components of assets such as the foregoing; for example a leased computer on the
ship may qualify as "Equipment" which may be included in a Trust Fund, provided
that both the lease and the computer are generally within the scope of the
Uniform Commercial Code.
The Receivables will be acquired by the Depositor from the related
Originator pursuant to a Receivables Acquisition Agreement between the
Originator and the Depositor (each, a "Receivables Acquisition Agreement"). The
Receivables included in each Trust Fund will be selected from those Receivables
held by the Originators based on the criteria specified in the applicable Trust
Agreement and described herein or in the related Prospectus Supplement.
With respect to each series of Securities, on or prior to the Closing
Date on which the Securities are delivered to Securityholders, the Depositor
will form a Trust Fund by either (i) transferring the related Receivables into a
Trust pursuant to a Trust Agreement between the Depositor and the Trustee or
(ii) entering into an Indenture with an Indenture Trustee, relating to the
issuance of such Securities, secured by the related Receivables.
The Receivables comprising each Trust Fund will generally have been
originated by the related Originator(s) or acquired by such Originator(s) from
Vendors or from other lessors in accordance with such Originator's(s') specified
underwriting criteria. The underwriting criteria applicable to the Receivables
included in any Trust Fund will be described in all material respects in the
related Prospectus Supplement.
THE ISSUERS
With respect to each series of Securities, the Depositor will either
establish a separate Trust that will issue such Securities, or the Depositor
will issue such Securities, in each case pursuant to the related Trust
Agreement. For purposes of this Prospectus and the related Prospectus
Supplement, the Depositor, if the Depositor issues the related Securities, or
the related Trust, if a Trust issues the related Securities, shall be referred
to as the "Issuer" with respect to such Securities.
Upon the issuance of the Securities of a given series, the proceeds
from such issuance will be used by the Depositor to acquire the related
Receivables from the related Originator. The related Servicer will service the
related Receivables pursuant to the applicable Servicing Agreement, and will be
compensated for acting as the Servicer. To facilitate servicing and to minimize
administrative burden and expense, the Servicers may be appointed custodians for
the related Receivables by each Trustee and the Depositor, as may be set forth
in the related Prospectus Supplement.
If the protection provided to the Securityholders of a given class by
the subordination of another Class of Securities of such series and by the
availability of the funds in the reserve account, if any, or any other Credit
Enhancement for such series is insufficient, the Issuer must rely solely on the
payments from the Lessees on the related Contracts, and the proceeds from the
sale of Equipment which secure or are leased under the Defaulted Contracts. In
such event, certain factors may affect such Issuer's ability to realize on the
collateral securing such Contracts, and thus may reduce the proceeds to be
distributed to the Securityholders of such series.
THE RECEIVABLES
Receivables Pools
Information with respect to the Receivables in each Trust Fund will be
set forth in the related Prospectus Supplement, including, the identity of the
related Originator(s), the related underwriting criteria and collection
policies, together with, to the extent appropriate, the composition of such
Receivables and the distribution of such Receivables by equipment type, payment
frequency and current principal balance as of the applicable Cut-off Date.
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Delinquencies, Repossessions, and Net Losses
Certain information relating to the related Originator's delinquency,
repossession and net loss experience with respect to Contracts it has originated
or acquired will be set forth in each Prospectus Supplement. This information
may include, among other things, the experience with respect to all Contracts in
such Originator's portfolio during certain specified periods, including
Contracts which may not meet the criteria for selection as a Receivable for any
particular Trust Fund. There can be no assurance that the delinquency,
repossession and net loss experience on any Trust Fund will be comparable to the
related Originator's prior experience.
Maturity and Prepayment Considerations
As more fully described in the related Prospectus Supplement, if a
Contract permits a Prepayment, such payment, together with accelerated payments
resulting from defaults, will shorten the weighted average life of the related
pool of Receivables and the weighted average life of the related Securities. The
rate of Prepayments on the Receivables may be influenced by a variety of
economic, financial and other factors. In addition, under certain circumstances,
the Depositor or the related Originator will be obligated to acquire Receivables
from the related Trust Fund pursuant to the applicable Trust Agreement or
Receivables Acquisition Agreement as a result of breaches of representations and
warranties. Any reinvestment risks resulting from a faster or slower
amortization of the related Securities which results from Prepayments will be
borne entirely by the related Securityholders.
The related Prospectus Supplement will set forth certain additional
information with respect to the maturity and prepayment considerations
applicable to a particular pool of Receivables and the related series of
Securities, together with a description of any applicable prepayment penalties.
Acquisition of Receivables From Originators
The Receivables underlying a Series of Securities will be acquired by
the Depositor, either directly or through affiliates (such as a Transferor),
from the related Originator pursuant to a Receivables Acquisition Agreement
between the Depositor or such affiliate and each such Originator.
The Depositor expects that, unless otherwise specified in the related
Prospectus Supplement, each Receivable so acquired will have been originated by
the Originator thereof in accordance with the underwriting criteria specified in
such Prospectus Supplement. Unless otherwise specified in the applicable
Prospectus Supplement, each Originator will be an institution experienced in
originating and servicing equipment leases in accordance with accepted industry
practices and prudent guidelines. Unless otherwise provided in the applicable
Prospectus Supplement, each Originator pursuant to the related Receivables
Acquisition Agreement will make certain representations and warranties to the
Depositor in respect of the related Receivables; the material terms of such
representations and warranties will be set forth in the related Prospectus
Supplement. Unless otherwise provided in the applicable Prospectus Supplement
with respect to each Series, the Depositor will assign all of its rights (except
certain rights of indemnification) and interest in the related Receivables
Acquisition Agreement to the related Trustee for the benefit of the
Securityholders of such Series, and the Originator shall thereupon be liable to
the Trustee for defective or missing documents or an uncured breach of such
Originator's representations or warranties, to the extent described in the
related Prospectus Supplement.
POOL FACTORS
The "Pool Factor" for each Class of Securities will be a seven-digit
decimal, which the Servicer will compute prior to each distribution with respect
to such Class of Securities, indicating the remaining outstanding principal
balance of such Class of Securities as of the applicable Payment Date, as a
fraction of the initial outstanding principal balance of such Class of
Securities. Each Pool Factor will be initially 1.0000000, and thereafter will
decline to reflect reductions in the outstanding principal balance of the
applicable Class of Securities. A Securityholder's portion of the aggregate
outstanding principal balance of the related Class of Securities is the product
of (i) the original aggregate purchase price of such Securityholder's Securities
and (ii) the applicable Pool Factor.
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As more specifically described in the related Prospectus Supplement
with respect to each series of Securities, the related Securityholders of record
will receive reports on or about each Payment Date concerning the payments
received on the Receivables, the Pool Balance (as such term is defined in the
related Prospectus Supplement, the "Pool Balance"), each Pool Factor and various
other items of information. In addition, Securityholders of record during any
calendar year will be furnished information for tax reporting purposes not later
than the latest date permitted by law.
USE OF PROCEEDS
The proceeds from the sale of the Securities of a given series will be
applied by the Depositor to the acquisition of the related Receivables from the
related Originator. The Depositor expects that it will make additional sales of
securities similar to the Securities from time to time, but the timing and
amount of any such additional offering will be dependent upon a number of
factors, including the volume of Contracts acquired by the Depositor, prevailing
interest rates, availability of funds and general market conditions.
THE DEPOSITOR
Prudential Securities Secured Financing Corporation, formerly known as
P-B Secured Financing Corporation (the "Depositor"), was incorporated in the
State of Delaware on August 26, 1988 as a wholly-owned, limited purpose finance
subsidiary of Prudential Securities Group Inc. (a wholly-owned indirect
subsidiary of The Prudential Insurance Company of America). The Depositor's
principal executive offices are located at 130 John Street, New York, New York
10038. Its telephone number is (212) 214-7435.
As described herein under "The Trust Funds," the only obligations, if
any, of the Depositor with respect to a Series of Securities may be pursuant to
certain limited representations and warranties and limited undertakings to
repurchase or substitute Receivables under certain circumstances. Unless
otherwise specified in the applicable Prospectus Supplement, the Depositor will
have no servicing obligations or responsibilities with respect to any Trust
Fund. The Depositor does not have, nor is it expected in the future to have, any
significant assets.
As specified in the related Prospectus Supplement the Servicer with
respect to any Series of Securities may be an affiliate of the Depositor. As
described under "The Trust Fund," the Depositor may acquire Receivables through
or from an affiliate.
Neither the Depositor nor Prudential Securities Group Inc. nor any of
its affiliates, including The Prudential Insurance Company of America, will
insure or guarantee the Certificates of any Series.
THE TRUSTEE
The Trustee for each series of Securities will be specified in the
related Prospectus Supplement. The Trustee's liability in connection with the
issuance and sale of the related Securities is limited solely to the express
obligations of such Trustee set forth in the related Trust Agreement.
With respect to each series of Securities, no resignation or removal of
the Trustee and no appointment of a successor Trustee shall become effective
until the acceptance of appointment by the successor Trustee. The Trustee may
resign for cause at any time by giving written notice thereof to the Depositor
and by mailing notice of resignation by first-class mail, postage prepaid, to
the Securityholders of such series at their addresses appearing on the Security
Register. The Trustee may be removed at any time by written notice of the
holders of Securities evidencing more than 50% of the voting rights with respect
to such series, delivered to the Trustee and the Depositor, unless an alternate
method is described in the related Prospectus Supplement. If the Trustee shall
resign, be removed, or become incapable of acting, or if a vacancy shall occur
in the office of Trustee for any cause, the Depositor shall promptly appoint a
successor Trustee. If no successor Trustee shall have been so appointed by the
Depositor or the Securityholders, or if no successor Trustee shall have accepted
appointment within 30 days after
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any such resignation or removal, existence of incapability, or occurrence of
such vacancy, the Trustee or any Securityholder may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
DESCRIPTION OF THE SECURITIES
General
The Securities will be issued in series. Each series of Securities (or,
in certain instances, two or more series of Securities) will be issued pursuant
to a Trust Agreement. The following summaries (together with additional
summaries under "The Trust Agreement" below) describe all material terms and
provisions relating to the Securities common to each Trust Agreement. The
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Trust Agreement for
the related Securities and the related Prospectus Supplement.
All of the Securities offered pursuant to this Prospectus and the
related Prospectus Supplement will be rated in one of the four highest rating
categories by one or more Rating Agencies.
The Securities will generally be styled as debt instruments, having a
principal balance and a specified Interest Rate. The Securities may either
represent beneficial ownership interests in the related Receivables held by the
related Trust or debt secured by certain assets of the related Issuer.
Each series or Class of Securities offered pursuant to this Prospectus
may have a different Interest Rate, which may be a fixed or adjustable interest
rate. The related Prospectus Supplement will specify the Interest Rate for each
series or Class of Securities described therein, or the initial interest rate
and the method for determining subsequent changes to the Interest Rate.
A series may include one or more Classes of Strip Securities entitled
(i) to principal distributions, with disproportionate, nominal or no interest
distributions, or (ii) to interest distributions, with disproportionate, nominal
or no principal distributions. In addition, a series of Securities may include
two or more Classes of Securities that differ as to timing, sequential order,
priority of payment, Interest Rate or amount of distribution of principal or
interest or both, or as to which distributions of principal or interest or both
on any Class may be made upon the occurrence of specified events, in accordance
with a schedule or formula, or on the basis of collections from designated
portions of the related pool of Receivables. Any such series may include one or
more Classes of Accrual Securities, as to which certain accrued interest will
not be distributed but rather will be added to the principal balance (or nominal
balance, in the case of Accrual Securities which are also Strip Securities)
thereof on each Payment Date, as hereinafter defined, or in the manner described
in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series may
include one or more other Classes of Senior Securities that are senior to one or
more other Classes of Subordinate Securities in respect of certain distributions
of principal and interest and allocations of losses on Receivables.
In addition, certain Classes of Senior (or Subordinate) Securities may
be senior to other Classes of Senior (or Subordinate) Securities in respect of
such distributions or losses.
General Payment Terms of Securities
As provided in the related Trust Agreement and as described in the
related Prospectus Supplement, Securityholders will be entitled to receive
payments on their Securities on the specified Payment Dates. Payment Dates with
respect to the Securities will occur monthly, quarterly or semi- annually, as
described in the related Prospectus Supplement.
The related Prospectus Supplement will describe the Record Date
preceding such Payment Date, as of which the Trustee or its paying agent will
fix the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Payment Date. As more fully described in the related
Prospectus Supplement, the
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Payment Date may be the fifteenth or twenty-fifth day of each month (or, in the
case of quarterly-pay Securities, the fifteenth or twenty-fifth day of every
third month; and in the case of semi-annual pay Securities, the fifteenth or
twenty-fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month that precedes the calendar
month in which such Payment Date occurs.
Each Trust Agreement will describe a Remittance Period preceding each
Payment Date (for example, in the case of monthly-pay Securities, the calendar
month preceding the month in which a Payment Date occurs). As more fully
provided in the related Prospectus Supplement, collections received on or with
respect to the related Receivables held by a Trust during a Remittance Period
will be required to be remitted by the related Servicer to the related Trustee
prior to the related Payment Date and will be used to fund payments to
Securityholders on such Payment Date. As may be described in the related
Prospectus Supplement, the related Trust Agreement may provide that all or a
portion of the payments collected on or with respect to the related Receivables
may be applied by the related Trustee to the acquisition of additional
Receivables during a specified period (rather than be used to fund payments of
principal to Securityholders during such period) with the result that the
related Securities will possess an interest-only period, also commonly referred
to as a revolving period, which will be followed by an amortization period. Any
such interest only or revolving period may, upon the occurrence of certain
events to be described in the related Prospectus Supplement, terminate prior to
the end of the specified period and result in the earlier than expected
amortization of the related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Trust Agreement may provide that all or a portion of
such collected payments may be retained by the Trustee (and held in certain
temporary investments, including Receivables) for a specified period prior to
being used to fund payments of principal to Securityholders.
Such retention and temporary investment by the Trustee of such
collected payments may be required by the related Trust Agreement for the
purposes of (a) slowing the amortization rate of the related Securities relative
to the rent payment schedule of the related Receivables, or (b) attempting to
match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in distributions to
the specified Securityholders and an acceleration of the amortization of such
Securities.
Neither the Securities nor the underlying Receivables will be
guaranteed or insured by any governmental agency or instrumentality or the
Depositor, the related Servicer, the related Originator, any Trustee or any of
their respective affiliates unless specifically set forth in the related
Prospectus Supplement.
As may be described in the related Prospectus Supplement, Securities of
each series covered by a particular Trust Agreement will either evidence
specified beneficial ownership interest in a separate Trust Fund created
pursuant to such Trust Agreement or represent debt secured by the related Trust
Fund. To the extent that any Trust Fund includes certificates of interest or
participations in Receivables, the related Prospectus Supplement will describe
the material terms and conditions of such certificates or participations.
Master Trusts
As may be described in the related Prospectus Supplement, each Trust
Agreement may provide that, pursuant to any one or more supplements thereto, the
Depositor may direct the related Trustee to issue from time to time new series
subject to the conditions described below (each such issuance a "Master Trust
New Issuance"). Each Master Trust New Issuance will have the effect of
decreasing the Equity Interest in the related Master Trust. Under each such
Master Trust Agreement, the Depositor may designate, with respect to any newly
issued series: (i) its name or designation; (ii) its initial principal amount
(or method for calculating such amount); (iii) its Interest Rate (or formula for
the determination thereof); (iv) the Payment Dates and the date or dates from
which interest shall accrue; (v) the method for allocating collections to
Securityholders of such series; (vi) any bank accounts to be used by such series
and the terms governing the operation of any such bank accounts; (vii) the
percentage used to calculate monthly servicing fees; (viii) the provider and
terms of any form of Credit Enhancement with respect thereto; (ix) the terms on
which the Securities of such series may be repurchased or remarketed to other
investors;
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(x) the number of Classes of Securities of such series, and if such series
consists of more than one Class, the rights and priorities of each such Class;
(xi) the extent to which the Securities of such series will be issuable in
book-entry form; (xii) the priority of such series with respect to any other
series; and (xiii) any other relevant terms. None of the Depositor, the related
Servicer, the related Trustee or any Master Trust is required or intends to
obtain the consent of any Securityholder of any outstanding series to issue any
additional series.
Each Master Trust Agreement provides that the Depositor may designate
terms such that each Master Trust New Issuance has an amortization period which
may have a different length and begin on a different date than such periods for
any series previously issued by the related Master Trust and then outstanding.
Moreover, each Master Trust New Issuance may have the benefits of Credit
Enhancements issued by enhancement providers different from the providers of the
Credit Enhancement, if any, with respect to any series previously issued by the
related Master Trust and then outstanding. Under each Master Trust Agreement,
the related Trustee shall hold any such Credit Enhancement only on behalf of the
Securityholders to which such Credit Enhancement relates. The Depositor will
have the option under each Master Trust Agreement to vary among series the terms
upon which a series may be repurchased by the Issuer or remarketed to other
investors. As more fully described in a related Prospectus Supplement, there is
no limit to the number of Master Trust New Issuances that the Depositor may
cause under a Master Trust Agreement. Each Master Trust will terminate only as
provided in the related Master Trust Agreement. There can be no assurance that
the terms of any Master Trust New Issuance might not have an impact on the
timing and amount of payments received by Securityholders of another series
issued by the same Master Trust.
Under each Master Trust Agreement and pursuant to a related supplement,
a Master Trust New Issuance may only occur upon the satisfaction of certain
conditions provided in each such Master Trust Agreement. The obligation of the
related Trustee to authenticate the Securities of any such Master Trust New
Issuance and to execute and deliver the supplement to the related Master Trust
Agreement is subject to the satisfaction of the following conditions: (a) on or
before the fifth business day immediately preceding the date upon which the
Master Trust New Issuance is to occur, the Depositor shall have given the
related Trustee, the related Servicer, the Rating Agency and certain related
providers of Credit Enhancement, if any, written notice of such Master Trust New
Issuance and the date upon which the Master Trust New Issuance is to occur; (b)
the Depositor shall have delivered to the related Trustee a supplement to the
related Master Trust Agreement, in form satisfactory to such Trustee, executed
by each party to the related Master Trust Agreement other than such Trustee; (c)
the Depositor shall have delivered to the related Trustee any related Credit
Enhancement agreement; (d) the related Trustee shall have received confirmation
from the Rating Agency that such Master Trust New Issuance will not result in
any Rating Agency reducing or withdrawing its rating with respect to any other
series or Class of such Trust (any such reduction or withdrawal is referred to
herein as a "Ratings Effect"); (e) the Depositor shall have delivered to the
related Trustee, the Rating Agency and certain providers of Credit Enhancement,
if any, an opinion of counsel acceptable to the related Trustee that for federal
income tax purposes (i) following such Master Trust New Issuance the related
Master Trust will not be deemed to be an association (or publicly traded
partnership) taxable as a corporation, (ii) such Master Trust New Issuance will
not affect the tax characterization as debt of Securities of any outstanding
series or Class issued by such Master Trust that were characterized as debt at
the time of their issuance and (iii) such Master Trust New Issuance will not
cause or constitute an event in which gain or loss would be recognized by any
Securityholders or the related Master Trust; and (f) any other conditions
specified in any supplement. Upon satisfaction of the above conditions, the
related Trustee shall execute the supplement to the related Master Trust
Agreement and issue the Securities of such new series.
Book-Entry Registration
As may be described in the related Prospectus Supplement,
Securityholders of a given series may hold their Securities through DTC (in the
United States) or CEDEL or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations that are participants in such
systems.
Cede, as nominee for DTC, will hold the global Securities in respect of
a given series. CEDEL and Euroclear will hold omnibus positions on behalf of the
CEDEL Participants (as defined below) and the Euroclear Participants (as defined
below) (collectively, the "Participants"), respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries")
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which in turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
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 Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of notes or certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations. 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 custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Transfers between DTC Participants will occur 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
Participants 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
same-day 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 in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear 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.
The Securityholders of a given series that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, Securities of such series may do so only
through Participants and Indirect Participants. In addition, Securityholders of
a given series will receive all distributions of principal and interest through
the Participants who in turn will receive them from DTC. Under a book-entry
format, Securityholders of a given series may experience some delay in their
receipt of payments, since such payments will be forwarded by the applicable
Trustee to Cede, as nominee for DTC. DTC will forward such payments to its
Participants, which thereafter will forward them to Indirect Participants or
such Securityholders. It is anticipated that the only "Securityholder" in
respect of any series will be Cede, as nominee of DTC. Securityholder of a given
series will not be recognized as Securityholders of such series, and such
Securityholders will be permitted to exercise the rights of Securityholders of
such series only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities of a given series among Participants on whose behalf it acts with
respect to such Securities and to receive and transmit distributions of
principal of, and interest on, such Securities. Participants and Indirect
Participants with which the Securityholders of a given series have accounts with
respect to such Securities similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective
Securityholders of such series. Accordingly, although such Securityholders will
not possess Securities, the Rules provide a mechanism by which Participants will
receive payments and will be able to transfer their interests.
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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
Securityholder of a given series to pledge Securities of such series to persons
or entities that do not participate in the DTC system, or to otherwise act with
respect to such Securities, may be limited due to the lack of a physical
certificate for such Securities.
DTC will advise the Trustee in respect of each Series that it will take
any action permitted to be taken by a Securityholder of the related series only
at the direction of one or more Participants to whose accounts with DTC the
Securities of such series are credited. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of Participants whose holdings include such undivided interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. 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 CEDEL
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 depository, 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. 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.
Euroclear was created in 1968 to hold securities for participants of
the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 28 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office, under contract
with Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the "Euroclear Operator" (as
defined below), and all Euroclear securities clearance accounts and Euroclear
cash accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. 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" 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.
Securities clearance accounts and cash accounts with the Euroclear
Operator 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
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of relationship with persons holding through Euroclear Participants.
Except as required by law, the Trustee in respect of a series will not
have any liability for any aspect of the records relating to or payments made or
account of beneficial ownership interests of the related Securities held by
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Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Definitive Notes
As may be described in the related Prospectus Supplement, the
Securities will be issued in fully registered, certificated form ("Definitive
Securities") to the Securityholders of a given series or their nominees, rather
than to DTC or its nominee, only if (i) the Trustee in respect of the related
series advises in writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to such Securities and
such Trustee is unable to locate a qualified successor, (ii) such Trustee, at
its option, elects to terminate the book-entry-system through DTC or (iii) after
the occurrence of an "Event of Default" under the related Indenture or a default
by the Servicer under the related Trust Agreements, Securityholders representing
at least a majority of the outstanding principal amount of such Securities
advise the applicable Trustee through DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in such
Securityholders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee will be required to notify all such
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive certificates representing
such Securities and receipt of instructions for re-registration, the applicable
Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Distributions of principal of, and interest on, such Securities will
thereafter be made by the applicable Trustee in accordance with the procedures
set forth in the related Indenture or Trust Agreement directly to holders of
Definitive Securities in whose names the Definitive Securities were registered
at the close of business on the applicable Record Date specified for such
Securities in the related Prospectus Supplement. Such distributions will be made
by check mailed to the address of such holder as it appears on the register
maintained by the applicable Trustee. The final payment on any such Security,
however, will be made only upon presentation and surrender of such Security at
the office or agency specified in the notice of final distribution to the
applicable Securityholders.
Definitive Securities in respect of a given series of Securities will
be transferable and exchangeable at the offices of the applicable Trustee or of
a certificate registrar named in a notice delivered to holders of such
Definitive Securities. No service charge will be imposed for any registration of
transfer or exchange, but the applicable Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
Reports to Securityholders
With respect to each series of Securities, on or prior to each Payment
Date for such series, the related Servicer or the related Trustee will forward
or cause to be forwarded to each holder of record of such class of Securities a
statement or statements with respect to the related Trust Fund setting forth the
information specifically described in the related Trust Agreement which
generally will include the following information:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal;
(iii) the amount of such distribution allocable to interest;
(iv) the Pool Balance, if applicable, as of the close of business
on the last day of the related Remittance Period;
(v) the aggregate outstanding principal balance and the Pool
Factor for each Class of Securities after giving effect to all
payments reported under (ii) above on such Payment Date;
(vi) the amount paid to the Servicer, if any, with respect to the
related Remittance Period;
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(vii) the amount of the aggregate purchase amounts for
Receivables that have been reacquired, if any, for such Remittance
Period; and
(viii) the amount of coverage under any letter of credit,
financial guaranty insurance policy, reserve account or other form of
credit enhancement covering default risk as of the close of business
on the applicable Payment Date and a description of any Credit
Enhancement substituted therefor.
Each amount set forth pursuant to subclauses (i), (ii), (iii) and (v)
with respect to the Securities of any series will be expressed as a dollar
amount per $1,000 of the initial principal balance of such Securities, as
applicable.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year, the applicable Trustee will provide to the
Securityholders a statement containing the amounts described in (ii) and (iii)
above for that calendar year and any other information required by applicable
tax laws, for the purpose of the Securityholders' preparation of federal income
tax returns.
DESCRIPTION OF THE TRUST AGREEMENTS
The following summary describes certain terms of each Trust Agreement
pursuant to which a Trust Fund will be created and the related Securities in
respect of such Trust Fund will be issued. For purposes of this Prospectus, the
term "Trust Agreement" as used with respect to a Trust means, collectively, and
except as otherwise specified, any and all agreements relating to the
establishment of the related Trust, the servicing of the related Receivables and
the issuance of the related Securities, including without limitation the
Indenture, (i.e. pursuant to which any Notes shall be issued). Forms of the
Trust Agreement have been filed as exhibits to the Registration Statement of
which the Prospectus forms a part. The summary does not purport to be complete.
It is qualified in its entirety by reference to the provisions of the Trust
Agreements.
Acquisition of the Receivables Pursuant to a Receivables Acquisition Agreement
On the Closing Date specified with respect to any given series of
Securities, the Depositor will acquire the related Receivables from the related
Originator pursuant to a Receivables Acquisition Agreement. The Depositor will
either transfer such Receivables to a Trust pursuant to a Pooling Agreement, or
will pledge the Depositor's right, title and interests in and to such
Receivables to a Trustee on behalf of Securityholders pursuant to an Indenture.
The rights and benefits of the Depositor under such Receivables Acquisition
Agreement will be assigned to the Trustee on behalf of Securityholders as
collateral for the Securities of the related series issued by a Trust or
pursuant to an Indenture. The obligations of the Depositor and the related
Servicer under such Trust Agreements include those specified below and in the
related Prospectus Supplement.
As more fully described in the related Prospectus Supplement, the
Depositor and/or the related Originator will be obligated to acquire from the
related Trust Fund its interest in any Receivable transferred to a Trust or
pledged to a Trustee on behalf of Securityholders if the interest of the
Securityholders therein is materially adversely affected by a breach of any
representation or warranty made by the Depositor or the related Originator with
respect to such Receivable, which breach has not been cured following the
discovery by or notice to the Depositor of the breach. To the extent that the
Depositor so acquires any Receivables, the related Originator will be obligated
to acquire such Receivables from the Depositor pursuant to the related
Receivables Acquisition Agreement contemporaneously with the Depositor's
acquisition of its interest in such Receivables from the applicable Trust Fund.
The obligation of the Depositor to acquire any such Receivables with respect to
which an Originator has breached a representation or warranty is subject to such
Originator's acquisition of such Receivables from the Depositor. In addition, if
so specified in the related Prospectus Supplement, the Depositor may from time
to time reacquire certain Receivables or substitute other Receivables for such
Receivable held by a Trust Fund subject to specified conditions set forth in the
related Trust Agreement and Receivables Acquisition Agreement.
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Accounts
With respect to each series of Securities issued by a Trust, the
related Servicer will establish and maintain with the applicable Trustee one or
more accounts, in the name of such Trustee on behalf of the related
Securityholders, into which all payments made on or with respect to the related
Receivables will be deposited (the "Collection Account"). The Servicer will also
establish and maintain with such Trustee separate accounts, in the name of such
Trustee on behalf of such Securityholders, in which amounts released from the
Collection Account and the reserve account or other Credit Enhancement, if any,
for distribution to such Securityholders will be deposited and from which
distributions to such Securityholders will be made (the "Distribution Account").
Any other accounts to be established with respect to a Trust, including
any reserve account, will be described in the related Prospectus Supplement.
For any series of Securities, funds in the Collection Account, the
Distribution Account, any reserve account and other accounts identified as such
in the related Prospectus Supplement (collectively, the "Trust Accounts") shall
be invested as provided in the related Trust Agreement in Eligible Investments.
"Eligible Investments" are generally limited to investments acceptable to the
Rating Agencies as being consistent with the rating of such Securities. Subject
to certain conditions, Eligible Investments may include securities issued by the
Depositor, the related Originator, the related Servicer or their respective
affiliates or other trusts created by the Depositor or its affiliates. Except as
described below or in the related Prospectus Supplement, Eligible Investments
are limited to obligations or securities that mature not later than the business
day immediately preceding the related Payment Date. However, subject to certain
conditions, funds in the reserve account may be invested in securities that will
not mature prior to the date of the next distribution and will not be sold to
meet any shortfalls. Thus, the amount of cash in any reserve account at any time
may be less than the balance of such reserve account. If the amount required to
be withdrawn from any reserve account to cover shortfalls in collections on the
related Receivables exceeds the amount of cash in such reserve account a
temporary shortfall in the amounts distributed to the related Securityholders
could result, which could, in turn, increase the average life of the Securities
of such series. Except as otherwise specified in the related Prospectus
Supplement, investment earnings on funds deposited in the applicable Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), shall be deposited in the applicable Collection Account on each
Payment Date and shall be treated as collections of interest on the related
Receivables.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution has a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means, with respect to a Trust, (a) the corporate trust
department of the related Indenture Trustee or the related Trustee, as
applicable, or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), which (i) (A) has either
(w) a long-term unsecured debt rating acceptable to the Rating Agencies or (x) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies or (B) the parent corporation of which has either (y) a
long-term unsecured debt rating acceptable to the Rating Agencies or (z) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies and (ii) whose deposits are insured by the FDIC.
To the extent that an Originator's or a Servicer's unsecured debt
ratings are acceptable to the Rating Agencies, amounts deposited to any Trust
Account may be commingled with Originator's or Servicer's general account
moneys. Any rights to so commingle moneys will be described in the related
Prospectus Supplement.
The Servicer
The Servicer under each Trust Agreement will be named in the related
Prospectus Supplement. The entity serving as Servicer may be an affiliate of the
Depositor and may have other business relationships with the Depositor or the
Depositor's affiliates. The Servicer with respect to each Series will service
the Receivables
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contained in the Trust Fund for such Series. Any Servicer may delegate its
servicing responsibilities to one or more sub-servicers, but will not be
relieved of its liabilities with respect thereto.
Each Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Trust Agreement. An uncured breach of such a
representation or warranty that in any respect materially and adversely affects
the interests of the Securityholders will constitute a Servicer Default by such
Servicer under the related Trust Agreement.
Servicing Procedures
Each Trust Agreement will provide that the related Servicer will make
reasonable efforts to collect all payments due with respect to the Receivables
held in the related Trust Fund and, in a manner consistent with the related
Trust Agreement, will continue such collection procedures as such Servicer
follows with respect to the particular type of Receivable in the particular pool
it services for itself and others. Consistent with its normal procedures, the
Servicer may, in its discretion and on a case-by-case basis, arrange with the
Lessee on a Receivable to extend or modify the payment schedule. Some of such
arrangements (including, without limitation any extension of the payment
schedule beyond the final scheduled Payment Date for the related Securities may
result in the Servicer acquiring such Receivable if such Contract becomes a
Defaulted Contract. The Servicer may sell the Equipment securing the respective
Defaulted Contract, if any, at a public or private sale, or take any other
action permitted by applicable law. See "Certain Legal Aspects of the
Receivables".
The material aspects of any particular Servicer's collections
procedures will be set forth in the related Prospectus Supplement.
Payments on Receivables
With respect to each series of Securities, the related Servicer will
deposit all payments on the related Receivables (from whatever source) and all
proceeds of such Receivables collected within two (2) business days of receipt
thereof in the related collection facility, such as a lock-box account or
collection account. Moneys deposited in such collection facility for a Trust
Fund may be commingled with funds from other sources. As specified in the
related Prospectus Supplement, the related Servicer will be required to deposit
payments on the related Receivables (from whatever source) collected during each
collection period (each, a "Collection Period") into the related Collection
Account on a specified day each month. Pending deposit into the related
Collection Account, collections in such collection facility may be invested by
the related Servicer at its own risk and for its own benefit, and will not be
segregated from funds of the related Servicer.
Servicing Compensation
As may be described in the related Prospectus Supplement with respect
to any series of securities issued by a Trust, the related Servicer will be
entitled to receive a servicing fee for each Collection Period (the "Servicing
Fee") in an amount equal to a specified percentage per annum (as set forth in
the related Prospectus Supplement, the "Servicing Fee Rate") of the value of the
assets held in the related Trust Fund, generally as of the first day of such
Collection Period. Each Prospectus Supplement and Servicing Agreement will
specify the priority of distributions with respect to the Servicing Fee
(together with any portion of the Servicing Fee that remains unpaid from prior
Payment Dates), such Servicing Fee may be paid prior to any distribution to the
related Securityholders.
Each Servicer will also collect and retain any late fees, the penalty
portion of interest paid on past due amounts and other administrative fees or
similar charges allowed by applicable law with respect to the Receivables, and
will be entitled to reimbursement from each Trust for certain liabilities.
Payments by or on behalf of Lessees will be allocated to scheduled payments and
late fees and other charges in accordance with such Servicer's normal practices
and procedures.
The Servicing Fee will compensate the related Servicer for performing
the functions of a third party servicer of similar types of receivables as an
agent for their beneficial owner, including collecting and posting all
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payments, responding to inquiries of Lessees on the related Receivables,
investigating delinquencies, sending payment coupons to Lessees, reporting tax
information to Lessees, paying costs of collection and disposition of defaults,
and policing the collateral. The Servicing Fee also will compensate the related
Servicer for administering the related Receivables, accounting for collections
and furnishing statements to the applicable Trustee and the applicable Indenture
Trustee, if any, with respect to distributions. The Servicing Fee also will
reimburse the related Servicer for certain taxes, accounting fees, outside
auditor fees, data processing costs and other costs incurred in connection with
administering the Receivables.
Distributions
With respect to each series of Securities, beginning on the Payment
Date specified in the related Prospectus Supplement, distributions of principal
and interest (or, where applicable, of principal or interest only) on each Class
of such Securities entitled thereto will be made by the applicable Indenture
Trustee to the Noteholders and by the applicable Trustee to the
Certificateholders of such series. The timing, calculation, allocation, order,
source, priorities of and requirements for each class of Noteholders and all
distributions to each class of Certificateholders of such series will be set
forth in the related Prospectus Supplement.
With respect to each series of Securities, on each Payment Date
collections on the related Receivables will be transferred from the Collection
Account to the Distribution Account for distribution to Securityholders,
respectively, to the extent provided in the related Prospectus Supplement.
Credit Enhancement, such as a reserve account, may be available to cover any
shortfalls in the amount available for distribution on such date, to the extent
specified in the related Prospectus Supplement. As more fully described in the
related Prospectus Supplement, and unless otherwise specified therein,
distributions in respect of principal of a Class of Securities of a given series
will be subordinate to distributions in respect of interest on such Class, and
distributions in respect of the Certificates of such series may be subordinate
to payments in respect of the Notes of such series.
Credit and Cash Flow Enhancements
The amounts and types of Credit Enhancement arrangements, if any, and
the provider thereof, if applicable, with respect to each class of Securities of
a given series will be set forth in the related Prospectus Supplement. If and to
the extent provided in the related Prospectus Supplement, credit enhancement may
be in the form of a Policy, subordination of one or more Classes of Securities,
reserve accounts, overcollateralization, letters of credit, credit or liquidity
facilities, third party payments or other support, surety bonds, guaranteed cash
deposits or such other arrangements as may be described in the related
Prospectus Supplement or any combination of two or more of the foregoing. If
specified in the applicable Prospectus Supplement, Credit Enhancement for a
Class of Securities may cover one or more other Classes of Securities of the
same series, and Credit Enhancement for a series of Securities may cover one or
more other series of Securities.
The presence of Credit Enhancement for the benefit of any Class or
series of Securities is intended to enhance the likelihood of receipt by the
Securityholders or such Class or series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. As more specifically provided in the related Prospectus
Supplement, the credit enhancement for a Class or series of Securities will not
provide protection against all risks of loss and will not guarantee repayment of
the entire principal balance and interest thereon. If losses occur which exceed
the amount covered by any Credit Enhancement or which are not covered by any
Credit Enhancement, Securityholders of any Class or series will bear their
allocable share of deficiencies, as described in the related Prospectus
Supplement. In addition, if a form of Credit Enhancement covers more than one
series of Securities, Securityholders of any such series will be subject to the
risk that such Credit Enhancement will be exhausted by the claims of
Securityholders of other series.
Statements to Indenture Trustees and Trustees
Prior to each Payment Date with respect to each series of Securities,
the related Servicer will provide to the applicable Indenture Trustee and/or the
applicable Trustee and Credit Enhancer as of the close of business on the last
day of the preceding related Collection Period a statement setting forth
substantially the same information as is
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required to be provided in the periodic reports provided to Securityholders of
such series described under "Description of the Securities--Reports to
Securityholders".
Evidence as to Compliance
Each Trust Agreement will provide that a firm of independent public
accountants will furnish to the related Trust and/or the applicable Indenture
Trustee and Credit Enhancer, annually, a statement as to compliance by the
related Servicer during the preceding twelve months (or, in the case of the
first such certificate, the period from the applicable Closing Date) with
certain standards relating to the servicing of the Receivables.
Each Trust Agreement will also provide for delivery to the related
Trust and/or the applicable Indenture Trustee of a certificate signed by an
officer of the related Servicer stating that such Servicer either has fulfilled
its obligations under such Trust Agreement in all material respects throughout
the preceding 12 months (or, in the case of the first such certificate, the
period from the applicable Closing Date) or, if there has been a default in the
fulfillment of any such obligation in any material respect, describing each such
default. Each Servicer also will agree to give each Indenture Trustee and each
Trustee notice of certain "Servicer Defaults" (as defined below) under the
related Trust Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Indenture
Trustee or the applicable Trustee.
Certain Matters Regarding the Servicers Each Trust Agreement will
provide that the related Servicer may not resign from its obligations and duties
as Servicer thereunder, except upon determination that the performance by such
Servicer of such duties is no longer permissible under applicable law. No such
resignation will become effective until the related Trustee or a successor
servicer has assumed such Servicer's servicing obligations and duties under the
Trust Agreement.
Except as otherwise provided in the related Prospectus Supplement, each
Trust Agreement will further provide that neither the related Servicer nor any
of its respective directors, officers, employees, or agents shall be under any
liability to the related Issuer or the related Securityholders for taking any
action or for refraining from taking any action pursuant to such Trust
Agreement, or for errors in judgment; provided, however, that neither such
Servicer nor any such person will be protected against any liability that would
'otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder. In addition, such Trust Agreement will
provide that the related Servicer is under no obligation to appear in,
prosecute, or defend any legal action that is not incidental to its servicing
responsibilities under such Trust Agreement and that, in its opinion, may cause
it to incur any expense or liability.
Under the circumstances specified in any such Trust Agreement, any
entity into which the related Servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which such Servicer is a
party, or any entity succeeding to the business of the Servicer or, with respect
to its obligations as Servicer, which corporation or other entity in each of the
foregoing cases assumes the obligations of such Servicer, will be the successor
to such Servicer under such Trust Agreement.
Servicer Default
Except as otherwise provided in the related Prospectus Supplement,
"Servicer Default" under a Trust Agreement will include (i) any failure by the
related Servicer to deliver to the applicable Trustee for deposit in any of the
related Trust Accounts any required payment or to direct such Trustee to make
any required distributions therefrom, which failure continues unremedied for
greater than three (3) Business Days after written notice from such Trustee is
received by such Servicer or after discovery by such Servicer; (ii) any failure
by such Servicer or the related Originator, as the case may be, duly to observe
or perform in any material respect any other covenant or agreement in such Trust
Agreement, which failure materially and adversely affects the rights of the
related Securityholders and which continues unremedied for greater than ninety
(90) days after the giving of written notice of such failure (1) to such
Servicer or the related Originator, as the case may be, by the applicable
Trustee or (2) to the Servicer or the related Originator, as the case may be,
and to the applicable Trustee by holders of the related
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Securities, as applicable, evidencing not less than 25% of the voting rights of
such outstanding Securities; and (iii) any Insolvency Event. An "Insolvency
Event" shall mean financial insolvency, readjustment of debt, marshalling of
assets and liabilities, or similar proceedings with respect to the Servicer or
the related Originator and certain actions by the Servicer or the related
Originator indicating its insolvency, reorganization pursuant to bankruptcy
proceedings, or inability to pay its obligations.
Rights upon Servicer Default
As more fully described in the related Prospectus Supplement, as long
as a Servicer Default under a Trust Agreement remains unremedied, the applicable
Trustee, Credit Enhancer or holders of Securities of the related series
evidencing not less than 25% of the voting rights of such then outstanding
Securities may terminate all the rights and obligations of the Servicer, if any,
under such Trust Agreement, whereupon a successor servicer appointed by such
Trustee or such Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Trust Agreement and will be entitled to
similar compensation arrangements. If, however, a bankruptcy trustee or similar
official has been appointed for the Servicer, and no Servicer Default other than
such appointment has occurred, such bankruptcy trustee or official may have the
power to prevent the applicable Trustee or such Securityholders from effecting a
transfer of servicing. In the event that the Trustee is unwilling or unable to
so act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a successor with a net worth of at least $25,000,000 and whose
regular business includes the servicing of a similar type of receivables. Such
Trustee may make such arrangements for compensation to be paid, which in no
event may be greater than the servicing compensation payable to the Servicer
under the related Trust Agreement.
Waiver of Past Defaults
With respect to each Trust Fund, unless otherwise provided in the
related Prospectus Supplement and subject to the approval of any Credit
Enhancer, the holders of Notes evidencing at least a majority of the voting
rights of such then outstanding Securities may, on behalf of all Securityholders
of the related Securities, waive any default by the Servicer, or by the related
Originator, in the performance of its obligations under the related Trust
Agreement and its consequences, except a default in making any required deposits
to or payments from any of the Trust Accounts in accordance with such Trust
Agreement. No such waiver shall impair the Securityholders' rights with respect
to subsequent defaults.
Amendment
As more fully described in the related Prospectus Supplement, each of
the Trust Agreements may be amended by the parties thereto, without the consent
of the related Securityholders, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Trust
Agreements or of modifying in any manner the rights of such Securityholders;
provided that such action will not, in the opinion of counsel satisfactory to
the applicable Trustee, materially and adversely affect the interests of any
such Securityholder and subject to the approval of any Credit Enhancer. As may
be describe in the related Prospectus Supplement, the Trust Agreements may also
be amended by the Depositor, the Servicer, and the applicable Trustee with the
consent of the holders of Securities evidencing at least a majority of the
voting rights of such then outstanding Securities for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Trust Agreements or of modifying in any manner the rights of such
Securityholders; provided, however, that no such amendment may (i) increase or
reduce in any manner the amount of, or accelerate or delay the timing of,
collections of payments on the related Receivables or distributions that are
required to be made for the benefit of such Securityholders or (ii) reduce the
aforesaid percentage of the Securities of such series which are required to
consent to any such amendment, without the consent of the Securityholders of
such series.
Insolvency Event
As described in the related Prospectus Supplement, if an Insolvency
Event occurs with respect to a Debtor relating to the applicable Trust Fund, the
related Trust will terminate, and the Receivables held in the related Trust Fund
will be liquidated and each such Trust will be terminated 90 days after the date
of such Insolvency Event, unless, before the end of such 90-day period, the
Trustee of such Trust shall have received written instructions from
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each of the related Securityholders (other than the Depositor) and/or Credit
Enhancer to the effect that such party disapproves of the liquidation of such
Receivables. Promptly after the occurrence of any Insolvency Event with respect
to a Debtor, notice thereof is required to be given to such Securityholders
and/or Credit Enhancer; provided, however, that any failure to give such
required notice will not prevent or delay termination of any Trust. Upon
termination of any Trust, the applicable Trustee shall direct that the assets of
such Trust be promptly sold (other than the related Trust Accounts) in a
commercially reasonable manner and on commercially reasonable terms. The
proceeds from any such sale, disposition or liquidation of such Receivables will
be treated as collections on such Receivables and deposited in the related
Collection Account. If the proceeds from the liquidation of such Receivables and
any amounts on deposit in the Reserve Account, if any, and the related
Distribution Account are not sufficient to pay the Securities of the related
series in full, and no additional Credit Enhancement is available, the amount of
principal returned to Securityholders will be reduced and some or all of such
Securityholders will incur a loss.
Each Trust Agreement will provide that the applicable Trustee does not
have the power to commence a voluntary proceeding in bankruptcy with respect to
any related Trust without the unanimous prior approval of all Certificateholders
(including the Depositor, if applicable) of such Trust and the delivery to such
Trustee by each such Certificateholder of a certificate certifying that such
Certificateholder reasonably believes that such Trust is insolvent.
Termination
With respect to each Trust, the obligations of the related Servicer,
the related Originator(s), the Depositor and the applicable Trustee pursuant to
the related Trust Agreement will terminate upon the earlier to occur of (i) the
maturity or other liquidation of the last related Receivable and the disposition
of any amounts received upon liquidation of any such remaining Receivables and
(ii) the payment to Securityholders of the related series of all amounts
required to be paid to them pursuant to such Trust Agreement. As more fully
described in the related Prospectus Supplement, in order to avoid excessive
administrative expense, the related Servicer will be permitted in respect of the
applicable Trust Fund, unless otherwise specified in the related Prospectus
Supplement, at its option to purchase from such Trust Fund, as of the end of any
Collection Period immediately preceding a Payment Date, if the Discounted
Contract Balance of the related Contracts is less than a specified percentage
(set forth in the related Prospectus Supplement) of the initial Pool Balance in
respect of such Trust Fund, all such remaining Receivables at a price equal to
the aggregate of the Purchase Amounts thereof as of the end of such Collection
Period. The related Securities will be redeemed following such purchase.
If and to the extent provided in the related Prospectus Supplement with
respect to a Trust Fund, the applicable Trustee will, within ten days following
a Payment Date as of which the Pool Balance is equal to or less than the
percentage of the initial Pool Balance specified in the related Prospectus
Supplement, solicit bids for the purchase of the Receivables remaining in such
Trust, in the manner and subject to the terms and conditions set forth in such
Prospectus Supplement. If such Trustee receives satisfactory bids as described
in such Prospectus Supplement, then the Receivables remaining in such Trust Fund
will be sold to the highest bidder.
As more fully described in the related Prospectus Supplement, any
outstanding Notes of the related series will be redeemed concurrently with
either of the events specified above and the subsequent distribution to the
related Certificateholders of all amounts required to be distributed to them
pursuant to the applicable Trust Agreement may effect the prepayment of the
Certificates of such series.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
General
The Contracts that comprise the Receivables will be "chattel paper" as
defined in the Uniform Commercial Code. Pursuant to the UCC for most purposes, a
sale of chattel paper is treated in a manner similar to a transaction creating a
security interest in chattel paper. The Depositor, the related Servicer and/or
the related Originator(s) will cause the filing of appropriate UCC-1 financing
statements to be made with the appropriate governmental
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authorities. Under the Trust Agreement, the related Servicer will be obligated
from time to time to take such actions as are necessary to protect and perfect
the Trust's or the Trustee's interests in the Contracts and their proceeds.
The Equipment
The related Originator will convey such Originator's interest in the
related Equipment to the Depositor. UCC financing statements will not be filed
to perfect any security interest in the Equipment unless otherwise specified in
the related Prospectus Supplement. Moreover, in the event of the repossession
and resale of Equipment, it may be subject to a superior lien. In such case, the
senior lienholder may be entitled to be paid the full amount of the indebtedness
owed to it out of the sale proceeds before such proceeds could be applied to the
payment of claims of the related Servicer on behalf of the Trust.
In the event of a default by the Lessee, the related Servicer on behalf
of the related Trustee may take action to enforce such Defaulted Contract by
repossession and resale of the leased Equipment. Under the UCC in most states, a
creditor can, without prior notice to the debtor, repossess assets securing a
defaulted contract by the Lessee's voluntary surrender of such assets or by
"self-help" repossession that does not involve a breach of the peace and by
judicial process.
In the event of a default by the Lessee, some jurisdictions require
that the Lessee be notified of the default and be given a time period within
which it may cure the default prior to repossession. Generally, this right of
reinstatement may be exercised on a limited number of occasions in any one-year
period.
The UCC and other state laws place restrictions on repossession sales,
including requirements that the secured party provide the Lessee with reasonable
notice of the date, time and place of any public sale and/or the date after
which any private sale of the collateral may be held and that any such sale be
conducted in a commercially reasonable manner. Each Trust Agreement may require
the related Servicer to sell promptly any repossessed item of Equipment,
reacquire such Equipment from the Trust Fund, re - lease such Equipment for the
benefit of the Securityholders or take such other action as specified in the
related Prospectus Supplement.
Under most state laws, a Lessee has the right to redeem collateral for
its obligations prior to actual sale by paying the secured party the unpaid
balance of the obligation plus reasonable expenses for repossession, holding and
preparing the collateral for disposition and arranging for its sale, plus, to
the extent provided for in the written agreement of the parties, reasonable
attorneys' fees.
In addition, because the market value of the equipment of the type
financed pursuant to the Receivables generally declines with age and because of
obsolescence, the net disposition proceeds of leased Equipment at any time
during the term of the lease may be less than the outstanding balance on the
Contract principal balance which it secures. Because of this, and because other
creditors may have rights in the related leased Equipment superior to those of
the related Trust Fund, the related Servicer may not be able to recover the
entire amount due on a Defaulted Contract in the event that such Servicer elects
to repossess and sell such leased Equipment at any time.
Under the UCC and laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a Lessee for any deficiency on
repossession and resale of the asset securing the unpaid balance of such
Lessee's contract. However, some states impose prohibitions or limitations on
deficiency judgments. In most jurisdictions the courts, in interpreting the UCC,
would impose upon a creditor an obligation to repossess the equipment in a
commercially reasonable manner and to "mitigate damages" in the event of a
Lessee's failure to cure a default. The creditor would be required to exercise
reasonable judgment and follow acceptable commercial practice in seizing and
disposing of the equipment and to offset the net proceeds of such disposition
against its claim. In addition, a Lessee may successfully invoke an election of
remedies defense to a deficiency claim in the event that the related Servicer's
repossession and sale of the leased Equipment is found to be a retention
discharging the Lessee from all further obligations under UCC Section 9-505(2).
If a deficiency judgment were granted, the judgment would be a personal judgment
against the Lessee for the shortfall, but a defaulting Lessee may have very
little capital or sources of income available following repossession. Therefore,
in many cases, it may not be useful to seek a deficiency judgment or, if one is
obtained, it may be settled at a significant discount.
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Certain statutory provisions, including federal and state bankruptcy
and insolvency laws, may also limit the ability of the related Servicer to
repossess and resell collateral or obtain a deficiency judgment. In the event of
the bankruptcy or reorganization of a Lessee, various provisions of the
Bankruptcy Code of 1978 (the "Bankruptcy Code") and related laws may interfere
with or eliminate the ability of the Servicer or the Trustee to enforce its
rights under the Receivables. If bankruptcy proceedings were instituted in
respect of a Lessee, the Trustee could be prevented from continuing to collect
payments due from or on behalf of such Lessee or exercising any remedies
assigned to such Trustee without the approval of the bankruptcy court, and the
bankruptcy court could permit the Lessee to use or dispose of the leased
Equipment and provide the Trustee with a lien on substitute collateral, so long
as such substitute collateral constituted "adequate protection" as defined under
the Bankruptcy Code.
In addition, certain of the Receivables may be leased by the Originator
to governmental entities. Payment by governmental authorities of amounts due
under such Contracts may be contingent upon legislative approval. Accordingly,
payment delays and collection difficulties as described in the related
Prospectus Supplement may limit collections with respect to certain governmental
Contracts.
These UCC and bankruptcy provisions, in addition to the possible
decrease in value of a repossessed item of Equipment (equipment leased pursuant
to a Finance Lease or an Operating Lease), may limit the amount realized on the
sale of the collateral to less than the amount due on the related Receivable.
CERTAIN TAX CONSIDERATIONS
The Prospectus Supplement for each series of Securities will summarize,
subject to the limitations stated therein, federal income tax considerations
relevant to the purchase, ownership and disposition of such Securities.
ERISA CONSIDERATIONS
The Prospectus Supplement for each series of Securities will summarize,
subject to the limitations discussed therein, considerations under ERISA
relevant to the purchase of such Securities by employee benefit plans and
individual retirement accounts.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Depositor from such
sale.
The Depositor intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Depositor with institutional investors through
dealers;
3. By direct placements by the Depositor with institutional investors;
and
4. By competitive bid.
In addition, if specified in the related Prospectus Supplement, a
series of Securities may be offered in whole or in part in exchange for the
Receivables (and other assets, if applicable) that would comprise the Trust Fund
in respect of such Securities.
37
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If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The Securities will be set forth
on the cover of the Prospectus Supplement relating to such series and the
members of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Depositor and any profit on the resale of Securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act.
The Prospectus Supplement will describe any such compensation paid by the
Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several underwriters and the underwriters will indemnify the Depositor against
certain civil liabilities, including liabilities under the Securities Act or
will contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such series.
Purchasers of Securities, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the Securities Act in connection with reoffers and sales by them
of Securities. Holders of Securities should consult with their legal advisors in
this regard prior to any such reoffer or sale.
LEGAL OPINIONS
Certain legal matters relating to the issuance of the Securities of any
series, including certain federal and state income tax consequences with respect
thereto, will be passed upon by Dewey Ballantine, New York, New York, or other
counsel specified in the related Prospectus Supplement.
FINANCIAL INFORMATION
A Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities, except
for serial issuances by a Master Trust. The Depositor's activities will be
limited solely to the activities of Trust Funds to be formed with respect to
each Series of Securities. Accordingly, no financial statements with respect to
any Trust Fund will be included in this Prospectus or in the related Prospectus
Supplement.
A Prospectus Supplement may contain the financial statements of the
related Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each
series of Securities, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
38
<PAGE>
INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus
and the pages on which the definitions of such terms may be found herein.
Article 2A....................................................................18
Bankruptcy Code...............................................................16
Cede..........................................................................11
CEDEL Participants............................................................27
Certificates...................................................................1
Class..........................................................................1
Collection Account............................................................30
Collection Period.............................................................31
Commission.....................................................................2
Contracts...................................................................1, 5
Cooperative...................................................................27
Credit Enhancement............................................................18
Credit Enhancer...............................................................18
Debt Securities...............................................................13
Definitive Securities.........................................................28
Depositaries..................................................................25
Depositor......................................................................4
Direct Participants...........................................................18
Distribution Account..........................................................30
DTC...........................................................................11
Eligible Deposit Account......................................................30
Eligible Investments..........................................................30
Equipment......................................................................1
Equity Certificates............................................................9
ERISA.........................................................................13
Euroclear Operator............................................................27
Euroclear Participants........................................................27
Exchange Act...................................................................2
FASB13........................................................................10
Finance Leases................................................................10
Finance Subsidiary............................................................16
Fixed Income Securities........................................................7
Grantor Trust Securities......................................................13
Indenture......................................................................6
Indenture Trustee..............................................................6
Indirect Participants.........................................................18
Insolvency Event..............................................................34
Insolvency Laws...............................................................16
Interest Rate...............................................................2, 7
Investment Company Act.........................................................9
Investment Earnings...........................................................30
Issuer.........................................................................1
Lease.........................................................................10
Lessee........................................................................10
Lessor........................................................................10
Master Trust...................................................................9
Master Trust Agreement.........................................................9
Master Trust New Issuance.....................................................24
Notes..........................................................................1
Originator.....................................................................1
39
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Participants..................................................................25
Partnership Interests.........................................................13
Pass-Through Rate..............................................................2
Payment Date...................................................................8
Policy.........................................................................1
Pool Balance..................................................................22
Pool Factor...................................................................21
Pooling Agreement..............................................................6
Pre-Funding Account...........................................................11
Pre-Funding Period............................................................11
Prepayment....................................................................18
Prospectus Supplement..........................................................1
Ratings Effect................................................................17
Receivables.................................................................1, 8
Receivables Acquisition Agreement.............................................20
Record Date....................................................................8
Registration Statement.........................................................2
Remittance Period..............................................................8
Rules.........................................................................26
Securities Act.................................................................2
Security Insurer..............................................................12
Securityholders................................................................8
Senior Securities..............................................................7
Servicer.......................................................................1
Servicer Defaults.............................................................33
Servicing Agreement............................................................6
Servicing Fee.................................................................31
Servicing Fee Rate............................................................31
Strip Securities...............................................................7
Subordinate Securities.........................................................7
Sub-Servicer...................................................................4
Terms and Conditions..........................................................27
Transferor.....................................................................4
Trust..........................................................................1
Trust Accounts................................................................30
Trust Agreement................................................................6
Trust Fund.....................................................................5
Trustee........................................................................6
Vendor.........................................................................4
40
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No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus Supplement or the Prospectus in connection with the offer made by
this Prospectus Supplement and the Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Depositor or by the Underwriter. This Prospectus Supplement and the
Prospectus do not constitute an offer or solicitation by anyone in any state in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. The delivery of this Prospectus
Supplement or the Prospectus at any time does not imply that information herein
or therein is correct as of any time subsequent to the date.
----------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Available Information ..................................................... S-2
Reports to Noteholders .................................................... S-2
Summary of Terms .......................................................... S-3
Risk Factors .............................................................. S-18
The Receivables ........................................................... S-18
The Transferor ............................................................ S-26
First Sierra .............................................................. S-26
The Servicer .............................................................. S-29
Formation of the Trust .................................................... S-30
Description of the Notes .................................................. S-31
The Indenture Trustee ..................................................... S-51
The Owner Trustee ......................................................... S-52
Prepayment and Yield Considerations ....................................... S-52
The Note Insurance Policy and the Note Insurer ............................ S-55
Certain Federal Income Tax Considerations ................................. S-59
State and Local Tax Considerations ........................................ S-61
ERISA Considerations ...................................................... S-61
Ratings ................................................................... S-62
Method of Distribution .................................................... S-62
Report of Experts ......................................................... S-63
Legal Matters ............................................................. S-63
Index of Principal Defined Terms .......................................... i
PROSPECTUS
Prospectus Supplement ..................................................... 2
Available Information ..................................................... 2
Incorporation of Certain Documents by Reference ........................... 2
Reports to Securityholders ................................................ 3
Summary of Terms .......................................................... 4
Special Considerations .................................................... 15
The Trust Funds ........................................................... 19
The Issuers ............................................................... 20
The Receivables ........................................................... 20
Pool Factors .............................................................. 21
Use of Proceeds ........................................................... 22
The Depositor ............................................................. 22
The Trustee ............................................................... 22
Description of the Securities ............................................. 23
Description of the Trust Agreement ........................................ 29
Certain Legal Aspects of the Receivables .................................. 35
Certain Tax Considerations ................................................ 37
ERISA Considerations ...................................................... 37
Methods of Distribution ................................................... 37
Legal Opinions ............................................................ 38
Financial Information ..................................................... 38
Additional Information .................................................... 38
Index of Terms ............................................................ 39
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Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Class A Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus Supplement and a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
First Sierra Financial, Inc.
Prudential Securities
Secured Financing Corporation
$210,000,000
(approximate)
___% Equipment
Contract-Backed
Notes, Class A
First Sierra Equipment
Contract Trust 1997-1
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PROSPECTUS SUPPLEMENT
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Prudential Securities Incorporated
First Union
Capital Markets Corp.
September __, 1997
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