Prospectus Supplement
(To Prospectus Dated November 8, 1999)
$250,000,000
FLAGSHIP AUTO RECEIVABLES OWNER TRUST 1999-2
ISSUER
[FLAGSHIP LOGO]
SERVICER
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
DEPOSITOR
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CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-15 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 16 IN THE PROSPECTUS.
The notes represent obligations of the trust only and do not represent
obligations of or interests in Flagship Auto Loan Funding LLC 1999-II, Flagship
Credit Corporation or any of their affiliates.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
A note is not a deposit and neither the notes nor the underlying accounts or
receivables are insured or guaranteed by any governmental agency or
instrumentality.
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THE TRUST WILL ISSUE FOUR CLASSES OF NOTES AS DESCRIBED BELOW.
CREDIT ENHANCEMENT FOR THE NOTES IS PROVIDED BY:
o Subordination of the certificates which represent the residual
interest in the trust.
o A spread account will be funded as described in this prospectus
supplement.
o The notes will be unconditionally and irrevocably guaranteed to the
extent described in this prospectus supplement by:
[MBIA LOGO]
<TABLE>
<CAPTION>
Final
Interest Rate Price to Underwriting Proceeds to Scheduled
Class Principal Amount (per annum) Public(1) Discount(2) Trust(3) Maturity Date
- ----- ---------------- ----------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
A-1 $117,000,000 6.420% 100.00% 0.375% 99.625% November 18, 2002
A-2 60,000,000 6.705 100.00 0.375 99.625 January 19, 2004
A-3 43,000,000 6.835 100.00 0.375 99.625 November 18, 2004
A-4 30,000,000 6.900 100.00 0.375 99.625 May 18, 2006
</TABLE>
(1) Total price to public = $250,000,000.00.
(2) Total underwriting discount = $937,500.00.
(3) Total proceeds to Trust = $249,062,500.00, before deducting
expenses estimated to be $625,000.00.
This prospectus supplement and the accompanying prospectus relate only to the
offering of the notes. The certificates are not offered under these documents.
Delivery of the notes, in book-entry form only, will be made through The
Depository Trust Company on or about November 24, 1999 against payment in
immediately available funds.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PRUDENTIAL SECURITIES
NOVEMBER 17, 1999
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Risk Factors..............................................................S-15
The Trust.................................................................S-24
The Seller................................................................S-25
The Originator............................................................S-25
The Originator's Loan Portfolios..........................................S-26
The Auto Loan Pool........................................................S-31
Note Factors and Other Information........................................S-40
Weighted Average Life of the Notes........................................S-40
Description of the Notes..................................................S-44
Description of the Transaction Documents..................................S-47
The Policy................................................................S-60
The Insurer...............................................................S-63
Registration of Notes.....................................................S-65
Certain Legal Aspects of the Auto Loans...................................S-71
Material Federal Income Tax Consequences..................................S-76
State Tax Consequences....................................................S-80
ERISA Considerations......................................................S-80
Ratings...................................................................S-82
Underwriting..............................................................S-82
Legal Opinions............................................................S-83
Experts...................................................................S-84
Glossary..................................................................S-84
Index of Defined Terms....................................................S-90
PROSPECTUS
Prospectus Supplement........................................................2
Available Information........................................................2
Incorporation of Certain Documents by Reference..............................2
Reports to Securityholders...................................................2
Summary of Terms.............................................................4
Risk Factors................................................................16
The Trust Funds.............................................................19
The Issuers.................................................................20
The Receivables.............................................................20
Pool Factors................................................................22
Use of Proceeds.............................................................23
The Depositor...............................................................23
The Trustee.................................................................23
Description of the Securities...............................................24
Description of the Trust Agreements.........................................30
Certain Legal Aspects of the Receivables....................................36
Certain Tax Considerations..................................................40
ERISA Considerations........................................................41
Methods of Distributions....................................................41
Legal Opinions..............................................................42
Financial Information.......................................................42
Additional Information......................................................42
Index of Terms...............................................................i
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the notes in two separate documents that progressively
provide more detail: (a) the accompanying prospectus, which provides general
information, some of which may not apply to this series of notes; and (b) this
prospectus supplement, which describes the specific terms of your series of
notes. You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the prospectus. We have not
authorized anyone to provide you with different information.
IF THE TERMS OF YOUR SERIES OF NOTES VARY BETWEEN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS
PROSPECTUS SUPPLEMENT.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will deliver a
prospectus supplement and prospectus until February 15, 2000.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The Table of Contents on the next page and the
Table of Contents included in the accompanying prospectus provide the pages on
which these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Defined Terms" on
page S-90 of this prospectus supplement and under the caption "Index of Terms"
on page i of the prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents described in the prospectus under "Incorporation of Certain
Documents by Reference" and the consolidated financial statements of MBIA
Insurance Corporation ("MBIA") and its subsidiaries included in, or as exhibits
to, the following documents, which have been filed with the Securities and
Exchange Commission by MBIA Inc., are hereby incorporated by reference in this
prospectus supplement:
(a) Annual Report on Form 10-K of MBIA Inc. for the year ended December
31, 1998; and
(b) Quarterly Report on Form 10-Q of MBIA Inc. for the period ended
September 30, 1999.
S-3
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All financial statements of MBIA and its subsidiaries included in documents
filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act after the date of this prospectus supplement and prior to the termination of
the offering of the notes will be deemed to be incorporated by reference into
this prospectus supplement and to be a part hereof from the respective dates of
filing of such documents.
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S-4
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SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS. IT DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING
YOUR INVESTMENT DECISION. TO UNDERSTAND ALL THE TERMS OF THE OFFERING OF
THE NOTES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
o CAPITALIZED TERMS USED AND NOT DEFINED IN THIS PROSPECTUS SUPPLEMENT HAVE
THE MEANINGS SET FORTH IN THE PROSPECTUS.
OFFERED NOTES
Flagship Auto Receivables Owner Trust 1999-2 will issue the following class of
notes: Class A-1 6.420% asset backed notes in the aggregate principal amount of
$117,000,000; Class A-2 6.705% asset backed notes in the aggregate principal
amount of $60,000,000; Class A-3 6.835% asset backed notes in the aggregate
principal amount of $43,000,000; and Class A-4 6.900% asset backed notes in the
aggregate principal amount of $30,000,000. The notes are being offered pursuant
to this prospectus supplement and the prospectus.
The notes offered in this prospectus supplement will be available only in
book-entry form through the facilities of The Depository Trust Company except
under certain limited circumstances.
ISSUER
Flagship Auto Receivables Owner Trust
1999-2.
SELLER
Flagship Auto Loan Funding LLC 1999-II.
ORIGINATOR AND SERVICER
Flagship Credit Corporation.
INSURER
MBIA Insurance Corporation.
INDENTURE TRUSTEE AND COLLATERAL AGENT
Harris Trust and Savings Bank.
OWNER TRUSTEE
First Union National Bank.
DEPOSITOR
Prudential Securities Secured Financing Corporation, a Delaware corporation and
a wholly-owned limited purpose subsidiary of Prudential Securities Incorporated.
CLOSING DATE
November 24, 1999.
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PAYMENT DATES
Payments on the notes will be made on the 18th day of each calendar month (or,
if that day is not a business day, the next business day), beginning with
December 20, 1999.
INTEREST PAYMENTS
o The interest rate for the Class A-1 notes is 6.420%.
o The interest rate for the Class A-2 notes is 6.705%.
o The interest rate for the Class A-3 notes is 6.835%.
o The interest rate for the Class A-4 notes is 6.900%.
Interest on the notes will be calculated on the basis of a 360-day year of
twelve 30-day months. On the first payment date, the interest payable to the
noteholders will be an amount equal to the product of (a) the interest rate
applicable to that class of notes, (b) the initial principal amount of that
class of notes and (c) a fraction (i) the numerator of which is the number of
days (assuming a 30-day month) from and including the closing date to but
excluding December 20, 1999 and (ii) the denominator of which is 360.
PRINCIPAL PAYMENTS
Principal of the notes will be payable on each payment date in an amount
generally equal to the lesser of (a) the sum of (i) the principal payment amount
described below for that payment date and (ii) an additional amount representing
the excess of the funds available for distribution on that payment date over the
sum of the amounts required to be paid on that payment date and (iii) certain
amounts, if any, to be released from the spread account on that payment date and
(b) the amount necessary to reduce the aggregate principal amount of the notes
to the targeted aggregate principal amount of the notes on that payment date.
The principal payment amount for a payment date generally will equal the sum of
the following amounts (without duplication):
o collections on the auto loans (other than charged-off auto loans)
during the preceding calendar month allocable to principal including
full and partial prepayments;
o the portion of the purchase amount deposited in the collection
account allocable to principal of each auto loan that was
repurchased by the originator or purchased by the servicer as of the
last day of the preceding calendar month due to a breach of certain
representations or warranties by the originator or breach of certain
covenants by the servicer relating to that auto loan;
o the principal balance of each auto loan that first became a
charged-off auto loan during the preceding calendar month (other
than charged-off auto loans for which
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substitutions occur as described below); and
o the aggregate amount of the reduction in the principal balances of
auto loans resulting from court orders during the preceding calendar
month in obligor insolvency proceedings which reduce the amount owed
on those obligors' auto loans.
The targeted aggregate principal amount of the notes on any payment date is a
percentage, called the notes target percentage, of the aggregate outstanding
principal balance of the auto loans. The notes target percentage generally will
be 89%, but will be reduced if certain portfolio performance criteria for the
auto loans are not met as described further in this prospectus supplement.
Each class of notes will be paid in sequential order. In other words, all
amounts available for the payment of principal on the notes will generally be
paid to holders of the Class A-1 notes until the Class A-1 notes are paid in
full. Then, all amounts available for the payment of principal on the notes will
generally be paid to holders of the Class A-2 notes until the Class A-2 notes
are paid in full. Then principal will be paid in the same manner to holders of
the Class A-3 notes and, after the payment in full of the Class A-3 notes, to
the holders of the Class A-4 notes.
FINAL SCHEDULED MATURITY DATE
The final scheduled maturity date of the Class A-1 notes is the November 2002
payment date. The final scheduled maturity date of the Class A-2 notes is the
January 2004 payment date. The final scheduled maturity date of the Class A-3
notes is the November 2004 payment date. The final scheduled maturity date of
the Class A-4 notes is the May 2006 payment date. The unpaid principal amount,
if any, of a class of notes will be due and payable on its respective final
scheduled maturity date.
OPTIONAL REDEMPTION
The seller will have the option, subject to certain conditions, to redeem all,
but not less than all, of the notes on any payment date on which the aggregate
outstanding principal balance of the notes is less than or equal to 10% of the
initial aggregate principal balance of the notes for an amount equal to the
remaining unpaid principal amount of the auto loans plus accrued interest
through the payment date on which the redemption will occur. To do so, the
seller will give notice to each noteholder, the insurer and the indenture
trustee at least 30 days before the payment date on which the redemption will
occur.
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TRUST PROPERTY
The primary assets of the trust will be a pool of motor vehicle retail
installment contracts which finance the purchase of new and used cars, vans and
light trucks originated indirectly by the originator through a network of
automobile dealerships. We refer to these contracts as "auto loans" and to the
persons who are obligated to make payments under these contracts as "obligors."
The auto loans in the trust will be sold by the originator to the seller, by
seller to the depositor, and then by the depositor to the trust. The trust will
grant a security interest in the auto loans and the other trust property to the
indenture trustee for the benefit of the noteholders and to MBIA in support of
the obligations owing to MBIA as the insurer under the insurance agreement
described below. The trust property will also include the following:
o monies received under the auto loans after a cutoff date of October
31, 1999 (or the date of origination if such loans are originated
after October 31, 1999);
o amounts held in bank accounts established for the trust;
o security interests in the cars, vans and light trucks financed by
the auto loans;
o any proceeds from insurance policies covering the financed vehicles
or the obligors;
o any rights Flagship has with respect to the auto loans against
dealers from which it purchased the auto loans; and
o rights of the seller under its purchase agreement with Flagship and
rights of the depositor under its purchase agreement with the
seller.
THE AUTO LOANS
On the closing date, the trust will acquire motor vehicle retail installment
contracts with an aggregate principal balance of approximately $257,620,719.36
as of the cutoff date of October 31, 1999. Information regarding the auto loans
is provided as of the close of business on the preliminary cutoff date of
September 30, 1999. During the period beginning after the preliminary cutoff
date and ending on or before the close of business on the cutoff date, the
originator purchased auto loans in addition to those described as of the
preliminary cutoff date. Some of these additional auto loans will be transferred
to the trust and included in the auto loan pool. The additional auto loans
purchased by the originator between the preliminary cutoff date and the cutoff
date will be selected by the originator based on substantially the same criteria
as were used to select the auto loans included in the trust as of the
preliminary cutoff date. The actual composition and characteristics of the auto
loan pool as of the cutoff date are not expected to materially differ from the
composition and characteristics of the pool of auto loans as of the preliminary
cutoff date.
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The trust expects to acquire prior to the first payment date approximately
$12,649,981.37 of additional auto loans, most of which were originated in
Pennsylvania. These additional auto loans have been excluded from the initial
pool of auto loans until certain Pennsylvania licenses are obtained by the
depositor and the trust. These licenses are expected to be obtained shortly
after the closing date. When we refer in this prospectus to the auto loans, we
generally are including the excluded auto loans unless otherwise noted and all
information in this prospectus supplement with respect to the pool of auto loans
includes the excluded auto loans, however, there is no assurance that the
Pennsylvania licenses will be obtained by the depositor and the trust before the
first payment date or that the excluded auto loans will be acquired by the
trust.
As of the preliminary cutoff date:
o the aggregate outstanding principal balance of the auto loans was
$231,483,767.50;
o the weighted average annual percentage rate of the auto loans was
approximately 14.83%;
o the weighted average remaining term to scheduled maturity of the
auto loans was approximately 61.07 months;
o the weighted average original term to scheduled maturity of the auto
loans was approximately 64.94 months; and
o approximately 66.82% of the auto loans by aggregate principal
balance were secured by used vehicles.
As of the cut-off date, no auto loan has a scheduled maturity later than
November 10, 2005, which is six months before the final scheduled maturity date
of the Class A-4 notes.
PRE-FUNDING
Approximately $12,649,981.37 of auto loans, most of which were originated in
Pennsylvania, have initially been excluded from the pool of auto loans until
certain Pennsylvania licenses are obtained. These licenses are expected to be
received shortly after the closing date.
Approximately $11,701,232.77 will be deposited on the closing date into a
pre-funding account held by the indenture trustee. The excluded auto loans will
be purchased by the trust with the funds in the pre-funding account promptly
upon receipt of the Pennsylvania licenses to the extent permitted by the insurer
and the rating agencies. In the event that the Pennsylvania licenses are not
obtained by the depositor and the trust prior to the initial payment date or the
insurer or the rating agencies do not approve the transfer of some or all of the
excluded auto loans, the originator will have the option to transfer other auto
loans meeting the eligibility criteria required for the initial auto loans to
the extent permitted by the insurer and the rating agencies. Funds on deposit in
the pre-funding account will be
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invested from time to time in highly rated short-term securities.
Any balance remaining in the pre-funding account after the purchase of the
additional auto loans on the initial payment date will be paid to noteholders as
a mandatory redemption.
INTEREST RESERVE ACCOUNT
We anticipate that the average interest rate earned by the trust on investment
of funds in the pre-funding account will be less than the interest rate on the
notes. To provide a source of funds to cover any shortfall resulting from this
difference, we will deposit $37,330.79 into a special interest reserve account
of the trust. On the initial payment date all amounts on deposit in the interest
reserve account (other than investment earnings) will be used to make up for
this interest shortfall.
THE OBLIGORS
The obligors are primarily "non-prime" consumers who would not necessarily
qualify for credit from traditional "prime" funding sources such as banks and
captive finance companies of automobile manufacturers.
SERVICING; SERVICING FEE
All payments on auto loans will be made by the obligors directly to the
servicer. The servicer will forward the proceeds of such payments, within two
business days after receipt, to the indenture trustee for deposit by the
indenture trustee to a collection account established in the name of the
indenture trustee. The servicer will service the auto loans in accordance with
its credit and collection policies. A servicing fee will be paid monthly to the
servicer on each payment date in an amount equal to one-twelfth of 2% times the
outstanding principal balance of the auto loans as of the last day of the
preceding collection period (or, for the first payment date, the cutoff date).
In addition, the servicer will be entitled to retain any and all delinquency
charges and late fees collected under the auto loans.
PURCHASE AMOUNTS
Upon the sale of the auto loans to the seller, the originator will make certain
customary representations and warranties with respect to each auto loan. In the
event of a breach of a representation or warranty with respect to an auto loan
that materially and adversely affects the interest of the trust, the indenture
trustee or the insurer, the originator will repurchase that auto loan for a
purchase price, called the purchase amount, generally equal to the outstanding
principal balance of the related auto loan plus all accrued and unpaid interest
to the last day of the preceding calendar month.
SUBSTITUTION OF AUTO LOANS
The originator will have the right (but not the obligation) to substitute auto
loans for charged-off auto loans; provided that, the substitute auto loans must
in the aggregate (i) be at least equal in outstanding principal balance and at
least equal in terms of credit quality to the auto loans being replaced; (ii)
not have final
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scheduled maturity dates later than the final scheduled maturity dates of the
auto loans being replaced; (iii) meet certain eligibility criteria, and (iv)
have an annual percentage interest rate at least equal to or greater than the
annual percentage interest rates of the auto loans being replaced. In addition
to the foregoing factors, the originator may not substitute auto loans for
charged-off auto loans if the substitution would cause the aggregate outstanding
principal balance of all substitute auto loans that were substituted for
charged-off auto loans, measured at the time of their substitution, to exceed
10% of the sum of the initial principal balance of the initial auto loans and
the pre-funded auto loans as of the cutoff date.
CREDIT ENHANCEMENT
THE INSURANCE POLICY
On the closing date, MBIA will issue an insurance policy in favor of the
indenture trustee for the benefit of the noteholders. Under the insurance
policy, the insurer will irrevocably and unconditionally guarantee timely
payment of interest on each payment date, as well as ultimate payment in full of
principal on the final scheduled maturity date. The insurer's obligations under
the insurance policy will be discharged to the extent that amounts due under the
insurance policy are received by the indenture trustee, whether or not these
amounts are properly applied by the indenture trustee.
CLASS SUBORDINATION
Credit enhancement for the notes is provided by subordination of the
certificates representing the residual interest in the trust.
SPREAD ACCOUNT
As credit enhancement for the notes, the servicer (or the indenture trustee on
behalf of and at the direction of the servicer) will establish and maintain a
spread account in the name of the indenture trustee. The spread account will be
funded as follows:
o On the closing date, the seller will deposit approximately
$7,728,621.58 (approximately 3% of the principal balance of the
initial auto loans as of the cutoff date) into the spread account.
o On the date, if any, on or before the first Payment Date on which
the excluded auto loans (or other loans) are transferred to the
trust, the seller will deposit 3% of the initial principal balance
of those auto loans into the spread account.
o On each payment date, the indenture trustee will deposit into the
spread account any amounts remaining after making all other
distributions required to be made prior to distributions into the
spread account. However, the indenture trustee will make this
deposit only to the extent necessary so that the amount on deposit
in the spread account will
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not be less than the spread account required amount (as described in
this prospectus supplement).
Funds on deposit in the spread account will be available on each payment date to
cover shortfalls in amounts available to pay certain amounts to the indenture
trustee, the collateral agent, the insurer and the servicer and in distributions
of interest and principal on the notes to the extent described in this
prospectus supplement.
After making all distributions to be made on any payment date, amounts in the
spread account which are in excess of the required amount of the spread account
for that payment date will be applied to reduce the outstanding principal amount
of the notes to the targeted aggregate principal amount of the notes on that
payment date; any remaining excess will be paid pursuant to items (10) and (11)
under "Application of Payments" below and then will be released to the
certificateholder(s).
DISTRIBUTIONS
The servicer (or the indenture trustee on behalf of and at the direction of the
servicer) will establish and maintain a collection account in the name of the
indenture trustee into which all payments made on the auto loans will be
deposited and held pending distribution to noteholders.
AVAILABLE FUNDS
The available funds for a payment date will be the sum of the following amounts
with respect to the preceding calendar month:
o all principal and interest payments on the auto loans;
o all proceeds received during the preceding calendar month, including
actual recovery amounts, with respect to auto loans that became
charged-off auto loans during the preceding calendar month, net of
the reasonable and customary out-of-pocket expenses incurred by the
servicer in connection with collection, enforcement or liquidation
and any amounts required by law to be remitted to the obligor on the
charged-off auto loan;
o earnings on investments of funds in the trust's accounts during the
preceding calendar month;
o the purchase amount deposited in the collection account for each
auto loan that was repurchased by the originator or the servicer, as
the case may be (generally equal to the outstanding principal
balance of the related auto loan plus all accrued and unpaid
interest to the last day of the preceding calendar month) in the
event that an auto loan has been repurchased by the originator in
the case of a breach of a representation or warranty with
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respect to that auto loan or by the servicer in certain other
circumstances; and
o withdrawals from the interest reserve account.
APPLICATION OF PAYMENTS
On each payment date, the indenture trustee will apply the available funds for
that payment date in the following order of priority:
(1) accrued and unpaid fees and expenses of the indenture trustee and
collateral agent, subject in each case to a maximum expense cap;
(2) servicing fees;
(3) interest on the notes;
(4) to MBIA, any monthly premium fees due and payable to MBIA;
(5) principal on the notes to the extent of the principal payment amount
for that payment date;
(6) any reasonable and nonrecurring fees and expenses of any successor
servicer, the indenture trustee and MBIA, related to the transfer of
servicing and the appointment of a successor servicer or temporary
successor servicer, subject to a maximum expense cap;
(7) to MBIA, any other amounts due under the terms of its insurance
agreement;
(8) to the indenture trustee and collateral agent, for deposit into the
spread account, the amount, if any, required to be deposited therein
necessary to maintain the requisite spread account amount (as
defined in this prospectus supplement);
(9) to the noteholders, as additional principal, any amount necessary to
reduce the outstanding principal amount of the notes to the targeted
principal amount of the notes on that payment date;
(10) to the payment of certain re-liening expenses, to the extent not
paid by the servicer;
(11) to any successor servicer, the indenture trustee, the collateral
agent and MBIA, any items payable that were not paid under clauses
(1) or (6) above; and
(12) to the certificateholder(s), the balance, if any.
In addition, any funds in the spread account in excess of the required amount on
any payment date will be applied, if and to the extent necessary, to further
reduce the outstanding principal amount of the notes to the targeted principal
amount of the notes on that payment date.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Mayer, Brown & Platt, special Federal tax counsel to the depositor, is of the
opinion that for Federal income tax purposes the notes will be characterized as
debt and the trust will not be characterized as an association (or publicly
traded partnership) taxable as a corporation. Each noteholder, by accepting a
note, will agree to treat the notes as debt.
ERISA CONSIDERATIONS
Subject to the restrictions and considerations discussed under "ERISA
Considerations," the notes will be eligible for purchase by employee benefit
plans.
An investor that is, or is acting on behalf of, an employee benefit plan subject
to ERISA or Section 4975 of the Code will be deemed to represent and warrant
that its investment in the notes, as applicable, will not result in a non-exempt
prohibited transaction under ERISA or Section 4975 of the Code.
RATING OF THE NOTES
It is a condition to the issuance of the notes that each class of notes be rated
at least "AAA," "Aaa" and "AAA" by Standard & Poor's Ratings Services, a
division of McGraw-Hill Companies, Inc. ("Standard & Poor's"), Moody's Investors
Service, Inc. ("Moody's") and Duff & Phelps Rating Co. ("DCR"), respectively.
The ratings of the notes will be based primarily on the issuance of the
insurance policy by, and the financial strength of, MBIA. The ratings of the
notes address the likelihood of the timely payment of interest and ultimate
payment of principal of the notes under their terms. The ratings are not a
recommendation to buy, sell or hold the notes. There can be no assurance that
such ratings will not be lowered or withdrawn by a rating agency if
circumstances so warrant.
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RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the notes.
RISKINESS OF
NON-PRIME OBLIGORS .............. The obligors generally consist of customers
with credit histories or income
characteristics who would have difficulty in
borrowing from banks, captive finance
companies of auto manufacturers or other
traditional sources of auto loan financing.
The average interest rate charged by the
originator to such "non-prime" borrowers is
generally higher than that charged by
commercial banks, financing arms of
automobile manufacturers and other
traditional sources of consumer auto
financing which typically impose more
stringent credit requirements. The payment
experience on loans of obligors with modest
credit impairment is likely to be different
than that on loans of traditional auto
financing sources and is likely to be more
sensitive to changes in the economic climate
in the areas in which such obligors reside.
As a result of the credit profile of the
obligors and the APRs of the auto loans, the
historical credit loss and delinquency rates
on the auto loans may be higher than those
experienced by banks, captive finance
companies of automobile manufacturers and
other traditional sources of consumer credit.
If an obligor defaults under an auto loan,
the only source of repayment on the auto loan
may be liquidation proceeds from the related
vehicle.
TERMINATION OF FLAGSHIP
AS SERVICER...................... The servicing of auto loans of "non-prime"
customers requires special skill and
diligence. The servicer believes that its
credit loss and delinquency experience
reflects in part its trained staff and
collection procedures. If Flagship is removed
or resigns as servicer, a third party
servicer will be required to assume the
obligations of successor servicer under the
Sales and Servicing Agreement. See
"Description of the Transaction
Documents--Servicing Succession" herein.
There can be no assurance, however, that
collections with respect to the auto loans
will not be adversely affected by any change
in servicer.
LIMITED DELINQUENCY
AND LOSS EXPERIENCE ............. The auto loans have been originated directly
by Flagship from auto dealers. Flagship's
origination experience with the underwriting
criteria in effect at the time the auto loans
were originated is very limited. Therefore,
although the originator
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has calculated and presented in this
prospectus supplement certain limited
delinquency and loss experience with respect
to its servicing portfolio, there can be no
assurance that the information presented will
reflect actual experience with respect to the
auto loans. In addition, there can be no
assurance that the future delinquency or loan
loss experience of the issuer with respect to
the auto loans will be better or worse than
that set forth herein with respect to
originator's servicing portfolio. See "The
Originator's Loan Portfolio" herein.
RATINGS OF THE NOTES;
DEPENDENCE ON INSURER ........... The ratings of the notes are based primarily
on the rating of the financial strength of
the insurer. Upon an insurer default, the
rating on the notes may be lowered or
withdrawn entirely. If any rating initially
assigned to the notes is subsequently lowered
or withdrawn for any reason, including by
reason of a downgrading of the insurer's
claims-paying ability, no person or entity
will be obligated to provide any additional
credit enhancement with respect to the notes
and investors will be relying solely on
collections and recoveries on the auto loans
for repayment of the notes. Any reduction or
withdrawal of a rating may have an adverse
effect on the liquidity and market price of
the notes.
The issuer does not have, nor is it permitted
or expected to have, any significant assets
or sources of funds other than the auto loans
and amounts on deposit in certain accounts
held by the indenture trustee on behalf of
the noteholders. The notes represent
obligations solely of the issuer and are not
obligations of, and will not be insured or
guaranteed by, the originator, the servicer,
the indenture trustee or any other person or
entity except for the guaranty provided with
respect to the notes by the insurer under the
Policy, as described herein. Although the
Policy covers shortfalls in insured payments
to noteholders on each payment date, in case
of an insurer default, the noteholders must
rely on the collections of the auto loans and
the proceeds from the repossession and sale
of vehicles which secure defaulted auto
loans. See "The Insurer" and "The Policy"
herein.
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NOTEHOLDERS BEAR
REINVESTMENT RISK AND
RISK OF REDUCED YIELDS
DUE TO VARIATIONS IN
PAYMENT RATES ON
AUTO LOANS...................... The auto loans may be prepaid at any time, in
full or in part, voluntarily or as a result
of defaults, casualties to the related
vehicles, death of an obligor or other
reasons. The servicer or the seller may be
required to repurchase one or more auto loans
from the trust if they breach specified
representations or covenants relating to the
auto loans described in "Description of the
Transaction Documents -- Sale and Assignment
of Auto Loans." The servicer also will have
the right to purchase all remaining auto
loans from the trust pursuant to a clean-up
call described in "Description of the Notes
-- Optional Redemption" in the prospectus
supplement. Each such prepayment, repurchase
or purchase will shorten the average life of
the notes. Prepayment rates may be influenced
by a variety of factors and cannot be
predicted with any assurance. You will bear
any reinvestment risks resulting from a
faster than expected rate of prepayment or
repurchase of auto loans. Any time your
principal is repaid to you at a time when you
did not expect to receive it, you may not be
able to reinvest your funds at the same or a
higher rate of return than the interest rate
on your notes. In addition, if the auto loans
are prepaid at a faster rate than expected,
this may reduce the yields of any classes of
notes purchased at a premium over their
principal amounts. If the auto loans are
prepaid at a slower rate than expected, it
may reduce the yields of any classes of notes
purchased at a discount to their principal
amounts.
VARIATIONS IN REGIONAL
ECONOMIC CONDITIONS
MAY CAUSE PAYMENT
REDUCTIONS OR DELAYS ........... As of the preliminary cutoff date, obligors
located in North Carolina, Texas, and
Maryland, respectively, comprised 20.54%,
13.58%, and 11.60% of the initial auto loans
by aggregate principal balance. Adverse
economic conditions or other factors
particularly affecting these states may
affect the delinquency, loan loss and
repossession experience of the auto loans.
TRUE SALE........................ The originator will warrant to the seller in
the Sales and Servicing Agreement that the
sale of the auto loans by it to the
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seller is a valid sale to the seller. In
addition, the originator will treat the
transactions described herein as a sale of
the auto loans to the seller, and the
originator has taken and will take all
actions that are required to perfect the
issuer's ownership interest in the auto
loans. Notwithstanding the foregoing, if the
originator were to become a debtor in a
bankruptcy case and a creditor or
trustee-in-bankruptcy of the originator or
the originator itself were to take the
position that the sale of auto loans to the
issuer should be recharacterized as a pledge
of such auto loans to secure a borrowing of
the originator and an insurer default were to
occur, then delays in payments of collections
of auto loans to the issuer could occur or,
should the court rule in favor of any such
trustee, debtor or creditor and an insurer
default were to occur, reductions in the
amount of such payments could result.
SUBSTANTIVE
CONSOLIDATION.................... The originator has taken or will take steps
in structuring the transactions contemplated
hereby that are intended to mitigate the risk
that the voluntary or involuntary application
for relief by the originator under the United
State Bankruptcy Code or similar state laws
("Insolvency Laws") will result in
consolidation of the assets and liabilities
of the seller with those of the originator.
These steps include the creation of the
seller as a separate limited-purpose entity
and providing that the LLC Agreement imposes
certain limitations on the seller, including
restrictions on the nature of the seller's
business and a restriction on the seller's
ability to commence a voluntary case under
any Insolvency Law. However, there can be no
assurance that the activities of the seller
would not result in a court concluding that
the assets and liabilities of the seller
should be consolidated with those of the
originator in the event that the originator
was subject to a proceeding under any
Insolvency Law. If a court were to reach such
a conclusion, then delays in payments on the
notes could occur or reductions in the
amounts of such payments could result.
RISK OF ORIGINATOR'S
INABILITY TO REPURCHASE
AUTO LOANS....................... In certain circumstances, the originator will
be required to repurchase auto loans from the
issuer with respect to which representations
and warranties have been breached. In the
event that the originator is incapable of
complying with its repurchase obligations and
an insurer default were to occur, noteholders
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may be subject to delays in receiving
payments and suffer loss of their investment
in the notes. See "Description of the
Transaction Documents--Sale and Assignment of
Auto Loans."
PRIORITY OF INTEREST
IN AUTO LOANS.................... The originator will warrant that the
transfers of the auto loans to the seller,
from seller to depositor, and depositor to
trust are each a valid assignment, transfer
and conveyance of the auto loans and that the
indenture trustee on behalf of the
noteholders and the insurer has a valid
security interest in such auto loans. The
Transaction Documents will provide that
Uniform Commercial Code ("UCC") filings will
be made to evidence such assignment and that
the indenture trustee will be required to
maintain possession of original copies of all
documents in connection with an auto loan
that constitute chattel paper; provided that
the servicer may take possession of such
original documents as necessary for the
enforcement of any auto loan. If the
servicer, the indenture trustee or other
third party, while in possession of any such
original documents in connection with the
auto loans, sells or pledges and delivers
such original documents to another party, in
violation of the Sales and Servicing
Agreement, there is a risk that such other
party could acquire an interest in such auto
loan having a priority over the issuer's
interest. Furthermore, if the servicer or a
third party, while in possession of any auto
loan, is rendered insolvent, such an event of
insolvency may result in competing claims to
ownership or security interests in such auto
loan. Such attempt could result in losses to
the noteholders or an acceleration of the
repayment of the notes. The originator will
be obligated to repurchase any auto loans if
there is a breach of such warranty and such
breach has not been cured. "Description of
the Transaction Documents--Sale and
Assignment of Auto Loans."
UNENFORCEABILITY OF THE
TRUST'S SECURITY INTERESTS IN
FINANCED VEHICLES BECAUSE
CERTIFICATES OF TITLE WILL NOT
BE AMENDED MAY CAUSE
PAYMENT REDUCTIONS OR
DELAYS.......................... When Flagship first originates an auto loan,
Flagship's security interest in the financed
vehicle is noted on the certificate of title
for the vehicle.
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Flagship will sell and assign its security
interests in the financed vehicles to the
seller. The seller, in turn, will sell and
assign those security interests to the
depositor, who will sell and assign those
security interests to the trust. The trust,
in turn, will sell and assign those security
interests to the indenture trustee for the
benefit of the noteholders and MBIA. In most
states, these assignments are effective
assignments of a security interest, and the
assignee succeeds to the assignor's rights as
secured party. However, due to the
administrative burden and expense, the
certificates of title for the financed
vehicles will not be marked, amended or
reissued to identify the seller, the
depositor, the trust or the indenture trustee
as the secured party. In the absence of this
action, in some states the indenture trustee
may not have a perfected security interest in
the financed vehicles securing the auto
loans. For a more complete description of
perfection issues, see "Certain Legal Aspects
of the Auto Loans--Security Interest in
Vehicles" in the prospectus.
NOTEHOLDERS MAY NOT
DECLARE EVENTS OF DEFAULT
UNDER THE INDENTURE OR
DECIDE THE CONSEQUENCES
OF AN EVENT OF DEFAULT ......... An event of default under the indenture can
generally occur only if MBIA delivers to the
indenture trustee a notice of the occurrence
of an event of default, and noteholders will
have no independent right to declare an event
of default. The indenture trustee or the
noteholders can only declare an event of
default under the indenture if MBIA has
defaulted in its obligations under the
insurance policy or is subject to an
insolvency proceeding. If there is an event
of default under the indenture and MBIA is
not in default under the insurance policy or
subject to an insolvency proceeding, MBIA
will have the right to cause the liquidation
of the trust property. This liquidation will
result in the redemption of the notes.
Following an event of default, the indenture
trustee will continue to submit claims under
the insurance policy to enable the trust to
make interest payments on your notes each
month and principal payments on the final
scheduled maturity date. However, following
an event of default, MBIA may elect to pay
all or any portion of the outstanding notes,
plus accrued interest on an accelerated
basis.
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VOTING RIGHTS OF
NOTEHOLDERS MAY BE
EXERCISED BY THE INSURER ........ So long as MBIA is not in default under the
insurance policy or subject to an insolvency
proceeding, it will have the right to
exercise all rights, including voting rights,
under the transaction documents without any
consent of noteholders. However, the
transaction documents cannot be amended
without the consent of each noteholder in any
manner if that amendment would:
o reduce the amount of, or delay the
timing of, collections of payments of
monthly principal and interest on the
auto loans or distributions required to
be made on any note;
o adversely affect, in any material
respect, the interests of the
noteholders; or
o alter the rights of noteholders to
consent to such amendment.
If MBIA is at the time in default under the
insurance policy or is subject to an
insolvency proceeding, it cannot take any
action under the transaction documents to
terminate the servicer, or to control or
direct the actions of the trust, the seller,
the servicer, the indenture trustee or the
owner trustee under the transaction
documents. Furthermore, if MBIA is at the
time in default under the insurance policy or
is subject to an insolvency proceeding,
MBIA's consent will not be required with
respect to any action (or waiver of a right
to take action) to be taken by the trust, the
seller, the servicer, the indenture trustee,
the owner trustee or the noteholders, except
that MBIA's consent is required to amend the
transaction documents if the amendment would
have a material adverse effect on MBIA.
INSURANCE ON VEHICLES ........... Each auto loan requires the Obligor to
maintain insurance covering physical damage
to the Vehicle in an amount not less than the
unpaid principal balance of such auto loan
pursuant to which the originator is named as
a loss payee. Since the Obligors select their
own insurers to provide the requisite
coverage, the specific terms and conditions
of their policies vary.
In the event insurance coverage is not
maintained by Obligors, and coverage is not
applicable on any blanket policy maintained
by the originator, then insurance recoveries
may be limited in the event of losses or
casualties to vehicles related to the auto
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loans, as a result of which noteholders could
suffer a loss on their investment.
YEAR 2000 COMPUTER ISSUES ....... Many computer systems in use today employ
software which was designed and developed
using two digits, rather than four, to
specify and store the year. As a result, such
systems will recognize the year 2000 as "00".
This could cause many computer applications
to fail completely or create erroneous
results unless corrective measures are taken.
The servicer utilizes some software and
related computer hardware technologies
essential to its operations that will be
affected by the Year 2000 issue. The servicer
has made changes and enhancements to its
internal computer systems which it believes
are sufficient to make all of its computer
systems Year 2000 compliant; however, if
additional changes or enhancements are
required, the expense associated with such
actions could be material. In addition, there
can be no assurance that the servicer's
financial results will not be adversely
affected if one or more of the companies
which provides services to the servicer is
materially adversely affected by the Year
2000 issue.
LIMITATIONS ON INTEREST
PAYMENTS AND FORECLOSURES ....... Generally, under the terms of the Soldiers'
and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), or similar state
legislation, an Obligor who enters military
service after the origination of the related
auto loan (including an Obligor who is a
member of the National Guard or is in reserve
status at the time of the origination of the
auto loan and is later called to active duty)
may not be charged interest (including fees
and charges) above an annual rate of 6%
during the period of such Obligor's active
duty status, unless a court orders otherwise
upon application of the lender. It is
possible that such action could have an
effect, for an indeterminate period of time,
on the ability of the servicer to collect
full amounts of interest on certain of the
auto loans. In addition, the Relief Act
imposes limitations that would impair the
ability of the servicer to foreclose on an
affected auto loan during the Obligor's
period of active duty status. Thus, in the
event that such an auto loan goes into
default, there may be delays and losses
occasioned by the inability of the servicer
to realize upon the Vehicle in a timely
fashion.
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POSSIBLE PREPAYMENTS AS
A RESULT OF PRE-FUNDING ........ Approximately $12,649,981.37 of auto loans,
most of which were originated in
Pennsylvania, have been excluded from the
initial pool of auto loans until certain
Pennsylvania licenses are obtained by the
depositor and the trust. These licenses are
expected to be obtained shortly after the
closing date. The excluded auto loans,
including all payments received thereon after
the cut-off date, will be purchased by the
trust upon receipt of the Pennsylvania
licenses with the funds in the pre-funding
account to the extent permitted by the
insurer and the rating agencies. In the event
that the Pennsylvania licenses are not
obtained by the depositor and the trust prior
to the initial payment date or the insurer or
the rating agencies do not approve some or
all of the excluded auto loans, the
originator will have the option to sell other
auto loans which meet the same eligibility
criteria required for the initial auto loans
and which are approved by the insurer and the
rating agencies. If the originator does not
have available or the insurer does not
approve a sufficient amount of eligible auto
loans at that time, noteholders would receive
a prepayment of the excess funds in the
pre-funding account on a pro rata basis. Any
such prepayment will shorten the weighted
average life of the notes. There can be no
assurance that the originator will generate
or that the insurer or the rating agencies
will approve sufficient auto loans that
satisfy the required criteria. It is
anticipated that the principal amount of any
additional auto loans sold will not be
exactly equal to the amount in the
pre-funding account and, therefore, there
will be at least a nominal amount of
principal prepaid to the noteholders.
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THE TRUST
GENERAL
The trust was formed under the Trust Agreement for the transaction
described in this prospectus supplement. After its formation, the trust will not
engage in any activity other than acquiring, holding and managing the auto loans
and the other assets of the trust and proceeds therefrom and issuing the notes
and certificates and making payments thereon.
The trust has no directors, officers or employees and is not involved in
any legal proceedings.
THE OWNER TRUSTEE
First Union National Bank ("First Union") will serve as the owner trustee
under the Trust Agreement. First Union is a national banking association and its
principal offices where information can be obtained relating to the trust are
located at One Rodney Square, 920 King Street, Suite 102, Wilmington, Delaware
19801. The Originator and its affiliates may maintain normal commercial banking
relations with the owner trustee and its affiliates.
THE INDENTURE TRUSTEE
Harris Trust and Savings Bank is the Trustee under the Indenture (the
"Indenture Trustee"). It is an Illinois banking corporation and its principal
offices are located at 311 West Monroe Street, Chicago Illinois 60606. The
Indenture Trustee's duties in connection with the notes are limited solely to
its express obligations under the Indenture and the Sales and Servicing
Agreement.
TRUST PROPERTY
The property of the trust will include:
(1) consumer retail automobile installment sales contracts
representing obligations of "non prime" borrowers (the "Auto Loans") on used and
new automobiles, light trucks, vans and minivans (the "Vehicles"), including
principal and interest payments received thereunder after October 31, 1999 (the
"Cut-off Date");
(2) amounts held from time to time in the Collection Account, the
Pre-Funding Account, the Interest Reserve Account and in one or more accounts
established by
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the servicer or the indenture trustee and maintained by the indenture trustee
(see "Description of the Transaction Documents--Accounts" herein);
(3) the rights of the originator under the assignments in the form
of an exhibit to the Sales and Servicing Agreement;
(4) security interests in the Vehicles;
(5) the rights of the originator under certain contracts, including
third party contracts and dealer agreements and the rights of the originator to
receive any proceeds with respect to the Auto Loans from claims on physical
damage, credit life and credit accident and health insurance policies covering
the Vehicles or the obligors;
(6) the rights of the originator to refunds for the costs of
extended service contracts and to refunds of unearned premiums with respect to
credit life and credit accident and health insurance policies covering Vehicles
or obligors;
(7) the fully executed original contract or promissory note in
connection with each Auto Loan, any agreements modifying any Auto Loan and the
original certificate of title for each Vehicle (or other evidence of title); and
(8) any and all proceeds of the foregoing.
In addition, the Insurer will issue the Policy for the benefit of the
noteholders.
THE SELLER
The seller was formed under the laws of the State of Delaware,
specifically to engage in the transactions described herein. Before the sale of
the Auto Loans to the seller, the seller will have no assets or obligations or
any operating history. The seller was created pursuant to a limited liability
company agreement dated as of October 5, 1999 (the "LLC Agreement"). Pursuant to
the LLC Agreement, the seller will engage in no activity other than (i)
acquiring, holding, managing and transferring the Auto Loans, the other assets
of the seller and any proceeds thereof, (ii) entering into and performing its
obligations under the transaction documents and (iii) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto.
THE ORIGINATOR
Flagship Credit Corporation ("Flagship") is an auto finance company
focusing on the non-prime sector of the market. As of June 30, 1999, Flagship
had total assets of approximately $684 million, stockholders equity of
approximately $63.9 million and net income of approximately $790 thousand (pro
forma unaudited) for the six months then ended. The
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principal executive offices of Flagship are located at One International Plaza,
Philadelphia, PA 19113 and its telephone number is (610) 521-8100.
Flagship is an indirect wholly owned subsidiary of Copelco Financial
Services Group, Inc ("Copelco"). As of June 30, 1999, Copelco had total assets
of approximately $4,891 million, stockholders equity of approximately $334
million and net income of approximately $16 million (unaudited) for the six
months then ended.
Flagship was formed in June 1999 as a result of a merger to combine
Copelco's two auto finance subsidiaries, Franklin Acceptance Corporation and
ProCredit, Inc., under a single corporate umbrella. Flagship (including its
predecessor companies) has been in the auto finance business since 1957. On a
cumulative basis, Flagship and its predecessors have originated approximately $2
billion in auto loans.
In July 1997 (in the case of ProCredit) and early 1998 (in the case of
Franklin), Flagship's predecessors took various actions designed to improve the
credit quality of the loans originated by the respective companies. As a result
of these efforts, the average credit bureau FICO score of the obligors for which
Flagship or its predecessors have originated loans has risen from an average of
593 for originations during January 1998 to the current level of 644 for
originations during September 1999.
THE ORIGINATOR'S LOAN PORTFOLIOS
GENERAL
Flagship currently originates loans through a network of 1,200 new and
used auto dealers in 27 states. Approximately 99% of the Company's dealers are
manufacturer authorized dealerships. Flagship evaluates its dealers through a
dealer scorecard which reviews profitability, loan quality and application
efficiency.
It is also one of two preferred non-prime lenders for the CarMax group.
CarMax is a used car superstore subsidiary of Circuit City Stores. The financing
application process is fully automated. The applicant completes an on-line
credit application which is submitted to two prime banks. If the applicant is
declined or no decision is made within 15 minutes, the application is
electronically forwarded to the two non-prime lenders; each has 15 to 20 minutes
to respond. The approvals are transmitted on-line to the customer at the
showroom. Flagship currently originates $8 million to $10 million of CarMax
paper per month and is currently servicing 25 locations.
Flagship may also purchase seasoned auto portfolios if the portfolio meets
certain underwriting criteria and has suitable interest rates and performance
characteristics.
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ORIGINATION PROCEDURES
The origination process has three components: application, credit analysis
and booking, with all policies and procedures centrally managed in Philadelphia,
Pennsylvania. Completed applications are faxed or transmitted from dealers to
the Philadelphia, Pennsylvania or Lanham, Maryland offices. Upon receipt, data
entry personnel enter the data into the credit processing system to facilitate
consistency in processing, statistical analysis, file retention as well as
compliance with applicable law. One credit bureau report is automatically run
for each applicant.
The integrated computer system will send completed applications to a
credit analyst's queue and will include credit bureau score and debt to income
calculations. The level of information verification on employment, income and
references varies according to the applicant's rank within the six tier credit
scale. The credit analyst will review the information against the underwriting
guidelines and approve, deny or issue a conditional approval. If the application
is incomplete or requires additional explanations, a credit analyst may contact
the applicant directly. All analysts are required to stay within the current
underwriting guidelines; any exceptions require the approval of the analyst's
supervisor and are entered into the credit processing system.
Upon approval of an application, the customer will complete and sign an
affidavit of insurance verification, an installment sale agreement and a title
application. The signed credit application, a copy of the invoice, a work order
for any dealer installed options, an odometer statement and a copy of the
customer's driver's license are delivered to the Originator. All customer
insurance coverage will be verified on the financed vehicle prior to
origination.
The approval rate is currently 29.28% with bookings of 31.50% of approved
applications for a net booking rate of approximately 9.24% of total
applications. At booking, a formal checklist is used to ensure that all
necessary funding events have been met, including satisfaction of underwriting
guidelines, proof of income, required insurance, vehicle information, references
and lien recording. Any exceptions to the underwriting guidelines have to be
approved and re-entered into the credit processing system. Once verification and
documentation are complete, Flagship funds the dealer. A separate Quality
Assurance Group monitors compliance with the underwriting policies.
The Originator utilizes standard form documents, subject to jurisdictional
consumer finance regulatory requirements. Each transaction package generally
contains the credit application with all comments, an income analysis worksheet,
credit bureau reports, the original installment sales contract, the executed
Federal Truth in Lending disclosure section, proof of insurance, certificate of
title and other required miscellaneous items. Borrowers are required to carry,
at their own expense, fire, theft and collision damage insurance and are
required to demonstrate proof of coverage.
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UNDERWRITING CRITERIA
Flagship's primary focus on the non-prime consumer targets those
individuals with proven stability in residency and employment who cannot easily
obtain financing from traditional prime sources. The borrower may have had
modest credit impairment stemming from limited delinquencies, or other minor
derogatory credit problems in the past, but has exhibited a favorable recent
track record in reestablishing good credit with recent debt obligations. First
time auto buyers are excluded from consideration.
Analysts evaluate the following factors when making an individual credit
evaluation: (1) the applicant's capacity to pay the loan from current income,
including the applicant's total debt to income ratio, the ratio of the payment
on the loan to the applicant's income and the term of the loan; (2) collateral
value, taking into account the applicant's ability to pay, the size of the down
payment and the purchase price and value of the vehicle; (3) the applicant's
credit listing and (4) the applicant's occupation, length of time on job and
length of time at current residence. The applicant is required to (1) have been
employed in his/her current job for at least six months and not to have had more
than two employers in the past two years; (2) earn a minimum annual income of
$18,000 or $24,000 jointly with a co-obligor; (3) have a total debt service to
income ratio of less than 45%; (4) have an auto loan payment to income ratio of
less than 20%.
The underwriting policies set forth the maximum advance rate against the
manufacturer's invoice or trade-in value (as published in the National
Automobile Dealers Association's Used Car Guide) as a function of the
applicant's credit tier. Tier 1 customers with FICO scores in excess of 700 may
have advance rates up to 140%; Tier 6 customers with FICO scores in the 580-599
range would be limited to 115% advance rates. Additional financing may be
extended for taxes, titles, licensing and certain products, subject to certain
caps.
SERVICING AND COLLECTIONS
Flagship maintains servicing facilities in Philadelphia, Pennsylvania,
Lanham, Maryland and Allentown, Pennsylvania. A centralized asset management
group in Philadelphia handles repossessions and liquidations.
Shortly after origination of each loan, the Servicer makes a welcome call
to the obligor to verify contract information, and other application
information. The Servicer's representative explains the loan's terms and
conditions and also verifies the first payment due date. All collections are
remitted to a lockbox.
Delinquencies are divided into three categories: Under 15 days, 15 to 45
days or over 45 days past due. Collection agents at progressively longer levels
of delinquency handle progressively few numbers of loans.
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Once a loan is over 45 days past due, the Servicer considers repossession
and may send a notice of pending repossession. In many cases, this notice
results in payment. If the account remains delinquent, it is forwarded to a
repossession coordinator who assigns the account to a licensed repossession
agent. Once a vehicle has been repossessed, the asset recovery department
becomes responsible for the disposition of the vehicle. The borrower is
encouraged to redeem the vehicle; the current borrower redemption rate is
approximately 25%. In order to reclaim the vehicle, the borrower must pay all
outstanding amounts, including all late fees and collection charges. The
Servicer sells repossessed vehicles exclusively at auctions. The chargeoff
policy is to write off all accounts in the month that they become 123 days past
due. In addition, all repossessions are marked down to the estimated proceeds
when the redemption holding period has expired. After chargeoff, in some states
further efforts may be made to collect any deficiency balance remaining by
making suitable payment arrangements with the debtor.
DELINQUENCY AND LOSS EXPERIENCE
Set forth in the following tables is certain information concerning the
delinquency and loan loss experience of the originator pertaining to auto loans.
However, there can be no assurance, that the delinquency, net credit loss and
repossession experience on the Auto Loans or any other isolated group of loans
from the originator's portfolio will be comparable to the originator's
experience as shown in the following tables. In particular, the delinquency and
loan loss experience described below should be considered in light of the
average maturity of the loans in each of the respective periods shown, which
reflect increasingly large additions of new loans in such periods. The
experience of the non-prime auto finance industry as a whole has been that the
rate of losses and delinquencies for non-prime motor vehicle installment sale
contracts generally will increase for a period following origination before
leveling and declining as such contracts approach maturity. Accordingly, the
annual loss and delinquency rates reflected in the following table would be
higher but for the effect of recently originated contracts which exhibit
relatively low loss and delinquency rates early in their terms. The rate of
losses and delinquencies on the Auto Loans as a whole will likely increase and
exceed the rates reflected in the following table for the period during which
the median age of the Auto Loans approximates the aging of non-prime motor
vehicle retail installment sale contracts during their period of maximum
expected losses and delinquencies.
The information set forth in the table below in regard to loans originated
by Flagship (or its predecessors) from its dealer network relates to loans
originated or acquired in the period since Flagship (or its predecessors)
adopted its current market focus (and related changes in underwriting criteria
and origination and servicing techniques) on "non-prime" as opposed to
"sub-prime" borrowers. Flagship does not believe that information with respect
to losses and delinquencies in periods prior to those set forth below is
meaningful for the foregoing reason, as well as because of changes in servicing
personnel and policies at Flagship (or its predecessors) related to such
transition and changes in servicing rights to Flagship (or its predecessors), in
the case of loans acquired by portfolio purchase.
S-29
<PAGE>
FLAGSHIP CREDIT CORPORATION CREDIT LOSS EXPERIENCE
<TABLE>
<CAPTION>
Fiscal Year Ended Three Month Periods Ended
----------------- ----------------------------------------------------------
December 31, 1998 March 31, 1999 June 30, 1999 September 30, 1999
----------------- -------------- ------------- ------------------
<S> <C> <C> <C> <C>
Average Principal Balance (1) $ 105,371,033 $ 252,463,079 $ 363,594,884 $ 466,346,168
Gross Charge-Offs (2) 2,207,395 1,499,984 1,495,829 2,880,746
Recoveries (3) 133,929 236,154 169,674 162,094
----------------- -------------- ------------- ------------------
Net Charge-Offs 2,073,466 1,263,830 1,326,155 2,718,652
Net Charge-Offs as Percent of Average 1.97% 2.00% 1.46% 2.33%
Principal Balance (4)
</TABLE>
- ----------
The chart set forth above reflects the portfolio of loans that were originated
after Flagship (or its predecessors) repositioned itself from a "sub-prime"
lender to a "non-prime" lender.
(1) Average Principal Balance represents the average of the month-end balances
during the period.
(2) Gross Charge-Offs represent the outstanding principal balance at the time
of charge off less the estimated net sales proceeds from the sale of the
related vehicles.
(3) Recoveries represent the difference between estimated sales proceeds and
actual sales proceeds of the related vehicles.
(4) Net Charge-Offs as a Percent of Average Principal Balance is annualized
based on four three-month quarters.
FLAGSHIP CREDIT CORPORATION DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
At December 31, 1998 At March 31, 1999 At June 30, 1999 At September 30, 1999
-------------------- ----------------- ---------------- ---------------------
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Outstanding .... $205,874,100.08 100.00% $283,525,482.35 100.00% $403,378,727.76 100.00% $494,833,712.90 100.00%
31-59 Days ............... 3,167,028.59 1.54% 4,132,767.43 1.46% 8,997,069.21 2.23% 13,244,779.13 2.68%
60-89 Days ............... 894,287.11 0.43% 960,713.14 0.34% 1,626,818.51 0.40% 3,421,821.17 0.69%
90 Days and Over ......... 599,529.10 0.29% 716,633.81 0.25% 707,008.54 0.18% 1,781,878.46 0.36%
--------------- ---- --------------- ---- --------------- ---- --------------- ----
Total Delinquencies .. $ 4,660,844.80 2.26% $ 5,810,114.38 2.05% $ 11,330,896.26 2.81% $ 18,448,478.76 3.73%
=============== ==== =============== ==== =============== ==== =============== ====
</TABLE>
(1) The chart set forth above reflects the portfolio of loans that were
originated after Flagship (or its predecessors) repositioned itself from a
"sub-prime" lender to a "non-prime" lender. The dollar amount of
delinquencies does not include vehicles in repossession that have been
charged-off.
S-30
<PAGE>
THE AUTO LOAN POOL
As of the preliminary Cut-off Date, each Auto Loan had an outstanding
principal balance of not more than $37,414.26 and an annual percentage rate
("APR") of not less than 8.39%. The tables below set forth information regarding
the composition and characteristics of the pool of Auto Loans as of the
Preliminary Cut-off Date. The information provided herein regarding the
composition and characteristics of the pool of Auto Loans is not expected to
materially differ from the actual composition and characteristics of the Auto
Loans as of the Cut-off Date. Prior to the issuance of the notes, Auto Loans may
be removed from the Auto Loan Pool as a result of loan prepayments,
delinquencies or otherwise. In such event, other Auto Loans may be included in
the Auto Loan Pool.
The information provided below also includes a representative sample of
the Excluded Auto Loans, most of which were originated in Pennsylvania, that
have been excluded from the initial pool of Auto Loans until certain
Pennsylvania licenses are obtained by the Depositor and the Trust. These
licenses are expected to be obtained shortly after the Closing Date. The
Excluded Auto Loans, including all payments received thereon after the Cut-off
Date, will be purchased by the Trust upon receipt of the Pennsylvania licenses
with the funds in the Pre-Funding Account to the extent approved by the Insurer
and the Rating Agencies. In the event that the Pennsylvania licenses are not
obtained prior to the initial payment date or the Insurer or the Rating Agencies
do not approve some or all of the Excluded Auto Loans, the Originator will have
the option to sell other Auto Loans which meet the same eligibility criteria
required for the initial Auto Loans and which are approved by the Insurer and
the Rating Agencies.
The composition of the Auto Loans as of the preliminary Cutoff Date, by
geographic distribution, distribution by APR, distribution by remaining
principal balance, distribution by original principal balance, distribution by
remaining term to scheduled maturity, distribution by original term to scheduled
maturity, distribution by date of origination, distribution by model year,
distribution by new or used Vehicles, and distribution by credit bureau score,
are set forth in the following tables.
COMPOSITION OF THE AUTO LOANS AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Term to Original Term
Aggregate Number of Average Scheduled to Scheduled
Weighted Average Principal Auto Loans in Principal Maturity Date Maturity Date
APR of Auto Loans Balance Pool Balance (months) (months)
- ----------------- --------------- ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
14.83% $231,483,767.50 14,903 $15,532.70 61.07 64.94
</TABLE>
S-31
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE AUTO LOANS AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Aggregate Aggregate Number of Percent of Number
State(1) Principal Balance Principal Balance Auto Loans of Auto Loans
- ----------------------- ----------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
AA (2) $ 12,589.31 0.01% 1 0.01%
AE (2) 29,449.76 0.01 1 0.01
Alaska 15,079.85 0.01 1 0.01
Alabama 122,411.75 0.05 7 0.05
Arkansas 501,504.40 0.22 29 0.19
Arizona 9,563,371.13 4.13 551 3.70
California 16,419,632.95 7.09 904 6.07
Colorado 1,154,685.33 0.50 72 0.48
Connecticut 80,240.61 0.03 6 0.04
District of Columbia 1,479,067.35 0.64 93 0.62
Delaware 3,494,739.73 1.51 229 1.54
Florida 13,931,336.61 6.02 1,001 6.72
Georgia 17,479,583.39 7.55 1,019 6.84
Iowa 38,145.43 0.02 2 0.01
Idaho 20,634.87 0.01 1 0.01
Illinois 100,904.54 0.04 7 0.05
Indiana 85,311.92 0.04 6 0.04
Kansas 1,018,508.82 0.44 70 0.47
Kentucky 35,255.49 0.02 3 0.02
Louisiana 883,515.74 0.38 51 0.34
Massachusetts 26,986.43 0.01 2 0.01
Maryland 26,847,208.62 11.60 1,779 11.94
Michigan 324,771.11 0.14 25 0.17
Minnesota 13,338.45 0.01 1 0.01
Missouri 1,285,361.61 0.56 70 0.47
Mississippi 39,891.93 0.02 2 0.01
Montana 20,063.94 0.01 1 0.01
North Carolina 47,537,521.76 20.54 2,993 20.08
North Dakota 42,078.69 0.02 2 0.01
Nebraska 11,533.24 0.00 1 0.01
New Jersey 6,194,244.36 2.68 425 2.85
New Mexico 73,446.42 0.03 4 0.03
Nevada 98,838.03 0.04 6 0.04
New York 7,085,919.09 3.06 498 3.34
Ohio 110,540.36 0.05 8 0.05
Oklahoma 15,701,284.87 6.78 964 6.47
Oregon 38,284.55 0.02 3 0.02
Pennsylvania (3) 9,048,242.61 3.91 617 4.14
Puerto Rico 13,556.69 0.01 1 0.01
Rhode Island 12,566.23 0.01 1 0.01
South Carolina 9,619,510.70 4.16 640 4.29
South Dakota 18,509.87 0.01 1 0.01
Tennessee 632,214.43 0.27 36 0.24
Texas 31,426,083.39 13.58 2,157 14.47
Virginia 8,302,130.41 3.59 580 3.89
Washington 101,316.28 0.04 6 0.04
Wisconsin 30,428.73 0.01 2 0.01
West Virginia 316,146.07 0.14 21 0.14
Wyoming 45,779.65 0.02 3 0.02
----------------- ------ ------ ------
Total.......... $ 231,483,767.50 100.00%(4) 14,903 100.00%(4)
================= ====== ====== ======
</TABLE>
- ----------
(1) Based on billing address of Obligor.
(2) Military address.
(3) The inclusion of Auto Loans originated in Pennsylvania in the pool of Auto
Loans is subject to receipt of certain Pennsylvania licenses on or prior
to the initial Payment Date.
(4) Percentages may not add up to 100% because of rounding.
S-32
<PAGE>
DISTRIBUTION OF THE AUTO LOANS BY APR AS OF THE PRELIMINARY CUT-OFF DATE
Percent of
Aggregate Percent of
Aggregate Principal Number of Number of
APR Range % Principal Balance Balance Auto Loans Auto-Loans
- --------------- ----------------- ---------- ---------- ----------
8.001 - 8.500 $ 21,746.64 0.01% 2 0.01%
8.501 - 9.000 191,867.09 0.08 15 0.10
9.001 - 9.500 135,186.09 0.06 8 0.05
9.501 - 10.000 2,974,745.90 1.29 191 1.28
10.001 - 10.500 2,480,485.36 1.07 159 1.07
10.501 - 11.000 3,860,997.35 1.67 238 1.60
11.001 - 11.500 6,651,391.77 2.87 378 2.54
11.501 - 12.000 9,692,829.92 4.19 557 3.74
12.001 - 12.500 10,772,730.47 4.65 601 4.03
12.501 - 13.000 15,563,673.54 6.72 982 6.59
13.001 - 13.500 21,842,493.33 9.44 1,386 9.30
13.501 - 14.000 18,168,744.61 7.85 1,086 7.29
14.001 - 14.500 18,398,842.55 7.95 1,070 7.18
14.501 - 15.000 16,538,989.46 7.14 1,074 7.21
15.001 - 15.500 12,818,339.40 5.54 796 5.34
15.501 - 16.000 19,502,249.73 8.42 1,251 8.39
16.001 - 16.500 17,093,602.53 7.38 1,203 8.07
16.501 - 17.000 15,003,241.41 6.48 1,040 6.98
17.001 - 17.500 10,486,057.97 4.53 667 4.48
17.501 - 18.000 23,095,458.79 9.98 1,688 11.33
18.001 - 18.500 1,727,032.00 0.75 119 0.80
18.501 - 19.000 1,567,610.54 0.68 131 0.88
19.001 - 19.500 613,376.95 0.26 50 0.34
19.501 - 20.000 1,302,921.84 0.56 111 0.74
20.001 - 20.500 227,187.29 0.10 19 0.13
20.501 - 21.000 298,473.56 0.13 30 0.20
21.001 - 21.500 64,523.37 0.03 7 0.05
21.501 - 22.000 178,078.83 0.08 22 0.15
22.001 - 22.500 148,710.09 0.06 14 0.09
22.501 - 23.000 36,520.63 0.02 4 0.03
23.001 - 23.500 6,563.14 0.00 1 0.01
23.501 - 24.000 12,448.50 0.01 2 0.01
24.001 - 24.500 6,646.85 0.00 1 0.01
--------------- ------ ------ ------
Total..... $231,483,767.50 100.00%(1) 14,903 100.00%(1)
=============== ====== ====== ======
- ----------
(1) Percentages may not add up to 100% because of rounding.
S-33
<PAGE>
DISTRIBUTION OF THE AUTO LOANS BY REMAINING PRINCIPAL BALANCE
AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of Percent of
Range of Remaining Aggregate Aggregate Number of Number of
Principal Balances Principal Balance Principal Balance Auto Loans Auto Loans
- ---------------------- ----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
$ 0.01 - 5,000.00 $ 501,582.43 0.22% 144 0.97%
5,000.01 - 10,000.00 16,900,465.50 7.30 2,045 13.72
10,000.01 - 15,000.00 65,227,765.53 28.18 5,188 34.81
15,000.01 - 20,000.00 77,490,720.57 33.48 4,474 30.02
20,000.01 - 25,000.00 50,500,829.14 21.82 2,293 15.39
25,000.01 - 30,000.00 17,877,913.42 7.72 665 4.46
30,000.01 - 35,000.00 2,839,463.55 1.23 90 0.60
35,000.01 - 40,000.00 145,027.36 0.06 4 0.03
---------------- ------ ------ ------
Total............. $ 231,483,767.50 100.00%(1) 14,903 100.00%(1)
================ ====== ====== ======
</TABLE>
- ----------
(1) Percentages may not add up to 100% because of rounding.
DISTRIBUTION OF THE AUTO LOANS BY
ORIGINAL PRINCIPAL BALANCE AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of Percent of
Range of Original Aggregate Aggregate Number of Number of
Principal Balances Principal Balance Principal Balance Auto Loans Auto Loans
- ---------------------- ----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
$ 0.01 - 5,000.00 $ 158,923.14 0.07% 42 0.28%
5,000.01 - 10,000.00 13,230,184.77 5.72 1,702 11.42
10,000.01 - 15,000.00 60,334,300.97 26.06 5,004 33.58
15,000.01 - 20,000.00 77,119,918.54 33.32 4,620 31.00
20,000.01 - 25,000.00 55,061,118.63 23.79 2,581 17.32
25,000.01 - 30,000.00 21,017,993.20 9.08 806 5.41
30,000.01 - 35,000.00 4,211,745.75 1.82 138 0.93
35,000.01 - 40,000.00 349,582.50 0.15 10 0.07
---------------- ------ ------ ------
Total............. $ 231,483,767.50 100.00%(1) 14,903 100.00%(1)
================ ====== ====== ======
</TABLE>
- ----------
(1) Percentages may not add up to 100% because of rounding.
S-34
<PAGE>
DISTRIBUTION OF THE AUTO LOANS BY
REMAINING TERM TO SCHEDULED MATURITY DATE AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Remaining Term Percent of Percent of
to Scheduled Aggregate Aggregate Number of Number of
Maturity Date Principal Balance Principal Balance Auto Loans Auto Loans
- ---------------- ----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
1 - 12 months $ 7,753.89 0.00% 3 0.02%
13 - 24 months 253,684.18 0.11 51 0.34
25 - 36 months 2,457,412.59 1.06 336 2.25
37 - 48 months 14,767,298.40 6.38 1,430 9.60
49 - 60 months 84,483,036.71 36.50 6,229 41.80
61 - 72 months 129,514,581.73 55.95 6,854 45.99
---------------- ------ ------ ------
Total......... $ 231,483,767.50 100.00%(1) 14,903 100.00%(1)
================ ====== ====== ======
</TABLE>
- ----------
(1) Percentages may not add up to 100% because of rounding.
DISTRIBUTION OF THE AUTO LOANS BY ORIGINAL TERM
TO SCHEDULED MATURITY DATE AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Original Term Percent of Percent of
to Scheduled Aggregate Aggregate Number of Number of
Maturity Date Principal Balance Principal Balance Auto Loans Auto Loans
- ---------------- ----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
13 - 24 months $ 142,682.95 0.06% 28 0.19%
25 - 36 months 1,684,544.46 0.73 249 1.67
37 - 48 months 10,401,445.27 4.49 1,084 7.27
49 - 60 months 84,335,432.12 36.43 6,346 42.58
61 - 72 months 134,919,662.70 58.28 7,196 48.29
---------------- ------ ------ ------
Total......... $ 231,483,767.50 100.00%(1) 14,903 100.00%(1)
================ ====== ====== ======
</TABLE>
- ----------
(1) Percentages may not add up to 100% because of rounding.
S-35
<PAGE>
DISTRIBUTION OF THE AUTO LOANS BY
DATE OF ORIGINATION AS OF THE PRELIMINARY CUT-OFF DATE
Percent of
Aggregate Aggregate Number Percent of
Principal Principal of Auto Number of
Date of Origination Balance Balance Loans Auto Loans
- -------------------- --------------- ---------- -------- ----------
July 1997........... $ 11,308.31 0.00% 1 0.01%
September 1997...... 26,621.24 0.01 2 0.01
October 1997........ 586.44 0.00 1 0.01
November 1997....... 59,124.45 0.03 8 0.05
December 1997....... 549,647.27 0.24 53 0.36
January 1998........ 158,516.02 0.07 17 0.11
February 1998....... 211,850.46 0.09 21 0.14
March 1998 ......... 325,143.07 0.14 33 0.22
April 1998.......... 408,933.14 0.18 38 0.25
May 1998............ 291,159.37 0.13 28 0.19
June 1998........... 280,431.14 0.12 23 0.15
July 1998........... 386,912.66 0.17 33 0.22
August 1998......... 407,060.34 0.18 30 0.20
September 1998...... 458,460.46 0.20 37 0.25
October 1998........ 559,644.83 0.24 44 0.30
November 1998....... 478,691.18 0.21 39 0.26
December 1998....... 1,326,406.70 0.57 99 0.66
January 1999........ 5,099,280.58 2.20 326 2.19
February 1999....... 12,467,188.65 5.39 856 5.74
March 1999.......... 14,916,980.18 6.44 952 6.39
April 1999.......... 36,981,009.15 15.98 2,466 16.55
May 1999............ 39,426,351.86 17.03 2,552 17.12
June 1999........... 42,428,842.67 18.33 2,673 17.94
July 1999........... 37,708,508.00 16.29 2,325 15.60
August 1999......... 30,123,506.79 13.01 1,861 12.49
September 1999...... 6,391,602.54 2.76 385 2.58
--------------- ------ ------ ------
Total......... $231,483,767.50 100.00%(1) 14,903 100.00%(1)
=============== ====== ====== ======
- ----------
(1) Percentages may not add up to 100% because of rounding.
S-36
<PAGE>
DISTRIBUTION OF THE AUTO LOANS BY
MODEL YEAR OF VEHICLE AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of Percent of
Aggregate Aggregate Number of Number of
Model Year Principal Balance Principal Balance Auto Loans Auto Loans
- ------------------ ----------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
1990.............. $ 33,243.30 0.01% 6 0.04%
1991.............. 325,669.54 0.14 47 0.32
1992.............. 1,418,905.41 0.61 186 1.25
1993.............. 3,878,812.24 1.68 429 2.88
1994.............. 7,393,919.35 3.19 713 4.78
1995.............. 18,521,528.42 8.00 1,568 10.52
1996.............. 35,997,858.90 15.55 2,594 17.41
1997.............. 41,994,504.96 18.14 2,744 18.41
1998.............. 41,578,419.99 17.96 2,521 16.92
1999.............. 75,711,239.66 32.71 3,881 26.04
2000.............. 4,629,665.73 2.00 214 1.44
---------------- ------ ------ ------
Total............. $ 231,483,767.50 100.00%(1) 14,903 100.00%(1)
================ ====== ====== ======
</TABLE>
- ----------
(1) Percentages may not add up to 100% because of rounding.
DISTRIBUTION OF THE AUTO LOANS BY
NEW OR USED VEHICLE AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of Percent of
Aggregate Aggregate Number of Number of
Vehicle Type Principal Balance Principal Balance Auto Loans Auto Loans
- ------------------ ----------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
New................ $ 76,800,782.86 33.18% 3,918 26.29%
Used............... 154,682,984.64 66.82 10,985 73.71
---------------- ------ ------ ------
Total........ $ 231,483,767.50 100.00%(1) 14,903 100.00%(1)
================ ====== ====== ======
</TABLE>
- ----------
(1) Percentages may not add up to 100% because of rounding.
S-37
<PAGE>
DISTRIBUTION OF THE AUTO LOANS BY FICO SCORE AS OF THE PRELIMINARY CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of Percent of
Aggregate Aggregate Number of Number of
FICO Score Range(1) Principal Balance Principal Balance Auto Loans Auto Loans
- ------------------- ----------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
401 - 425 $ 15,232.37 0.01% 1 0.01%
426 - 450 12,118.56 0.01 1 0.01
451 - 475 99,000.36 0.04 9 0.06
476 - 500 403,854.22 0.17 34 0.23
501 - 525 1,477,283.21 0.64 129 0.87
526 - 550 5,975,359.44 2.58 522 3.50
551 - 575 9,899,775.47 4.28 810 5.44
576 - 600 32,685,125.01 14.12 2,212 14.84
601 - 625 48,888,503.52 21.12 3,141 21.08
626 - 650 55,150,701.84 23.82 3,356 22.52
651 - 675 39,412,811.58 17.03 2,372 15.92
676 - 700 17,818,637.37 7.70 1,082 7.26
701 - 725 10,101,039.43 4.36 603 4.05
726 - 750 5,230,352.41 2.26 328 2.20
751 - 800 3,899,132.79 1.68 271 1.82
801 - 850 400,703.88 0.17 31 0.21
851 and over 14,136.04 0.01 1 0.01
---------------- ------ ------ ------
Total......... $ 231,483,767.50 100.00%(2) 14,903 100.00%(2)
================ ====== ====== ======
</TABLE>
- ----------
(1) FICO is a credit bureau score and is not a proprietary credit score used
by the originator.
(2) Percentages may not add up to 100% because of rounding.
SIMPLE INTEREST RECEIVABLES
As of the Cut-off Date, all of the Auto Loans provide for allocation of
payments according to the "simple interest" method ("Simple Interest
Receivables"). A Simple Interest Receivable provides for the amortization of the
amount financed under the receivable over a series of fixed level monthly
payments. Each monthly payment consists of a principal repayment plus an
installment of interest which is calculated on the basis of the outstanding
principal balance of the receivable multiplied by the stated APR and further
multiplied by the period elapsed (as a fraction of a calendar year) since the
preceding payment of interest was made. As payments are received under a Simple
Interest Receivable, the amount received is applied first to interest accrued to
the date of payment and the balance is applied to reduce the unpaid principal
balance. Accordingly, if an Obligor pays a fixed monthly installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if an Obligor pays a fixed monthly installment after its scheduled
due date, the portion of the payment allocable to interest for the period since
the preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the portion of the payment applied to reduce
the unpaid principal balance will be correspondingly less. In either case, the
Obligor pays a fixed monthly installment until the Final Scheduled Maturity
Date, at which time the amount of the final
S-38
<PAGE>
installment is increased or decreased as necessary to repay the then outstanding
principal balance. If a Simple Interest Receivable is prepaid, the Obligor is
required to pay interest only to the date of prepayment.
ELIGIBILITY REQUIREMENTS
To be eligible for inclusion into the Auto Loan Pool ("Eligible Auto
Loans") an Auto Loan must meet certain criteria set forth in the Sales and
Servicing Agreement as of the Cut-off Date, including without limitation:
- have an Obligor whose billing address is in the United States;
- have an original term to its scheduled maturity date of not more
than 72 months;
- provides for level monthly payments which fully amortize the amount
financed over the original term (except for the last payment, which
may be different from the level payment for various reasons,
including late or early payments during the term of the Auto Loan);
- be not more than 31 days past due;
- have an original scheduled maturity equal to or less than 60 months,
except up to 66% of the aggregate outstanding principal balance of
the Auto Loans (the "Outstanding Portfolio Balance") may have an
original scheduled maturity equal to or less than 72 months;
- have an APR of at least 7.00% and not more than 25.00%;
- not cause more than 21.5% of the Outstanding Portfolio Balance to be
located in one single state;
- have a maximum amount financed of $30,000, except up to 2.0% of the
Outstanding Portfolio Balance may have a maximum amount financed of
$65,000;
- not cause more than 1% of the Outstanding Portfolio Balance to have
a credit bureau score (FICO) below 500;
- not cause more than 9% of the Outstanding Portfolio Balance to have
a credit bureau score (FICO) below 550;
- not cause more than 30% of the Outstanding Portfolio Balance to have
a credit bureau score (FICO) below 600;
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- not cause the percentage of the dollar amount of Auto Loans which
finance used Vehicles in the pool to exceed 70% of the Outstanding
Portfolio Balance;
- have a credit bureau score of at least 580 if its original scheduled
maturity is in excess of 60 months; and
- relate to a Vehicle funded by a loan such that the sum of the age of
the vehicle and the term of the loan are no greater than 8 years.
NOTE FACTORS AND OTHER INFORMATION
Each class of notes will be assigned a "Note Factor" consisting of a
seven-digit decimal which the servicer will compute each month indicating the
principal balance for each class of notes as a fraction of the initial principal
balance of the corresponding class of notes. The Note Factor for each class of
notes will be 1.0000000 as of the Closing Date; thereafter, each Note Factor
will decline to reflect reductions in the principal balance of each class of
notes. As a noteholder, your share of the principal balance of a particular
class of notes is the product of (1) the original denomination of your note and
(2) the applicable class Note Factor.
Under the Indenture, the noteholders and the Insurer will receive monthly
reports concerning the payments received on the Auto Loans, the Outstanding
Portfolio Balance, the Note Factors and various other items of information.
Noteholders of record during any calendar year will be furnished information for
tax reporting purposes not later than the latest date permitted by law. See
"Description of the Transaction Documents--Statements to Noteholders."
WEIGHTED AVERAGE LIFE OF THE NOTES
Absent an Event of Default which has resulted in an acceleration of the
notes, no principal payments on any class of notes will be made until all notes
with lower class designations have been paid in full. For example, no payments
on the Class A-4 notes will be made until the Class A-1 notes, Class A-2 notes
and Class A-3 notes have been paid in full. See "Description of the Notes --
Principal Payments." As the rate of payment of principal of each class of notes
depends primarily on the rate of payment (including prepayments) of the
principal balance of the Auto Loans, final payment of any class of the notes
could occur significantly earlier than the applicable Final Scheduled Maturity
Date. Reinvestment risk associated with early payment of each class of notes
will be borne exclusively by the noteholders. It is expected that final payment
of each class of the notes will occur on or prior to the applicable Final
Scheduled Maturity Date. However, if sufficient funds are not available to pay
the notes in full on or prior to the applicable Final Scheduled Maturity Date,
final payment of the notes could occur later than such date.
Prepayments on auto loans can be measured relative to a prepayment
standard or model. The model used in this prospectus supplement, the Absolute
Prepayment Model ("ABS"), represents an assumed rate of prepayment each month
relative to the original number of auto
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loans in a pool of auto loans. ABS further assumes that all the auto loans are
the same size and amortize at the same rate and that each receivable in each
month of its life will either be paid as scheduled or be prepaid in full. For
example, in a pool of auto loans originally containing 10,000 auto loans, a 1%
ABS rate means that 100 auto loans prepay each month. ABS does not purport to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of auto loans, including the Auto
Loans.
The tables captioned "Percent of Initial Class A-1 Note and Class A-2 Note
Principal Balances at Various ABS Percentages" and "Percent of Initial Class A-3
Note and Class A-4 Note Principal Balances at Various ABS Percentages"
(together, the "ABS Table") have been prepared on the basis of the
characteristics of the Auto Loans. The ABS Table assumes that (a) the Auto Loans
prepay monthly at the specified constant percentage of ABS, with no defaults,
losses or repurchases, (b) each scheduled monthly payment on the Auto Loans is
made on the last day of each month and each month has 30 days, (c) payments on
the notes are made on each payment date (and each such date is assumed to be the
18th day of each applicable month), (d) the balance in the Spread Account on
each payment date is equal to the Requisite Spread Account Amount, (e) the
Excluded Auto Loans are acquired by the Trust on or before the first Payment
Date, and (f) the Seller exercises its option to purchase the Auto Loans and
cause the notes to be redeemed. The ABS Table indicates the projected weighted
average life of each class of notes and sets forth the percent of the initial
principal amount of each class of notes that is projected to be outstanding
after each of the payment dates shown at various constant ABS percentages.
The ABS Table also assumes that the Auto Loans have been aggregated into
hypothetical pools with all of the Auto Loans within each such pool having the
following characteristics and that the level scheduled monthly payment for each
of the pools (which is based on its aggregate principal balance, APR, original
number of scheduled payments and remaining number of scheduled payments as of
the Cutoff Date) will be such that each pool will be fully amortized by the end
of its remaining term to maturity. Each hypothetical pool has an assumed cutoff
date of the Cutoff Date.
ORIGINAL REMAINING
AGGREGATE TERM TERM
PRINCIPAL TO MATURITY TO MATURITY
POOL BALANCE CONTRACT RATE (IN MONTHS) (IN MONTHS)
- ---- --------- ------------- ----------- -----------
1 ............... $ 3,174,410.50 16.338% 39 31
2 ............... $ 17,241,648.40 15.779% 50 44
3................ $ 98,638,679.56 15.096% 60 56
4................ $ 151,215,531.81 14.508% 71 67
The actual characteristics and performance of the Auto Loans will differ
from the assumptions used in constructing the ABS Table. The assumptions used
are hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave
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under varying prepayment scenarios. For example, it is very unlikely that the
Auto Loans will prepay at a constant level of ABS until maturity or that all of
the Auto Loans will prepay at the same level of ABS. Moreover, the diverse terms
of Auto Loans within each of the four hypothetical pools could produce slower or
faster principal distributions than indicated in the ABS Table at the various
constant percentages of ABS specified, even if the original and remaining terms
to maturity of the Auto Loans are as assumed. Any difference between such
assumptions and the actual characteristics and performance of the Auto Loans, or
actual prepayment experience, will affect the percentages of initial balances
outstanding over time and the weighted average lives of each class of notes.
THE FOLLOWING ABS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS
DESCRIBED ABOVE (INCLUDING THE ASSUMPTIONS REGARDING THE CHARACTERISTICS AND
PERFORMANCE OF THE AUTO LOANS WHICH WILL DIFFER FROM THE ACTUAL CHARACTERISTICS
AND PERFORMANCE THEREOF) AND SHOULD BE READ IN CONJUNCTION THEREWITH.
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PERCENT OF INITIAL CLASS A-1 NOTE AND CLASS A-2 NOTE
PRINCIPAL BALANCES AT VARIOUS ABS PERCENTAGES
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
--------------- ---------------
PAYMENT DATE 0.00% 1.00% 1.30% 1.50% 1.70% 2.00% 0.00% 1.00% 1.30% 1.50% 1.70% 2.00%
- ------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date .................. 100 100 100 100 100 100 100 100 100 100 100 100
November 18, 2000 ............. 62 40 33 28 23 16 100 100 100 100 100 100
November 18, 2001 ............. 27 0 0 0 0 0 100 84 62 47 32 9
November 18, 2002 ............. 0 0 0 0 0 0 75 1 0 0 0 0
November 18, 2003 ............. 0 0 0 0 0 0 0 0 0 0 0 0
November 18, 2004 ............. 0 0 0 0 0 0 0 0 0 0 0 0
November 18, 2005 ............. 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg. Life (years)(1) 1.4 0.9 0.8 0.7 0.7 0.6 3.3 2.4 2.2 2.0 1.9 1.7
</TABLE>
- ----------
(1) The weighted average life of a note is determined by (a) multiplying the
amount of each principal payment of such note by the number of years from
the date of the issuance of such note to the related payment date (b)
adding the results and (c) dividing the sum by the related initial
principal amount of such note.
PERCENT OF INITIAL CLASS A-3 NOTE AND CLASS A-4 NOTE
PRINCIPAL BALANCES AT VARIOUS ABS PERCENTAGES
<TABLE>
<CAPTION>
CLASS A-3 NOTES CLASS A-4 NOTES
--------------- ---------------
PAYMENT DATE 0.00% 1.00% 1.30% 1.50% 1.70% 2.00% 0.00% 1.00% 1.30% 1.50% 1.70% 2.00%
- ------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date ................... 100 100 100 100 100 100 100 100 100 100 100 100
November 18, 2000 .............. 100 100 100 100 100 100 100 100 100 100 100 100
November 18, 2001 .............. 100 100 100 100 100 100 100 100 100 100 100 100
November 18, 2002 .............. 100 100 69 47 24 0 100 100 100 100 100 85
November 18, 2003 .............. 84 7 0 0 0 0 100 100 0 0 0 0
November 18, 2004 .............. 0 0 0 0 0 0 0 0 0 0 0 0
November 18, 2005 .............. 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg. Life (years)(1) 4.3 3.5 3.2 3.0 2.8 2.5 4.8 4.2 4.0 3.6 3.4 3.1
</TABLE>
- ----------
(1) The weighted average life of a note is determined by (a) multiplying the
amount of each principal payment of such note by the number of years from
the date of the issuance of such note to the related payment date (b)
adding the results and (c) dividing the sum by the related initial
principal amount of such note.
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DESCRIPTION OF THE NOTES
GENERAL
The notes will be issued pursuant to the Indenture. The notes initially
will be represented by notes registered in the name of Cede & Co. ("Cede") as
the nominee of The Depository Trust Company ("DTC"), and will only be available
in the form of book-entries on the records of DTC and participating members
thereof. The notes will be issued in minimum denominations of $1,000 and
integral multiples of $1,000, except that one Class A-1 Note, one Class A-2
Note, one Class A-3 Note and one Class A-4 Note may be issued in another
denomination. All references to "holders" or "Noteholders" and to authorized
denominations, when used with respect to the notes, shall reflect the rights of
beneficial owners of the notes ("Note Owners"), and limitations thereof, as they
may be indirectly exercised through DTC and its participating members, except as
otherwise specified herein. See "Registration of Notes" herein.
PAYMENT OF INTEREST
The Class A-1 Notes will bear interest at an annual rate equal to 6.420%
(the "Class A-1 Interest Rate"). The Class A-2 Notes will bear interest at an
annual rate equal to 6.705% (the "Class A-2 Interest Rate"). The Class A-3 Notes
will bear interest at an annual rate equal to 6.835% (the "Class A-3 Interest
Rate"). The Class A-4 Notes will bear interest at an annual rate equal to 6.900%
(the "Class A-4 Interest Rate"). Interest on the notes will be calculated on the
basis of a 360-day year of twelve 30-day months.
Noteholders will receive regular payments of interest ("Noteholders'
Interest Payment Amounts") as follows: On each Payment Date, the holders of the
notes as of the related Record Date will be entitled to receive, pro rata,
thirty (30) days of interest at the applicable Interest Rate on the outstanding
principal amount of that class of notes at the close of the preceding Payment
Date. Nevertheless, on the initial Payment Date, the interest payable to the
noteholders of record will be an amount equal to the product of (a) the interest
rate applicable to such class of notes, (b) the initial principal amount of such
class of notes and (c) a fraction (i) the numerator of which is the number of
days (assuming a 30-day month) from and including the Closing Date to but
excluding the initial Payment Date and (ii) the denominator of which is 360.
Interest on the notes which is due but not paid on any Payment Date will
be payable on the next Payment Date together with, to the extent permitted by
law, interest on such unpaid amount at the interest rate applicable to such
class.
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PRINCIPAL PAYMENTS
Principal of the notes will be payable on each Payment Date in an amount
equal to the sum of (i) the Noteholders' Principal Payment Amount, (ii) the
Additional Noteholders' Principal Payment Amount and (iii) the Released Funds
Principal Payment Amount.
On each Payment Date (other than after acceleration of the notes after an
Event of Default), the amount of principal to be paid to Noteholders will be
paid to holders of each class of notes sequentially. In other words, principal
will be applied first to pay principal of the Class A-1 Notes until the
outstanding principal amount of the Class A-1 Notes has been reduced to zero
(the amount of principal paid to holders of the Class A-1 Notes on a Payment
Date being referred to as the "Class A-1 Principal Payment Amount"), then to pay
principal of the Class A-2 Notes until the outstanding principal amount of the
Class A-2 Notes has been reduced to zero (the amount of principal paid to
holders of the Class A-2 Notes on a Payment Date being referred to as the "Class
A-2 Principal Payment Amount"), then to pay principal of the Class A-3 Notes
until the outstanding principal amount of the Class A-3 Notes has been reduced
to zero (the amount of principal paid to holders of the Class A-3 Notes on a
Payment Date being referred to as the "Class A-3 Principal Payment Amount") and,
then to pay the principal of the Class A-4 Notes until the outstanding principal
amount of the Class A-4 Notes has been reduced to zero (the amount of principal
paid to holders of the Class A-4 Notes on a Payment Date being referred to as
the "Class A-4 Principal Payment Amount").
In addition, funds released from the Pre-Funding Account on the first
Payment Date will be paid to Noteholders on a pro rata basis based on the
outstanding principal amounts of their respective Notes.
PRE-FUNDING ACCOUNT
Approximately $12,649,981.37 of Auto Loans, most of which were originated
in Pennsylvania (the "Excluded Auto Loans"), have been excluded from the initial
pool of auto loans until the Depositor and the Trust obtain licenses under the
Pennsylvania Motor Vehicle Sales Finance Act (the "Pennsylvania Licenses").
These licenses are expected to be obtained shortly after the closing date.
On the Closing Date, $11,701,232.77, representing an amount equal to
approximately 92.5% of the aggregate outstanding principal balance as of the
Cut-off Date of the Excluded Auto Loans, will be deposited into a pre-funding
account (the "Pre-Funding Account") held by and in the name of the Indenture
Trustee. The Excluded Auto Loans, including all payments received thereon after
the Cut-off Date, will be purchased by the Trust upon receipt of the
Pennsylvania Licenses with the funds in the Pre-Funding Account to the extent
permitted by the Insurer and the Rating Agencies. In the event that the
Pennsylvania Licenses are not obtained prior to the initial Payment Date or the
Insurer or the Rating Agencies do not approve the transfer of some or all of the
Excluded Auto Loans, the Originator will have the option to
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transfer other Auto Loans meeting the eligibility criteria required for the
initial Auto Loans to the extent permitted by the Insurer and the Rating
Agencies. Any Excluded Auto Loans or other Auto Loans acquired by the Trust
after the Closing Date and on or prior to the first Payment Date are referred to
as "Subsequent Auto Loans." Any balance remaining in the Pre-Funding Account
after the purchase of loans on that date will be paid to noteholders, on a pro
rata basis based on the principal amount of each note as a mandatory prepayment.
All investment earnings on amounts in the Pre-Funding Account will be included
in the Available Funds for the first Payment Date.
The average interest rate earned by the Trust on investment of funds in
the pre-funding account is expected to be less than the weighted average
interest rate on the Notes. To provide a source of funds to cover any shortfall
resulting from this difference, on the Closing Date, $37,330.79 will be
deposited into an interest reserve account (the "Interest Reserve Account") held
by and in the name of the Indenture Trustee. The deposit into the interest
reserve account will be funded from the proceeds of the sale of the Notes. On
the initial Payment Date, the Servicer will instruct the Indenture Trustee to
withdraw from the interest reserve account and deposit into the Collection
Account an amount equal to the product of (a) the initial deposit to the
Pre-Funding Account multiplied by (b) a fraction (i) the numerator of which is
the number of days (assuming a 30-day month) from and including the Closing Date
to but excluding the first Payment Date and (ii) the denominator of which is
360, multiplied by (c) the excess of (1) the weighted average interest rate of
the Notes plus the Insurer Premium rate over (2) the investment earnings on
funds in the pre-funding account expressed as a per annum rate. Amounts
remaining in the Interest Reserve Account after all required payments are made
therefrom on the initial Payment Date will be paid to the Servicer.
If the Insurer and the Rating Agencies approve the transfer to the Trust
on or before the first Payment Date of any Subsequent Auto Loans, all
collections with respect to such Auto Loans after the Cut-off Date (in the case
of Auto Loans originated on or prior to the Cut-off Date) or after the
origination of the Auto Loan (in the case of Auto Loans originated after the
Cut-off Date) will be included in the Available Funds for the first Payment
Date.
Funds on deposit in the Pre-Funding Account and the Interest Reserve
Account will be invested from time to time in highly rated short term
securities. Monies on deposit in the Pre-Funding Account and the Interest
Reserve Account will not be available to cover losses on or in respect of the
Auto Loans or the Notes.
OPTIONAL REDEMPTION
The Seller is permitted at its option to purchase all remaining Auto Loans
from the trust (with the consent of the Insurer if such purchase and redemption
would result in a claim under the Policy or if any amount owing to the Insurer
or on the notes would remain unpaid). The Seller may exercise this repurchase
option on or after the last day of any month on or after which the then
outstanding aggregate principal balance of the notes is less than or equal to
ten percent
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(10%) of the initial aggregate principal balance of the notes at a price equal
to the remaining unpaid principal amount of the Auto Loans as of such last day
of the month plus accrued interest thereon through the Payment Date on which the
redemption will occur. Exercise of these rights will result in the early
retirement of the notes. Upon declaration of an optional redemption, the
Indenture Trustee will give written notice of termination to the Insurer and
each noteholder of record. The final payment to any noteholder will be made only
upon surrender and cancellation of such holder's Note at the office or agency of
the Indenture Trustee specified in the notice of termination.
DESCRIPTION OF THE TRANSACTION DOCUMENTS
The following summary describes the material terms of the Transaction
Documents. The "Transaction Documents" include, among others, the Sales and
Servicing Agreement, the Transfer Agreements, the Trust Agreement, the
Indenture, the Insurance Agreement, the Spread Account Agreement (as such terms
are hereinafter defined). Copies of the Transaction Documents will be filed with
the Commission following the issuance of the notes. This summary is qualified in
its entirety by reference to the actual Transaction Documents.
SALE AND ASSIGNMENT OF AUTO LOANS
On the Closing Date, the Seller will purchase, without recourse, except as
provided in the Sales and Servicing Agreement, from the Originator, its entire
interest in the Auto Loans, together with the security interests held by the
Originator in the related Vehicles. Each Auto Loan will be identified in a
schedule appearing as an exhibit to the Sales and Servicing Agreement. The
Depositor will Purchase the Auto Loans from the Seller and the Trust will
purchase the Auto Loans from the Depositor pursuant to the Transfer Agreements
on the Closing Date. The Trust will issue the notes pursuant to the Indenture.
The Indenture Trustee will execute, authenticate, and deliver the notes.
In the Sales and Servicing Agreement dated as of the Closing Date (the
"Sales and Servicing Agreement"), the Originator will represent and warrant
among other things that (1) the information provided in the Sales and Servicing
Agreement with respect to each Auto Loan is correct in all material respects;
(2) at the dates of origination of the Auto Loans, physical damage insurance
covering each Vehicle was in effect in accordance with the normal requirements
of Flagship; (3) at the date of issuance of the notes, the Auto Loans are free
and clear of all security interests, liens, charges, and encumbrances and no
offsets, defenses, or counterclaims have been asserted or threatened; (4) at the
date of issuance of the notes, each of the Auto Loans is or will be secured by a
first-priority perfected security interest in the related Vehicle in favor of
Flagship, and (5) each Auto Loan, at the time it was originated, complied and,
at the date of issuance of the notes, complies in all material respects with
applicable federal and state law, including, without limitation, consumer
credit, truth in lending, equal credit opportunity and disclosure laws. As of
the last day of the first month following the discovery by or notice to the
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Originator of a breach of any representation or warranty that materially and
adversely affects the interest of the Trust, the Indenture Trustee or the
Insurer, unless the breach is cured, the Originator will purchase such Auto Loan
from the Trust for the Purchase Amount. The repurchase obligation will
constitute the sole remedy available to the noteholders, the Insurer or the
Indenture Trustee for any such uncured breach. However, the Originator will be
required to indemnify the Indenture Trustee, the Insurer, the Trust and the
noteholders against all costs, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel, which may be asserted against
or incurred by any of them, as a result of third party claims arising out of
events or facts giving rise to such breach with respect to the Auto Loans.
On or before the Closing Date, the original documents related to each Auto
Loan and the related Vehicle will be delivered to the Indenture Trustee as
custodian, and the Indenture Trustee then will maintain physical possession of
the original documents related to the Auto Loans and the related Vehicle except
as may be necessary for the servicing of the Auto Loans by the Servicer. The
Auto Loans will not be stamped to reflect the ownership thereof by the Trust.
However, on or prior to the Closing Date, the Originator's accounting records
and computer systems will reflect the sale and assignment of the Auto Loans to
the Trust and Uniform Commercial Code ("UCC") financing statements reflecting
such sales to the Trust and pledge to the Indenture Trustee by the Trust will be
filed. See "Certain Legal Aspects of the Auto Loans - Security Interest in the
Vehicles" herein.
The Originator shall have the right (but not the obligation) to substitute
Auto Loans ("Substitute Auto Loans") for Charged-off Auto Loans; provided that
Substitute Auto Loans in the aggregate must meet the following criteria
("Substitution Criteria"): (i) be at least equal in outstanding principal
balance and at least equal in terms of credit quality to the Auto Loans being
replaced; (ii) not have final scheduled maturity dates later than the final
scheduled maturity dates of the Auto Loans being replaced; (iii) be Eligible
Auto Loans; (iv) satisfy all of the representations and warranties contained in
the Sales and Servicing Agreement; (v) never have been more than thirty-one (31)
days delinquent; and (vi) have APR's at least equal to or greater than the APR's
of the Auto Loans being replaced. In addition to the foregoing factors, the
Originator may not substitute Auto Loans for Charged-off Auto Loans if such
substitutions would cause the aggregate outstanding principal balance of
Substitute Auto Loans that were substituted for Charged-off Auto Loans, measured
at the time of their substitution, to exceed 10% of the Initial Portfolio
Balance after giving effect to such substitution.
All Charged-off Auto Loans will continue to be used in the evaluation of
portfolio performance tests regardless of whether such Charged-off Auto Loans
are removed from the pool.
The Excluded Auto Loans, including all payments received thereon after the
Cut-off Date, will be purchased by the Trust with the funds in the Pre-Funding
Account upon receipt of the Pennsylvania Licenses to the extent approved by the
Insurer and the Rating Agencies. In the event that the Pennsylvania Licenses are
not obtained prior to the initial payment date, the Originator will have the
option to transfer other Auto Loans which meet the eligibility
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requirements for the initial Auto Loans to the extent permitted by the Insurer
and the Rating Agencies.
ACCOUNTS
On or prior to the next billing period after the Cut-off Date, the
Servicer will notify each Obligor to make payments directly to the Servicer with
respect to the Auto Loans. The Indenture Trustee will establish and maintain
initially with itself one or more accounts (collectively, the "Collection
Account") in the name of the Indenture Trustee on behalf of the noteholders and
the Insurer. The Collection Account will be an Eligible Account (as defined
below). The Servicer will forward the proceeds of payments on the Auto Loans to
the Indenture Trustee for deposit in the Collection Account within two Business
Days of receipt thereof. The Indenture Trustee will have the authority to give
to the Obligors notice of the assignment of the Auto Loans and to issue new
payment instructions.
An "Eligible Account" means a segregated trust account that is maintained
with the corporate trust department of a depository institution acceptable to
the Insurer (so long as an Insurer Default shall not have occurred and be
continuing), or (ii) a segregated direct deposit account maintained with a
depository institution or trust company organized under the laws of the United
States of America, or any of the State thereof, or the District of Columbia,
have a certificate of deposit short term deposit or commercial paper rating of
at least A-1+ by Standard & Poor's and P-1 by Moody's and D-1+ by DCR (if the
account is rated by DCR) and a long term rating of at least AA- by Standard &
Poor's and (so long as an Insurer Default shall not have occurred and be
continuing) acceptable to the Insurer.
AVAILABLE FUNDS
On each Payment Date, the Trustee will apply the Available Funds in the
Collection Account to make required payments of principal and interest to
noteholders. The Available Funds for a Payment Date will be the sum of the
following amounts with respect to the preceding Collection Period:
(a) all principal and interest payments on the Auto Loans;
(b) all proceeds received during the related Collection Period with
respect to Auto Loans that became Charged-off Auto Loans during such
related Collection Period, net of the reasonable and customary
out-of-pocket expenses incurred by the Servicer in connection with
collection, enforcement or liquidation and any amounts required by law to
be remitted to the Obligor on such Charged-off Auto Loan;
(c) proceeds from Actual Recovery Amounts with respect to
Charged-off Auto Loans;
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(d) earnings on investments of funds in the Collection Account, the
Pre-Funding Account and the Spread Account during the related Collection
Period;
(e) the Purchase Amount deposited in the collection account for each
Auto Loan that was repurchased by the Originator or the Servicer, as the
case may be, as of the last day of the related Collection Period; and
(f) withdrawals from the Interest Reserve Account.
If the Insurer and the Rating Agencies approve the transfer to the Trust
on or before the first Payment Date of any Subsequent Auto Loans, all
collections with respect to such Auto Loans after the Cut-off Date (in the case
of Auto Loans originated on or prior to the Cut-off Date) or after the
origination of the Auto Loan (in the case of Auto Loans originated after the
Cut-off Date) will be included in the Available Funds for the first Payment
Date.
The Insurer may at any time, and as often as it chooses, with respect to a
Payment Date, have the option (but shall not be required, except as required
under the Policy) to deliver amounts to the Trustee for deposit into the
Collection Account for any of the following purposes: (1) to provide funds in
respect of the payment of fees or expenses of any provider of services to the
Trust with respect to such Payment Date, and (2) to include such amount as part
of Available Funds for such Payment Date to the extent that without such amount
a draw would be required to be made on the Policy. Any amounts delivered by the
Insurer shall be included in the Reimbursement Amounts due to the Insurer.
APPLICATION OF PAYMENTS
On each Payment Date, the Indenture Trustee will distribute the Available
Funds for such Payment Date in the following order of priority:
(a) to the Indenture Trustee and Collateral Agent, (i) all amounts
due to the Indenture Trustee and Collateral Agent (other than fees) in
respect of the immediately prior Collection Period, together with all
reimbursements for such items from prior Collection Periods subject to a
maximum expense cap and (ii) the Indenture Trustee and Collateral Agent
Fee in respect of the immediately prior Collection Period and all unpaid
Indenture Trustee and Collateral Agent Fee from prior Collection Periods;
(b) to the Servicer, the Servicing Fee and all unpaid Servicing
Fees;
(c) to the noteholders, pro-rata, the Noteholders' Interest Payment
Amount;
(d) to the Insurer, any monthly premium fees (the "Insurer Premium")
due and payable to the Insurer;
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(e) to the Noteholders, sequentially first to holders of the Class
A-1 Notes until the Class A-1 Notes are paid in full, then to the holders
of the Class A-2 Notes until the Class A-2 Notes are paid in full, then to
the holders of the Class A-3 Notes until the Class A-3 Notes are paid in
full and thereafter to the holders of the Class A-4 Notes until the Class
A-4 Notes are paid in full, the Noteholders' Principal Payment Amount;
(f) to any successor servicer, the Indenture Trustee and the
Insurer, any reasonable and nonrecurring fees and expenses related to the
transfer of servicing and the appointment of a successor servicer or
temporary successor servicer, subject to a maximum expense cap;
(g) to the Insurer, any other amounts (the "Reimbursement Amounts")
due under the terms of the Insurance Agreement;
(h) to the Indenture Trustee and Collateral Agent for deposit into
the Spread Account, the amount, if any, required to be deposited therein
necessary to maintain the Requisite Spread Account Amount;
(i) to the noteholders, the Additional Noteholders' Principal
Payment Amount;
(j) to the payment of any Re-liening Expenses to the extent not paid
by the Servicer;
(k) to any successor servicer, the Insurer, the Indenture Trustee
and Collateral Agent, any items payable to them that were not paid under
clauses (a) or (f) above; and
(l) to the holder(s) of the Certificates, the remaining balance, if
any, in the Collection Account.
THE SPREAD ACCOUNT
As part of the consideration for the issuance of the Policy, the Trust
shall establish with Harris Trust and Savings Bank (in such capacity, the
"Collateral Agent") an account (the "Spread Account") for the benefit of the
Insurer and the Indenture Trustee on behalf of the noteholders. On the Closing
Date, the Trust shall deposit into the Spread Account an amount equal to
$7,728,621.58. On the date, if any, on or before the first Payment Date on which
any Subsequent Auto Loans are transferred to the Trust, an amount will be
deposited in the Spread Account equal to 3% of the principal balances of those
Auto Loans as of the Cut-off Date or, if later, the date of origination of such
Auto Loans. If on any Payment Date, the amount of Available Funds is
insufficient to make all payments required to be made on such day under
priorities (a) through (f) under "Application of Payments," then amounts on
deposit in the Spread Account will be applied to pay the amounts due on such
Payment Date under priorities (a) through (f).
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Amounts on deposit in the Spread Account on any Payment Date which (after
all payments and withdrawals from the Spread Account on that Payment Date) are
in excess of the Requisite Spread Account Amount will be applied to the extent
necessary to reduce the aggregate principal amount of the notes to the Notes
Target Amount and, thereafter, will be applied in accordance with priorities (j)
through (l) under "Application of Payments" above.
EVENTS OF DEFAULT
Unless an Insurer Default (as hereinafter defined) shall have occurred,
"Events of Default" under the Indenture will consist of those events defined in
the Insurance Agreement (the "Insurance Agreement") as Insurance Agreement
Indenture Indicators, and will constitute an Event of Default under the
Indenture only if the Insurer delivers to the Indenture Trustee a written notice
specifying that any such Insurance Agreement Indenture Indicators constitutes an
Event of Default under the Indenture. An "Insurance Agreement Indenture
Indicator" will include the occurrence of any of the following:
(1) a demand for payment under the Policy;
(2) certain events of insolvency, readjustment of debt, marshaling
of assets and liabilities, or similar proceedings with respect to Copelco,
any subsidiary of Copelco or the Trust and certain actions by Copelco, any
subsidiary of Copelco or the Trust, indicating its insolvency,
reorganization under bankruptcy proceedings, or inability to pay its
obligations (an "Insolvency Event");
(3) the Trust becoming taxable as an association (or publicly traded
partnership) taxable as a corporation for federal or state income tax
purposes;
(4) the sum of the amount of Available Funds with respect to any
Payment Date plus the amount (if any) available from the Spread Account is
less than the sum of the amounts described in clauses (a) through (f)
under "Application of Payments" herein;
(5) delinquency, default and loss ratios exceed certain levels
specified in the Insurance Agreement and under the Level II Portfolio
Performance Tests (as defined in the Glossary);
(6) the occurrence of a Servicer Termination Event under the Sales
and Servicing Agreement; or
(7) any failure by the Servicer, the Seller, the Originator or the
Trust to observe or perform in any material respect any other covenants,
representations, warranties or agreements in the Sales and Servicing
Agreement, the Indenture or any of the documents related thereto, which
failure continues past any applicable cure period.
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If such an Event of Default occurs and the Insurer gives notice of
acceleration, then, so long as an Insurer Default shall not have occurred and be
continuing, the notes shall become due and payable at par with accrued interest
thereon. In such event, the Insurer will have the right, but not the obligation,
to instruct the Indenture Trustee to liquidate the Auto Loans, in whole or in
part, on any date or dates following the acceleration of the notes due to such
Event of Default, and to distribute the proceeds of such liquidation in
accordance with the terms of the Indenture. Following the occurrence of any
Event of Default and acceleration of the notes, the Indenture Trustee will
continue to submit claims as necessary under the Policy for any Deficiency
Amounts with respect to the notes, except that the Insurer, in its sole
discretion, may elect to pay all or any portion of the outstanding amount of the
notes in excess thereof, plus accrued interest thereon. See "The Policy" herein.
If an Insurer Default has occurred, "Events of Default" will consist of
the following events:
(1) a default for five days or more in the payment of any interest
on the notes;
(2) a default for five days or more in the payment of the principal
of the notes when the same becomes due and payable;
(3) a default in (a) the observance or performance in any material
respect of any covenant or agreement of the Trust made in the Indenture,
(b) any representation or warranty made by the Trust in the Indenture, or
(c) any certificate delivered in connection therewith and the continuation
of any such default or the failure to cure such breach of a representation
or warranty for a period of 30 days (or such longer period not in excess
of 90 days as is reasonably necessary to cure such default) after notice
thereof is given to the Trust by the Indenture Trustee or to the Trust and
the Indenture Trustee by the holders of at least 25% in principal amount
of the notes then outstanding; or
(4) certain events of bankruptcy, insolvency, receivership or
liquidation of the Trust.
Upon the occurrence of an Event of Default, and so long as an Insurer
Default has occurred and is continuing, the Indenture Trustee or the holders of
notes representing at least a majority of the principal amount of the notes then
outstanding may declare the principal of the notes to be immediately due and
payable. Such declaration may, under certain circumstances, be rescinded by the
holders of notes representing at least a majority of the principal amount of the
notes then outstanding. The Indenture Trustee may also institute proceedings to
collect amounts due or foreclose on the Auto Loans, exercise remedies as a
secured party, sell the related Auto Loans or elect to have the Trust maintain
possession of such Auto Loans. If the Indenture Trustee has the right to
liquidate the Auto Loans while an Insurer Default has occurred and is
continuing, the Indenture Trustee will nevertheless be prohibited from selling
the related Auto Loans following an Event of Default unless (i) the holders of
all the outstanding notes consent to
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the sale or (ii) the proceeds of the sale are sufficient to pay in full the
principal of and the accrued interest on all of the outstanding notes at the
date of the sale.
STATEMENTS TO NOTEHOLDERS
On each Payment Date, the Indenture Trustee will include with each payment
to each noteholder of record as of the close of business on the applicable
Record Date, to the Insurer and to each Rating Agency that is currently rating
the notes a statement (prepared by the Servicer) setting forth the following
information with respect to the preceding Collection Period, to the extent
applicable:
(1) the amount of the payment allocable to principal of each class
of notes;
(2) the amount of the payment allocable to interest on each class of
notes;
(3) the Outstanding Portfolio Balance and the Note Factor for each
class of notes as of the close of business on the last day of the
preceding Collection Period;
(4) the aggregate principal balance of each class of notes as of the
close of business on the last day of the preceding Collection Period,
after giving effect to payments allocated to principal reported under (1)
above;
(5) the amount of the Servicing Fee paid to the Servicer with
respect to the related Collection Period, the amount of any unpaid
Servicing Fees and the change in such amount from that of the prior
Payment Date;
(6) the amount paid to the noteholders under the Policy or from the
Spread Account for such Payment Date;
(7) the amount payable to the Insurer on such Payment Date;
(8) the aggregate amount in the Spread Account and the change in
such amount from the previous Payment Date;
(9) as of the end of the preceding Collection Period, the number of
Auto Loans and the aggregate principal amount scheduled to be paid thereon
for which the related Obligors are delinquent in making scheduled payments
thereon for various periods of delinquency;
(10) the number and the aggregate Purchase Amount of Auto Loans
repurchased by the Originator or purchased by the Servicer; and
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(11) the cumulative outstanding principal balance of all Auto Loans
that have become Charged-off Auto Loans net of Recoveries, during the
period from the Cut-off Date to the last day of the related Collection
Period.
Each amount set forth under subclauses (1), (2) and (6) above shall be
expressed in the aggregate and as a dollar amount per $1,000 of original
principal balance of a Note.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Sales and Servicing Agreement,
the Indenture Trustee will mail to each person who at any time during such
calendar year shall have been a noteholder and received any payment on such
holder's notes, a statement (prepared by the Servicer) containing the sum of the
amounts described in (1) and (2) above for the purposes of such noteholder's
preparation of federal income tax returns. See "Description of the Transaction
Documents--Statements to Noteholders" and "Material Federal Income Tax
Consequences" herein.
EVIDENCE AS TO COMPLIANCE
The Sales and Servicing Agreement will provide that a firm of independent
certified public accountants will furnish to the Indenture Trustee and the
Insurer annually a report as to compliance by the Servicer during the preceding
annual period with certain standards relating to the servicing of the Auto
Loans.
The Sales and Servicing Agreement will also provide for annual delivery to
the Indenture Trustee and the Insurer, of a certificate signed by an officer of
the Servicer stating that the Servicer has fulfilled its obligations under the
Sales and Servicing Agreement throughout the preceding annual period or, if
there has been a default in the fulfillment of any such obligation, describing
each such default. The Servicer has agreed to give the Indenture Trustee and the
Insurer notice of any Events of Default and Servicer Termination Events under
the Sales and Servicing Agreement.
Copies of such statements and certificates may be obtained by noteholders
by a request in writing addressed to the Indenture Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer shall service Auto Loans pursuant to the Sales and Servicing
Agreement. The Servicer shall provide to the Indenture Trustee and the Insurer
no later than the third business day following the applicable Record Date a
monthly report concerning certain cash flow and other activity with respect to
the Auto Loans.
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In performing its obligations the Servicer may, acting in the name of the
Trust and without necessarily obtaining the prior consent of the Trust or the
Indenture Trustee, enter into and grant modifications, waivers and amendments to
the terms of any Auto Loan except for modifications, waivers or amendments that
(1) are inconsistent with the servicing standards set forth in the Sales and
Servicing Agreement, (2) would reduce the amount or extend the time for payment
of any Auto Loan payment to be made under an Auto Loan or the Obligor's
obligations to make payment of the same, (3) would reduce or adversely affect
the Obligor's obligation to maintain, service, insure and care for the Vehicle,
or (4) otherwise could adversely affect the interests of any of the Trust, the
Indenture Trustee, the Insurer or the noteholders.
The Servicer will use its best efforts, to the extent commercially
reasonable, to repossess any Vehicle subject to a defaulted Auto Loan and it
will use its best efforts to sell such Vehicle for cash in a timely manner and
upon commercially reasonable terms and conditions available at the time. In the
event that the Servicer is required to sell a Vehicle securing a defaulted Auto
Loan at a time when the Servicer has similar vehicles available for sale, the
Servicer will not favor any such other vehicle in its remarketing efforts.
The Servicer is obligated by the Sales and Servicing Agreement to take all
appropriate collection and recovery actions with respect to defaulted Auto Loans
including, but not limited to, repossession in accordance with applicable law.
All funds received by the Servicer in the performance of its duties with respect
to any defaulted Auto Loan or Vehicle (net of the Servicer's actual
out-of-pocket, customary expenses reasonably incurred in the collection of such
defaulted Auto Loan) shall be held in trust by the Servicer, as agent for the
Indenture Trustee, and be immediately (but, in any event, within two Business
Days) turned over to the Indenture Trustee for deposit into the Collection
Account and to be applied as described in "Application of Payments."
SERVICING DUTIES
The Sales and Servicing Agreement will provide that the Servicer may not
resign from its obligations and duties as Servicer except upon determination
that its performance of such duties is no longer permissible under applicable
law as evidenced by an opinion of counsel delivered to the Insurer and with the
consent of the Insurer. No such resignation will become effective until a
successor servicer reasonably acceptable to the Insurer has assumed the
servicing obligations and duties under the Sales and Servicing Agreement. If
Flagship resigns as Servicer or is terminated as Servicer, a successor servicer
will assume the servicing obligations and duties under the Sales and Servicing
Agreement. However, so long as no Insurer Default shall have occurred and be
continuing, the Insurer in its sole and absolute discretion may appoint a
successor Servicer.
The Sales and Servicing Agreement will further provide that neither the
Servicer nor any of its directors, officers, employees, and agents will be under
any liability to the Trust or the noteholders for taking any action or for
refraining from taking any action under the Sales and
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Servicing Agreement, or for errors in judgment. However, neither the Servicer
nor any such person will be protected against any liability that would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Sales and Servicing Agreement will provide
that the Servicer is under no obligation to appear in, prosecute, or defend any
legal action that is not incidental to its servicing responsibilities under the
Sales and Servicing Agreement and that, in its opinion, may cause it to incur
any expense or liability.
The Servicer will be entitled to receive a fee (the "Servicing Fee") on
each Payment Date, equal to the result of one-twelfth times 2% of the
Outstanding Portfolio Balance as of the close of business on the last day of the
preceding Collection Period. However, with respect to the first Payment Date the
Servicer will be entitled to receive a Servicing Fee equal to the result of
one-twelfth times 2% of the Initial Portfolio Balance. As additional servicing
compensation, the Servicer will also be entitled to receive certain late fees,
prepayment charges and other administrative fees or similar charges allowed by
applicable law with respect to the Auto Loans. Payments by or on behalf of
Obligors will be allocated to scheduled loan payments, late fees and other
charges and principal and interest in accordance with the Servicer's normal
practices and procedures. The Servicing Fee will be paid out of collections from
the Auto Loans, before payments to noteholders.
The Servicing Fee and additional servicing compensation will compensate
the Servicer for performing the functions of a third party servicer of Auto
Loans as an agent for the Trust, including collecting and posting all payments,
responding to inquiries of Obligors on the Auto Loans, investigating
delinquencies, sending payment coupons to Obligors, reporting tax information to
Obligors, paying costs of disposition of defaults and policing the collateral.
The Servicing Fee also will compensate the Servicer for administering the Auto
Loans, including accounting for collections and furnishing monthly and annual
statements to the Indenture Trustee and the Insurer with respect to payments and
generating federal income tax information. The Servicing Fee also will reimburse
the Servicer for certain taxes, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering the
Auto Loans.
SERVICER TERMINATION EVENTS
Any of the following events will constitute a "Servicer Termination Event"
under the Sales and Servicing Agreement:
o any failure by the Servicer to deliver to the Indenture Trustee for
payment to the noteholders any required payment, which failure continues
unremedied for two Business Days (or, in the case of a payment or deposit
to be made no later than a Payment Date, the failure to make such payment
or deposit by such Payment Date), or any failure to deliver to the
Indenture Trustee and the Insurer (i) the monthly Servicer's report by the
third Business Day prior to the related Payment Date or (ii) the annual
accountants'
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report, the annual statement as to compliance or the statement to the
noteholders, in each case, within 10 days of the date it is due;
o any failure by the Servicer duly to observe or perform in any material
respect any other covenant or agreement in the Transaction Documents which
continues unremedied for 30 days after the giving of written notice of
such failure (1) to the Servicer by the Insurer or by the Indenture
Trustee, or (2) to the Servicer and to the Indenture Trustee and the
Insurer by the holders of notes evidencing not less than 51% of the
outstanding principal balance of the notes;
o certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities, or similar proceedings with respect to the Servicer or an
Insolvency Event with respect to the Servicer, or
o the occurrence of an Insurance Agreement Indicator or an Insurance
Agreement Indenture Indicator.
An "Insurance Agreement Indicator" means an event of default under the
Insurance Agreement as it may be modified, amended or waived by MBIA in its sole
discretion without the consent of the Indenture Trustee or any noteholder.
Remedies available to MBIA upon the occurrence of an Insurance Agreement
Indicator include (i) increasing the amount required to be paid as principal by
decreasing the Noteholders' Percentage and therefore reducing the Notes Target
Amount and (ii) terminating Flagship's appointment as Servicer. An Insurance
Agreement Indicator may be waived by the Insurer in its sole discretion.
RIGHTS UPON SERVICER TERMINATION EVENT
Following the occurrence of a Servicer Termination Event, the Indenture
Trustee, at the direction of the Controlling Party (as hereinafter defined)
shall terminate all the rights and obligations of the Servicer under the Sales
and Servicing Agreement, whereupon the successor Servicer as shall be or have
been appointed by the Insurer (or, if an Insurer Default shall have occurred and
be continuing, by the Indenture Trustee or the noteholders) will succeed to the
responsibilities, duties and liabilities of the Servicer upon terms acceptable
to both such successor servicer and the party entitled to designate such
successor servicer. However, a successor Servicer shall have no liability with
respect to any obligation which was required to be performed by the predecessor
Servicer before the date the successor Servicer becomes the Servicer or the
claim of a third party (including a noteholder) based on any alleged action or
inaction of the predecessor Servicer as Servicer. The predecessor Servicer shall
be responsible for all costs related to the transfer of servicing to the
successor Servicer.
"Insurer Default" shall mean any one of the following events shall have
occurred and be continuing:
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o the Insurer fails to make a payment required under the Policy
in accordance with its terms;
o the Insurer
-- files any petition or commences any case or proceeding
under any applicable federal or state law relating to
insolvency, bankruptcy, rehabilitation, liquidation or
reorganization to be adjudicated as bankrupt or
insolvent,
-- makes a general assignment for the benefit of its
creditors, or
-- has an order for relief entered against it under the
United States Bankruptcy Code or any other similar
federal or state law relating to insolvency, bankruptcy,
rehabilitation, liquidation or reorganization which is
final and nonappealable; or
o a court of competent jurisdiction or other competent
regulatory authority, enters a final and nonappealable order,
judgment or decree
-- appointing a custodian, trustee, agent or receiver for
the Insurer or for all or any substantial portion of its
property or
-- authorizing the taking of possession by a custodian,
trustee, agent or receiver of the Insurer (or the taking
of possession of all or any substantial portion of the
property of the Insurer).
SERVICING SUCCESSION
If a Servicer Termination Event occurs, the Indenture Trustee shall, at
the direction of the Controlling Party, terminate the rights and obligations of
the Servicer under the Sales and Servicing Agreement. See "Risk
Factors--Termination of Flagship as Servicer" and "Description of the
Transaction Documents--Servicer Termination Events" herein. If such event occurs
when Flagship is the Servicer, or if Flagship resigns as Servicer or is
terminated as Servicer by the Insurer, a third-party successor Servicer as
appointed by the Controlling Party will become the successor Servicer under the
Sales and Servicing Agreement. From and after succeeding as Servicer, such
successor Servicer will receive compensation in an amount equal to one-twelfth
of the Servicing Fee Rate times the Outstanding Portfolio Balance as of the
related Collection Period.
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CONTROLLING PARTY
The party that has the right to exercise remedies under the Transaction
Documents, including agreeing to amendments and waivers, is generally referred
to herein as the "Controlling Party." The Insurer will generally be the
Controlling Party so long as no Insurer Default has occurred and is continuing.
In the event such an Insurer Default has occurred and is continuing, such rights
will generally be held by the holders of a majority of the outstanding principal
balance of the notes (the "Note Majority") until such time as no Insurer Default
exists whereby such rights will revert back to the Insurer. In either case,
certain matters require the consent of 100% of the noteholders. These include
changing the maturity of the principal of any Note, changing the amount of any
installments of principal or interest with respect to any Note or reducing the
aggregate outstanding principal amount of the notes.
THE POLICY
The following information has been supplied by MBIA Insurance Corporation,
the Insurer, for inclusion in this Prospectus Supplement. The Insurer does not
accept any responsibility for the accuracy or completeness of this Prospectus
Supplement or any information or disclosure contained herein, or omitted
herefrom, other than with respect to the accuracy of the information regarding
the Policy and the Insurer set forth under the headings "The Policy" and "The
Insurer" herein. Additionally, the Insurer makes no representation regarding the
notes or the advisability of investing in the notes.
The Insurer, in consideration of the payment of a premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any noteholder that an amount equal to each full and complete Insured Payment
will be received from the Insurer by the Indenture Trustee, or its successors,
as indenture trustee for the noteholders, on behalf of the noteholders, for
distribution by the Indenture Trustee to each noteholder of each noteholder's
proportionate share of the Insured Payment.
The Insurer's obligations under the Policy, with respect to a particular
Insured Payment, will be discharged to the extent funds equal to the applicable
Insured Payment are received by the Indenture Trustee, whether or not those
funds are properly applied by the Indenture Trustee. Insured Payments will be
made only at the time set forth in the Policy, and no accelerated Insured
Payments will be made regardless of any acceleration of the notes, unless the
acceleration is at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Issuer, the Trust or
the Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability for withholding taxes).
The Insurer will pay any Insured Payment that is a Preference Amount on
the Business Day following receipt on a Business Day by the Insurer's fiscal
agent of the following:
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o a certified copy of the order requiring the return of a preference
payment,
o an opinion of counsel satisfactory to the Insurer that the order
is final and not subject to appeal,
o an assignment in a form that is reasonably required by the
Insurer, irrevocably assigning to the Insurer all rights and claims of the
noteholder relating to or arising under the notes against the debtor which
made the preference payment or otherwise with respect to the preference
payment and
o appropriate instruments to effect the appointment of the Insurer
as agent for the noteholder in any legal proceeding related to the
preference payment, which instruments are in a form satisfactory to the
Insurer;
provided that if these documents are received after 12:00 p.m., New York time,
on that Business Day, they will be deemed to be received on the following
Business Day. Payments by the Insurer will be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the noteholder and not to any noteholder directly
unless the noteholder has returned principal or interest paid on the notes to
the receiver or trustee in bankruptcy, in which case such payment will be
disbursed to the noteholder.
The Insurer will pay any other amount payable under the Policy no later
than 12:00 p.m., New York 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 Insurer or any successor fiscal agent appointed by
the Insurer of a notice from the Indenture Trustee specifying the Insured
Payment which is due and owing on the applicable Payment Date; provided that if
such Notice is received after 12:00 p.m., New York time, on that Business Day,
it will be deemed to be received on the following Business Day. If any such
notice received by Insurer's fiscal agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Policy, it shall be
deemed not to have been received by the Insurer's fiscal agent for purposes of
this paragraph, and the Insurer or the Insurer's fiscal agent, as the case may
be, will promptly so advise the Indenture Trustee and the Indenture Trustee may
submit an amended Notice.
Insured Payments due under the Policy, unless otherwise stated therein,
will be disbursed by the Insurer's fiscal agent to the Indenture Trustee, on
behalf of the noteholders, 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 Insurer only, and the fiscal agent
will in no event be liable to noteholders for any acts of the fiscal agent or
any failure of the Insurer to deposit, or cause to be deposited, sufficient
funds to make payments due under the Policy.
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Subject to the terms of the Indenture, the Insurer will be subrogated to
the rights of each noteholder to receive payments under the notes to the extent
of any payment by the Insurer under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Deficiency Amount" means (a) for any Payment Date, any shortfall in the
sum of Available Funds plus amounts on deposit in the Spread Account to pay the
related Noteholders' Interest Payment Amount, and (b) on the Final Scheduled
Maturity Date for a class of notes, any shortfall in the sum of Available Funds
plus amounts on deposit in the Spread Account to pay the outstanding principal
amount of that class of notes (after taking into account all distributions to be
made on such Payment Date).
"Insured Payment" means (a) as of any Payment Date, any Deficiency Amount
and (b) any Preference Amount.
"Preference Amount" means any amount previously distributed to a
noteholder on the notes that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the meanings set forth in the Indenture as of the date of
execution of the 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 Insurer.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason, including payment, or provision being made for
payment, prior to maturity of the notes.
The 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 Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
A form of the Policy is attached to this Prospectus Supplement as Exhibit
A.
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THE INSURER
THE INSURER
MBIA Insurance Corporation, the 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 Insurer. The 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 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 Insurer, changes in control and transactions among affiliates. Additionally,
the Insurer is required to maintain contingency reserves on its liabilities in
specified amounts and for specified periods of time.
FINANCIAL INFORMATION ABOUT THE INSURER
The consolidated financial statements of the Insurer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1998 and
December 31, 1997 and for each of the three years in the period ended December
31, 1998, 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, 1998 and the consolidated financial statements of the Insurer and
its subsidiaries as of September 30, 1999 and for the nine month periods ended
September 30, 1999 and September 30, 1998 included in the Quarterly Report on
Form 10-Q of MBIA Inc. for the period ended September 30, 1999, 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 that statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Statement.
All financial statements of the 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 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 those documents.
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The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities and generally accepted accounting
principles:
STATUTORY ACCOUNTING PRACTICES
----------------------------------------
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
Admitted Assets.................... $6,521 $6,930
Liabilities........................ 4,231 4,571
Capital and Surplus................ 2,290 2,359
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
----------------------------------------
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
Assets............................. $7,488 $7,422
Liabilities........................ 3,211 3,234
Shareholder's Equity............... 4,277 4,188
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
Copies of the financial statements of the Insurer incorporated by
reference herein and copies of the Insurer's 1998 year-end audited financial
statements prepared in accordance with statutory accounting practices are
available, without charge, from the Insurer. The address of the Insurer is 113
King Street, Armonk, New York 10504. The telephone number of the Insurer is
(914) 273-4545.
YEAR 2000 READINESS DISCLOSURE
MBIA Inc. is actively managing a high-priority year 2000 or Y2K program
addressing the issue of whether its computer systems can correctly distinguish
between the years 1900 and 2000. MBIA Inc. has established an independent Y2K
testing lab in its Armonk office, with a committee of business unit managers
overseeing the project. MBIA Inc. has a budget of
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$1.13 million for its 1998-2000 Y2K efforts. As of September 30, 1999, MBIA Inc.
has spent $949,000 on the project. A recent review of efforts at certain
subsidiaries has indicated the need to spend an additional $1.03 million this
year on remediation. As of September 30, 1999, MBIA Inc. has spent $568,000 of
this additional amount. However, this increase will not have a material effect
on MBIA Inc.'s financial results.
MBIA Inc. has initiated a comprehensive Y2K plan which includes the
following phases: assessment - completed in the second quarter of 1998;
remediation - completed in the fourth quarter of 1998; testing - completed in
the second quarter of 1999; and contingency planning - completed in the third
quarter of 1999, subject to final approval by senior management and any need for
revision that might arise in the future. This plan covers "mission-critical"
internally developed systems, vendor software, hardware and certain third party
entities through which MBIA Inc. conducts its business. Testing to date
indicates that functions critical to the financial guarantee business, both
domestic and international, were Y2K-ready as of December 31, 1998.
Additional testing is being carried out throughout 1999.
FINANCIAL STRENGTH RATINGS OF THE INSURER
Moody's Investors Service, Inc. rates the financial strength of the
Insurer as "Aaa."
Standard & Poor's Ratings Services Group, a division of The McGraw-Hill
Companies, Inc., rates the financial strength of the Insurer "AAA."
Fitch IBCA, Inc. rates the financial strength of the Insurer as "AAA."
Each rating of the Insurer should be evaluated independently. The ratings
reflect each respective rating agency's current assessment of the
creditworthiness of the 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 notes,
and the 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 notes. The Insurer does
not guaranty the market price of the notes nor does it guaranty that the ratings
on the notes will not be revised or withdrawn.
REGISTRATION OF NOTES
The notes will initially be registered in the name of Cede & Co. ("Cede"),
the nominee 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 Uniform Commercial
Code, and a "clearing agency" registered under the
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provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC accepts securities for deposit from its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants in such securities through electronic
book-entry changes in accounts of Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also 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.
If you are acquiring beneficial ownership interests in the notes, you may
hold the notes directly through DTC if you are a Participant, or you may hold
your interest indirectly through organizations which are Participants. Your
ownership of a book-entry note will be recorded on the records of the brokerage
firm, bank, thrift institution or other financial intermediary (each, a
"Financial Intermediary") that maintains your account for that purpose. In turn,
the Financial Intermediary's ownership of such book-entry note will be recorded
on the records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant). See "Registration of Notes" herein.
BOOK-ENTRY REGISTRATION
Class A-1 Noteholders, Class A-2 Noteholders, Class A-3 Noteholders and
Class A-4 Noteholders (together, the "Book-Entry Noteholders") will hold their
notes (together, the "Book-Entry Notes") 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 Book-Entry Notes. 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") 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 securities. 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
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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 Book-Entry
Notes 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 Book-Entry Notes in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent Book-Entry Notes settlement processing, dated the business
day following the DTC settlement date, and such credits or any transactions in
such notes 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 Book-Entry Notes 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 Book-Entry Noteholders that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, notes may do so only through Participants and Indirect
Participants. In addition, Book-Entry Noteholders will receive all payments of
principal and interest through the Participants who in turn will receive them
from DTC. Under a book-entry format, Book-Entry Noteholders may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Indenture 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 Book-Entry Noteholders. It is anticipated that the only "Book-Entry
Noteholder" will be Cede, as nominee of DTC. Noteholders will not be recognized
as Book-Entry Noteholders, and such Book-Entry Noteholders will be permitted to
exercise the rights of Book-Entry Noteholders 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
Book-Entry Notes among
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Participants on whose behalf it acts with respect to such notes and to receive
and transmit distributions of principal of, and interest on, such Book-Entry
Notes. Participants and Indirect Participants with which the Book-Entry
Noteholders have accounts with respect to such notes similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
the Book-Entry Noteholders. Accordingly, although such Book-Entry Noteholders
will not possess Book-Entry Notes, the Rules provide a mechanism by which
Participants will receive payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Book-Entry
Noteholder to pledge Book-Entry Notes to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Book-Entry Notes, may be limited due to the lack of a physical certificate for
such Book-Entry Notes.
DTC will advise the Indenture Trustee that it will take any action
permitted to be taken by a Book-Entry Noteholder only at the direction of one or
more Participants to whose accounts with DTC the Book-Entry Notes 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 Trust
Depository. CEDEL holds Book-Entry Notes 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 Book-Entry Notes. 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
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional Trust 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
securities 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
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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 Underwriter. 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 securities
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 Indenture Trustee will not have any
liability for any aspect of the records relating to or payments made or account
of beneficial ownership interests of the Book-Entry Notes held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DTC management is aware that some computer applications, systems, and the
like for processing data ("SYSTEMS") that are dependent upon calendar dates,
including before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to security holders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
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However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information of the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
DEFINITIVE NOTES
The Book-Entry Notes will be issued in fully registered, certificated form
("Definitive Notes") to the noteholders or their nominees, rather than to DTC or
its nominee, only if (i) the Indenture Trustee advises in writing that DTC is no
longer willing or able to discharge properly its responsibilities as Trust
Depository with respect to such Book-Entry Notes and the Indenture Trustee is
unable to locate a qualified successor, (ii) such Indenture 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 Indenture or a default by the
Servicer under the Sales and Servicing Agreement, Book-Entry Noteholders
representing at least a majority of the outstanding principal amount of such
Book-Entry Notes advise the Indenture Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in such Book-Entry Noteholders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Indenture Trustee will be required to notify all such Book-Entry
Noteholders through Participants of the availability of Definitive Notes. Upon
surrender by DTC of the definitive Book-Entry Notes representing such Book-Entry
Notes and receipt of instructions for reregistration, the Indenture Trustee will
reissue such Book-Entry Notes as Definitive Notes to such Book-Entry
Noteholders.
Payments of principal of, and interest on, such Book-Entry Notes will
thereafter be made by the Indenture Trustee in accordance with the procedures
set forth in the Indenture directly to holders of Definitive Notes in whose
names the Definitive Notes were registered at the close of business on the
Record Date. Such payments will be made by check mailed to the address of such
holder as it appears on the register maintained by the Indenture 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 payment to the applicable noteholders.
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Definitive Notes will be transferable and exchangeable at the offices of
the Indenture Trustee, or of a note registrar named in a notice delivered to
holders of such Definitive Notes. No service charge will be imposed for any
registration of transfer or exchange, but the Indenture Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
CERTAIN LEGAL ASPECTS OF THE AUTO LOANS
GENERAL
The transfers of the Auto Loans, the perfection of the security interests
in the Auto Loans and the enforcement of rights to realize on the Vehicles as
collateral for the Auto Loans are subject to a number of federal and state laws,
including the UCC as in effect in various states. The Servicer will take such
action as is required to perfect the rights of the Indenture Trustee in the Auto
Loans. If, through inadvertence or otherwise, a third party were to purchase
(including the taking of a security interest in) an Auto Loan for new value in
the ordinary course of its business, without actual knowledge of the Trust's
interest, and take possession of an Auto Loan, the purchaser would acquire an
interest in such Auto Loan superior to the interest of the Issuer. No action
will be taken to perfect the rights of the Indenture Trustee in proceeds of any
insurance policies covering individual vehicles or Obligors. Therefore, the
rights of a third party with an interest in such proceeds could prevail against
the rights of the Trust or the Indenture Trustee prior to the time such proceeds
are deposited by the Servicer into the Collection Account.
SECURITY INTERESTS IN THE VEHICLES
In states in which retail installment sale contracts such as the Auto
Loans evidence the credit sale of automobiles, light trucks, vans and minivans
by dealers to Obligors, the contracts also constitute personal property security
agreements and include grants of security interests in the vehicles under the
applicable UCC. Perfection of security interests in the financed automobiles,
light trucks, vans and minivans is generally governed by the motor vehicle
registration laws of the state in which the vehicle is located. In all states in
which the Auto Loans have been originated, a security interest in automobiles,
light trucks, vans and minivans is perfected by obtaining the certificate of
title to the Vehicle or notation of the secured party's lien on the vehicles'
certificate of title (in addition, in Louisiana, a copy of the installment sale
contract must be filed with the appropriate governmental recording office).
Each Auto Loan will name the Originator as obligee or assignee and as the
secured party. The Originator will have represented and warranted that it has
taken all actions necessary under the laws of the state in which the Vehicle is
located to perfect the Originator's security interest in the Vehicle, including,
where applicable, having a notation of its lien recorded on such vehicle's
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certificate of title. The Obligors on the Auto Loans will not be notified of the
sales from the Originator to the Seller, from the Seller to the Depositor or
from the Depositor to the Trust and no action will be taken to record the
related transfers of the security interests in the Vehicles by amendment of the
certificates of title for the Vehicles or otherwise.
The Originator will transfer and assign its security interest in the
related Vehicles to the Seller. The Seller will then transfer and assign its
security interest in those Vehicles to the Depositor. The Depositor will
transfer and assign its security interest in the Vehicles to the Trust, which
will pledge its interest in the Vehicles to the Indenture Trustee. However,
because of the administrative burden and expense, the certificates of title of
such vehicles will not be amended to identify the Trust or the Indenture Trustee
as the new secured party.
In most states, an assignment is an effective conveyance of a security
interest without amendment of any lien noted on a vehicle's certificate of
title, and the assignee succeeds thereby to the assignor's rights as secured
party. However, by not identifying the Trust or the Indenture Trustee as the
secured party on the certificate of title, the security interest of the Trust in
the Vehicle could be defeated through fraud or negligence.
Under the laws of most states, the perfected security interest in a
vehicle continues for four months after the vehicle is moved to a state other
than the state in which it is initially registered and thereafter until the
owner thereof re-registers the vehicle in the new state. A majority of states
generally require surrender of a certificate of title to re-register a vehicle.
Accordingly, a secured party must surrender possession if it holds the
certificate of title to the vehicle or, in the case of a vehicle registered in a
state providing for the notation of a lien on the certificate of title but not
possession by the secured party, the secured party will receive notice of
surrender if the security interest is noted on the certificate of title. Thus,
the secured party will have the opportunity to re-perfect its security interest
in the vehicle in the state of relocation. In states that do not require a
certificate of title for registration of a motor vehicle, re-registration could
defeat perfection. Under the Sales and Servicing Agreement, the Servicer is
obligated to take appropriate steps, at the Servicer's expense, to maintain
perfection of security interests in the Vehicles and is obligated to purchase
the related Auto Loan if it fails to do so.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for unpaid taxes take priority over even a perfected security
interest in a financed vehicle. The Code also grants priority to certain federal
tax liens over the lien of a secured party. The laws of certain states and
federal law permit the confiscation of vehicles by government authorities under
certain circumstances if used in unlawful activities, which may result in the
loss of a secured party's perfected security interest in the confiscated
vehicle.
REPOSSESSION
In the event of default by vehicle purchasers, the holder of the motor
vehicle retail installment sale contract has all the remedies of a secured party
under the UCC, except where
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specifically limited by other state laws. Among the UCC remedies, the secured
party has the right to perform self-help repossession unless such act would
constitute a breach of the peace. Self-help is the most likely method to be used
by the Servicer and is accomplished simply by retaking possession of the
financed vehicle. In the event of default by the obligor, some jurisdictions
require that the obligor be notified of the default and be given a time period
within which he may cure the default prior to repossession. Generally, the right
of reinstatement may be exercised on a limited number of occasions in any
one-year period. In cases where the obligor objects or raises a defense to
repossession, or if otherwise required by applicable state law, a court order
must be obtained from the appropriate state court, and the vehicle must then be
repossessed in accordance with that order.
The UCC and other state laws require the secured party to provide the
obligor with reasonable notice of the date, time and place of any public sale
and/or the date after which any private sale of the collateral may be held. The
obligor has the right to redeem the collateral prior to actual sale by paying
the secured party the unpaid principal balance of the obligation plus reasonable
expenses for repossessing, holding and preparing the collateral for disposition
and arranging for its sale, plus, in some jurisdictions, reasonable attorneys'
fees, or, in some states, by payment of delinquent installments or the unpaid
balance.
The proceeds of resale of the vehicles generally will be applied first to
the expenses of resale and repossession and then to the satisfaction of the
indebtedness. While some states impose prohibitions or limitations on deficiency
judgments if the net proceeds from resale do not cover the full amount of the
indebtedness, a deficiency judgment can be sought in those states that do not
prohibit or limit such judgments. However, the deficiency judgment would be a
personal judgment against the obligor for the shortfall, and a defaulting
obligor can be expected to have very little capital or sources of income
available following repossession. 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.
Occasionally, after resale of a vehicle and payment of all expenses and
all indebtedness, there is a surplus of funds. In that case, the UCC requires
the creditor to remit the surplus to any holder of a lien with respect to the
vehicle or, if no such lienholder exists or there are remaining funds, the UCC
requires the creditor to remit the surplus to the former owner of the vehicle.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance, including requirements regarding the adequate disclosure of
loan terms (including finance charges and deemed finance charges), and
limitations on loan terms (including the permitted finance charge or deemed
finance charge), collection practices and creditor remedies. The application of
these laws to particular circumstances is not always certain and some courts and
regulatory authorities have shown a willingness to adopt novel interpretations
of such laws. These laws include the
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Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Fair Debt Collection Procedures Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z, the Soldiers' and Sailors' Civil Relief Act
of 1940, state adoptions of the National Consumer Act and the Uniform Consumer
Credit Code, and state motor vehicle retail installment sales act, retail
installment sales acts and other similar laws. Also, state laws impose finance
charge ceilings and other restrictions on consumer transactions and require
contract disclosures in addition to those required under federal law. These
requirements impose specific statutory liabilities upon creditors who fail to
comply with their provisions. In some cases, this liability could affect an
assignee's ability to enforce consumer finance contracts such as the Auto Loans
or result in the imposition of penalties in excess of amounts owing on the Auto
Loans. In some instances, particularly in actions based upon fraud or unfair and
deceptive practices, damage awards have been large. If the Issuer were obligated
to pay any such damages, its assets would be directly reduced, resulting in a
potential loss to the noteholders.
Under the laws of certain states, finance charges with respect to motor
vehicle retail installment contracts may include the additional amount, if any,
that a purchaser pays as part of the purchase price for a vehicle solely because
the purchaser is buying on credit rather than for cash (a "cash sale
differential"). If a dealer charges such a differential, applicable finance
charge ceilings could be exceeded.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code, other statutes or the common law, has the effect
of subjecting an assignee of a seller of goods in a consumer credit transaction
(and certain related creditors) to all claims and defenses that the obligor in
the transaction could assert against the seller of the goods. Liability under
the FTC Rule is limited to the amounts paid by the obligor under the contract
and the holder of the contract may also be unable to collect any balance
remaining due thereunder from the obligor.
All of the Auto Loans will be subject to the requirements of the FTC Rule.
Accordingly, the Issuer, as holder of the Auto Loans, will be subject to any
claims or defenses that the purchaser of the applicable Vehicle may assert
against the seller of the Vehicle. Such claims are limited to a maximum
liability equal to the amounts paid by the Obligor on the Auto Loan. If an
Obligor were successful in asserting any such claim or defense, such claim or
defense would constitute a breach of the Originator's warranties under the Sales
and Servicing Agreement and would create an obligation of the Originator to
repurchase the Auto Loan unless the breach is cured. See "Description of the
Transaction Documents--Sale and Assignment of Auto Loans."
Courts have applied general equitable principles to secured parties
pursuing repossession and litigation involving deficiency balances. These
equitable principles may have the effect of relieving an obligor from some or
all of the legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections provided under the 14th
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Amendment to the Constitution of the United States. Courts have generally upheld
the notice provisions of the UCC and related laws as reasonable or have found
that the repossession and resale by the creditor do not involve sufficient state
action to afford constitutional protection to borrowers.
Under most state vehicle dealer licensing laws, sellers of automobiles,
light trucks, vans and minivans are required to be licensed to sell vehicles at
retail sale. In addition, with respect to used vehicles, the Federal Trade
Commission's Rule on Sale of Used Vehicles requires that all sellers of used
vehicles prepare, complete and display a "Buyer's Guide" which explains the
warranty coverage for such vehicles. Furthermore, Federal Odometer Regulations
promulgated under the Motor Vehicle Information and Cost Savings Act and the
motor vehicle title laws of most states require that all sellers of used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if
either a Buyer's Guide or Odometer Disclosure Statement was not provided to the
purchaser of a Vehicle, the Obligor may be able to assert a defense against the
seller of the Vehicle. If an Obligor on an Auto Loan were successful in
asserting any such claim or defense, the Servicer would pursue on behalf of the
Issuer any reasonable remedies against the seller or the manufacturer of the
vehicle, subject to certain limitations as to the expense of any such action to
be specified in the Sales and Servicing Agreement.
Pursuant to the Sales and Servicing Agreement, the Originator will
represent and warrant that each Auto Loan originated by it complies with all
requirements of law in all material respects. Accordingly, if an Obligor has a
claim against the Issuer for violation of any law and such claim materially and
adversely affects the Trust's interest in an Auto Loan, such violation would
constitute a breach of the warranties of the Originator and would create an
obligation of the Originator to repurchase the Auto Loan unless the breach is
cured.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a secured party
to realize upon collateral or to enforce a deficiency judgment. For example, in
a Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
creditor from repossession of a vehicle and, as part of the rehabilitation plan,
may reduce the amount of the secured indebtedness to the market value of the
vehicle at the time of bankruptcy (as determined by the court), leaving the
creditor as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences of
the purchase, ownership and disposition of the notes and such summary represents
the opinion of Federal Tax Counsel subject to the qualifications set forth
herein. An opinion of Federal Tax Counsel, however, is not binding on the
Internal Revenue Service (the "IRS") or the courts. No ruling on any of the
issues discussed below will be sought from the Internal Revenue Service. The
following summary is intended as a discussion of the possible effects of certain
federal income tax consequences to holders, but does not purport to furnish
information in the level of detail or with the attention to a holder's specific
tax circumstances that would be provided by a holder's own tax advisor. For
example, it does not discuss the tax consequences of the purchase, ownership and
disposition of the notes by noteholders that are subject to special treatment
under the federal income tax laws (including banks and thrifts, insurance
companies, regulated investment companies, dealers in securities, foreign
investors, trusts and estates and pass-through entities, the equity holders of
which are any of the foregoing). In addition, the discussion regarding the notes
is limited to the federal income tax consequences of the initial noteholders and
not a purchaser in the secondary market. Moreover, there are no cases or
Internal Revenue Service rulings on similar transactions involving both debt and
equity interests issued by a trust with terms similar to those of the notes. As
a result, the Internal Revenue Service may disagree with all or a part of the
discussion below. We suggest that prospective investors consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the notes.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended, the Treasury regulations promulgated
thereunder and judicial or ruling authority, all of which are subject to change,
which change may be retroactive.
SCOPE OF THE TAX OPINIONS
In the opinion of Federal Tax Counsel, the trust will not be classified as
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. Further, Federal Tax Counsel is of the opinion that
the notes will be characterized as debt for federal income tax purposes.
In addition, Federal Tax Counsel has prepared or reviewed the statements
under the heading "Summary of Terms--Material Federal Income Tax Consequences"
as they relate to federal income tax matters and under the heading "Material
Federal Income Tax Consequences" herein and is of the opinion that such
statements are a fair and accurate discussion of all material federal income tax
consequences of the purchase, ownership and disposition of the notes. Such
statements are intended as a discussion of the possible effects of the
classification of the trust on investors and of related tax matters affecting
investors generally, but do not purport to furnish information in the level of
detail or with the attention to the investor's specific tax circumstances
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that would be provided by an investor's own tax adviser. Accordingly, we suggest
that investors consult their own tax advisers with regard to the tax
consequences of investing in the notes.
TAX CLASSIFICATION OF THE TRUST
Federal Tax Counsel is of the opinion that the trust will not be
classified as an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. A copy of such opinion of Federal
Tax Counsel will be filed with the Commission as an exhibit to a Form 8-K prior
to the confirmation of sales of any notes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on Federal Tax Counsel's conclusion that the nature of the
income of the trust will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
If the trust were taxable as a corporation for federal income tax
purposes, the trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income on the auto
loans, reduced by its interest expense on the notes provided the notes are
respected as debt for federal income tax purposes (see discussion in the
following paragraph). Any such corporate income tax could materially reduce cash
available to make payments on the notes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The seller will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal, state and local income and franchise tax purposes. In the opinion
of Federal Tax Counsel, the notes will be characterized as debt for federal
income tax purposes. A copy of such opinion of Federal Tax Counsel will be filed
with the Commission with a Form 8-K following the issuance of the notes. The
discussion below assumes this characterization of the notes is correct.
The discussion below assumes that all payments on the notes are
denominated in U.S. dollars, and that the notes are not Strip Notes. Moreover,
the discussion assumes that the interest formula for the notes meets the
requirements for "qualified stated interest" under Treasury regulations (the
"OID regulations") relating to original issue discount ("OID"), and that any OID
on the notes (i.e., any excess of the principal amount of the notes over their
issue price) does not exceed a de minimis amount (i.e., 1/4% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID regulations.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the notes will not be considered issued
with OID. The stated interest thereon will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with such
noteholder's method of tax accounting. Under the OID regulations, a holder of a
note issued with a de minimis amount of OID must include such OID in income, on
a
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pro rata basis, as principal payments are made on the note. A purchaser who buys
a note for more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of the Code.
Sale or Other Disposition. If a noteholder sells a note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the note. The
adjusted tax basis of a note to a particular noteholder will equal the holder's
cost for the note, increased by any market discount, OID and gain previously
included by such noteholder in income with respect to the note and decreased by
the amount of bond premium (if any) previously amortized and by the amount of
principal payments previously received by such noteholder with respect to such
note. Any such gain or loss will be capital gain or loss if the note was held as
a capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Capital losses may be used by
a corporate taxpayer only to offset capital gains, and by an individual taxpayer
only to the extent of capital gains plus $3,000 of other income.
Foreign Holders. Interest payments made (or accrued) to a noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the trust or the seller or a "controlled foreign corporation" with respect to
which the trust or the seller is a "related person" within the meaning of the
Code and (ii) provides the indenture trustee or other person who is otherwise
required to withhold U.S. tax with respect to the notes with an appropriate
statement (on Internal Revenue Service Form W-8 or a similar form), signed under
penalties of perjury, certifying that the beneficial owner of the note is a
foreign person and providing the foreign person's name and address. If a note is
held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the note. If such interest is not portfolio interest, then it
will be subject to United States federal withholding tax at a rate of 30
percent, unless that rate is reduced or eliminated pursuant to an applicable tax
treaty and the foreign person provides the trustee or other payor of the
interest with a copy of Internal Revenue Service Form 1001, or if the interest
is effectively connected with the conduct of a U.S. trade or business and the
foreign person provides a copy of Internal Revenue Service Form 4224.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
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On October 6, 1997, final Treasury regulations (the "Withholding Tax
Regulations") were issued that modify certain of the filing requirements with
which foreign persons must comply in order to be entitled to an exemption from
U.S. withholding tax or a reduction to the applicable U.S. withholding tax rate.
Those persons currently required to file Form W-8 generally will continue to be
required to file that form. However, the requirement that foreign persons submit
Form W-8 is extended to most foreign persons who wish to seek an exemption from
withholding tax on the basis that income from the notes is effectively connected
with the conduct of a U.S. trade or business (in lieu of Form 4224) and to
foreign persons wishing to rely on a tax treaty to reduce the withholding tax
rate (in lieu of Form 1001). Under the Withholding Tax Regulations, a foreign
person would generally be required to submit Form W-8BEN in lieu of Form 1001 or
to submit Form W-8ECI in lieu of Form 4224, although alternative documentation
may be applicable in certain situations. The Withholding Tax Regulations are
effective for payments of interest due after December 31, 2000, but Forms 4224
and 1001 filed prior to that date will continue to be effective until the
earlier of December 31, 2001 or the current expiration date of those forms. We
suggest that prospective investors consult their tax advisors with respect to
the effect of the Withholding Tax Regulations.
Backup Withholding. Each holder of a note (other than an exempt holder
such as a corporation, tax exempt organization, qualified pension and profit
sharing trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt noteholder fail to
provide the required certification, the trust will be required to withhold 31
percent of the amount otherwise payable to the holder, and remit the withheld
amount to the Internal Revenue Service as a credit against the holder's federal
income tax liability. We suggest that noteholders consult with their tax
advisors as to their eligibility for exemption from backup withholding and the
procedure for obtaining the exemption, and the potential impact of the
Withholding Tax Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the Internal Revenue Service successfully asserted that
the notes did not represent debt for federal income tax purposes, the notes
might be treated as equity interests in the trust. If so treated, the trust
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on notes recharacterized as equity).
Alternatively, and most likely in the view of Federal Tax Counsel, the Trust
might be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
foreign holders generally would be subject to U.S. tax and U.S. tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of trust expenses.
Furthermore, such a characterization could subject holders to state and local
taxation in jurisdictions in which they are not currently subject to tax.
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Information Reporting and Withholding. The trust will be required to
report annually to the IRS, and to each noteholder of record, the amount of
interest paid on the notes (and the amount of interest withheld for Federal
income taxes, if any) for each calendar year, except as to exempt noteholders
(generally, noteholders that are corporations, tax-exempt organizations,
qualified pension and profit-sharing trusts and individual retirement accounts).
For nonresident aliens who provide certification as to their status as
nonresidents, interest paid will be reported on Form 1042-S. However,
withholding will not apply as long as the certification is valid. Generally,
certification must be renewed every three calendar years. Accordingly, each
noteholder (other than exempt noteholders who are not subject to the reporting
requirements) will be required to provide, under penalties of perjury, a
certificate containing the noteholder's name, address, correct Federal taxpayer
identification number and a statement that the noteholder is not subject to
backup withholding. If a nonexempt noteholder fails to provide the required
certification or recertify its foreign status, the trust will be required to
withhold 31% for U.S. residents or 30% for nonresident aliens of the amount
otherwise payable to the noteholder, and remit the withheld amount to the IRS as
a credit against the noteholder's Federal income tax liability.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences" above, we suggest that potential purchasers
consider the state income tax consequences of the acquisition, ownership and
disposition of the notes. State income tax law may vary substantially from state
to state, and this discussion does not purport to describe any aspect of the
income tax laws of any state. Therefore, We suggest that potential purchasers
consult their own tax advisors with respect to the various tax consequences of
an investment in the notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans subject to those provisions, and
entities deemed to hold plan assets of such plans (each, a "Benefit Plan"), from
engaging in certain transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to the Benefit Plan. A violation of these "prohibited transaction" rules
may generate excise tax and other penalties and liabilities under ERISA and the
Code for such persons. ERISA also imposes certain duties on persons who are
fiduciaries of Benefit Plans subject to ERISA. Under ERISA, any person who
exercises any authority or control respecting the management or disposition of
the assets of a Benefit Plan is considered to be a fiduciary of such Benefit
Plan (subject to certain exceptions not here relevant).
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Certain transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased notes if assets of the Issuer were deemed to be assets of the
Benefit Plan. Under a regulation issued by the United States Department of Labor
(the "Plan Assets Regulation"), the assets of the Issuer would be treated as
plan assets of a Benefit Plan for the purposes of ERISA and the Code only if the
Benefit Plan acquired an equity interest in the Issuer and none of the
exceptions contained in the Plan Assets Regulation was applicable. An "equity
interest" is defined under the Plan Assets Regulation as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Although there is little guidance on
the subject and although the Issuer has not obtained an opinion of counsel under
state law, the Issuer believes that, at the time of their issuance, the notes
should be treated as indebtedness without substantial equity features for the
purposes of the Plan Assets Regulation. This determination is based in part upon
the traditional debt features of such notes, including the reasonable
expectation of purchasers of such notes that they will be repaid when due, as
well as the absence of conversion rights, warrants and other typical equity
features. It should be noted that the debt treatment of the notes for ERISA
purposes could change subsequent to their issuance (i.e., they could be treated
as equity) if the ratings of the notes change or the credit quality of the notes
materially deteriorates.
Without regard to whether notes are treated as an equity interest under
the Plan Assets Regulation, the acquisition or holding of notes by or on behalf
of a Benefit Plan could be considered to give rise to a prohibited transaction
if the Issuer, Flagship, the Servicer, the Indenture Trustee or the Owner
Trustee is or becomes a party in interest or a disqualified person with respect
to such Benefit Plan. Certain exemptions from the prohibited transaction rules
could be applicable to the purchase and holding of notes by a Benefit Plan
depending on the type and circumstances of the plan fiduciary making the
decision to acquire such notes. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding certain transactions
entered into by insurance company pooled separate accounts; PTCE 95-60,
regarding certain transactions entered into by insurance company general
accounts; PTCE 96-23, regarding certain transactions effected by "in-house asset
managers"; PTCE 91-38 regarding certain transactions entered into by bank
collective investment funds; and PTCE 84-14, regarding certain transactions
effected by "qualified professional asset managers." Even if the conditions
specified in one or more of these exemptions are met, the scope of the relief
provided by these exemptions might or might not cover all acts which might be
construed as prohibited transactions. There can be no assurance that any of
these, or any other exemption, will be available with respect to any particular
transaction involving the notes.
By acquiring a note, each purchaser and transferee will be deemed to
represent, warrant and covenant that either (i) it is not acquiring such note
with the assets of an ERISA Plan or a governmental plan subject to applicable
law that is substantially similar to Section 406 of ERISA or Section 4975 of the
Code or (ii) the acquisition and holding of such note by the purchaser or
transferee, throughout the period that it holds such note, will not result in a
nonexempt prohibited transaction under section 406 of ERISA or Section 4975 of
the Code (or, in the case of a governmental plan, any substantially similar
applicable law), because the purchase and
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holding of such note is covered by a prohibited transaction exemption, all of
the conditions of which are and will be satisfied upon its acquisition of, and
throughout the term that it holds, such note. Each investor in a notes will be
deemed to represent, warrant and covenant that it will not sell, pledge or
otherwise transfer such note in violation of the foregoing.
Any person proposing to purchase notes with Plan assets should consult
with its counsel with respect to, among other things, the potential
applicability of ERISA and the Code to such investments and whether any
exemption would be applicable (in the case of notes) or whether PTE 95-60 is
applicable (in the case of notes). Each investor must determine on its own
whether all conditions of the applicable exemption have been satisfied.
Purchasers of notes using the assets of government plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA),
which are not subject to Title I of ERISA, should consider applicable state or
other laws, which may be substantially similar to ERISA or the Code. Moreover,
each Plan fiduciary should determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the notes
is appropriate for the Plan, taking into account the overall investment policy
of the Plan, the composition of the Plan's investment portfolio, and the
risk/return characteristics of the notes.
RATINGS
It is a condition to the issuance of the notes that each class of notes be
rated at least "AAA," "Aaa" and "AAA" by Standard & Poor's, Moody's and DCR,
respectively. The basis of the ratings on the notes will be issuance of the
Policy by the Insurer and the financial strength of the Insurer. Standard &
Poor's, Moody's and DCR are collectively referred to herein as the "Rating
Agencies." The ratings assess the likelihood of timely payment of interest on
each Payment Date and the ultimate payment of principal of the notes on their
respective Final Scheduled Maturity Dates to the holders of the notes. There is
no assurance that any ratings will not be lowered or withdrawn if, in the
judgment of the Rating Agencies, circumstances in the future so warrant.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement, dated November 17, 1999, the Depositor has agreed with the Originator
and Prudential Securities Incorporated (the "Underwriter") to sell to the
Underwriter all of the notes. The underwriting agreement provides that the
Underwriter is obligated to purchase all of the notes if any are purchased.
The Underwriter proposes to offer the notes initially at the prices on the
cover page of this prospectus supplement, and to certain dealers at that price
less a discount of up to 0.100% of the principal on each Class A-1 Note, 0.125%
on each Class A-2 Note, 0.150% on each Class A-3 Note and 0.225% on each Class
A-4 Note. The Underwriter and those dealers may allow a
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discount of 0.03125% of the principal of each Class A-1 Note, 0.06250% on each
Class A-2 Note, 0.06250% on each Class A-3 Note and 0.06250% on each Class A-4
Note on sales to certain other dealers. After the initial public offering, the
public offering price and such discounts may change.
The notes are a new issue of securities with no established trading
market. The Underwriter intends to make a secondary market for the notes.
However, it is not obligated to do so and may discontinue making a secondary
market for the notes at any time without notice. No assurance can be given as to
how liquid the trading market for the notes will be.
Flagship has agreed to indemnify the Underwriter against certain
liabilities under the Securities Act, or contribute to payments which the
Underwriter may be required to make in respect thereof.
In the ordinary course of their respective businesses, the Underwriter and
its affiliates have engaged and may in the future engage in investment banking,
commercial banking, insurance or other transactions with the Originator and its
affiliates.
The Underwriter may engage in stabilizing transactions, syndicate covering
transactions and penalty bids in accordance with Rule 104 under the Exchange
Act. Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of the notes in the open market after
the distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriter to reclaim a selling concession or discount
from a syndicate member when the notes originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the notes to be higher than it would
otherwise be in the absence of such transactions. The Underwriter is not
required to engage in these activities and may end any of these activities at
any time.
LEGAL OPINIONS
Certain legal matters relating to the notes and certain federal income tax
and other matters will be passed upon for the Originator and the Servicer by
Brian Meyers, Esq., General Counsel of Flagship Credit Corporation and for the
Underwriter, the Depositor and the Trust by Mayer, Brown & Platt, Chicago,
Illinois. Mayer, Brown & Platt may from time to time render legal services to
the Originator and its affiliates.
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EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998,
incorporated by reference in this prospectus supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
GLOSSARY
As used in this Prospectus Supplement, the following terms shall have the
following meanings:
"Actual Recovery Amounts" with respect to a Charged-off Auto Loan,
proceeds from the sale of the related Financed Vehicle, proceeds of the related
insurance policy, proceeds from any dealer agreements and any other recoveries
with respect to such Charged-off Auto Loan and the related Financed Vehicle, net
of reasonable and customary out-of-pocket expenses and amounts so received that
are required to be refunded to the Obligor on such Auto Loan.
"Additional Noteholders' Principal Payment Amount" means, on each Payment
Date on which the outstanding principal balance of the notes (after giving
effect to the payment of the Noteholders' Principal Payment Amount to
noteholders in clause (e) in "Description of the Transaction Documents --
Application of Payments") exceeds the Notes Target Amount, the lesser of (a) an
amount necessary to reduce the aggregate principal amount of the notes to the
Notes Target Amount and (b) the amount of Available Funds remaining on deposit
in the Collection Account for such Payment Date after making the payments set
forth in (a) - (h) in "Description of the Transaction Documents -- Application
of Payments".
"Charged-off Auto Loan" means, with respect to an Auto Loan, the earliest
to occur of the following: (i) 10% or more of any scheduled payment on such Auto
Loan is 123 days or more delinquent as of the end of such Collection Period,
(ii) the related vehicle has been repossessed and sold or (iii) substantially
all of the payments thereunder are deemed uncollectible by the Servicer.
"Collection Period" means each calendar month.
"Cram Down Loss" means, with respect to an Auto Loan, if a court of
appropriate jurisdiction in an insolvency proceeding shall have issued an order
reducing the amount owed on an Auto Loan or otherwise modifying or restructuring
payments to be made on an Auto Loan, an amount equal to such reduction in
principal balance of such Auto Loan or the reduction in the net present value
(using as the discount rate the lower of the contract rate or the rate of
interest
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specified by the court in such order) of the payments as so modified or
restructured. A Cram Down Loss shall be deemed to have occurred on the date such
order is entered.
"Cumulative Net Loss Rate" means, as of any Determination Date, the
quotient of the aggregate amount of Net Losses with respect to the Auto Loans
from the Cutoff Date to the last day of the related Collection Period, divided
by the Initial Portfolio Balance.
"Delinquency Ratio" means the aggregate Principal Balance of Auto Loans
with part or all of one or more contractual payments 31 days or more past due as
of the last day of the related Collection Period (other than Charged-off Auto
Loans and, from and after the 25th Collection Period, Auto Loans for which the
related Obligor has paid during the preceding six Collection Periods an
aggregate amount not less than the sum of six monthly payments) expressed as a
percentage of the Outstanding Portfolio Balance as of the last day of the
related Collection Period.
"Determination Date" means, with respect to any Payment Date, the fifth
Business Day prior to such Payment Date.
"Indenture Trustee and Collateral Agent Fee" means, for each Payment Date,
an amount equal to the fee set forth in Sales and Servicing Agreement which
shall compensate the Indenture Trustee and Collateral Agent in its dual capacity
as Indenture Trustee and Collateral Agent.
"Initial Portfolio Balance" means, as of any date for all Auto Loans
acquired by the Trust (other than Substitute Auto Loans) on or prior to such
date, the sum of: (a) the principal balances as of the Cut-off Date of all such
Auto Loans originated on or prior to the Cut-off Date, and (b) the original
principal balances of all such Auto Loans originated by the Originator after the
Cut-off Date.
"Insurance Agreement Indicator" means the occurrence of any of certain
events specified in the Insurance Agreement, including the failure of the
Servicer or certain of its affiliates to meet certain financial and other
requirements or to meet the Level II Portfolio Performance Tests.
"Level I Cumulative Net Loss Test" means, for any Collection Period
specified below, a Cumulative Net Loss Rate greater than or equal to the
percentage set forth opposite such Collection Period:
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Collection Period Cumulative Net Loss
----------------- Percentage Level
----------------
Sixth through Eighth 1.35
Ninth through Eleventh 1.70
Twelfth through Fourteenth 3.05
Fifteenth through Seventeenth 4.40
Eighteenth through Twentieth 5.60
Twenty-First through Twenty-Third 6.60
Twenty-Fourth through Twenty-Sixth 7.50
Twenty-Seventh through Twenty-Ninth 8.30
Thirtieth through Thirty-Second 8.90
Thirty-Third and thereafter 9.30
"Level I Delinquency Test" means, for any Determination Date, the
arithmetic average of the monthly Delinquency Ratios for the four previous
Collection Periods is greater than or equal to 6.65%.
"Level I Net Loss Test" means, for any Determination Date, the arithmetic
average monthly Net Loss Rates for the four previous Collection Periods is
greater than or equal to 8%.
"Level I Portfolio Performance Indicator" means, any violation of any of
the Level I Delinquency Test, the Level I Cumulative Net Loss Test or the Level
I Net Loss Test, which violation has not been cured.
"Level II Cumulative Net Loss Test" means, for any Collection Period
specified below, a Cumulative Net Loss Rate greater than the percentage set
forth opposite such Collection Period:
Collection Period Cumulative Net Loss
----------------- Percentage
----------
Sixth through Eighth 1.75
Ninth through Eleventh 2.40
Twelfth through Fourteenth 3.70
Fifteenth through Seventeenth 5.35
Eighteenth through Twentieth 6.85
Twenty-First through Twenty-Third 8.05
Twenty-Fourth through Twenty-Sixth 9.15
Twenty-Seventh through Twenty-Ninth 10.05
Thirtieth through Thirty-Second 10.75
Thirty-Third and thereafter 11.30
"Level II Delinquency Test" means, for any Determination Date, the
arithmetic average of the monthly Delinquency Ratios for the four previous
Collection Periods is greater than 8.08%.
S-86
<PAGE>
"Level II Net Loss Test" means, for any Determination Date, the arithmetic
average monthly Net Loss Rates for the four previous Collection Periods is
greater than 10%.
"Level II Portfolio Performance Tests" means, collectively, the Level II
Delinquency Test, the Level II Cumulative Net Loss Test, and the Level II Net
Loss Test.
"Net Losses" means, for any Collection Period, the amount, if any, by
which (a) the sum of (i) the aggregate Principal Balance of all Auto Loans which
became Charged-off Auto Loans during such Collection Period, plus accrued and
unpaid interest thereon to the end of the related Collection Period, plus (ii)
the aggregate of all Cram Down Losses that occurred during the related
Collection Period, exceeds (b) the Actual Recovery Amounts received during the
related Collection Period in respect of all Charged-off Auto Loans.
"Net Loss Rate" means, with respect to any Collection Period, the product,
expressed as a percentage, of (i) twelve and (ii) a fraction, the numerator of
which equals Net Losses for such Collection Period and the denominator of which
equals the Outstanding Portfolio Balance on the last day of the preceding
Collection Period.
"Noteholders' Percentage" means, on any Payment Date, 89%; provided that
the "Noteholders' Percentage" will be 82% upon the occurrence and during the
continuance of an uncured Level I Portfolio Performance Indicator (provided that
a Level I Portfolio Performance Indicator shall not be considered cured unless
no Level I Portfolio Performance Indicator has occurred or is continuing for the
prior four consecutive Collection Periods) and will be zero percent upon the
occurrence of an Insurance Agreement Indicator.
"Noteholders' Principal Payment Amount" means, with respect to any Payment
Date, the lesser of (a) one hundred percent (100%) of the Principal Payment
Amount for such Payment Date or (b) an amount necessary to reduce the aggregate
principal amount of the notes to the Notes Target Amount for such Payment Date.
Notwithstanding the foregoing, all outstanding principal and interest with
respect to a class of notes will be payable in full on the Final Scheduled
Maturity Date for such class of notes.
"Notes Target Amount" means, for any Payment Date, the product of the
Noteholders' Percentage for such Payment Date multiplied by the Outstanding
Portfolio Balance as of the end of the related Collection Period.
"Overcollateralization Amount" means, as of any Payment Date, the excess
of the Outstanding Portfolio Balance as of the end of the preceding Collection
Period over the outstanding principal balance of the notes (after giving effect
to all payments on the notes on such Payment Date).
"Principal Payment Amount" with respect to a Payment Date will equal the
sum of the following amounts (without duplication):
S-87
<PAGE>
(a) collections on Auto Loans (other than Charged-off Auto Loans)
allocable to principal including full and partial prepayments;
(b) the portion of the Purchase Amount deposited in the Collection
Account allocable to principal of each Auto Loan that was repurchased by
the Originator or purchased by the Servicer as of the last day of the
related Collection Period;
(c) the principal balance of each Auto Loan that first became a
Charged-off Auto Loan during the preceding Collection Period, other than
Charged-off Auto Loans for which the Originator has made substitutions of
Substitute Auto Loans (see "Sale and Assignment of Auto Loans");
(d) the aggregate amount of Cram Down Losses with respect to the Auto
Loans that shall have occurred during the preceding Collection Period; and
(e) any net proceeds from the liquidation of the Auto Loans pursuant
to an acceleration of the notes upon an Event of Default.
"Purchase Amount" means, with respect to an Auto Loan, the amount, as of
the close of business on the last day of a Collection Period, required to prepay
in full such Auto Loan under the terms thereof including the outstanding
principal balance of the related Auto Loan plus all accrued and unpaid interest
and interest to the end of the month of purchase.
"Record Date" means, with respect to a Payment Date, (i) in the case of
Book-Entry Notes, the close of business on the Business Day prior to such
Payment Date and (ii) in the case of Definitive Notes, the close of business on
the last day of the calendar month preceding such Payment Date; provided that in
the case of the initial Payment Date, the Record Date shall be the close of
business on the Closing Date.
"Released Funds Principal Payment Amount" means for any Payment Date, the
lesser of (a) the amount by which the funds in the Spread Account (after giving
effect to all payments and withdrawals on that Payment Date) exceed the
Requisite Spread Account Amount and (b) the amount necessary (after giving
effect to the Noteholders' Principal Payment Amount and the Additional
Noteholders' Principal Payment Amount on that date) to reduce the aggregate
principal amount of the notes to the Notes Target Amount.
"Re-liening Expenses" means any reasonable and nonrecurring fees and
expenses relating to reissuing or amending the certificates of title relative to
the Vehicles to reflect the assignment of the Auto Loans to the Trust and the
Trust's pledge of its interest in the Auto Loans to the Indenture Trustee.
"Requisite Spread Account Amount" will equal the initial spread account
amount on the Closing Date, and thereafter, as of any Determination Date, after
giving effect to all payments to be made on the related Payment Date, will be an
amount equal to the greater of (a) the lesser of
S-88
<PAGE>
(i) 3% of the Initial Portfolio Balance and (ii) 5% of the Outstanding Portfolio
Balance as of the end of the preceding Collection Period, and (b) the greater of
(i) 1% of the Initial Portfolio Balance and (ii) an amount such that the sum of
(A) the funds on deposit in the Spread Account (after all payments and
withdrawals from the Spread Account on such Payment Date) and (B) the
Overcollateralization Amount is greater than 2% of the Initial Portfolio
Balance.
S-89
<PAGE>
INDEX OF DEFINED TERMS
ABS.......................................................................S-40
ABS Table.................................................................S-41
Additional Noteholders' Principal Payment Amount..........................S-84
Agreement..................................................................A-2
Applicable Payment Date....................................................A-5
Application of Payments...................................................S-51
APR.......................................................................S-31
Auto Loans.................................................................S-8
Benefit Plan..............................................................S-80
Book-Entry Noteholder.....................................................S-67
Book-Entry Noteholders....................................................S-66
Book-Entry Notes..........................................................S-66
Business Day...............................................................A-2
Buyer's Guide.............................................................S-75
cash sale differential....................................................S-74
Cede......................................................................S-44
CEDEL Participants........................................................S-68
Charged-off Auto Loan.....................................................S-84
Class A-1 Interest Rate...................................................S-44
Class A-1 Principal Payment Amount........................................S-45
Class A-2 Interest Rate...................................................S-44
Class A-2 Principal Payment Amount........................................S-45
Class A-3 Interest Rate...................................................S-44
Class A-3 Principal Payment Amount........................................S-45
Class A-4 Interest Rate...................................................S-44
Class A-4 Principal Payment Amount........................................S-45
clearing agency...........................................................S-65
clearing corporation......................................................S-65
Collateral Agent..........................................................S-51
Collection Account........................................................S-49
Collection Period.........................................................S-84
controlled foreign corporation............................................S-78
Controlling Party.........................................................S-60
Cooperative...............................................................S-69
Copelco...................................................................S-26
Cram Down Loss............................................................S-84
Cut-off Date..............................................................S-24
DCR.......................................................................S-14
Deficiency Amount.........................................................S-62
Definitive Notes..........................................................S-70
Depositaries..............................................................S-66
disqualified persons......................................................S-80
S-90
<PAGE>
DTC.......................................................................S-44
DTC Services..............................................................S-69
Eligible Account..........................................................S-49
Eligible Auto Loans.......................................................S-39
equity interest...........................................................S-81
Euroclear Operator........................................................S-69
Euroclear Participants....................................................S-68
Event of Default..........................................................S-70
Events of Default.........................................................S-52
Excluded Auto Loans.......................................................S-45
Financial Intermediary....................................................S-66
First Union...............................................................S-24
Fiscal Agent...............................................................A-2
Flagship..................................................................S-25
Foreign person............................................................S-78
FTC Rule..................................................................S-74
Holder-in-Due-Course......................................................S-74
holders...................................................................S-44
in-house asset managers...................................................S-81
Indenture Trustee.........................................................S-24
Indenture Trustee and Collateral Agent Fee................................S-85
Indirect Participants.....................................................S-67
Industry..................................................................S-69
Initial Portfolio Balance.................................................S-85
Insolvency Event..........................................................S-52
Insolvency Laws...........................................................S-18
Insurance Agreement.......................................................S-52
Insurance Agreement Event of Default......................................S-58
Insurance Agreement Indenture Indicators..................................S-52
Insurance Agreement Indicator Test........................................S-85
Insured Payment...........................................................S-62
Insurer....................................................................A-1
Insurer Default...........................................................S-58
Insurer Premium...........................................................S-50
Interest Reserve Account..................................................S-46
IRS.......................................................................S-76
Level 1 Portfolio Performance Test........................................S-86
LLC Agreement.............................................................S-25
MBIA.......................................................................S-3
mission-critical..........................................................S-65
Moody's...................................................................S-14
non-prime.................................................................S-10
Note Factor...............................................................S-40
Note Majority.............................................................S-60
S-91
<PAGE>
Note Owners...............................................................S-44
Noteholders' Interest Payment Amounts.....................................S-44
Noteholders' Percentage...................................................S-87
Noteholders' Principal Payment Amount.....................................S-87
Noteholders...............................................................S-44
Notes Target Amount.......................................................S-87
Notice.....................................................................A-3
Obligations................................................................A-5
obligors...................................................................S-8
OID.......................................................................S-77
OID regulations...........................................................S-77
Overcollateralization Amount..............................................S-87
Owner......................................................................A-3
Participants..............................................................S-66
parties in interest.......................................................S-80
Pennsylvania Licenses.....................................................S-45
plan assets...............................................................S-80
Plan Assets Regulation....................................................S-81
Policy.....................................................................A-1
Portfolio interest........................................................S-78
Pre-Funding Account.......................................................S-45
Preference Amount.........................................................S-62
prime.....................................................................S-10
Principal Payment Amount...................................................S-6
prohibited transaction....................................................S-80
PTCE......................................................................S-81
Purchase Amount...........................................................S-88
qualified professional asset managers.....................................S-81
Qualified stated interest.................................................S-77
Rating Agencies...........................................................S-82
Ratings of the Notes......................................................S-14
Re-liening Expenses.......................................................S-88
Record Date...............................................................S-88
Reimbursement Amounts.....................................................S-51
related person............................................................S-78
Released Funds Principal Payment Amount...................................S-88
Relief Act................................................................S-22
Requisite Spread Account Amount...........................................S-88
Rules.....................................................................S-67
Sales and Servicing Agreement.............................................S-47
Servicer Termination Event................................................S-57
Servicing Fee.............................................................S-57
simple interest...........................................................S-38
Simple Interest Receivables...............................................S-38
S-92
<PAGE>
Spread Account............................................................S-51
Standard & Poor's.........................................................S-14
sub-prime.................................................................S-29
Subsequent Auto Loans.....................................................S-46
Substitute Auto Loans.....................................................S-10
Substitution Criteria.....................................................S-48
SYSTEMS...................................................................S-69
Terms and Conditions......................................................S-69
Transaction Documents.....................................................S-47
Trustee and Collateral Agent Fee..........................................S-85
UCC.......................................................................S-19
Underwriter...............................................................S-82
Vehicles..................................................................S-24
Withholding Tax Regulations...............................................S-79
Year 2000 problems........................................................S-69
S-93
<PAGE>
EXHIBIT A
NOTE GUARANTY INSURANCE POLICY
OBLIGATIONS: $250,000,000 POLICY NO. [ ]
Flagship Auto Receivables Owner Trust 1999-2
$117,000,000 6.420% Class A-1 Notes
$ 60,000,000 6.705% Class A-2 Notes
$ 43,000,000 6.835% Class A-3 Notes
$ 30,000,000 6.900% Class A-4 Notes
MBIA Insurance Corporation (the "Insurer"), in consideration of the
payment of the premium and subject to the terms of this Note Guaranty Insurance
Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to any
Owner that an amount equal to each full and complete Insured Payment will be
received from the Insurer by Harris Trust and Savings Bank, or its successors,
as indenture trustee for the Owners (the "Indenture Trustee"), on behalf of the
Owners, for distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Insurer's obligations hereunder
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 this
Policy, and no accelerated Insured Payments shall be made regardless of any
acceleration of the Obligations, unless such acceleration is at the sole option
of the Insurer.
Notwithstanding the foregoing paragraph, this Policy does not cover
shortfalls, if any, attributable to the liability of the Issuer, the Trust or
the Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Insurer will pay any Insured Payment that is a Preference Amount on
the Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (a) a certified copy of the order requiring the return of a
preference payment, (b) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (c) an assignment in such form as
is reasonably required by the Insurer, irrevocably assigning to the Insurer all
rights and claims of the Owner relating to or arising under the Obligations
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (d) appropriate instruments to effect the
appointment of the Insurer as agent for such Owner and any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the 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 Obligations to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
A-1
<PAGE>
The Insurer will pay any other amount payable hereunder 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 Insurer, or any successor fiscal agent appointed
by the 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 claim hereunder, it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the 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 hereunder, unless otherwise stated herein, 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 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 Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under this Policy.
Subject to the terms of the Agreement, the Insurer shall be subrogated to
the rights of each Owner to receive payments under the Obligations to the extent
of any payment by the Insurer hereunder.
As used herein, the following terms shall have the following meanings:
"Agreement" means the Indenture dated as of November 1, 1999 among
Flagship Auto Receivables Owner Trust 1999-2, as the Issuer and Harris Trust and
Savings Bank, as Indenture Trustee, without regard to any amendment or
supplement thereto, unless such amendment or supplement has been approved in
writing by the Insurer.
"Business Day" means any day other than (a) a Saturday or a Sunday, (b) a
day on which the Insurer is closed or (c) a day on which banking institutions in
New York City or in the city in which the corporate trust office of the
Indenture Trustee under the Agreement is located are authorized or obligated by
law or executive order to close.
"Deficiency Amount" means (a) for any Payment Date, any shortfall in the
sum of Available Funds plus amounts on deposit in the Spread Account to pay the
related Noteholders' Interest Payment Amount, and (b) on the related Final
Scheduled Maturity Date, any shortfall in the sum of Available Funds plus
amounts on deposit in the Spread Account to pay the outstanding principal amount
of the related class of Notes (after taking into account all distributions to be
made on such Payment Date).
A-2
<PAGE>
"Insured Payment" means as of any Payment Date, (a) any Deficiency Amount
and (b) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by facsimile substantially in the form of Exhibit A attached hereto, the
original of which is subsequently delivered by registered or certified mail,
from the Indenture Trustee specifying the Insured Payment which shall be due and
owing on the applicable Payment Date.
"Owner" means each Noteholder (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the applicable Notes to
payment under the Policy.
"Preference Amount" means any amount previously distributed to an Owner on
the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set forth in the Agreement as of the date of execution
of this Policy, without giving effect to any subsequent amendment to or
modifications of the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal Agent may be made
at the address listed below for the Fiscal Agent or such other address as the
Insurer shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, 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.
THIS 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 this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
This Policy is not cancelable for any reason. The premium on this Policy
is not refundable for any reason, including payment, or provision being made for
payment, prior to maturity of the Obligations.
A-3
<PAGE>
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed and
attested this ____ day of November 1999.
MBIA INSURANCE CORPORATION
By: ______________________________________
Title: ___________________________________
Attest:
By: ____________________________
Secretary
A-4
<PAGE>
EXHIBIT A
THE NOTE GUARANTY INSURANCE
POLICY NUMBER: [________]
NOTICE UNDER NOTE GUARANTY
INSURANCE POLICY NUMBER: [________]
State Street Bank and Trust Company, N.A., as Fiscal Agent
for MBIA Insurance Company
15th Floor
61 Broadway
New York, NY 10006
Attention: Municipal Registrar and
Paying Agent
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorize officer of [NAME OF INDENTURE TRUSTEE], as
trustee (the "Indenture Trustee"), hereby certifies to State Street Bank and
Trust Company, N.A. (The "Fiscal Agent") and MBIA Insurance Corporation (the
"Insurer"), with reference to Note Guaranty Insurance Policy Number: [________]
(the "Policy") issued by the Insurer in respect of the $250,000,000 Flagship
Auto Receivables Owner Trust 1999-2, $117,000,000 6.420% Class A-1 Notes,
$60,000,000 6.705% Class A-2 Notes, $43,000,000 6.835% Class A-3 Notes and
$30,000,000 6.900% Class A-4 Notes (the "Obligations"), that:
(a) the Indenture Trustee is the indenture trustee under the
Indenture dated as of November 1, 1999, among Flagship Auto Receivables
Owner Trust 1999-2 as Issuer and Harris Trust and Savings Bank, as
Indenture Trustee for the Owners;
(b) the amount due under clause (a) of the definition of Deficiency
Amount for the Payment Date occurring on [____________] (the "Applicable
Payment Date") is
$[________];
(c) the amount due under clause (b) of the definition of Deficiency
Amount for the Payment Date is $[________];
(d) the sum of the amounts listed in paragraphs (b) and (c) above is
$[________] (the "Deficiency Amount");
A-5
<PAGE>
(e) the amount of previously distributed payments on the Obligations
that is recoverable and sought to be recovered as a voidable preference by
a trustee in bankruptcy pursuant to the Bankruptcy Code in accordance with
a final nonappealable order of a court having competent jurisdiction is
$[________] (the "Preference Amount");
(f) the total Insured Payment due is $[________], which amount
equals the sum of the Deficiency Amount and the Preference Amount;
(g) the Indenture Trustee is making a claim under and pursuant to
the terms of the Policy for the dollar amount of the Insured Payment set
forth in (d) above to be applied to the payment of the Deficiency Amount
for the Applicable Payment Date in accordance with the Agreement and for
the dollar amount of the Insured Payment set forth in (e) above to be
applied to the payment of any Preference Amount; and
(h) the Indenture Trustee directs that payment of the Insured
Payment be made to the following account by bank wire transfer of federal
or other immediately available funds in accordance with the terms of the
Policy: [INDENTURE TRUSTEE'S ACCOUNT NUMBER].
Any capitalized terms used in this Notice and not otherwise defined herein
shall have the meaning assigned thereto in the Policy.
Any Person Who Knowingly And With Intent To Defraud Any Insurance Company Or
Other Person Files An Application For Insurance Or Statement Of Claim Containing
Any Materially False Information, Or Conceals For The Purpose Of Misleading,
Information Concerning Any Fact Material Thereto, Commits A Fraudulent Insurance
Act, Which Is A Crime, And Shall Also Be Subject To A Civil Penalty Not To
Exceed Five Thousand Dollars And The Stated Value Of The Claim For Each Such
Violation.
IN WITNESS WHEREOF, the Indenture Trustee has executed and delivered this
Notice under the Policy as of the [____] day of [______________], [____].
[NAME OF INDENTURE TRUSTEE], as Indenture
Trustee
By: _______________________________________
Title: ____________________________________
A-6
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
AUTO RECEIVABLES BACKED SECURITIES ISSUABLE IN SERIES
PRUDENTIAL SECURITIES SECURED FINANCING
CORPORATION,
DEPOSITOR
This Prospectus describes certain Auto Receivables Backed Notes (the
"Notes") and Auto Receivables 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 (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 retail
installment sales contracts between manufacturers, dealers or certain other
originators and retail purchasers secured by new and used automobiles and light
duty trucks financed thereby, or participation interests therein, together with
all monies received relating thereto (the "Contracts"). Each Trust Fund may also
include a security interest in the underlying new and used automobiles and light
duty trucks and property relating thereto, together with the proceeds thereof
(the "Vehicles" 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 "RISK
FACTORS" 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 "RISK FACTORS."
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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.
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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.
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The date of this Prospectus is November 8, 1999.
<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 policies, 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, Suite 1400, 14th Floor, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. The Commission
maintains a site on the World Wide Web at http://www.sec.gov containing reports,
proxy materials, information statements, and other items. 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.
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
2
<PAGE>
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, One New York Plaza, New York, New York 10292,
Attention: Joe Donovan.
3
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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 Incorporated. The Depositor's
principal executive offices are located at One
New York Plaza, New York, New York 10292, and
its telephone number is (212) 778-1000. 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 Vehicles ("Manufacturers") and
acquired by the related Originator, (iii)
originated by various dealers, which may or may
not be affiliated with one or more Manufacturers
("Dealers", and together with Manufacturers,
"Vendors") or (iv) 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" in the related Prospectus Supplement.
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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 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 retail installment sales contracts between
manufacturers, dealers or certain other
originators and retail purchasers secured by new
and used automobiles and light duty trucks
financed thereby, or participation interests
therein, together with all monies received
relating thereto (the "Contracts"). Each Trust
Fund also may include a security interest in the
underlying new and used automobiles and light
duty trucks and property relating thereto,
together with the proceeds thereof (the
"Vehicles" and together with the Contracts, the
"Receivables").
Each Trust Fund will include Receivables with
respect to which the related Contract or the
related underlying Vehicles is subject to
federal or state registration or titling
requirements. No Trust Fund will include
Receivables with respect to which the underlying
Contracts or Vehicles relate to office
equipment, 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.
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. 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.
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
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5
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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 interests 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 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
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6
<PAGE>
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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.
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
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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 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.
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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,
earning 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
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
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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 Funds ............... As specified in the related Prospectus
Supplement, each Trust Fund will consist of the
related Contracts, and may include a security
interest in the related Vehicles. 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
overcollateralization. See "Description of the
Trust Agreement -- Credit and Cash Flow
Enhancement." The Contracts are obligations for
the purchase of the Vehicles, or evidence
borrowings used to acquire the Vehicles. As
specified in the related Prospectus Supplement,
the Contracts may consist of any combination of
Rule of 78s Contracts, Fixed Value Contracts or
Simple Interest Contracts. Generally, "Rule of
78s Contracts" provide for fixed level monthly
payments which will amortize the full amount of
the Contract over its term. The Rule of 78s
Contracts provide for allocation of payments
according to the "sum of periodic balances" or
"sum of monthly payments" method (the "Rule of
78s"). Each Rule of 78s Contract provides for
the payment by the Obligor of a specified total
amount of payments, payable in monthly
installments on the related due date, which
total represents the principal amount financed
and finance charges in an amount calculated on
the basis of a stated annual percentage rate
("APR") for the term of such Contract. The rate
at which such amount of finance charges is
earned and, correspondingly, the amount of each
fixed monthly payment allocated to reduction of
the outstanding principal balance of the related
Contract are calculated in accordance with the
Rule of 78s. Under tile Rule of 78s, the portion
of each payment allocable to interest is higher
during the early months of the term of a
Contract and lower during later months than that
under a constant yield method for allocating
payments between interest and principal.
Notwithstanding the foregoing, as specified in
the related Prospectus Supplement, all payments
received by the related Servicer on or in
respect of the Rule of 78s Contracts may be
allocated on an actuarial basis.
Generally, the "Fixed Value Contracts" provide
for monthly payments with a final fixed value
payment which is greater than the scheduled
monthly payments. A Fixed Value Contract
provides for amortization of the loan over a
series of fixed level payment monthly
installments, but also requires a final
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fixed value payment due after payment of such
monthly installments which may be satisfied by
(i) payment in full in cash of such amount, (ii)
transfer of the vehicle to the related
Originator provided certain conditions are
satisfied or (iii) refinancing the fixed value
payment in accordance with certain conditions.
With respect to Fixed Value Contracts, as
specified in the related Prospectus Supplement,
only the principal and interest payments due
prior to the final fixed value payment and not
the final fixed value payment may be included
initially in the related Trust Fund.
"Simple Interest Contracts" provide for the
amortization of the amount financed under the
receivable over a series of fixed level monthly
payments. However, unlike the monthly payment
under Rule of 78s Contracts, each monthly
payment consists of an installment of interest
which is calculated on the basis of the
outstanding principal balance of the receivable
multiplied by the stated APR and further
multiplied by the period elapsed (as a fraction
of a calendar year) since the preceding payment
of interest was made. As payments are received
under a Simple Interest Contract, the amount
received is applied first to interest accrued to
the date of payment and the balance is applied
to reduce the unpaid principal balance.
Accordingly, if an Obligor pays a fixed monthly
installment before its scheduled due date, the
portion of the payment allocable to interest for
the period since the preceding payment was made
will be less than it would have been had the
payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid
principal balance will be correspondingly
greater. Conversely, if an Obligor pays a fixed
monthly installment after its scheduled due
date, the portion of the payment allocable to
interest for the period since the preceding
payment was made will be greater than it would
have been had the payment been made as
scheduled, and the portion of the payment
applied to reduce the unpaid principal balance
will be correspondingly less. In either case,
the Obligor pays a fixed monthly installment
until the final scheduled payment date, at which
time the amount of the final installment is
increased or decreased as necessary to repay the
then outstanding principal balance.
If an Obligor elects to prepay a Rule of 78s
Contract in full, it is entitled to a rebate of
the portion of the outstanding balance then due
and payable attributable to unearned finance
charges. If a Simple Interest Contract is
prepaid, rather than receive a rebate, the
Obligor is required to pay interest only to the
date of prepayment. The amount of a rebate under
a Rule of 78s Contract calculated in accordance
with the Rule of 78s will always be less than
had such rebate been calculated on an actuarial
basis and generally will be less than the
remaining scheduled payments of interest that
would be due under a Simple Interest Contract
for which all payments were made on schedule.
Distributions to Securityholders may not be
affected by Rule of 78s rebates under the Rule
of 78s Contract because pursuant to the related
Prospectus Supplement such distributions may be
determined using the actuarial method.
The related Prospectus Supplement will further
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.
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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 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.
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. The
Pre-Funding Account, if any, will be reduced
during the related Pre-Funding Period by the
amount thereof used to purchase Additional
Receivables. Any amount remaining in the
Pre-Funding Account at the end of the related
Pre-Funding Period will be distributed to the
related Securityholders, pro rata, on the
Payment Date immediately following the end of
the Pre-Funding Period.
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 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
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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 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 Vehicles.
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Perfection of security interests in automobiles
and light duty trucks is generally governed by
the vehicle registration or titling laws of the
state in which each vehicle is registered or
titled. In most states, a security interest in a
vehicle is perfected by notation of the secured
party's lien on the vehicle's certificate of
title. Each Prospectus Supplement will specify
whether, due to the administrative burden and
expense, the Depositor, the related Servicer or
the Trustee will amend any certificate of title
to identify the Depositor or the Trustee as the
new secured party on the certificates of title
relating to the Vehicles. See "Certain Legal
Aspects of the Receivables."
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 Vehicles 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 Vehicles will not be perfected
in favor of the related Trust or Trustee. See
"Certain Legal Aspects of the Receivables."
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
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retirement accounts. See "ERISA Considerations"
in the related Prospectus Supplement.
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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RISK FACTORS
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 Originator will
warrant (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) 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 INTERESTS. The transfer of the Receivables by the related
Originators to the Depositor pursuant to each Receivables Acquisition Agreement
and then by the Depositor to the Trustee pursuant to the related Trust
Agreement, the perfection of the security interests in the Receivables and the
enforcement of rights to realize on the Vehicles as collateral for the
Receivables are subject to a number of federal and state laws, including the UCC
as in effect in various states. As specified in each Prospectus Supplement, the
related Servicer will take such action as is required to perfect the rights of
the Trustee in the Receivables. If, through inadvertence or otherwise, a third
party were to purchase (including the taking of a security interest in) a
Receivable for new value in the ordinary course of its business, without actual
knowledge of the Trust's interest, and take possession of a Receivable, the
purchaser would acquire an interest in such Receivable superior to the interest
of the Trust. As further specified in each Prospectus Supplement, no action will
be taken to perfect the rights of the Trustee in proceeds of the VSI Insurance
Policy or of any other insurance policies covering individual Vehicles or
Obligors. Therefore, the rights of a third party with an interest in such
proceeds could prevail against the rights of the Trust prior to the time such
proceeds are deposited by the related Servicer into a Trust Account. See
"Certain Legal Aspects of the Receivables."
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 Obligors
thereunder are absolute and unconditional, regardless of any defense, set-off or
abatement which the Obligor 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.
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In the event that the Depositor or the Trustee must rely on
repossession and disposition of Vehicles 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 in any affect the ability of the Issuer to realize the full amount due on a
Contract include whether amendments to certificates of title relating to the
Vehicles had been filed, whether financing statements to perfect the security
interest in the Vehicles had been filed, depreciation, obsolescence, damage or
loss of any Vehicle, 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 that is a
corporation, limited liability company or other entity (each, a "Finance
Subsidiary") pursuant to articles of incorporation or other organizational
documents 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 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.
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Obligors of the Vehicles 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.
INSURANCE ON VEHICLES. Each Receivable generally requires the
related Obligor to maintain insurance covering physical damage to the Vehicle in
an amount not less than the unpaid principal balance of such Receivable pursuant
to which the Originator is named as a loss payee. Since the Obligors select
their own insurers to provide the requisite coverage, the specific terms and
conditions of their policies may vary.
DELINQUENCIES. There can be no assurance that the historical levels
of delinquencies and losses experienced by the related Originator on its
automobile loan 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."
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
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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 automobile finance 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.
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) received 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 Vehicles relating to such pool of
Receivables, (v) the right to proceeds from claims on physical damage policies,
if any, covering such Vehicles or the related Obligors, as the case may be, (vi)
the proceeds of any repossessed Vehicles 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 or more classes of Securities.
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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 manufacturers and acquired by the
related Originator, (iii) originated by various Dealers and acquired by the
related Originator or (iv) acquired by the related Originator from originators
or owners of Receivables.
Each Trust Fund will include Receivables with respect to which the
related Contract or the related Vehicles is subject to federal or state
registration or titling requirements. No Trust Fund will include Receivables
with respect to which the underlying Contracts or Vehicles relate to office
equipment, 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.
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 Obligors on the related Contracts, and the proceeds from the
sale of Vehicles 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
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with, to the extent appropriate, the composition of such Receivables and the
distribution of such Receivables by payment frequency and current principal
balance as of the applicable Cut-off Date.
THE CONTRACTS
As specified in the related Prospectus Supplement, the Contracts may
consist of any combination of Rule of 78s Contracts, Fixed Value Contracts or
Simple Interest Contracts. Generally, "Rule of 78s Contracts" provide for fixed
level monthly payments which will amortize the full amount of the Contract over
its term. The Rule of 78s Contracts provide for allocation of payments according
to the "sum of periodic balances" or "sum of monthly payments" method (the "Rule
of 78s"). Each Rule of 78s Contract provides for the payment by the Obligor of a
specified total amount of payments, payable in monthly installments on the
related due date, which total represents the principal amount financed and
finance charges in an amount calculated on the basis of a stated annual
percentage rate ("APR") for the term of such Contract. The rate at which such
amount of finance charges is earned and, correspondingly, the amount of each
fixed monthly payment allocated to reduction of the outstanding principal
balance of the related Contract are calculated in accordance with the Rule of
78s. Under the Rule of 78s, the portion of each payment allocable to interest is
higher during the early months of the term of a Contract and lower during later
months than that under a constant yield method for allocating payments between
interest and principal. Notwithstanding the foregoing, as specified in the
related Prospectus Supplement, all payments received by the related Servicer on
or in respect of the Rule of 78s Contracts may be allocated on an actuarial
basis.
Generally, the "Fixed Value Contracts" provide for monthly payments
with a final fixed value payment which is greater than the scheduled monthly
payments. A Fixed Value Contract provides for amortization of the loan over a
series of fixed level payment monthly installments, but also requires a final
fixed value payment due after payment of such monthly installments which may be
satisfied by (i) payment in full in cash of such amount, (ii) transfer of the
vehicle to the related Originator provided certain conditions are satisfied or
(iii) refinancing the fixed value payment in accordance with certain conditions.
With respect to Fixed Value Contracts, as specified in the related Prospectus
Supplement, only the principal and interest payments due prior to the final
fixed value payment and not the final fixed value payment may be included
initially in the related Trust Fund.
"Simple Interest Contracts" provide for the amortization of the
amount financed under the receivable over a series of fixed level monthly
payments. However, unlike the monthly payment under Rule of 78s Contracts, each
monthly payment consists of an installment of interest which is calculated on
the basis of the outstanding principal balance of the receivable multiplied by
the stated APR and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received under a Simple Interest Contract, the amount received is applied first
to interest accrued to the date of payment and the balance is applied to reduce
the unpaid principal balance. Accordingly, if an Obligor pays a fixed monthly
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if an Obligor pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. In either case, the Obligor pays a fixed monthly
installment until the final scheduled payment date, at which time the amount of
the final installment is increased or decreased as necessary to repay the then
outstanding principal balance.
If an Obligor elects to prepay a Rule of 78s Contract in full, it is
entitled to a rebate of the portion of the outstanding balance then due and
payable attributable to unearned finance charges. If a Simple Interest Contract
is prepaid, rather than receive a rebate, the Obligor is required to pay
interest only to the date of prepayment. The amount of a rebate under a Rule of
78s Contract calculated in accordance with the Rule of 78s will always be less
than had such rebate been calculated on an actuarial basis and generally will be
less than the remaining scheduled payments of interest that would be due under a
Simple Interest Contract for which all payments were made on schedule.
Distributions to Security holders may not be affected
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by Rule of 78s rebates under the Rule of 78s Contract because pursuant to the
related Prospectus Supplement such distributions may be determined using the
actuarial method.
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 retail automobile receivables 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
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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.
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 Incorporated (a wholly-owned indirect
subsidiary of The Prudential Insurance Company of America). The Depositor's
principal executive offices are located at One New York Plaza, New York, New
York 10292. Its telephone number is (212) 778-1000.
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 Incorporated 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
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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 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.
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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 Payment Date may be the fifteenth, eighteenth,
twenty-fifth or other day of each month (or, in the case of quarterly-pay
Securities, the fifteenth, eighteenth, twenty-fifth or other day of every third
month; and in the case of semi-annual pay Securities, the fifteenth, eighteenth,
twenty-fifth or other 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
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respect thereto; (ix) the terms on which the Securities of such series may be
repurchased or remarketed to other investors; (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") which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
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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.
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
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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 tile 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 Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
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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;
(vii) the amount of the aggregate purchase amounts for Receivables
that have been reacquired, if any, for such Remittance Period; and
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(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.
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
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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 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.
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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 Obligor 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 Vehicle 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 Obligors 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 payments, responding to inquiries of Obligors on the related
Receivables, investigating delinquencies, sending payment coupons to Obligors,
reporting tax information to Obligors, 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.
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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 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.
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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 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
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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 described 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.
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 aggregate
principal balance or other amount 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
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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 transfer of the Receivables by the related Originators to the
Depositor pursuant to each Receivables Acquisition Agreement and then by the
Depositor to the Trustee pursuant to the related Trust Agreement, the perfection
of the security interests in the Receivables and the enforcement of rights to
realize on the Vehicles as collateral for the Receivables are subject to a
number of federal and state laws, including the UCC as in effect in various
states. As specified in each Prospectus Supplement, the related Servicer will
take such action as is required to perfect the rights of the Trustee in the
Receivables. If, through inadvertence or otherwise, a third party were to
purchase (including the taking of a security interest in) a Receivable for new
value in the ordinary course of its business, without actual knowledge of the
Trust's interest, and take possession of a Receivable, the purchaser would
acquire an interest in such Receivable superior to the interest of the Trust. As
further specified in each Prospectus Supplement, no action will be taken to
perfect the rights of the Trustee in proceeds of any insurance policies covering
individual Vehicles or Obligors. Therefore, the rights of a third party with an
interest in such proceeds could prevail against the rights of the Trust prior to
the time such proceeds are deposited by the related Servicer into a Trust
Account.
SECURITY INTERESTS IN THE FINANCED VEHICLES
General
Retail installment sale contracts such as the Receivables evidence
the credit sale of automobiles and light duty trucks by dealers to consumers.
The contracts also constitute personal property security agreements and include
grants of security interests in the related automobiles and light duty trucks
under the UCC. Perfection of security interests in automobiles and light duty
trucks is generally governed by the vehicle registration or titling laws of the
state in which each vehicle is registered or titled. In most states a security
interest in a vehicle is perfected by notation of the secured party's lien on
the vehicle's certificate of title.
Unless otherwise specified in the related Prospectus Supplement, all
of the Contracts acquired from Originators name the related Originator as
obligee or assignee and as the secured party. As specified in the related
Prospectus Supplement, the related Originator will represent that it has taken
all actions necessary under the laws of the state in which the related Vehicles
are titled to perfect its security interest in such Vehicles, including, where
applicable, having a notation of its lien recorded on the related certificate of
title.
Perfection
Pursuant to the related Receivables Acquisition Agreement, the
Originator will sell and assign the Receivables and its security interests in
the Vehicles to the Depositor and, pursuant to the related Trust Agreement, the
Depositor will assign to the Trustee the Receivables and its interest in the
Originator's security interests in the Financed Vehicles. Each of the related
Prospectus Supplements will specify whether, because of the administrative
burden and expense, the Depositor, the related Servicer or the Trustee will
amend any certificate of title to identify the Depositor or the Trustee as the
new secured party on the certificates of title relating to the Vehicles. Each of
the related Prospectus Supplements will specify the UCC financing statements to
be filed in order to perfect the transfer to the Depositor of the Receivables
and the transfer to the Trustee of the Receivables. Further, although neither
the Depositor nor the Trustee will rely on possession of the Receivables as the
legal basis
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for the perfection of their respective interests therein or in the security
interests in the Vehicles, the related Servicer, as specified in the related
Prospectus Supplement, will continue to hold the Receivables and any
certificates of title relating to the Vehicles in its possession as custodian
for the Trustee pursuant to the related Trust Agreement which, as a practical
matter, should preclude any other party from claiming a competing security
interest in the Receivables on the basis that the security interest is perfected
by possession.
A security interest in a motor vehicle registered in most states may
be perfected against creditors and subsequent purchasers without notice for
valuable consideration only by one or more of the following: depositing with the
related Department of Motor Vehicles or analogous state office a properly
endorsed certificate of title for the vehicle showing the secured party as legal
owner or lienholder thereon, or filing a sworn notice of lien with the related
Department of Motor Vehicles or analogous state office and noting such lien on
the certificate of title, or, if the vehicle has not been previously registered,
filing an application in usual form for an original registration together with
an application for registration of the secured party as legal owner or
lienholder, as the case may be. However, under the laws of most states, a
transferee of a security interest in a motor vehicle is not required to reapply
to the related Department of Motor Vehicles or analogous state office for a
transfer of registration when the security interest is sold or when the interest
of the transferee arises from the transfer of a security interest by the
lienholder to secure payment or performance of an obligation. Accordingly, under
the laws of such states, the assignment by the related Originators of their
interests in the Receivables to the Depositor Seller under the related
Receivables Acquisition Agreement, and the assignment by the Depositor of its
interest in the Receivables to the Trustee under the related Trust Agreement are
effective conveyances of the respective security interests of the related
Originators and the Depositor in the Receivables, and specifically, the
Vehicles, without such re-registration and without amendment of any lien noted
on the related certificate of title, and (subject to the immediately succeeding
paragraphs) the Depositor will succeed to the related Originator's rights as
secured party and the Trustee will succeed to the Depositor's rights as secured
party.
Although re-registration of the vehicle is not necessary to convey a
perfected security interest in the Vehicles to the Trustee, the Trustee's
security interest could be defeated through fraud, negligence, forgery or
administrative error since it may not be listed as legal owner or lienholder on
the certificates of title to the Vehicles. However, in the absence of fraud,
negligence, forgery or administrative error, the notation of the related
Originator's lien on the certificates of title will be sufficient to protect the
Trust against the rights of subsequent purchasers of a Vehicle or subsequent
creditors who take a security interest in a Vehicle. In each Receivables
Acquisition Agreement, the related Originators will represent and warrant, and
in the related Trust Agreement, the Depositor will represent and warrant that it
has, or has taken all action necessary to obtain, a perfected security interest
in each Vehicle. If there are any Vehicles as to which the related Originator
failed to obtain a first priority perfected security interest, its security
interest would be subordinate to, among others, subsequent purchasers of such
Vehicles and holders of first priority perfected security interests therein.
Such a failure, however, would constitute a breach of the related Originator's
representations and warranties under the related Receivables Acquisition
Agreement and the Depositor's representations and warranties under the related
Trust Agreement. Accordingly, pursuant to the related Trust Agreement, the
Depositor would be required to repurchase the related Receivables from the
Trustee and, pursuant to the related Receivables Acquisition Agreement, the
related Originators would be required to repurchase such Receivables from the
Depositor, in each case unless the breach were cured.
Continuity of Perfection
Under the laws of most states, a perfected security interest in a
motor vehicle continues for four months after the vehicle is moved to a new
state from the one in which it is initially registered and thereafter until the
owner re-registers such motor vehicle in the new state. A majority of states
generally require surrender of a certificate of title to re-register a vehicle.
In those states that require a secured party to hold possession of the
certificate of title to maintain perfection of the security interest, the
secured party would learn of the reregistration through the request from the
Obligor under the related installment sale contract to surrender possession of
the certificate of title to assist in such re-registration. In the case of
vehicles registered in states providing for the notation of a lien on the
certificate of title but not requiring possession by the secured party (such as
Texas), the secured party would receive notice of surrender from the state of
re-registration if the security interest is noted on the certificate of title.
Thus, the secured party would have the opportunity to reperfect its security
interest in the vehicle in the state of relocation. However, these procedural
safeguards will not protect the secured party if, through fraud, forgery or
administrative error, the debtor somehow procures a new certificate of title
that does not list the secured party's lien. Additionally, in states that do not
require surrender of a certificate of title for re-registration of a vehicle,
re-registration could
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defeat perfection. In each of the Trust Agreements, the related Servicer will be
required to take steps to effect re-perfection upon receipt of notice of
re-registration or information from the Obligor as to relocation. Similarly,
when an Obligor sells a Vehicle, the related Servicer will have an opportunity
to require satisfaction of the related Receivable before release of the lien,
either because the related Servicer will be required to surrender possession of
the certificate of title in connection with the sale, or because the related
Servicer will receive notice as a result of its lien noted thereon. Pursuant to
the related Trust Agreement, the related Servicer will hold the certificates of
title for the related Vehicles as custodian for the Trustee. Under the related
Trust Agreement, the related Servicer will be obligated to take appropriate
steps, at its own expense, to maintain perfected security interests in the
Vehicles.
Priority of Certain Liens Arising by Operation of Law
Under the laws of most states, certain statutory liens such as
mechanics', repairmen's and garagemen's liens for repairs performed on a motor
vehicle, motor vehicle accident liens, towing and storage liens, liens arising
under various state and federal criminal statutes and liens for unpaid taxes
take priority over even a first priority perfected security interest in such
vehicle by operation of law. The UCC also grants priority to certain federal tax
liens over the lien of a secured party. The laws of most states and federal law
permit the confiscation of motor vehicles by governmental authorities under
certain circumstances if used in or acquired with the proceeds of unlawful
activities, which may result in the loss of a secured party's perfected security
interest in a confiscated vehicle. The related Originators will represent and
warrant to the Depositor in the related Receivables Acquisition Agreement and
the Depositor will represent and warrant to the Trustee in the related Trust
Agreement that, as of the related Closing Date, each security interest in a
Vehicle shall be a valid, subsisting and enforceable first priority security
interest in such Vehicle. However, liens for repairs or taxes superior to the
security interest of the Trustee in any such Vehicle, or the confiscation of
such Vehicle, could arise at any time during the term of a Receivable. No notice
will be given to the Trustee or any Securityholder in the event such a lien or
confiscation arises and any such lien or confiscation arising after the related
Closing Date would not give rise to the related Originator's repurchase
obligation under the related Receivables Acquisition Agreement or the
Depositor's repurchase obligation under the related Trust Agreement.
REPOSSESSION
In the event of default by an Obligor, the holder of the related
retail installment sale contract has all the remedies of a secured party under
the UCC, except where specifically limited by other state laws. The UCC remedies
of a secured party include the right to repossession by self-help means, unless
such means would constitute a breach of the peace. Unless a vehicle is
voluntarily surrendered, self-help repossession is accomplished simply by taking
possession of the related financed vehicle. In cases where the Obligor objects
or raises a defense to repossession, or if otherwise required by applicable
state law, a court order is obtained from the appropriate state court, and the
vehicle must then be recovered in accordance with that order. In some
jurisdictions, the secured party is required to notify the debtor of the default
and the intent to repossess the collateral and give the debtor a time period
within which to cure the default prior to repossession. Generally, this right of
cure may only be exercised on a limited number of occasions during the term of
the related contract. Other jurisdictions permit repossession without prior
notice if it can be accomplished without a breach of the peace (although in some
states, a course of conduct in which the creditor has accepted late payments has
been held to create a right by the Obligor to receive prior notice).
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and other state laws require a secured party to provide the
Obligor with reasonable notice of the date, time and place of any public sale
and/or the date after which any private sale of the collateral may be held. In
addition, some states also impose substantive timing requirements on the sale of
repossessed vehicles in certain circumstances and/or various substantive timing
and content requirements on such notices. In most states, under certain
circumstances after a financed vehicle has been repossessed, the Obligor may
redeem the collateral by paying the delinquent installments and other amounts
due. The Obligor has the right to redeem the collateral prior to actual sale or
entry by the secured party into a contract for sale of the collateral by paying
the secured party the unpaid principal balance of the obligation, accrued
interest thereon, reasonable expenses for repossessing, holding, and preparing
the collateral for disposition and arranging for its sale, plus, in some
jurisdictions, reasonable attorneys' fees and legal expenses or in some other
states, by payment of delinquent installments on the unpaid principal balance of
the related obligation.
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DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of the Vehicles generally will be applied
first to the expenses of resale and repossession and then to the satisfaction of
the indebtedness. In many instances, the remaining principal amount of such
indebtedness will exceed such proceeds. Under the UCC and laws applicable in
some states, a creditor is entitled to bring an action to obtain a deficiency
judgment from a debtor for any deficiency on repossession and resale of a motor
vehicle securing such debtor's loan; however, in some states, a creditor may not
seek a deficiency judgment from a debtor whose financed vehicle had an initial
cash sales price less than a specified dollar amount. Some states, impose
prohibitions or limitations or notice requirements on actions for deficiency
judgments. In addition to the notice requirement described above, the UCC
requires that every aspect of the sale or other disposition, including the
method, manner, time, place and terms, be "commercially reasonable." Generally,
courts have held that when a sale is not "commercially reasonable", the secured
party loses its right to a deficiency judgment. In addition, the UCC permits the
debtor or other interested party to recover for any loss caused by noncompliance
with the provisions of the UCC. Also, prior to a sale, the UCC permits the
debtor or other interested person to obtain an order mandating that the secured
party refrain from disposing of the collateral if it is established that the
secured party is not proceeding in accordance with the "default" provisions
under the UCC. However, the deficiency judgment would be a personal judgment
against the Obligor for the shortfall, and a defaulting Obligor can be expected
to have very little capital or sources of income available following
repossession. 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 or be uncollectible.
Occasionally, after resale of a vehicle and payment of all expenses
and indebtedness, there is a surplus of funds. In that case, the UCC requires
the creditor to remit the surplus to any holder of a subordinate lien with
respect to the vehicle or if no such lienholder exists or if there are remaining
funds, the UCC requires the creditor to remit the surplus to the Obligor under
the contract.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon creditors and servicers
involved in consumer finance. These laws include the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B
and Z, state adaptations of the National Consumer Act and of the Uniform
Consumer Credit Code, state motor vehicle retail installment sale acts, state
"lemon" laws and other similar laws. In addition, the laws of certain states,
impose finance charge ceilings and other restrictions on consumer transactions
and require contract disclosures in addition to those required under federal
law. These requirements impose specific statutory liabilities upon creditors who
fail to comply with their provisions. In some cases, this liability could affect
the ability of an assignee such as the Trustee to enforce consumer finance
contracts such as the Receivables.
The so-called "Holder-in-Due-Course Rule" of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting any assignee of the
seller in a consumer credit transaction (and certain related creditors and their
assignees) to all claims and defenses which the Obligor in the transaction could
assert against the seller. Liability under the FTC Rule is limited to the
amounts paid by the Obligor under the contract, and the holder of the contract
may also be unable to collect any balance remaining due thereunder from the
Obligor. The FTC Rule is generally duplicated by the Uniform Consumer Credit
Code, other state statutes or the common law in certain states. To the extent
that the Receivables will be subject to the requirements of the FTC Rule, the
Trustee, as holder of the Receivables, will be subject to any claims or defenses
that the purchaser of the related Vehicle may assert against the seller of such
Vehicle. Such claims will be limited to a maximum liability equal to the amounts
paid by the Obligor under the related Receivable.
Under most state vehicle dealer licensing laws, sellers of
automobiles and light duty trucks are required to be licensed to sell vehicles
at retail sale. In addition, with respect to used vehicles, the Federal Trade
Commission's Rule on Sale of Used Vehicles requires that all sellers of used
vehicles prepare, complete and display a "Buyer's Guide" which explains the
warranty coverage for such vehicles. Furthermore, Federal Odometer Regulations
promulgated under the Motor Vehicle Information and Cost Savings Act and the
motor vehicle title laws of most states require that all sellers of used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or
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if either a Buyer's Guide or Odometer Disclosure Statement was not provided to
the purchaser of a Vehicle, the Obligor may be able to assert a defense against
the seller of the Vehicle. If an Obligor on a Receivable were successful in
asserting any such claim or defense, the related Servicer would pursue on behalf
of the Trust any reasonable remedies against the seller or manufacturer of the
vehicle, subject to certain limitations as to the expense of any such action to
be specified in the related Trust Agreement.
Any such loss, to the extent not covered by credit support (as
specified in the Related Prospectus Supplement), could result in losses to the
Securityholders. As specified in the related Prospectus Supplement, if an
Obligor were successful in asserting any such claim or defense as described in
this paragraph or the two immediately preceding paragraphs, such claim or
defense may constitute a breach of a representation and warranty under the
related Receivables Acquisition Agreement and the related Trust Agreement and
may create an obligation of the related Originator and the Depositor to
repurchase such Receivable unless the breach were cured.
Courts have applied general equitable principles to secured parties
pursuing repossession or litigation involving deficiency balances. These
equitable principles may have the effect of relieving an Obligor from some or
all of the legal consequences of a default.
In several cases, consumers have asserted that the self-help
remedies of secured parties under the UCC and related laws violate the due
process protections of the 14th Amendment to the Constitution of the United
States. Courts have generally either upheld the notice provisions of the UCC and
related laws as reasonable or have found that the creditor's repossession and
resale do not involve sufficient state action to afford constitutional
protection to consumers.
As specified in the related Prospectus Supplement, the related
Originators and the Depositor will represent and warrant under the related
Receivables Acquisition Agreement and the related Trust Agreement, respectively,
that each Receivable complies with all requirements of law in all material
respects. Accordingly, if an Obligor has a claim against the Trustee for
violation of any law and such claim materially and adversely affects the
Trustee's interest in a Receivable, such violation would constitute a breach of
representation and warranty under the related Receivables Acquisition Agreement
and the related Trust Agreement and would create an obligation of the related
Originators and the Depositor to repurchase such Receivable unless the breach
were cured.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
creditor to realize upon collateral or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a creditor from repossessing a motor vehicle, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the motor vehicle at the time of bankruptcy (as determined by the
court), leaving the party providing financing as a general unsecured creditor
for the remainder of the indebtedness. A bankruptcy court may also reduce the
monthly payments due under a contract or chance the rate of interest and time of
repayment of the indebtedness. Any such shortfall, to the extent not covered by
credit support (as specified in each Prospectus Supplement), could result in
losses to the Securityholders.
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.
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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.
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.
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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 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.
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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.
Accrual Securities .......................................................... 7
Additional Receivables ...................................................... 12
Cede ........................................................................ 12
Certificates ................................................................ 1
Class ....................................................................... 1
Collection Account .......................................................... 30
Collection Period ........................................................... 32
Commission .................................................................. 2
Contracts ................................................................... 1
Cooperative ................................................................. 28
Credit Enhancement .......................................................... 19
Credit Enhancer ............................................................. 19
Debt Securities ............................................................. 14
Definitive Securities ....................................................... 29
Depositaries ................................................................ 26
Depositor ................................................................... 4
Direct Participants ......................................................... 18
Distribution Account ........................................................ 31
Eligible Deposit Account .................................................... 4
Eligible Institution ........................................................ 31
Eligible Investments ........................................................ 31
Equity Certificates ......................................................... 9
ERISA ....................................................................... 14
Euroclear Operator .......................................................... 28
Euroclear Participants ...................................................... 28
Exchange Act ................................................................ 2
Finance Subsidiary .......................................................... 17
Fixed Income Securities ..................................................... 6
Grantor Trust Securities .................................................... 14
Indenture ................................................................... 5
Indenture Trustee ........................................................... 5
Indirect Participants ....................................................... 18
Insolvency Event ............................................................ 34
Insolvency Laws ............................................................. 17
Interest Rate ............................................................... 2
Investment Company Act ...................................................... 8
Investment Earnings ......................................................... 31
Issuer ...................................................................... 1
Master Trust ................................................................ 8
Master Trust Agreement ...................................................... 4
Master Trust New Issuance ................................................... 25
Notes ....................................................................... 1
Originator .................................................................. 1
Participants ................................................................ 26
Partnership Interests ....................................................... 14
Pass-Through Rate ........................................................... 2
Payment Date ................................................................ 7
Policy ...................................................................... 1
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Pool Balance ................................................................ 23
Pool Factor ................................................................. 22
Pooling Agreement ........................................................... 5
Pre-Funding Account ......................................................... 12
Pre-Funding Period .......................................................... 12
Prepayment .................................................................. 19
Prospectus Supplement ....................................................... 1
Ratings Effect .............................................................. 18
Receivables ................................................................. 1
Receivables Acquisition Agreement ........................................... 20
Record Date ................................................................. 7
Registration Statement ...................................................... 2
Remittance Period ........................................................... 8
Rules ....................................................................... 27
Securities .................................................................. 1
Securities Act .............................................................. 2
Security Insurer ............................................................ 12
Securityholders ............................................................. 7
Senior Securities ........................................................... 7
Servicer .................................................................... 1
Servicer Defaults ........................................................... 34
Servicing Agreement ......................................................... 5
Servicing Fee ............................................................... 32
Servicing Fee Rate .......................................................... 32
Strip Securities ............................................................ 7
Sub-Servicer ................................................................ 4
Subordinate Securities ...................................................... 7
Terms and Conditions ........................................................ 28
Transferor .................................................................. 4
Trust ....................................................................... 1
Trust Accounts .............................................................. 31
Trust Agreement ............................................................. 6
Trust Fund .................................................................. 1
Trustee ..................................................................... 6
Vehicles .................................................................... 1
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FLAGSHIP AUTO RECEIVABLES
OWNER TRUST 1999-2
$117,000,000 CLASS A-1 6.420% NOTES
$ 60,000,000 CLASS A-2 6.705% NOTES
$ 43,000,000 CLASS A-3 6.835% NOTES
$ 30,000,000 CLASS A-4 6.900% NOTES
[FLAGSHIP LOGO]
(SERVICER)
FLAGSHIP AUTO LOAN FUNDING LLC 1999-II
(SELLER)
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(DEPOSITOR)
---------------------
PROSPECTUS SUPPLEMENT
---------------------
PRUDENTIAL SECURITIES
NOVEMBER 17, 1999
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