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PROSPECTUS
CHEVY CHASE AUTO RECEIVABLES TRUST 1996-1
$227,697,669.92
6.60% AUTO RECEIVABLES BACKED CERTIFICATES
CHEVY CHASE BANK, F.S.B.
SELLER AND SERVICER
Principal, and interest to the extent of the Pass-Through Rate of 6.60% per
annum, will be distributed to Certificateholders on the 15th day of each month
(or, if such 15th day is not a Business Day, the next following Business Day),
beginning July 15, 1996. The aggregate principal balance of the Receivables as
of the Cut-Off Date is $227,697,669.92. The final scheduled distribution date of
the Certificates will be the Distribution Date in December, 2002 (the "Final
Scheduled Distribution Date").
The 6.60% Auto Receivables Backed Certificates (the "Certificates") represent
fractional undivided interests in the assets of the Chevy Chase Auto Receivables
Trust 1996-1 (the "Trust") to be formed pursuant to a Pooling and Servicing
Agreement (the "Pooling Agreement"), dated as of June 1, 1996, among Chevy Chase
Bank, F.S.B. (the "Bank"), as seller and as servicer of the receivables (the
"Seller" and the "Servicer," respectively), and First Bank National Association,
as trustee (the "Trustee"). The assets of the Trust will primarily consist of
simple interest retail installment sales contracts and installment loans (the
"Receivables") secured by new and used automobiles, light duty trucks and vans
financed thereby (the "Vehicles"), certain payments made thereunder on or after
June 1, 1996 (the "Cut-Off Date"), security interests in the Vehicles and the
proceeds thereof received by the Trust from the Seller on or prior to the date
of the issuance of the Certificates, all as more fully described herein.
(COVER CONTINUED ON NEXT PAGE)
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH IN "SPECIAL CONSIDERATIONS" HEREIN.
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE BANK OR ANY AFFILIATES OF THE BANK.
NEITHER THE CERTIFICATES NOR THE UNDERLYING RECEIVABLES OR ANY COLLECTIONS
THEREON ARE INSURED OR GUARANTEED BY THE SAVINGS ASSOCIATION INSURANCE FUND, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC (1) COMMISSIONS SELLER (1)(2)
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Per Certificate 99.953125% .250% 99.703125%
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Total $227,590,936.64 $569,244.18 $227,021,692.46
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(1) Plus accrued interest at the Pass-Through Rate from June 15, 1996.
(2) Before deduction of expenses payable by the Bank estimated at $550,000.
The Certificates are offered by the several Underwriters when, as and if issued
by the Trust, delivered to and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that the Certificates
will be offered globally and delivered in book-entry form on or about June 27,
1996 through the facilities of The Depository Trust Company, Cedel Bank, societe
anonyme and Euroclear System, against payment in immediately available funds.
J.P. MORGAN & CO.
CS FIRST BOSTON
June 21, 1996. SMITH BARNEY INC.
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
The assets of the Trust also will include a financial guaranty insurance
policy (the "Certificate Insurance Policy") from MBIA Insurance Corporation (the
"Certificate Insurer"), which will unconditionally and irrevocably guarantee
payment of amounts due to the holders of the Certificates (the
"Certificateholders") to the extent described herein. The Trustee will also have
access to a Reserve Account and a Yield Maintenance Account to be established
for the benefit of the Certificateholders and the Certificate Insurer.
There currently is no secondary market for the Certificates. The
Underwriters intend to make a secondary market in the Certificates but have no
obligation to do so.
[MBIA LOGO]
AVAILABLE INFORMATION
The Seller 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
Certificates offered pursuant to this Prospectus. For further information,
reference is made to the Registration Statement which may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at 500 West Madison, 14th Floor, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Servicer, on behalf of the Trust, will also file or cause to be filed with the
Commission such periodic reports as may be required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Servicer with the Registration
Statement, either on its own behalf or on behalf of the Trust, relating to the
Certificates, with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act, after the date of this Prospectus and prior to the
termination of the offering of the Certificates offered hereby, 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 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.
The Servicer 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). Written requests for such copies should be directed to: Chevy
Chase Bank, F.S.B., 8401 Connecticut Avenue, Chevy Chase, Maryland 20815,
Attention: Chief Financial Officer. Telephone requests for such copies should be
directed to Chevy Chase Bank, F.S.B. at (301) 986-7000.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued, periodic and annual
unaudited reports containing information concerning the Receivables will be
prepared by the Servicer and sent on behalf of the Trust only to Cede & Co.
("Cede"), as nominee of The Depository Trust Company ("DTC") and registered
holder of the Certificates. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
The Servicer will file with the Commission such periodic reports as are required
under the Exchange Act, and the rules and regulations thereunder and as are
otherwise agreed to by the Commission. Copies of such periodic reports may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
2
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Bank or any Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein is correct as of any time subsequent
to the date hereof or that there has been no change in the affairs of the Bank
since such date or that the information contained or incorporated by reference
herein is correct as of any time subsequent to its date.
Until September 19, 1996 (90 days after the commencement of the offering),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
TABLE OF CONTENTS
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Available Information........................................................................................... 2
Incorporation of Certain Documents by Reference................................................................. 2
Reports to the Certificateholders............................................................................... 2
Summary of Terms................................................................................................ 4
Special Considerations.......................................................................................... 10
Formation of the Trust.......................................................................................... 11
The Trust Property.............................................................................................. 12
Use of Proceeds................................................................................................. 12
Prepayment and Yield Considerations............................................................................. 12
Pool Factor and Other Information............................................................................... 13
The Receivables Pool............................................................................................ 13
The Seller and the Servicer..................................................................................... 17
The Certificates................................................................................................ 20
The Certificate Insurer......................................................................................... 33
The Certificate Insurance Policy................................................................................ 35
Certain Legal Aspects of the Receivables........................................................................ 37
Certain Federal Income Tax Consequences......................................................................... 40
ERISA Considerations............................................................................................ 42
Ratings......................................................................................................... 45
Underwriting.................................................................................................... 45
Report of Experts............................................................................................... 46
Legal Matters................................................................................................... 46
Annex I......................................................................................................... 47
Appendix A...................................................................................................... A-1
Appendix B...................................................................................................... B-1
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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. CERTAIN CAPITALIZED
TERMS USED IN THIS SUMMARY OF TERMS ARE DEFINED ELSEWHERE IN THIS PROSPECTUS ON
THE PAGES INDICATED IN THE INDEX OF PRINCIPAL TERMS.
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Issuer............................ Chevy Chase Auto Receivables Trust 1996-1 (the "Trust"
or the "Issuer").
Seller/Servicer................... Chevy Chase Bank, F.S.B., a federally chartered stock
savings bank (the "Bank"). The principal executive
offices of the Seller and the Servicer are located at
8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
Trustee........................... First Bank National Association, a national banking
association. The corporate trust offices of the Trustee
are located at 180 East 5th Street, St. Paul, Minnesota
55101, and the telephone number of the Trustee is (612)
973-6700 (bond holder services).
Cut-Off Date...................... June 1, 1996.
Securities Offered................ The 6.60% Auto Receivables Backed Certificates (the
"Certificates"). The Certificates will evidence
fractional undivided ownership interests in the assets
of the Trust. The Certificates will be offered for
purchase in denominations of $1,000 and integral
multiples thereof. See "The Certificates -- General."
Each Certificateholder will also purchase the right to
receive a pro rata share of amounts payable under the
Yield Maintenance Account established pursuant to the
Pooling Agreement ("Yield Maintenance Payments").
The Trust......................... The Trust will be a trust established under the laws of
the State of New York. The activities of the Trust are
limited by the terms of the Pooling Agreement to
purchasing, owning and managing the Receivables, issuing
and making payments on the Certificates and other
activities related thereto.
Trust Property.................... The assets of the Trust (the "Trust Property") include
(i) the Receivables, (ii) all monies (including accrued
interest) due or received on or after the Cut-Off Date,
(iii) the Collection Account and the Certificate Account
and such amounts as from time to time may be held in one
or more accounts established and maintained by the
Servicer and the Trustee pursuant to the Pooling
Agreement, as described below, (iv) the security
interests in the Vehicles, (v) the rights to proceeds
from claims on physical damage, credit life and
disability insurance policies, if any, covering Vehicles
or Obligors, as the case may be, (vi) any proceeds from
the sale of repossessed Vehicles, (vii) all rights to
receive payments under certain circumstances from the
Reserve Account, (viii) the Certificate Insurance Policy
and (ix) certain other property, as more fully described
herein. See "The Trust Property."
The Receivables................... The Receivables consist of simple interest retail
installment sales contracts between dealers and retail
purchasers and installment loans which are secured by
the new and used automobiles, light duty trucks and vans
financed thereby. Each Obligor's obligation
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4
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under its Receivable is a full recourse obligation. The
"Obligor" is the obligor under each Receivable including
any guarantor. The Receivables contain provisions which
unconditionally obligate the Obligor to make all
payments under the related Receivable. Approximately
77.27% of the Receivables (by aggregate principal
balance of the Receivables as of the Cut-Off Date) were
purchased or originated by the Bank and the other 22.73%
of the Receivables were purchased by the Bank's
wholly-owned subsidiary, Consumer Finance Corporation
("CFC"). The Receivables purchased or originated by CFC
are referred to herein as the "CFC Receivables." See
"The Receivables Pool."
Registration of Certificates...... The Certificates will be represented initially by
physical certificates registered in the name of Cede, as
nominee of DTC. Persons acquiring beneficial ownership
interests in such Certificates ("Beneficial Owners") may
elect to hold their interests through DTC, in the United
States of America, or Cedel Bank, societe anonyme
("CEDEL") or the Euroclear System ("Euroclear"), in
Europe. A Beneficial Owner will not be entitled to
receive a Definitive Certificate representing such
person's interest in the Trust except in certain limited
circumstances. Under the terms of the Pooling Agreement,
Beneficial Owners will not be recognized as
Certificateholders and will be permitted to exercise the
rights of the Certificateholders only indirectly through
DTC. See "The Certificates -- Book-Entry Registration."
Pass-Through Rate................. 6.60% per annum, calculated on the basis of a 360-day
year consisting of twelve 30-day months (the
"Pass-Through Rate").
Distribution Date................. The 15th day of each month (or, if such 15th day is not
a day on which banks located in New York, New York, St.
Paul, Minnesota or Chevy Chase, Maryland are open for
the purpose of conducting commercial banking business (a
"Business Day"), the next following Business Day) (each
a "Distribution Date") beginning July 15, 1996.
Monthly Interest.................. On each Distribution Date, the Trustee will distribute
pro rata to the Certificateholders of record as of the
close of business on the day (whether or not a Business
Day) immediately preceding such Distribution Date (or,
if Definitive Certificates are issued, the close of
business on the last day of the calendar month immedi-
ately preceding the month of such Distribution Date)
(the "Record Date") interest at one-twelfth of the
Pass-Through Rate on the Certificate Principal Balance
immediately prior to such Distribution Date. To the
extent interest collections received by the Trust are
insufficient to pay such interest as a result of the
APRs on certain of the Receivables, the
Certificateholders will be entitled to amounts payable
from the Yield Maintenance Account. The "Certificate
Principal Balance" shall equal, initially,
$227,697,669.92 (the "Original Certificate Principal
Balance") and thereafter, the Original Certificate
Principal Balance, reduced by all amounts previously
distributed to Certificateholders and allocable to
principal. A "Collection Period" with respect to a
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Distribution Date will be the calendar month preceding
the month in which such Distribution Date occurs. See
"The Certificates -- Flow of Funds."
Monthly Principal................. On each Distribution Date, the Trustee will distribute
to Certificateholders, as of the related Record Date,
the Monthly Principal relating to such Distribution
Date. See "The Certificates -- Flow of Funds."
Accounts.......................... The Pooling Agreement will require that the Trustee
establish an account (the "Collection Account") and that
the Servicer deposit into the Collection Account all
collections received by the Servicer on the Receivables
within two Business Days following receipt of such
amounts. With respect to any Distribution Date and on
the related Determination Date, the Servicer shall
instruct the holder of the Collection Account to deposit
into an account established by the Trustee (the
"Certificate Account") all funds collected on the
Receivables during the most recently completed
Collection Period.
Credit Enhancement................ The credit enhancement available for the benefit of the
Certificateholders will consist of the Reserve Account
and the Certificate Insurance Policy.
A. Reserve Account............... The Trustee will hold a Reserve Account (the "Reserve
Account") for the benefit of the Certificateholders and
the Certificate Insurer. The Reserve Account will be
created with an initial deposit by the Seller of cash in
an amount required by the Pooling Agreement (the
"Reserve Initial Deposit"). The Reserve Initial Deposit
will be augmented on each Distribution Date by the
deposit in the Reserve Account of amounts otherwise
distributable to the Seller from Excess Interest until
the amount in the Reserve Account reaches an amount
equal to the Specified Reserve Balance. Thereafter,
amounts otherwise distributable to the Seller will be
deposited in the Reserve Account to the extent necessary
to maintain the amount in the Reserve Account at an
amount equal to the Specified Reserve Balance. Amounts
in the Reserve Account (including any investment
earnings thereon) on any Distribution Date (after giving
effect to all distributions made on such Distribution
Date) in excess of the Specified Reserve Balance for
such Distribution Date generally will be released to the
Seller. With respect to any Distribution Date, "Excess
Interest" shall mean funds on deposit in the Certificate
Account after distribution of the Required Payments to
the Certificateholders on such Distribution Date and
payment of the fee due the Trustee, the premium then due
to the Certificate Insurer and the Reimbursement Amount.
The "Specified Reserve Balance" with respect to any
Distribution Date means the amount so specified in the
Pooling Agreement. The Reserve Account will be
maintained with the Trustee as an Eligible Deposit
Account, and will not be part of the Trust. See "The
Reserve Account."
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6
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The Certificate Insurer may, at its option and without
notice to, or the consent of, the Certificateholders,
reduce the Specified Reserve Balance.
B. The Certificate Insurance
Policy........................... On or before the Closing Date, the Seller will obtain
the Certificate Insurance Policy (the "Certificate
Insurance Policy") which is noncancelable, in favor of
the Trustee on behalf of the Certificateholders. On each
Distribution Date, the Certificate Insurer will be
required to make available to the Trustee the amount, if
any, by which the Required Payments on the Certificates
exceed the sum of (x) Available Funds as of such
Distribution Date and (y) the amount, if any, then on
deposit in the Reserve Account. The Certificate
Insurance Policy does not guarantee to the Cer-
tificateholders any specified rate of prepayments. A
payment by the Certificate Insurer under the Certificate
Insurance Policy is referred to herein as an "Insured
Payment." See "The Certificate Insurance Policy " and
"The Certificate Insurer" herein.
The Trustee will (i) receive as attorney-in-fact of each
Certificateholder, any Insured Payment from the
Certificate Insurer and (ii) disburse such Insured
Payment to each Certificateholder in accordance with the
Pooling Agreement. The Pooling Agreement will provide
that to the extent the Certificate Insurer makes In-
sured Payments, either directly or indirectly (as by
paying through the Trustee), to the Certificateholders,
the Certificate Insurer will be subrogated to the rights
of such Certificateholders with respect to such Insured
Payments. The Certificate Insurer will receive
reimbursement for such Insured Payments, but only from
the sources and in the manner provided in the Pooling
Agreement. Such subrogation and reimbursement will have
no effect on the Certificate Insurer's obligations under
the Certificate Insurance Policy.
Yield Maintenance Account......... Certain of the Receivables have annual percentage rates
of interest ("APRs") which are less than the sum of the
Pass-Through Rate, the Servicing Fee Rate and the rates
at which the Certificate Insurer's premium and the
Trustee's fee are calculated (the sum of such rates, the
"Required Rate"). The Yield Maintenance Account is a
segregated trust account which will not be part of the
Trust into which the Seller will make a single deposit
on the Closing Date in an amount (the "Initial Yield
Maintenance Amount") necessary to fund any shortfall on
interest collections which results from Receivables
having an APR of less than the Required Rate. After the
Closing Date no additional amounts will be deposited in
the Yield Maintenance Account. The Initial Yield
Maintenance Amount has been calculated using a zero
prepayment rate on the Receivables. On each
Determination Date, the Servicer is permitted to
recalculate the amount required to be on deposit in the
Yield Maintenance Account (the "Yield Maintenance
Amount"), which may decline as Receivables having less
than the Required Rate prepay or are otherwise removed
from the Trust. Any amounts in excess of the Yield
Maintenance Amount will be released to the Seller.
Amounts may be withdrawn from the Yield Maintenance
Account only
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with respect to the interest shortfalls described above.
Any excess funds in the Yield Maintenance Account will
be released to the Seller.
Certificate Insurer............... MBIA Insurance Corporation and any successor thereto.
Servicing......................... The Servicer will be responsible for servicing,
managing, arranging, making collections on and otherwise
enforcing the Receivables. The Servicer will be required
to exercise the degree of skill and care in performing
these functions that it customarily exercises with
respect to similar receivables owned by the Servicer.
The Servicer will be entitled to retain from collections
on the Receivables a monthly fee (the "Servicing Fee")
equal to one-twelfth the product of (i) 1.40% (the
"Servicing Fee Rate") and (ii) the Pool Balance as of
the beginning of the immediately preceding Collection
Period. The Servicer may designate CFC to act as
sub-servicer with respect to the CFC Receivables.
Optional Termination.............. The Seller will have the option, subject to certain
conditions set forth in the Pooling Agreement, including
the deposit of the sum specified in the Pooling
Agreement, to remove all, but not less than all, of the
property in the Trust, and thereby cause early
retirement of the Certificates as of any Distribution
Date following a Record Date on which the Pool Balance
is 5% or less of the Original Certificate Principal
Balance (such option, the "Optional Termination"). In
the event of such a removal, the entire outstanding
Certificate Principal Balance, together with accrued
interest thereon at the Pass-Through Rate, will be
required to be paid to the Certificateholders on such
Distribution Date. The Certificate Insurance Policy will
not insure payments to Certificateholders resulting from
an Optional Termination. See "The Certificates --
Optional Termination."
Certain Legal Aspects of the
Receivables...................... Because of the administrative burden and expense that
would be entailed in doing so, the certificates of title
for the Vehicles will not be amended to identify the
Trustee as the secured party. If there are any Vehicles
as to which the Bank failed to obtain a perfected
security interest, its security interest would be
subordinate to, among others, subsequent purchasers of
the Vehicles and holders of perfected security
interests. Pursuant to the Pooling Agreement, the Seller
will assign its security interests in the Vehicles to
the Trustee. Under the laws of Virginia and North
Carolina, such an assignment of security interests may
not be, and under the laws of Maryland will not be,
sufficient to convey to the Trustee perfected security
interests in the Vehicles. The Seller will covenant in
the Pooling Agreement to repurchase any Receivable if,
on the Closing Date, a valid, subsisting and enforceable
first priority security interest in the related Vehicle,
which will have been assigned to the Trust, has not been
perfected (or is not in the process of being perfected)
in favor of the applicable Lender. The Seller will also
covenant in the Pooling Agreement to repurchase any
Receivable if, after the Closing Date, a valid,
subsisting and enforceable first priority security
interest in the name of the
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applicable Lender is not maintained on behalf of the
Trust in the related Vehicle. See "Special
Considerations -- Certain Legal Aspects" and "Certain
Legal Aspects of the Receivables."
Certain Federal Tax
Considerations................... In the opinion of Shaw, Pittman, Potts & Trowbridge,
counsel to the Seller, the Trust will constitute a
grantor trust for federal income tax purposes and will
not be subject to federal income tax. Beneficial Owners
of the Certificates must report their respective
allocable shares of all income earned on the Trust
Property (other than amounts treated as "stripped
coupons") and may deduct their respective allocable
shares of reasonable servicing fees. See "Certain
Federal Income Tax Consequences -- Tax Status of the
Trust." Prospective investors should note that no
rulings have been or will be sought from the Internal
Revenue Service (the "Service") with respect to any of
the federal income tax consequences discussed herein,
and no assurance can be given that the Service will not
take contrary positions. See "Certain Federal Income Tax
Consequences."
ERISA Considerations.............. Certificates may be purchased by or with the assets of
an employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), and the provisions of Section 4975 of the
Code. An acquisition of Certificates by such an employee
benefit plan is subject to the general fiduciary stan-
dards of ERISA and satisfaction of the conditions
imposed under the terms of certain prohibited
transaction exemptions granted to the Underwriters. See
"ERISA Considerations."
Ratings........................... It is a condition of the original issuance of the
Certificates that the Certificates be rated in the
highest rating category by at least one of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Services, a division of The McGraw-Hill Compa-
nies, Inc. ("S&P") or Fitch Investors Service, Inc.
("Fitch") (Moody's, S&P or Fitch, collectively, the
"Rating Agencies"). The rating of the Certificates will
depend primarily on an assessment by the Rating Agencies
of the claims-paying ability of the Certificate Insurer.
Any reduction in the rating assigned to the
claims-paying ability of the Certificate Insurer below
the rating initially given to the Certificates would
likely result in a reduction of the rating of the
Certificates. A security rating is not a recommendation
to buy, sell or hold securities, and may be subject to
revision or withdrawal at any time by the assigning
entity. See "Ratings."
Special Considerations............ For a discussion of certain factors that should be
considered by prospective investors in the Certificates,
see "Special Considerations" herein.
Certain Legal Matters............. Certain legal matters relating to the validity of the
issuance of the Certificates will be passed upon for the
Seller and the Underwriters by Shaw, Pittman, Potts &
Trowbridge, Washington, D.C.
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SPECIAL CONSIDERATIONS
Prospective Certificateholders should consider, among other things, the
following factors in connection with the purchase of the Certificates:
LIMITED LIQUIDITY. There currently is no secondary market for the
Certificates, and there is no assurance that one will develop or, if one does
develop, that it will continue until the Certificates are paid in full. The
Underwriters intend to make a market in the Certificates but have no obligation
to do so.
CERTAIN LEGAL ASPECTS. Because of the administrative burden and expense
that would be entailed in doing so, the certificates of title for the Vehicles
will not be amended to identify the Trustee as the secured party. If there are
any Vehicles as to which the Bank failed to obtain a perfected security
interest, its security interest would be subordinate to, among others,
subsequent purchasers of the Vehicles and holders of perfected security
interests. Pursuant to the Pooling Agreement, the Seller will assign its
security interests in the Vehicles to the Trustee. Under the laws of Virginia
and North Carolina, such an assignment of security interests may not be, and
under the laws of Maryland will not be, sufficient to convey to the Trustee
perfected security interests in the Vehicles. The Seller will covenant in the
Pooling Agreement to repurchase any Receivable if, on the Closing Date, a valid,
subsisting and enforceable first priority security interest in the related
Vehicle, which will have been assigned to the Trust, has not been perfected (or
is not in the process of being perfected) in favor of the applicable Lender. The
Seller will also covenant in the Pooling Agreement to repurchase any Receivable
if, after the Closing Date, a valid, subsisting and enforceable first priority
security interest in the name of the applicable Lender is not maintained on
behalf of the Trust in the related Vehicle. See "Certain Legal Aspects of the
Receivables."
YIELD AND PREPAYMENT CONSIDERATIONS. The weighted average life of the
Certificates will be reduced by full or partial prepayments on the Receivables.
The Receivables will generally be prepayable at any time without penalty.
Prepayments (or, for this purpose, equivalent payments to the Trust) may result
from payments by Obligors, liquidations due to default, the receipt of proceeds
from physical damage or credit life and/or credit disability insurance,
repurchases by the Seller as a result of certain uncured breaches of
representations and warranties made with respect to the Receivables, purchases
by the Servicer as a result of certain uncured breaches of the covenants made by
it with respect to the Receivables, or the exercise by the Seller of its
Optional Termination.
The Seller has served or is serving as the seller/servicer with respect to
three prior auto loan securitization transactions, Chevy Chase Auto Receivables
Trust 1995-2, Chevy Chase Auto Receivables Trust 1995-1 and Chevy Chase
Automobile Loan Trust 1991-1 and, accordingly, has limited historical experience
with respect to prepayments. The Seller has not as of the date hereof prepared
data on prepayment rates and is not aware of publicly available industry
statistics that set forth principal prepayment experience for retail installment
sales contracts similar to the Receivables. The Seller can make no prediction as
to the actual prepayment rates that will be experienced on the Receivables. The
Seller, however, believes that the actual rate of prepayments will result in a
substantially shorter weighted average life than the scheduled weighted average
life of the Receivables.
BOOK-ENTRY REGISTRATION. Issuance of the Certificates in book-entry form
may reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Certificates for which they cannot
obtain definitive physical securities representing such Certificateholders'
interests, except in certain circumstances described herein.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC, CEDEL or
Euroclear and, in such case, DTC, CEDEL or Euroclear, as the case may be, will
be required to credit such distributions to the accounts of its participating
organization which thereafter will be required to credit them to the accounts of
the Certificateholders either directly or indirectly through indirect
participants. See "The Certificates -- Book-Entry Registration."
CONSUMER PROTECTION LAWS. The Receivables are subject to federal and state
consumer protection laws which impose requirements with respect to the making,
transfer, acquisition, enforcement and collection of
10
<PAGE>
consumer loans. Such laws, as well as any new laws or rules which may be
adopted, may adversely affect the Servicer's ability to collect on the
Receivables. In addition, failure by the Seller to have complied, or the
Servicer to comply, with such requirements could adversely affect the
enforceability of the Receivables. The Seller will make representations and
warranties relating to the validity and enforceability of the Receivables and
its compliance with applicable law in connection with its performance of the
transactions contemplated by the Pooling Agreement. Pursuant to the Pooling
Agreement, if the Trust's interest in a Receivable is materially and adversely
affected by the failure of such Receivable to comply with applicable
requirements of consumer protection law, such Receivable will be repurchased by
the Seller. The sole remedy if any such representation or warranty is not
complied with and such noncompliance continues beyond the applicable cure period
is that the Receivables affected thereby will be repurchased by the Seller.
RATING OF THE CERTIFICATES. It is a condition to the issuance of the
Certificates that they be rated in the highest rating category by at least one
of the Rating Agencies. The rating of the Certificates will depend primarily on
an assessment by the Rating Agencies of the claims-paying ability of the
Certificate Insurer. Any reduction in the rating assigned to the claims-paying
ability of the Certificate Insurer below the rating initially given to the
Certificates would likely result in a reduction of the rating of the
Certificates. The rating by a Rating Agency of the Certificates is not a
recommendation to purchase, hold or sell the Certificates, inasmuch as such
rating does not comment as to market price or suitability for a particular
investor but addresses the likelihood of the payment of principal and interest
on the Certificates pursuant to their terms. There is no assurance that a rating
will remain in effect for any given period of time or that ratings will not be
reduced, suspended or withdrawn by the Rating Agencies.
LIMITED ASSETS. The Trust does not have, nor is it permitted or expected to
have, any significant assets or sources of funds other than the Receivables,
amounts on deposit in the Collection Account and the Certificate Account, the
Certificate Insurance Policy and the right to receive payments under certain
circumstances from the Reserve Account. The Certificates represent interests
solely in the Trust and are not obligations of, and will not be insured or
guaranteed by, the Seller, the Trustee or any other person or entity other than
the Certificate Insurer in accordance with the terms of the Certificate
Insurance Policy. Consequently, the Certificateholders must rely upon payments
on the Receivables, Insured Payments and, if and to the extent available,
amounts on deposit in the Reserve Account and the Yield Maintenance Account.
GEOGRAPHIC CONCENTRATION. As of the Cut-Off Date, based upon billing
address information provided to the Seller, the Obligors resided in 31 states
and the District of Columbia, three of which, Maryland, Virginia and North
Carolina, account for 24.33%, 47.94% and 12.33%, respectively, of the aggregate
principal balance of the Receivables in the Trust. Adverse economic conditions
in Maryland, Virginia or North Carolina could adversely affect the delinquency,
loan loss or repossession experience of the Trust with respect to the
Receivables.
FORMATION OF THE TRUST
The Seller will establish the Trust by selling and assigning the Receivables
and certain other Trust Property to the Trustee in exchange for the
Certificates. Prior to such sale and assignment, the Trust will have no assets
or obligations or any operating history. The Trust will not engage in any
business other than acquiring and holding the Trust Property, issuing the
Certificates and distributing payments on the Certificates.
The Seller, immediately prior to its transfer of the Receivables to the
Trust, will acquire the CFC Receivables from CFC.
The Servicer will hold the Receivables and the certificates of title or
ownership relating to the Vehicles as custodian for the Trustee. However, the
Receivables will not be marked or stamped to indicate that they have been sold
to the Trust, and the certificates of title or ownership for the Vehicles will
not be endorsed or otherwise amended to identify the Trust as the new secured
party. Under such circumstances and in certain jurisdictions, the Trust's
interest in the Receivables and the Vehicles may be defeated. See "Certain Legal
Aspects of the Receivables."
11
<PAGE>
The Trust will not acquire any assets other than the Trust Property, and it
is not anticipated that the Trust will have any need for additional capital
resources. Because the Trust will have no operating history upon its
establishment and will not engage in any business other than acquiring and
holding the Trust Property, issuing the Certificates and distributing payments
on the Certificates, no historical or PRO FORMA financial statements or ratios
of earnings to fixed charges with respect to the Trust have been included
herein.
If the protection provided to the Certificateholders by the Certificate
Insurance Policy, the Reserve Account and the Yield Maintenance Account is
insufficient, the Certificateholders would have to look principally to the
Obligors on the Receivables and to the proceeds from the repossession and sale
of Vehicles which secure Defaulted Receivables. In such event, certain factors,
such as the Trustee's failure to have perfected security interests in the
Vehicles in all states, may affect the Trust's ability to repossess and sell the
Vehicles securing the Receivables, and thus may reduce the proceeds to be
distributed to Certificateholders. See "The Certificates -- Flow of Funds," "The
Certificate Insurance Policy" and "Certain Legal Aspects of the Receivables."
THE TRUST PROPERTY
Each Certificate will represent a fractional undivided interest in the
Trust. The Trust Property will include (i) the Receivables, (ii) all monies
(including accrued interest) due or received thereon on or after the Cut-Off
Date, (iii) all amounts and property from time to time held in or credited to
the Collection Account and the Certificate Account, (iv) all of the Seller's
security interests in the Vehicles, (v) all rights to receive payments under
certain circumstances from the Reserve Account, (vi) the Certificate Insurance
Policy, (vii) all of the Seller's rights to receive proceeds from claims on
physical damage, credit life and disability insurance policies covering the
Vehicles or the Obligors, as the case may be, to the extent that such insurance
policies relate to the Receivables, (viii) all of the Seller's right to all
documents contained in the Receivable Files, (ix) all of the Seller's rights of
recourse against Dealers relating to the Receivables, (x) all property
(including the right to receive future Liquidation Proceeds and Recoveries) that
secures a Receivable and that shall have been acquired by or on behalf of the
Trustee and (xi) all proceeds (within the meaning of Section 9-306 of the UCC)
of the foregoing. The Pooling Agreement does not permit the Trust to acquire any
additional assets. The Yield Maintenance Account will hold certain amounts
relating to the provision of the Yield Maintenance Payments. The Trustee will
hold the Certificate Insurance Policy.
USE OF PROCEEDS
A portion of the net proceeds to be received by the Seller from the sale of
the Certificates will be used by the Seller to purchase the CFC Receivables from
CFC; the remainder of such net proceeds will be used by the Seller for general
corporate purposes.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Certificates will be directly related
to the scheduled rate of principal payments on the underlying Receivables. If
the Certificates are purchased at a price of other than par, the yield to
maturity on the Certificates also will be affected by the rate of principal
payments. The principal payments on such Receivables may be in the form of
scheduled principal payments or liquidations due to default, casualty and the
like. Any such payments will result in distributions to the Certificateholders
of amounts which would otherwise have been distributed over the remaining term
of the Receivables. In general, the rate of such payments may be influenced by a
number of other factors, including general economic conditions.
The effective yield to the Certificateholders will depend upon, among other
things, the price at which such Certificates are purchased, the amount of
principal, including both scheduled and nonscheduled payments thereof, which is
paid to the Certificateholders and the rate at which such principal is paid.
Interest on the Receivables will be passed through to Certificateholders on
each Distribution Date to the extent of the Pass-Through Rate applied to the
Certificate Principal Balance immediately prior to such
12
<PAGE>
Distribution Date. In the event of prepayments on a Receivable,
Certificateholders will receive thirty (30) days' interest on such Receivable to
the extent that amounts are available from Available Funds, the Reserve Account,
the Yield Maintenance Account and the Certificate Insurance Policy and are
sufficient for such purpose. See "The Certificates -- Flow of Funds."
POOL FACTOR AND OTHER INFORMATION
The "Pool Factor" will be a number (calculated to seven decimal places)
which the Servicer will compute each month equal to the Certificate Principal
Balance as of the close of business on the Distribution Date in that month,
divided by the Original Certificate Principal Balance. The Pool Factor will be
1.0000000 as of the date of the Closing Date, and thereafter will decline to
reflect reductions in the Certificate Principal Balance. A Certificateholder's
portion of the Certificate Principal Balance for a given month is the product of
(i) the original denomination of the holder's Certificate and (ii) the Pool
Factor.
Pursuant to the Pooling Agreement, the Certificateholders will receive from
the Trustee monthly reports concerning the payments received on the Receivables,
the Pool Balance, the Pool Factor and various other items of information.
Certificateholders of record during any calendar year will be furnished
information by the Trustee for tax reporting purposes not later than the latest
date permitted by law. See "The Certificates -- Reports to Certificateholders."
THE RECEIVABLES POOL
GENERAL
The Receivables in the pool were purchased or originated by Chevy Chase Bank
F.S.B. (the "Bank") or its wholly-owned subsidiary, CFC ("CFC," together with
the Bank, the "Lenders"). Of the aggregate principal balance of the Receivables
as of the Cut-off Date, 77.27% were purchased or originated by the Bank (the
"Bank Receivables") and 22.73% were purchased by CFC (the "CFC Receivables").
Of the Bank Receivables as of the Cut-Off Date, 97.89%, by aggregate
principal balance, were purchased by the Bank from dealers in new and used
automobiles, light duty trucks and vans ("Dealers") in the ordinary course of
business and 2.11% were originated directly by the Bank at or through its
deposit branches. Approximately 62.62% of the aggregate principal balance of the
Bank Receivables represents financing of new automobiles, light duty trucks and
vans, and approximately 37.38% represents financing of used automobiles, light
duty trucks and vans.
All of the CFC Receivables as of the Cut-Off Date were purchased from
Dealers. Approximately 37.76% of the aggregate principal balance of the CFC
Receivables represents financing of new automobiles, light duty trucks and vans,
and approximately 62.24% represents financing of used automobiles, light duty
trucks and vans.
UNDERWRITING PROCEDURES
Each Receivable was originated or purchased by the Lenders after a review by
the Lenders in accordance with their established underwriting procedures. Each
Lender has its own underwriting procedures.
The underwriting procedures of each Lender are designed to provide a basis
for assessing the Obligor's ability and willingness to repay the loan. In
conducting this assessment, the Lenders consider the Obligor's ratio of debt to
income and evaluate the Obligor's credit history through a review of a written
credit report compiled by a recognized consumer credit reporting bureau. The
Obligor's equity in the collateral and the terms of the loan are of secondary
importance in the Lenders' analysis. For the Obligor's purchase of an
automobile, the Bank's guidelines provide for financing up to 115% of the dealer
cost for new vehicles and of the Trade-In Value (as published by the National
Automobile Dealers Association, a standard reference source for dealers in used
vehicles) for used vehicles. CFC has two sets of guidelines which vary based on
the obligor's credit history. For new vehicles, CFC will finance up to 105% of
dealer cost, plus sales taxes, license fees and a maximum of $2,000 of rebatable
warranties and insurance, or 130% of dealer cost, inclusive of all additional
expenses. For used vehicles, CFC will finance up to 110% of the Trade-in Value,
plus sales taxes, license fees and a maximum of $2,000 of rebatable warranties
and insurance, or 130% of the Trade-in Value,
13
<PAGE>
inclusive of all additional expenses. The Lenders' guidelines are intended only
to provide a basis for lending decisions, and exceptions to such guidelines may,
within certain limits, be made based upon the credit judgment of the lending
officer. The Lenders periodically conduct quality audits to ensure compliance
with their established policies and procedures.
CFC's underwriting guidelines relate to a category of lending in which loans
may be made to applicants who have experienced certain adverse credit events
(and therefore would not necessarily meet all of the Bank's guidelines for its
traditional loan program) but who meet certain other creditworthiness tests.
Such loans may experience higher rates of delinquencies, repossessions and
losses, especially under adverse economic conditions, as compared with loans
originated pursuant to the Bank's traditional lending program.
SELECTION CRITERIA
The Receivables were selected from the Lenders' portfolios on the basis of a
number of criteria, including the following: each Receivable (i) has an original
term to maturity of 12 to 72 months, (ii) has a maturity of not later than May
2002, (iii) except with respect to the Balloon Receivables, provides for level
monthly payments that fully amortize the amount financed over the original term,
(iv) was not more than 59 days past due as of the Cut-Off Date and (v) has an
unpaid principal balance of not less than $1,000 as of the Cut-Off Date. The
weighted average remaining term (number of payments) of the Receivables was
55.06 months as of the Cut-Off Date.
All the Receivables are prepayable at any time. Neither Lender maintains
records of the historical prepayment experience of its automobile receivables
portfolio, and the Seller makes no prediction as to the actual prepayment
experience on the Receivables. See also "The Certificates -- Optional
Termination" regarding the Seller's option to purchase the Receivables when the
Pool Balance is 5% or less of the Original Certificate Principal Balance.
The Receivables are simple interest installment sales contracts and
installment loans which provide for equal monthly payments, except for 0.55% of
the Receivables (as a percentage of the initial Pool Balance) with respect to
which the last scheduled monthly payment of each such Receivable is
significantly larger than any prior scheduled monthly payment (each such
Receivable, a "Balloon Receivable"). As payments are received under a simple
interest receivable, interest accrued to date is paid first and the remaining
payment is applied to reduce the unpaid principal balance. Accordingly, if an
obligor pays a fixed monthly installment before its due date, the portion of the
payment allocable to interest for the period since the preceding payment will be
less than it would have been had the payment been made on the due date, and the
portion of the payment applied to reduce the principal balance will be
correspondingly greater. Conversely, if an obligor pays a fixed monthly
installment after its due date, the portion of the payment allocable to interest
for the period since the preceding payment will be greater than it would have
been had the payment been made on the due date, and the portion of the payment
applied to reduce the principal balance will be correspondingly less, in which
case a larger portion of the principal balance will be due on the final
scheduled payment date. In the case of a liquidation or repossession, amounts
recovered are applied first to the expenses of repossession, then to unpaid
interest and finally to unpaid principal.
The composition, distribution by APR and geographical distribution of the
Receivables as of the Cut-Off Date are as set forth in the following tables.
14
<PAGE>
COMPOSITION OF THE RECEIVABLES
<TABLE>
<S> <C>
Initial Aggregate Principal Balance......................... $227,697,669.92
Number of Receivables....................................... 16,062
Average Original Principal Balance.......................... $14,606.41
Range of Original Principal Balances...................... $1,990.66 to 39,789.82
Average Remaining Principal Balance......................... $14,176.17
Range of Remaining Principal Balances..................... $1,051.50 to 39,353.94
Weighted Average APR (1).................................... 11.81%
Range of APRs............................................. 5.50% to 29.00%
Weighted Average Original Term to Maturity (1).............. 57.25 months
Range of Original Terms to Maturity....................... 12 months to 72 months
Weighted Average Remaining Term to Maturity (1)............. 55.06 months
Range of Remaining Terms of Maturity...................... 12 months to 72 months
</TABLE>
- ------------------------
(1) Weighted by current balance.
DISTRIBUTION OF THE RECEIVABLES BY APR AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF NUMBER OF AGGREGATE AGGREGATE
RANGE OF APRS RECEIVABLES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
5.0000% to 5.9999%............................. 1 0.01% $ 2,535.37 0.00%
6.0000% to 6.9999%............................. 130 0.81% 1,877,007.93 0.83%
7.0000% to 7.9999%............................. 2,015 12.54% 32,292,022.78 14.18%
8.0000% to 8.9999%............................. 2,900 18.05% 45,147,958.47 19.83%
9.0000% to 9.9999%............................. 2,491 15.51% 37,588,350.62 16.51%
10.0000% to 10.9999%............................ 1,770 11.02% 26,322,738.71 11.56%
11.0000% to 11.9999%............................ 1,139 7.09% 15,935,215.47 7.00%
12.0000% to 12.9999%............................ 765 4.76% 10,113,071.88 4.44%
13.0000% to 13.9999%............................ 335 2.09% 4,194,853.28 1.84%
14.0000% to 14.9999%............................ 145 0.90% 1,784,711.98 0.79%
15.0000% to 15.9999%............................ 247 1.54% 3,251,792.94 1.43%
16.0000% to 16.9999%............................ 560 3.49% 6,949,608.76 3.05%
17.0000% to 17.9999%............................ 863 5.37% 12,385,597.12 5.44%
18.0000% to 18.9999%............................ 1,157 7.20% 13,713,300.34 6.02%
19.0000% to 19.9999%............................ 360 2.24% 4,632,613.11 2.03%
20.0000% to 20.9999%............................ 67 0.42% 636,925.73 0.28%
21.0000% to 21.9999%............................ 298 1.86% 2,613,225.78 1.15%
22.0000% to 22.9999%............................ 81 0.50% 753,387.82 0.33%
23.0000% to 23.9999%............................ 664 4.13% 6,746,276.30 2.96%
24.0000% to 24.9999%............................ 59 0.37% 642,539.69 0.28%
25.0000% to 25.9999%............................ 1 0.01% 15,857.29 0.01%
29.0000% to 29.9999%............................ 14 0.09% 98,078.55 0.04%
----------- ------ ----------------- ------
Total....................................... 16,062 100.00% $ 227,697,669.92 100.00%
----------- ------ ----------------- ------
----------- ------ ----------------- ------
</TABLE>
15
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE RECEIVABLES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF NUMBER OF AGGREGATE AGGREGATE
STATE (1) RECEIVABLES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
District of Columbia............................ 342 2.13% $ 4,782,851.57 2.10%
Georgia......................................... 1,179 7.34% 17,342,322.53 7.62%
Maryland........................................ 3,953 24.61% 55,411,445.00 24.33%
North Carolina.................................. 2,057 12.81% 28,074,935.97 12.33%
Pennsylvania.................................... 572 3.56% 8,689,753.57 3.82%
Virginia........................................ 7,681 47.82% 109,155,229.64 47.94%
Other........................................... 278 1.73 4,241,131.64 1.86%
----------- ------ ----------------- ------
Total....................................... 16,062 100.00% $ 227,697,669.92 100.00%
----------- ------ ----------------- ------
----------- ------ ----------------- ------
</TABLE>
- ------------------------
(1) Based upon the billing addresses of the Obligors.
DISTRIBUTION OF THE RECEIVABLES BY REMAINING PRINCIPAL BALANCE AS OF THE CUT-OFF
DATE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF NUMBER OF AGGREGATE AGGREGATE
RANGE OF REMAINING PRINCIPAL BALANCES RECEIVABLES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
$0.00 to $4,999.99......................... 247 1.54% $ 963,756.28 0.42%
$5,000.00 to $9,999.99........................ 2,933 18.26% 24,014,117.90 10.55%
$10,000.00 to $14,999.99........................ 6,895 42.93% 86,673,945.31 38.07%
$15,000.00 to $19,999.99........................ 3,982 24.79% 67,856,015.75 29.80%
$20,000.00 to $24,999.99........................ 1,390 8.65% 30,727,709.04 13.50%
$25,000.00 to $29,999.99........................ 468 2.91% 12,664,822.75 5.56%
$30,000.00 to $34,999.99........................ 127 0.79% 4,060,750.26 1.78%
$35,000.00 to $39,999.99........................ 20 0.13% 736,552.63 0.32%
----------- ------ ----------------- ------
Total....................................... 16,062 100.00% $ 227,697,669.92 100.00%
----------- ------ ----------------- ------
----------- ------ ----------------- ------
</TABLE>
DISTRIBUTION OF THE RECEIVABLES BY REMAINING TERMS TO MATURITY AS OF THE CUT-OFF
DATE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NUMBER OF NUMBER OF AGGREGATE AGGREGATE
RANGE OF REMAINING TERMS TO MATURITY RECEIVABLES RECEIVABLES PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1 to 12........................................ 5 0.03% $ 30,419.64 0.01%
13 to 24........................................ 158 0.98% 923,510.89 0.41%
25 to 36........................................ 988 6.15% 8,588,232.81 3.77%
37 to 48........................................ 3,209 19.98% 35,601,607.76 15.64%
49 to 60........................................ 10,801 67.25% 163,464,671.22 71.79%
61 to 72........................................ 901 5.61% 19,089,227.60 8.38%
----------- ------ ----------------- ------
Total......................................... 16,062 100.00% $ 227,697,669.92 100.00%
----------- ------ ----------------- ------
----------- ------ ----------------- ------
</TABLE>
16
<PAGE>
THE SELLER AND THE SERVICER
GENERAL
The Seller, which is one of the Lenders, is a federally chartered stock
savings bank. The Seller's executive offices are located at 8401 Connecticut
Avenue, Chevy Chase, Maryland 20815, and the Seller's telephone number is (301)
986-7000. The Seller is subject to comprehensive regulation, examination and
supervision by the Office of Thrift Supervision (the "OTS") within the
Department of the Treasury and the Federal Deposit Insurance Corporation (the
"FDIC"). Deposits at the Seller are fully insured up to $100,000 per insured
depositor by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC.
At March 31, 1996, the Bank had consolidated assets of approximately $5.1
billion, deposits of approximately $4.3 billion, and stockholders' equity of
approximately $344.5 million. As a savings bank chartered under the laws of the
United States, the Bank is subject to certain minimum regulatory capital
requirements imposed under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, as amended ("FIRREA"). At March 31, 1996, the Bank was
in compliance with all such regulatory capital requirements in effect at that
date. In addition, the Bank's capital ratios at March 31, 1996 were sufficient
for the bank to meet the ratios established for "well capitalized" institutions
pursuant to "prompt corrective action" regulations promulgated by the OTS
pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991.
On the basis of its balance sheet at March 31, 1996, the Bank also met the
FIRREA-mandated fully phased-in capital requirements (which take into account
the phase-out of certain assets from regulatory capital over a period ending
June 30, 1996) and, on a fully phased-in basis, met the capital standards
established for "well-capitalized" institutions under the prompt corrective
action regulations.
Because of the continued improvement in the financial condition of the Bank,
on March 29, 1996, the OTS released the Bank from certain restrictions and
requirements contained in an agreement with the OTS, which had been amended in
October 1993. In connection with the termination of the written agreement at the
request of the OTS, the Board of Directors of the Bank has adopted a resolution
that addresses certain issues previously addressed by the written agreement. The
resolution also provides that the Bank will present a plan annually to the OTS
detailing anticipated consumer loan securitization activity.
Institutions insured by the SAIF, including the Bank, pay higher deposit
insurance premiums than similarly-situated institutions insured by the Bank
Insurance Fund ("BIF"). Legislation designed to reduce or eliminate the
disparity between BIF and SAIF insurance premiums by, among other things,
imposing on thrift institutions, including the Bank, a one-time assessment
estimated to be up to 85 basis points on their SAIF-insured deposits to
capitalize the SAIF was included in budget legislation which passed Congress in
November 1995 and was vetoed for other reasons by President Clinton in December
1995. Congress is also considering legislation which would eliminate a provision
of the Internal Revenue Code that permits thrifts that meet certain
requirements, including the Bank, to establish reserves for bad debts and to
deduct each year reasonable additions to those reserves in lieu of taking a
deduction for bad debts actually sustained during the taxable year. Congress is
also considering legislation which would, among other things: (i) abolish the
OTS and transfer its functions to other agencies, and (ii) require federally
chartered thrifts, including the Bank, to convert to national bank or state bank
charters or thrift charters. It cannot be determined whether, or in what form,
such legislation will eventually be enacted.
The other Lender, CFC, is a wholly-owned subsidiary of the Seller, formed in
December 1994 for the purpose of providing automobile financing to applicants
who may have experienced certain adverse credit events. See "The Receivables
Pool."
DELINQUENCY AND DEFAULT EXPERIENCE
There can be no assurance that the levels of delinquency and loss experience
reflected in the tables below, are indicative of the performance of the
Receivables included in the Trust.
17
<PAGE>
CHEVY CHASE BANK, F.S.B.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------------
1992 1993 1994 1995
---------------------------- -------------------------- -------------------------- ---------
DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF DOLLAR
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
(000) RECEIVABLES (000) RECEIVABLES (000) RECEIVABLES (000)
----------- --------------- --------- --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding(1)................... $ 84,533 $ 166,307 $ 299,096 $ 431,351
DELINQUENCIES:(2)(3)
30-59 Days........................ $ 1,469 1.74% $ 1,210 0.73% $ 4,074 1.36% $ 2,491
60-89 Days........................ 237 0.28% 223 0.13% 729 0.24% 742
90 days or more................... 328 0.39% 226 0.14% 1,209 0.40% 1,667
----------- --- --------- --- --------- --- ---------
Total Delinquencies............... $ 2,034 2.41% $ 1,659 1.00% $ 6,012 2.00% $ 4,900
----------- --- --------- --- --------- --- ---------
----------- --- --------- --- --------- --- ---------
<CAPTION>
AS OF MARCH 31, 1996
--------------------------
PERCENTAGE OF DOLLAR PERCENTAGE OF
TOTAL AMOUNT TOTAL
RECEIVABLES (000) RECEIVABLES
--------------- --------- ---------------
<S> <C> <C> <C>
Receivables
Outstanding(1)................... $ 470,690
DELINQUENCIES:(2)(3)
30-59 Days........................ 0.58% $ 2,540 0.54%
60-89 Days........................ 0.17% 784 0.17%
90 days or more................... 0.39% 1,744 0.37%
--- --------- ---
Total Delinquencies............... 1.14% $ 5,068 1.08%
--- --------- ---
--- --------- ---
</TABLE>
- ------------------------------
(1) Total Seller Portfolio is the net remaining principal balance.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
(3) Includes repossessions in inventory.
CHEVY CHASE BANK, F.S.B.
LOSS EXPERIENCE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1992 1993 1994 1995
---------------------------- -------------------------- -------------------------- ---------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
DOLLAR AVERAGE DOLLAR AVERAGE DOLLAR AVERAGE DOLLAR
AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT RECEIVABLES AMOUNT
(000) OUTSTANDING (000) OUTSTANDING (000) OUTSTANDING (000)
----------- --------------- --------- --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Receivables
Outstanding(1)............... $ 90,271 $ 116,475 $ 245,295 $ 363,845
----------- --------- --------- ---------
Gross Charge-offs(2).......... $ 811 0.90% $ 627 0.54% $ 766 0.31% $ 2,120
Recoveries(4)................. 103 0.12% 115 0.10% 219 0.09% 275
----------- --- --------- --- --------- --- ---------
Net Losses.................... $ 708 0.78% $ 512 0.44% $ 547 0.22% $ 1,845
----------- --- --------- --- --------- --- ---------
----------- --- --------- --- --------- --- ---------
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1996
--------------------------
PERCENTAGE OF PERCENTAGE OF
AVERAGE DOLLAR AVERAGE
RECEIVABLES AMOUNT RECEIVABLES
OUTSTANDING (000) OUTSTANDING
--------------- --------- ---------------
<S> <C> <C> <C>
Average Receivables
Outstanding(1)............... $ 451,303
---------
Gross Charge-offs(2).......... 0.58% $ 655 0.58%(3)
Recoveries(4)................. 0.07% 53 0.05%(3)
--- --------- ---
Net Losses.................... 0.51% $ 602 0.53%(3)
--- --------- ---
--- --------- ---
</TABLE>
- ------------------------------
(1) Equals the arithmetic average of the month-end balances.
(2) Gross Charge-offs represent the excess of the outstanding loan balance over
net liquidation proceeds, where net liquidation proceeds are the excess of
liquidation proceeds over the sum of repossession, liquidation and other
related expenses.
(3) Annualized.
(4) Includes current post-disposition recoveries on receivables previously
charged off.
18
<PAGE>
CONSUMER FINANCE CORPORATION
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31,
DECEMBER 31, 1995 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF
AMOUNT TOTAL AMOUNT TOTAL
(000) RECEIVABLES (000) RECEIVABLES
--------- ------------- --------- -------------
Receivables
Outstanding(1)......................................................... $ 49,375 $ 71,857
Delinquencies(2)(3):
30 - 59 Days............................................................ $ 2,528 5.12 % $ 2,398 3.34 %
60 - 89 Days............................................................ $ 609 1.23 % $ 956 1.33 %
90 days or more......................................................... $ 871 1.76 % $ 1,523 2.12 %
--------- --- --------- ---
Total Delinquencies..................................................... $ 4,008 8.11 % $ 4,877 6.79 %
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
- ------------------------
(1) Receivables Outstanding consists of all amounts due from obligors as posted
to the related accounts.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
(3) Includes repossessions in inventory.
CONSUMER FINANCE CORPORATION
LOSS EXPERIENCE
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEAR ENDED MARCH 31,
DECEMBER 31, 1995 1996
------------------------ --------------------------------
DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF
AMOUNT TOTAL AMOUNT AVERAGE RECEIVABLES
(000) RECEIVABLES (000) OUTSTANDING
--------- ------------- --------- ---------------------
<S> <C> <C> <C> <C>
Average Receivables
Outstanding(1).................................................. $ 21,383 $ 62,575
Gross Charge-offs(2)............................................. $ 144 0.67 % $ 199 1.27%(3)
Recoveries(4).................................................... $ 0 0.00 % $ 8 0.05%(3)
Net Losses....................................................... $ 144 0.67 % $ 191 1.22%(3)
</TABLE>
- ------------------------
(1) Equals the arithmetic average of the month-end balances.
(2) Gross Charge-offs represent the excess of the outstanding loan balance over
net liquidation proceeds, where net liquidation proceeds are the excess of
liquidation proceeds over the sum of repossession, liquidation and other
related expenses.
(3) Annualized.
(4) Includes current post-disposition recoveries on receivables previously
charged off.
19
<PAGE>
LITIGATION
The Seller is not involved in any legal proceedings, and is not aware of any
pending or threatened legal proceedings, that would have a material adverse
effect upon its financial condition or results of operations.
THE CERTIFICATES
The Certificates will be issued pursuant to the Pooling Agreement to be
entered into by the Servicer, the Seller and the Trustee. The Trustee will
provide a copy of the Pooling Agreement to Certificateholders without charge on
written request addressed to its Corporate Trust Department at 180 East 5th
Street, St. Paul, Minnesota 55101, Att: Structured Finance.
The following summary describes certain terms of the Pooling Agreement, does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Pooling Agreement. Wherever provisions of the Pooling Agreement
are referred to, such provisions are hereby incorporated herein by reference.
GENERAL
The Certificates will be offered for purchase in denominations of $1,000 and
integral multiples thereof and will be represented initially by physical
certificates registered in the name of Cede as nominee of DTC. No Certificate
Owner will be entitled to receive a definitive certificate representing such
person's interest in the Trust except in the event that Definitive Certificates
are issued under the limited circumstances described herein. Unless and until
Definitive Certificates are issued, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants and all references to distributions, notices, reports, and
statements to Certificateholders shall refer to distributions, notices, reports,
and statements to DTC. See "-- Book-Entry Registration" and "-- Definitive
Certificates."
In general, it is intended that Certificateholders receive, on each
Distribution Date, an amount of principal equal to the decrease in the Pool
Balance from the beginning to the end of the related Collection Period, plus
interest at one-twelfth of the Pass-Through Rate on the Certificate Principal
Balance immediately prior to such Distribution Date. See "-- Flow of Funds."
Principal and interest to be distributed to Certificateholders may be provided
by payments made by or on behalf of Obligors, the payment of Purchase Amounts by
the Seller or the Servicer, amounts, if any, from the Reserve Account and the
Yield Maintenance Account, proceeds from physical damage insurance, Liquidation
Proceeds (net of certain Servicer expenses) upon the repossession and sale of
Vehicles or Recoveries (net of certain Servicer expenses) after the repossession
and sale of Vehicles and any Insured Payments remitted by the Certificate
Insurer under the Certificate Insurance Policy. See "The Certificate Insurance
Policy."
Distribution of principal and interest on the Certificates with respect to
each Collection Period will be made on the Distribution Date immediately
succeeding such Collection Period, commencing on July 15, 1996. Each Collection
Period will be one calendar month.
BOOK-ENTRY REGISTRATION
The Certificates will be book-entry certificates (the "Book-Entry
Certificates"). The Beneficial Owners may elect to hold their Certificates
through DTC (in the United States), or CEDEL or Euroclear (in Europe) if they
are participants of such systems ("Participants"), or indirectly through
organizations which are Participants in such systems. The Book-Entry
Certificates will initially be registered in the name of Cede, the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank, N.A. ("Citibank") will act as depositary for CEDEL and
Chemical Bank, New York will act as depositary for Euroclear (in such
capacities, individually, the "Relevant Depositary" and collectively the
"European Depositaries"). Unless and until Definitive Certificates are issued,
it is anticipated that the only "Certificateholder" of the Certificates will be
Cede, as nominee of DTC. Beneficial Owners will not be the Certificateholders as
that term is used in the Pooling Agreement. Beneficial Owners are only permitted
to exercise their rights indirectly through Participants and DTC.
20
<PAGE>
A Beneficial Owner's ownership of a Book-Entry Certificate will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate 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, and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC Participants.
While such Certificates are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
such Certificates and is required to receive and transmit distributions of
principal of, and interest on, such Certificates. Participants and indirect
participants with whom Beneficial Owners have accounts with respect to
Certificates are similarly required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess certificates, the Rules
provide a mechanism by which Beneficial Owners will receive distributions and
will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Beneficial Owners who are not Participants may transfer ownership of
Certificates only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer such Certificates, by
book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Certificates will be executed through DTC and the accounts of
the respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Beneficial
Owners.
Because of time zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) 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
settlements in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "Certain Federal Income Tax Consequences --
Foreign Investors" and "-- Backup Withholding" herein and "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to this Prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective 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 the Relevant 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 the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or
21
<PAGE>
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 European Depositaries.
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 participating organization ("DTC Participants") and to facilitate the
clearance and settlement of securities transactions between DTC Participants
through electronic book-entries, thereby eliminating the need for physical
movement of notes or certificates. DTC 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 DTC Participant, either directly or indirectly ("Indirect DTC Participants").
In general, Beneficial Owners will be subject to the Rules, as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant 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
Euroclear ("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 27 currencies, including United
States dollars. Euroclear 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 the Brussels, Belgium office of Morgan
Guarantee Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear 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 Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible
22
<PAGE>
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 or relationship
with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each Payment
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC Participants in accordance
with DTC's normal procedures. Each DTC Participant will be responsible for
disbursing such payment to the Beneficial Owners of the Book-Entry Certificates
that it represents and to each Financial Intermediary for which it acts as
agent. Each such Financial Intermediary will be responsible for disbursing funds
to the Beneficial Owners of the Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Certificates, to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to Cede, as
nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the Rules, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling Agreement only at the direction of one
or more DTC Participants to whose DTC accounts the Book-Entry Certificates are
credited. CEDEL or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by a Certificateholder under the Pooling Agreement
on behalf of a CEDEL Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of certificates among Participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
The Certificates will be issued in fully registered, certificated form
("Definitive Certificates") to the Beneficial Owners or their nominees, rather
than to DTC or its nominee, only if (i) the Trustee advises the Beneficial
Owners 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 a Servicer Default, the Beneficial Owners representing at least a
majority of the outstanding principal amount of such Certificates advise the
Trustee through DTC in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of the
Beneficial Owners.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the global certificate or the certificates representing the Certificates and
receipt by the Trustee of instructions for re-registration, the Trustee will
reissue the Certificates as Definitive Certificates to the Beneficial Owners,
and thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling Agreement ("Holders").
23
<PAGE>
Distributions of principal of, and interest on, Definitive Certificates will
be made by the Trustee in accordance with the procedures set forth in the
Pooling Agreement directly to Holders in whose names the Definitive Certificates
were registered at the close of business on the applicable Record Date. Such
distributions will be made by check mailed to the address of such Holder as it
appears on the register maintained by the Trustee. The final payment on any
Definitive Certificate, however, will be made only upon presentation and
surrender of such Definitive Certificate at the office or agency specified in
the notice of final distribution to the applicable Certificateholders.
Definitive Certificates will be transferable and exchangeable at the offices
of the Trustee. No service charge will be imposed for any registration of
transfer or exchange, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
CONVEYANCE OF RECEIVABLES
On the Closing Date, the Seller will sell, transfer, assign, set over and
otherwise convey to the Trustee, without recourse (except as expressly set forth
in the Pooling Agreement), all of its right, title and interest in and to the
Receivables, including its security interests in the Vehicles. CFC will convey
the CFC Receivables to the Seller prior to such sale and assignment. The Trustee
will, concurrently with such sale and assignment, execute, authenticate and
deliver the definitive certificates representing the Certificates to the
Underwriters against payment to the Seller of the net purchase price of the sale
of the Certificates.
In the Pooling Agreement, the Seller will represent and warrant to the
Trustee, among other things, that (i) the information provided with respect to
Receivables is correct in all material respects; (ii) the Obligor on each
Receivable is required to obtain physical damage and theft insurance in
accordance with Seller's normal requirements; (iii) at the date of issuance of
the Certificates, the Receivables are free and clear of all security interests,
liens, charges, and encumbrances and no setoffs, defenses, or counterclaims
against the Seller have been asserted or threatened (other than the interest of
the Trustee); (iv) on the Closing Date, each of the Receivables is or will be
secured by a first priority perfected security interest in the Vehicle in favor
of the applicable Lender; and (v) each Receivable, at the time it was
originated, complied, and on the Closing Date complies, in all material
respects, with applicable federal and state laws, including consumer credit,
truth in lending, equal credit opportunity, and disclosure laws. The only
recourse the Trustee and the Certificateholders will have against the Seller for
breach or failure to be true of any of the representations and warranties
contained in the Pooling Agreement with respect to a Receivable will be to
require the Seller to repurchase the Receivable. See "-- Mandatory Repurchase of
Receivables."
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Trustee will appoint the Servicer as initial custodian
of the Receivables. The Servicer, in its capacity as custodian, will hold the
Receivables and all electronic entries, documents, instruments and writings
relating thereto (each, a "Receivable File"), either directly or through
sub-servicers, on behalf of the Trustee for the benefit of Certificateholders
and the Certificate Insurer. The Receivables will not be stamped or otherwise
marked to reflect the sale and assignment of the Receivables to the Trust and
will not be segregated from other receivables held by the Servicer or the
subservicers. However, Uniform Commercial Code (the "UCC") financing statements
reflecting the sale and assignment of the Receivables by the Seller to the
Trustee will be filed, and the Servicer's accounting records and computer
systems will be marked to reflect such sale and assignment. See "Formation of
the Trust" and "Certain Legal Aspects of the Receivables." Pursuant to the terms
of the Pooling Agreement, the Servicer will be required to file continuation
statements relating to such UCC financing statements in order to maintain the
perfected security interest of the Trust in the Receivables. The Servicer may
designate CFC to act as Custodian with respect to Receivables Files relating to
the CFC Receivables.
SERVICING PROCEDURES
The Receivables will be serviced by the Servicer pursuant to the Pooling
Agreement. The Servicer may designate CFC to act as sub-servicer with respect to
the CFC Receivables, although such designation will not relieve the Servicer
from its servicing obligations with respect to such CFC Receivables. The Pooling
Agreement requires that servicing of the Receivables by the Servicer shall
generally be carried out in the same manner in which it services receivables and
vehicles held for its own account. In performing its duties
24
<PAGE>
thereunder, the Servicer will act on behalf and for the benefit of the Trustee
and the Holders and the Certificate Insurer, subject at all times to the
provisions of the Pooling Agreement, without regard to any relationship which
the Servicer or any affiliate of the Servicer may otherwise have with an
Obligor.
CFC's collection procedures differ in certain respects from those employed
by the Bank. On an obligor's fifth day of delinquency, CFC sends a late payment
notice and begins the collection process, while the Bank initiates these steps
on the obligor's tenth day of delinquency. CFC's collections department is
staffed to have approximately one collector for every 800 loans outstanding,
compared to the Bank's ratio of approximately one collector for every 3,000
loans outstanding. In general, CFC initiates the repossession process by the
30th day of delinquency, while the Bank begins this process by the 40th day of
delinquency.
The Servicer, as an independent contractor on behalf of the Trust and for
the benefit of the Certificateholders and the Certificate Insurer, will be
responsible for managing, servicing and administering the Receivables and
enforcing and making collections on the Receivables and any Insurance Policies
and for enforcing any security interest in any of the Vehicles, all as set forth
in the Pooling Agreement. The Servicer's responsibilities will include
collecting and posting of all payments, responding to inquiries of Obligors,
investigating delinquencies, accounting for collections, furnishing monthly and
annual statements to the Trustee and the Certificate Insurer, with respect to
distributions, providing appropriate federal income tax information for use in
providing information to Certificateholders, collecting and remitting sales and
property taxes on behalf of taxing authorities and maintaining the perfected
security interest of the Seller in the Vehicles.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For its servicing of the Receivables, the Servicer will be entitled to
retain from collections on the Receivables a Servicing Fee equal to one-twelfth
of the product of (i) 1.40% and (ii) the Pool Balance of all Receivables as of
the first day of the immediately preceding Collection Period. A portion of such
Servicing Fee may be paid over by the Servicer to CFC with respect to its
sub-servicing of the CFC Receivables.
All costs of servicing each Receivable in the manner required by the Pooling
Agreement shall be borne by the Servicer, but the Servicer shall be entitled to
retain, out of any amounts actually recovered with respect to any Defaulted
Receivable or the Vehicles subject thereto, the Servicer's actual out-of-pocket
expenses reasonably incurred with respect to such Defaulted Receivable or
Vehicle.
MANDATORY REPURCHASE OF RECEIVABLES
In the event of a breach or failure to be true of any representation or
warranty with respect to the Receivables described in "-- Conveyance of
Receivables," which breach or failure materially and adversely affects a
Receivable or the interests of the Trust, the Certificateholders or the
Certificate Insurer in such Receivable, the Seller, unless such breach or
failure has been cured by the last day of the Collection Period following the
Collection Period during which the Seller becomes aware of, or receives written
notice from the Trustee or the Servicer of, such breach or failure, will be
required to repurchase, as of such day (or, at Seller's option, as of the last
day of the month in which such breach was discovered), the Receivable from the
Trustee for the Purchase Amount. The Purchase Amount is payable on the
Determination Date in such subsequent Collection Period. The repurchase
obligation will constitute the sole remedy available to the Certificateholders
or the Trustee against the Seller for any such uncured breach or failure.
The "Purchase Amount" of any Receivable means, with respect to any
Distribution Date an amount equal to the sum of (a) the outstanding principal
balance of such Receivable as of the last day of the preceding Collection Period
and (b) the amount of accrued interest on such principal balance at the related
APR from the date a payment was last made by or on behalf of the Obligor through
the Determination Date immediately preceding such Distribution Date, and after
giving effect to the receipt of monies collected on such Receivable in such
preceding Collection Period.
ACCOUNTS
On the Closing Date, the Trustee will establish the Collection Account, into
which all payments (other than amounts representing the Servicing Fee and other
amounts payable to the Servicer as additional servicing compensation) made on or
with respect to the Receivables will be deposited, and the Certificate
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Account, from which all distributions with respect to the Receivables and the
Certificates will be made. The Seller will establish the Reserve Account and the
Yield Maintenance Account with the Trustee. The Collection Account, the
Certificate Account, the Reserve Account and the Yield Maintenance Account are
collectively referred to as the "Accounts." Each Account will be established in
the name of the Trustee on behalf of the Trust, the Certificateholders and the
Certificate Insurer. The Reserve Account and the Yield Maintenance Account will
not be assets of the Trust, although such accounts will be pledged to the Trust.
Any net investment earnings on the Yield Maintenance Account will be released to
the Seller on each Distribution Date.
On each Distribution Date, as described under "Flow of Funds," certain
amounts are required to be deposited in the Reserve Account. No later than the
Claim Date, amounts, if any, on deposit in the Reserve Account will be deposited
in the Certificate Account to the extent that Required Payments for the
following Distribution Date exceed Available Funds. Amounts on deposit in the
Reserve Account that are in excess of the Specified Reserve Balance will be
released to the Seller. The Certificate Insurer may, at its option and without
notice to, or the consent of, the Certificateholders, reduce the Specified
Reserve Balance.
Each Account will be maintained at all times in an Eligible Deposit Account.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Bank or (b) a segregated trust account with the corporate trust
department of a depository institution with corporate trust powers organized
under the laws of the United States of America or any state thereof or the
District of Columbia (or any United States branch or agency of a foreign bank)
and whose deposits are insured by the FDIC, provided that such institution must
have a net worth in excess of $50,000,000 and must have a rating of Baa3 or
higher from Moody's and a rating of BBB- or higher from S&P with respect to
long-term deposit obligations.
"Eligible Bank" means any depository institution (which shall initially be
the Trustee), organized under the laws of the United States of America or any
one of the states thereof or the District of Columbia (or any United States
branch or agency of a foreign bank), which is subject to supervision and
examination by federal or state banking authorities and which at all times (a)
has a net worth in excess of $50,000,000 and (b) has either (i) a rating of P-1
from Moody's and A-1+ from S&P with respect to short-term deposit obligations,
or (ii) if such institution has issued long-term unsecured debt obligations, a
rating of A2 or higher from Moody's and AA from S&P with respect to long-term
unsecured debt obligations.
Funds in the Accounts will be invested as provided in the Pooling Agreement
in Eligible Investments at the direction of the Servicer. "Eligible Investments"
are generally limited to investments acceptable to the Rating Agencies as being
consistent with the rating of the Certificates and acceptable to the Certificate
Insurer. Eligible Investments must mature not later than the Business Day before
the date on which the funds invested in such Eligible Investments are required
to be withdrawn from the Accounts. Any earnings (net of losses and investment
expenses) on amounts on deposit in the Collection Account will be deposited into
the Collection Account and shall be available for distribution to the
Certificateholders.
The Servicer may deduct from amounts otherwise payable to the Collection
Account with respect to a Collection Period an amount equal to amounts
previously deposited by the Servicer into the Collection Account but later
determined to have resulted from mistaken deposits.
INDEMNIFICATION
The Pooling Agreement will provide that the Servicer will defend, indemnify
and hold harmless the Trustee, the Trust, the Certificateholders, and the
Certificate Insurer against any and all costs, expenses, losses, damages, claims
and liabilities, including reasonable fees and expenses of counsel and expenses
of litigation, reasonably incurred, arising out of or resulting from the use,
repossession or operation by the Servicer or any affiliate thereof of any
Vehicles; PROVIDED, HOWEVER, that the Servicer will have no obligation to
indemnify any person or entity against any credit loss on any Receivable
serviced by the Servicer in accordance with the requirements of the Pooling
Agreement. The Servicer will also indemnify, defend and hold harmless the Trust,
the Trustee and its officers, directors, employees and agents, and the
Certificate Insurer from and against any loss, liability, expense, damage or
injury, including any judgement, award, settlement, reasonable attorneys' fees
and other costs or expenses incurred in connection with the defense of
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any action, proceeding or claim, to the extent such loss, liability, expense,
damage or injury arises out of, or is imposed upon such persons through, the
willful misfeasance, bad faith or negligence of the Servicer in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties as Servicer under the Pooling Agreement. The Seller's obligations, as
Servicer, to indemnify the Trust and the Certificateholders for acts or
omissions of the Seller as Servicer will survive the removal of the Servicer but
will not apply to any acts or omissions of a successor Servicer.
FLOW OF FUNDS
On or before the earlier of the eighth Business Day or the eleventh calendar
day of each month (each, a "Determination Date"), the Servicer will (x) instruct
the Trustee to withdraw from the Collection Account and deposit into the
Certificate Account the amount deposited to the Collection Account with respect
to the Receivables during or otherwise with respect to the related Collection
Period, including Liquidation Proceeds, and (y) deliver to the Trustee, the
Rating Agencies and the Certificate Insurer a certificate (the "Servicer's
Certificate") setting forth the information needed to make payments and other
distributions and transfers on the upcoming Distribution Date.
If, in preparing the Servicer's Certificate, the Servicer determines that
the Required Payments exceed Available Funds, the Servicer will calculate the
Insufficiency Amount and notify the Trustee and the Certificate Insurer thereof.
Pursuant to the Pooling Agreement, the Trustee will withdraw from the Reserve
Account and deposit in the Certificate Account an amount equal to the lesser of
(x) such Insufficiency Amount and (y) the amount then on deposit in the Reserve
Account. Unless the Certificate Insurer has otherwise caused the remaining
Insufficiency Amount (after any deposits from the Reserve Account) to be
deposited in the Certificate Account not later than 12:00 p.m. St. Paul,
Minnesota time on the Claim Date preceding any Distribution Date, the Trustee
will deliver on such Claim Date a completed Notice of Nonpayment to the
Certificate Insurer (with the Insufficiency Amount as of such Claim Date, the
amount withdrawn from the Reserve Account, the amount of the Insured Payment,
and any other data appropriately completed). The Certificate Insurer will then
pay such Insured Payment as of such Claim Date as provided under the terms of
the Certificate Insurance Policy.
On each Distribution Date, the Trustee is required to pay the entire amount
of money then on deposit in the Certificate Account, other than amounts
deposited into the Certificate Account in error and Liquidation Proceeds from
Receivables purchased by the Seller or the Servicer, as the case may be, in the
following order of priority:
(a) to itself, the Trustee fee;
(b) to the Certificate Insurer, an amount equal to any premium owed to
it for such Distribution Date;
(c) to the Certificateholders, pro rata, the Monthly Interest, including
any overdue Monthly Interest;
(d) to the Certificateholders, pro rata, the Monthly Principal,
including any overdue Monthly Principal;
(e) to the Certificate Insurer, by wire transfer of immediately
available funds to the account designated in writing by the Certificate
Insurer, the Reimbursement Amount, if any, then owed to the Certificate
Insurer;
(f) to the Reserve Account, by wire transfer of immediately available
funds, the lesser of (i) the difference, if any, between (x) the Specified
Reserve Balance as of such Distribution Date and (y) the amount on deposit
in the Reserve Account and (ii) the aggregate amount remaining in the
Certificate Account;
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(g) to the Servicer, the Trustee and the Certificate Insurer, certain
indemnification amounts to which they may be entitled; and
(h) to the Seller, the aggregate amount remaining in the Certificate
Account.
As used in this Prospectus, the following terms have the following meanings:
"Available Funds" means, with respect to a Distribution Date, for the
related Determination Date, any and all amounts then held in the Collection
Account and deposited thereto with respect to the Receivables during or
otherwise with respect to the related Collection Period, together with amounts
to be transferred from the Yield Maintenance Account to the Certificate Account
with respect to such Distribution Date, less the amount described in clauses (a)
and (b) above for such Distribution Date. "Available Funds" does not include
amounts, if any, on deposit in the Reserve Account or any amounts paid by the
Certificate Insurer under the Certificate Insurance Policy.
"Claim Date" means, with respect to a Distribution Date, the third Business
Day immediately preceding such Distribution Date.
"Defaulted Receivable" means, with respect to any Distribution Date, a
Receivable with respect to which the earlier of the following has occurred: (i)
the related Obligor is contractually delinquent for 180 days as of the end of
the most recently completed Collection Period or (ii) as to which the Servicer
has determined in accordance with its customary servicing practices that
eventual payment of the scheduled payments is unlikely.
"Insufficiency Amount" means, with respect to any Distribution Date, the
excess, if any, of (x) the Required Payments over (y) Available Funds.
"Late Payment Rate" means, for any Distribution Date, the rate of interest
as it is publicly announced by Citibank, N.A. at its principal office in New
York, New York as its "Prime Rate" (any change in such Prime Rate of interest to
be effective on the date such change is announced by Citibank, N.A.) plus 2%.
The Late Payment Rate shall be computed on the basis of a 360-day year
consisting of twelve 30-day months.
"Liquidated Receivable" means a Defaulted Receivable with respect to which
the Servicer has determined that eventual payment in full is unlikely or has
repossessed and disposed of the related Vehicle.
"Liquidation Proceeds" means, with respect to any Liquidated Receivable and
Collection Period, the monies collected with respect to such Liquidated
Receivable during such Collection Period from whatever source (other than claims
under the Certificate Insurance Policy or withdrawals from the Reserve Account
or the Yield Maintenance Account), net of the sum of (i) any amounts expended by
the Servicer for the account of the Obligor and (ii) any amount required by law
to be remitted to the Obligor.
"Monthly Interest" for any Distribution Date will equal one-twelfth of the
product of the Pass-Through Rate on the Certificate Principal Balance
immediately prior to such Distribution Date.
"Monthly Principal" for any Distribution Date will equal the excess of (x)
the aggregate unpaid principal balances of the Receivables on the last day of
the second preceding Collection Period (or, in the case of the first
Distribution Date, the Original Certificate Principal Balance) over (y) the
aggregate unpaid principal balances of the Receivables on the last day of the
preceding Collection Period; PROVIDED, HOWEVER, that Monthly Principal on the
Final Scheduled Distribution Date will equal the Certificate Principal Balance
on such date. For the purpose of determining Monthly Principal, the unpaid
principal balance of a Defaulted Receivable or a Purchased Receivable is deemed
to be zero on and after the last day of the Collection Period in which such
Receivable became a Defaulted Receivable or a Purchased Receivable. In no event
shall the Monthly Principal to be distributed exceed the Certificate Principal
Balance.
"Pool Balance" means, with respect to any date of determination, the
aggregate outstanding principal balance of all the Receivables as of the close
of business on such date.
"Purchased Receivable" means, with respect to a Distribution Date, a
Receivable purchased by the Seller or the Servicer on or prior to the
Determination Date immediately preceding such Distribution Date.
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"Recoveries" means all amounts collected as judgments against an Obligor or
others related to the failure of such Obligor to pay any required amounts under
the related Receivable or to return the Vehicles, in each case as reduced by any
out-of-pocket expenses reasonably incurred by the Servicer in enforcing such
Receivable or in liquidating such Vehicles.
"Reimbursement Amount" means, with respect to any Distribution Date, the
aggregate of unreimbursed Insured Payments paid by the Certificate Insurer under
the Certificate Insurance Policy as of such Distribution Date, plus the amount
of any unpaid premium owed to the Certificate Insurer, plus accrued interest on
each at the Late Payment Rate.
"Required Payments" means, with respect to any Distribution Date, the sum of
the Monthly Principal and Monthly Interest.
WITHHOLDING
The Trustee is required to comply with all federal income tax withholding
requirements respecting payments to Certificateholders of interest or original
issue discount with respect to the Certificates that the Trustee reasonably
believes are applicable under the Code. Foreign Owners will be subject to U.S.
income and withholding tax unless they provide certain certifications as
described under "Certain Federal Income Tax Consequences -- Foreign Owners." The
consent of neither the Certificateholders nor the Beneficial Owners will be
required for such withholding. In the event that the Trustee does withhold or
causes to be withheld any amount from interest or original issue discount
payments or advances thereof to any Certificateholders pursuant to federal
income tax withholding requirements, the Trustee is required to indicate the
amount withheld in its monthly report to such Certificateholders. If any
withholding or other tax is imposed by any jurisdiction, neither the
Certificateholders nor the Owners have any right to receive additional interest
or other amounts in consequence thereof.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will furnish or cause to be furnished
with each payment to Certificateholders, a statement (a "Monthly Report"), based
on information in the Servicer's Certificate, setting forth the following
information for such Distribution Date:
(a) the amount of the distribution allocable to principal, including any
overdue principal;
(b) the amount of the distribution allocable to interest, including any
overdue interest;
(c) the aggregate amount of fees and compensation received by the
Servicer and the Trustee for the Collection Period;
(d) the amount, if any, of Insured Payments with respect to such
Distribution Date;
(e) the amount, if any, withdrawn from the Reserve Account and the Yield
Maintenance Account with respect to such Distribution Date;
(f) the aggregate net losses on the Receivables for the related
Collection Period;
(g) the Pool Balance and the Pool Factor as of the end of the related
Collection Period;
(h) the aggregate principal balance of all Receivables which were
delinquent 30 days or more as of the last day of the related Collection
Period; and
(i) the Certificate Principal Balance as of such Distribution Date
(after giving effect to the distributions on such Distribution Date).
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EVIDENCE AS TO COMPLIANCE
The Pooling Agreement requires that on or before December 31 of each year,
beginning December 31, 1997, the Servicer will deliver an officers' certificate
to the Trustee and the Certificate Insurer stating (i) a review of the
activities of the Servicer during the preceding 12-month period ended September
30 of such year (or such longer or shorter period since the date of this
Agreement) and of its performance under this Agreement has been made under such
officers' supervision and (ii) to the best of such officers' knowledge, based on
such review, the Servicer has fulfilled all of its obligations under the Pooling
Agreement throughout such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officers and the nature and status thereof.
The Servicer shall cause a firm of independent certified public accountants
(who may also render other services to the Servicer) to deliver to the Trustee,
with a copy to the Rating Agencies and the Certificate Insurer and each holder
of the Certificates, within 90 days following the end of each fiscal year of the
Servicer, beginning with the Servicer's fiscal year ending September 30, 1997, a
written statement to the effect that such firm has read the monthly Servicer's
Certificates delivered pursuant to the Pooling Agreement with respect to each
Collection Period during such one-year or (longer or shorter) period and
reviewed the servicing of the Receivables by the Servicer and that such review
(1) included tests relating to automobile, light duty truck and van loans
serviced for others in accordance with the requirements of the Uniform Single
Attestation Program for Mortgage Bankers, to the extent the procedures in such
program are applicable to the servicing obligations set forth in the Pooling
Agreement, and (2) except as described in the report, disclosed no exceptions or
errors in the records relating to automobile, light duty truck and van loans
serviced for others that, in the firm's opinion, paragraph four of such program
requires such firm to report.
OTHER SERVICING PROCEDURES
The Servicer will covenant in the Pooling Agreement that: (A) the Vehicle
securing each Receivable will not be released from the security interest granted
by the Receivable in whole or in part, except as contemplated by the Pooling
Agreement; (B) the Servicer will not impair in any material respect the rights
of the Trustee or the Certificateholders in the Receivables, certain rights
under agreements with Dealers related to breach of representations and
warranties of Dealers with respect to the Receivables, or any physical damage or
other insurance policy; and (C) the Servicer will not increase or decrease the
amount of payments or the amount financed under a Receivable, or change the APR
of a Receivable; PROVIDED, HOWEVER, that the Servicer may extend any Receivable
for credit-related reasons that would be acceptable to the Servicer with respect
to retail installment sales contracts and installment loans serviced by it for
its own account in accordance with its customary standards. However, if the
cumulative extensions with respect to any Receivable shall cause the term of any
such Receivable to extend beyond the last day of the Collection Period
immediately preceding the Final Scheduled Distribution Date, then the Servicer
shall be obligated to purchase such Receivable as of the last day of the
Collection Period following the Collection Period in which the extension was
made (or, at the Servicer's election, as of the last day of the Collection
Period or earlier under certain circumstances).
In the event of a breach by the Servicer of any covenant described above
that materially and adversely affects a Receivable or the interests of the
Trust, the Certificateholders or the Certificate Insurer in such Receivable, the
Servicer, unless such breach has been cured by the last day of the Collection
Period following the Collection Period during which the Servicer became aware
of, or received written notice of, such breach, will be required to purchase as
of such day (or, at the Servicer's election, as of the last day of the
Collection Period during which such breach was discovered) the Receivable from
the Trustee for the Purchase Amount which shall be paid on the Determination
Date in such subsequent Collection Period or earlier under certain
circumstances. The purchase obligation will constitute the sole remedy available
to the Certificateholders or the Trustee against the Servicer for any such
uncured breach, except with respect to certain indemnities of the Servicer under
the Pooling Agreement related thereto. Payment of the Purchase Amounts is not
covered by the Certificate Insurance Policy.
The Pooling Agreement will also require the Servicer to charge off a
Receivable as a Defaulted Receivable in accordance with its customary standards
and to follow such of its normal collection practices
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and procedures as it deems necessary or advisable, and that are consistent with
the standard of care required by the Pooling Agreement, to realize upon any
Receivable. The Servicer may sell the Vehicle securing such Receivable at a
judicial sale or take any other action permitted by applicable law. See "Certain
Legal Aspects of the Receivables." The net proceeds of such realization will be
deposited into the Collection Account at the time and in the manner described
above.
CERTAIN MATTERS REGARDING THE SERVICER
The Pooling Agreement will provide that the 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 Trustee or a
successor servicer acceptable to the Certificate Insurer has assumed such
Servicer's servicing obligations and duties under the Pooling Agreement.
The Pooling Agreement will further provide that neither the Servicer nor any
of its respective directors, officers, employees, or agents shall be under any
liability to the Trust or the Certificateholders for taking any action or for
refraining from taking any action pursuant to the Pooling Agreement, or for
errors in judgment; PROVIDED, HOWEVER, that 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 Pooling 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 Pooling Agreement and
that, in its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in the Pooling Agreement, any entity into
which the Servicer may be merged or consolidated, or any entity resulting from
any merger or consolidation to which the Servicer is a party, or any entity
succeeding to 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 the Servicer, will be the successor to the Servicer
under the Pooling Agreement.
SERVICER DEFAULT
Any of the following events will constitute a "Servicer Default" under the
Pooling Agreement: (i) any failure by the Servicer to deliver to the Trustee on
or before the Determination Date the Servicer's Certificate or to deliver to the
Trustee for distribution to the Certificateholders any required payment, which
failure continues unremedied for more than three Business Days after written
notice from (x) the Trustee, the Holders of Certificates evidencing not less
than 25% of the Certificate Principal Balance and the Certificate Insurer or (y)
the Certificate Insurer is received by the Servicer; (ii) any failure by the
Servicer or the Seller duly to observe or perform in any material respect any
other covenant or agreement of the Servicer or the Seller, as the case may be,
in the Pooling Agreement, which failure materially and adversely affects the
rights of the Certificateholders and which continues unremedied for more than 30
days after the giving of written notice of such failure (x) to the Servicer or
the Seller, as the case may be, by the Trustee and by the Certificate Insurer,
(y) to the Servicer or the Seller, as the case may be, and to the Trustee by the
Certificateholders evidencing not less than 25% of the Certificate Principal
Balance and by the Certificate Insurer or (z) to the Servicer or the Seller, as
the case may be, by the Certificate Insurer; 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 and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations.
REMOVAL OF THE SERVICER
The Servicer can only be removed pursuant to a Servicer Default. If a
Servicer Default shall have occurred and be continuing, (x) with the consent of
the Certificate Insurer, either the Trustee or the Certificateholders evidencing
not less than 51% of the Certificate Principal Balance or (y) the Certificate
Insurer shall give written notice to the Servicer of the termination of all of
the rights and obligations of the Servicer under the Pooling Agreement. On and
after the time the Servicer receives a notice of termination, the Trustee shall
be the successor in all respects to the Servicer in its capacity as servicer of
the Receivables under the Pooling Agreement. The Trustee may, if it shall be
unwilling to so act, or shall, if it is unable to so
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act, appoint, or petition a court of competent jurisdiction for the appointment
of, a successor Servicer acceptable to the Certificate Insurer to act as
successor to the outgoing Servicer under the Pooling Agreement.
WAIVER OF PAST DEFAULTS
The Holders of Certificates evidencing at least 51% of the Certificate
Principal Balance (with the consent of the Certificate Insurer), or the
Certificate Insurer, may waive certain defaults by the Servicer in the
performance of its obligations under the Pooling Agreement. No such waiver shall
impair the Certificate Insurer's or the Certificateholders' rights with respect
to subsequent defaults.
OPTIONAL TERMINATION
The Pooling Agreement will provide that on any Distribution Date following
the Record Date on which the Pool Balance is 5% or less of the Original
Certificate Principal Balance, the Seller will have the option to acquire all
rights, title and interest in all, but not less than all, Receivables held in
the Trust, by paying into the Trust for retirement of the Certificates an amount
equal to the aggregate Purchase Amounts for the Receivables, together with any
Reimbursement Amounts then owed to the Certificate Insurer.
AMENDMENT
The Pooling Agreement may be amended by agreement of the Trustee, the Seller
and the Servicer at any time, without the consent of the Certificateholders but
with the consent of the Certificate Insurer, to cure any ambiguity or defect, to
correct or supplement any provisions therein, to correct any typographical error
or to add any other provisions with respect to matters or questions arising
thereunder, upon receipt of an opinion of counsel to the Trustee that such
amendment will not adversely affect in any material respect the interests of any
Certificateholder or the Certificate Insurer.
The Pooling Agreement may also be amended from time to time by the Trustee,
the Seller and the Servicer with the consent of the Certificate Insurer and
Holders of Certificates evidencing not less than 51% of the Certificate
Principal Balance for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling Agreement or of
modifying in any manner the rights of the Certificateholders; PROVIDED, HOWEVER,
that no such amendment shall (a) increase or reduce in any manner the amount of,
or accelerate or delay the timing of, collections of payments on the Receivables
or distributions which are required to be made on any Certificate without the
consent of the Holder of such Certificate or (b) reduce the aforesaid percentage
of Certificateholders required to consent to any amendment, without unanimous
consent of the Certificateholders.
The Trustee is required under the Pooling Agreement to furnish
Certificateholders, the Certificate Insurer and the Rating Agencies with written
notice of the substance of any such amendment to the Pooling Agreement promptly
upon execution of such amendment.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of the Pooling Agreement, the Certificates (other than the authentication
thereof) or of any Receivable or related document and will not be accountable
for the use or application by the Seller of any funds paid to the Seller in
consideration of the sale of the Certificates. If no Servicing Default has
occurred, then the Trustee will be required to perform only those duties
specifically required of it under the Pooling Agreement. However, upon receipt
of the various resolutions, certificates, statement, opinions, reports,
documents, orders or other instruments required to be furnished to it, the
Trustee will be required to examine them to determine whether they conform as to
form to the requirements of the Pooling Agreement.
No recourse is available based on any provision of the Pooling Agreement,
the Certificates or any Receivable or assignment thereof against First Bank
National Association, in its individual capacity, and First Bank National
Association shall not have any personal obligation, liability or duty whatsoever
to any Certificateholder or any other person with respect to any such claim and
such claim shall be asserted solely against the Trust Property or any
indemnitor, except for such liability as is determined to have resulted from the
Trustee's own negligence or willful misconduct. No Certificateholder will have
any right under the
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Pooling Agreement to institute any proceeding with respect to the Pooling
Agreement, unless such Certificateholder previously received the consent of the
Certificate Insurer and has given to the Trustee written notice of default and
further, unless the holders of Certificates evidencing not less than 25% of the
Certificate Principal Balance have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity and the Trustee for 30 days has neglected or
refused to institute any such proceedings.
The Trustee may resign, subject to the conditions set forth below, at any
time upon written notice to the Servicer, in which event the Servicer, with the
consent of the Certificate Insurer, will be obligated to appoint a successor
Trustee. If no successor Trustee shall have been so appointed and have accepted
such appointment within 30 days after the giving of such notice of resignation,
the resigning Trustee may petition a court of competent jurisdiction for the
appointment of a successor Trustee. Any successor Trustee shall meet the
financial and other standards for qualifying as a successor Trustee under the
Pooling Agreement. The Servicer may also remove the Trustee if the Trustee
ceases to be eligible to continue as such under the Pooling Agreement, or is
legally unable to act, or if the Trustee is adjudicated to be insolvent. In such
circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective without the written consent of the
Certificate Insurer and until acceptance of the appointment by the successor
Trustee.
The Pooling Agreement provides that the Trustee shall prepare or shall cause
to be prepared any tax returns required to be filed by the Trust and shall
promptly sign and file such returns. In addition, the Pooling Agreement provides
that in no event shall the Trustee be liable for any liabilities, costs or
expenses of the Trust or the Certificateholders under any tax law, including
without limitation federal, state or local income or excise taxes or any other
tax imposed on or measured by income (or any interest or penalty with respect
thereto or arising from a failure to comply therewith).
The Servicer will indemnify, defend and hold harmless the Trustee, its
officers, directors, employees and agents and the Certificate Insurer from and
against any loss, liability or expense incurred without negligence or bad faith
on the part of the Trustee or its officers, directors, employees or agents and
arising out of or in connection with the acceptance or administration by the
Trustee of the trust created pursuant to the Pooling Agreement, as applicable,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of the Trustee's
powers or duties under the Pooling Agreement.
THE CERTIFICATE INSURER
The Certificate Insurer, formerly known as Municipal Bond Investors
Assurance Corporation, 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 Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in 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 Certificate Insurer has one European branch in the
Republic of France.
All information regarding the Certificate Insurer, a wholly owned subsidiary
of MBIA Inc., including the financial statements of the Certificate Insurer for
the year ended December 31, 1995, 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, 1995, is hereby incorporated by reference into
this Prospectus 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 to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
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<PAGE>
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
-----------------------------------
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets......................... $ 3,814 $ 3,989
Liabilities............................. 2,540 2,672
Capital and Surplus..................... 1,274 1,317
</TABLE>
<TABLE>
<CAPTION>
GAAP
-----------------------------------
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets.................................. $ 4,463 $ 4,548
Liabilities............................. 1,937 2,006
Shareholder's Equity.................... 2,526 2,542
</TABLE>
Audited financial statements of the Certificate Insurer as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 are included herein as Appendix A. Unaudited financial statements of the
Certificate Insurer for the three-month period ended March 31, 1996 are included
herein as Appendix B. Such financial statements have been prepared on the basis
of generally accepted accounting principles. Copies of the Certificate Insurer's
1995 year-end audited financial statements prepared in accordance with statutory
accounting practices are available from the Certificate Insurer. The address of
the Certificate Insurer is 113 King Street, Armonk, New York 10504.
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from the
Certificate Insurer or the Securities and Exchange Commission. The address of
the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of the
information regarding the Certificate Insurance Policy and Certificate Insurer
set forth under the headings "THE CERTIFICATE INSURER" and "THE CERTIFICATE
INSURANCE POLICY" and in Appendices A and B.
Moody's rates the claims paying ability of the Certificate Insurer "Aaa."
S&P rates the claims paying ability of the Certificate Insurer "AAA."
Fitch rates the claims paying ability of the Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate 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 Certificates,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the Certificates. The
Certificate Insurer does not guaranty the market price of the Certificates nor
does it guaranty that the ratings on the Certificates will not be reversed or
withdrawn.
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THE CERTIFICATE INSURANCE POLICY
The following information has been supplied by MBIA Insurance Corporation
(the "Certificate Insurer") for inclusion in this Prospectus.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee, or its
successor, as trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policy with respect to a particular
Insured Payment shall be discharged to the extent funds equal to the applicable
Insured Payment are received by the Trustee, whether or not such funds are
properly applied by the Trustee. Insured Payments shall be made only at the time
set forth in the Certificate Insurance Policy and no accelerated Insurance
Payments shall be made regardless of any acceleration of the Certificates,
unless such acceleration is at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust or
the Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Certificate 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 (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Owner relating to or arising under the Certificates against the debtor which
made such preference payment or otherwise with respect to such preference
payment and (iv) appropriate instruments to effect the appointment of the
Certificate Insurer as agent for such Owner in any legal proceeding related to
such preference payment, such instruments being in a form satisfactory to the
Certificate 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 Certificates to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of the Distribution Date on which the related Deficiency Amount is due or
the third 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
Certificate Insurer or any successor fiscal agent appointed by the Certificate
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 under the Certificate Insurance
Policy it shall be deemed not to have been received by the Fiscal Agent for
purposes of this paragraph, and the Certificate Insurer or the Fiscal Agent, as
the case may be, shall promptly so advise the Trustee and the Trustee may submit
an amended Notice.
Insured Payments due under the Certificate Insurance Policy unless otherwise
stated therein will be disbursed by the Fiscal Agent to the 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 Trustee for the payment of such Insured Payment
and legally available therefor.
The Fiscal Agent is the agent of the Certificate 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 Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policy.
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<PAGE>
As used in the Certificate Insurance Policy, the following terms shall have
the following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement dated as of June 1,
1996 among Chevy Chase Bank, F.S.B., as Seller and as Servicer, and the Trustee,
as trustee, without regard to any amendment or supplement thereto, unless such
amendment or modification has been approved in writing by the Certificate
Insurer.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City, Chevy Chase, Maryland or in the
city in which the Corporate Trust Office of the Trustee under the Agreement or
the Certificate Insurer is located are authorized or obligated by law or
executive order to close.
"DEFICIENCY AMOUNT" means the excess, if any, of Required Payments over Net
Available Distribution Amount for such Distribution Date.
"INSURED PAYMENT" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Certificate Insurance Policy, the original of which is subsequently delivered by
registered or certified mail, from the Trustee specifying the Insured Payment
which shall be due and owing on the applicable Distribution Date.
"OWNER" means each Holder (as defined in the Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the applicable
Certificates to payment thereunder.
"PREFERENCE AMOUNT" means any amount previously distributed to an Owner on
the Certificates 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 Certificate Insurance Policy and not otherwise
defined in the Certificate Insurance Policy shall have the respective meanings
set forth in the Agreement as of the date of execution of the Certificate
Insurance Policy, without giving effect to any subsequent amendment or
modification to the Agreement, unless such amendment or modification has been
approved in writing by the Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of process on
the Fiscal Agent of the Certificate Insurer may be made at the address listed
below for the Fiscal Agent of the Certificate Insurer or such other address as
the Certificate Insurer shall specify in writing to the 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 Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to maturity of the
Certificates.
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<PAGE>
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTEREST IN VEHICLES
Retail installment sale contracts and installment loans such as the
Receivables evidence the credit sale of automobiles, light duty trucks and vans
by dealers to obligors; the contracts and the installment loan and security
agreements also constitute personal property security agreements and include
grants of security interests in the vehicles under the UCC. Perfection of
security interests in the vehicles is generally governed by the motor vehicle
registration laws of the state in which the vehicle is located. In Maryland,
Virginia and North Carolina, the jurisdictions in which most of the Vehicles are
located, a security interest in a vehicle is perfected by notation of the
secured party's lien on the vehicle's certificate of title and, in Virginia and
North Carolina, by delivery of the certificate of title to the secured party.
Each Receivable prohibits the sale or transfer of the Vehicle without the
consent of the applicable Lender.
Pursuant to the Pooling Agreement, the Seller will assign its security
interests in the Vehicles to the Trustee. However, because of the administrative
burden and expense, neither the Lender nor the Trustee will amend any
certificate of title to identify the Trust as the new secured party on the
certificates of title relating to the Vehicles. Also, the Bank, as Servicer,
will continue to hold any certificates of title relating to the Vehicles in its
possession as custodian for the Trustee pursuant to the Agreement. See "The
Certificates -- Conveyance of Receivables."
Under the laws of Virginia and North Carolina, such an assignment of
security interests may not be, and under the laws of Maryland will not be,
sufficient to convey to the Trustee perfected security interests in the
Vehicles.
Because the Trust is not identified as the secured party on the certificate
of title, the security interest of the Trust in the vehicle could be defeated in
certain circumstances. In the absence of fraud or forgery by the vehicle owner
or the Bank or CFC or administrative error by state or local agencies or the
Bank, the notation of the lien of the Bank (or of CFC with respect to the CFC
Receivables) on the certificates should be sufficient to protect the Trust
against the right of subsequent purchasers of a Vehicle or subsequent lenders
who take a security interest in a Vehicle. If there are any Vehicles as to which
the Bank or CFC failed to obtain a perfected security interest, its security
interest would be subordinate to, among others, subsequent purchasers of the
Vehicles and holders of perfected security interests. Such a failure, however,
would constitute a breach of the Bank's warranties under the Pooling Agreement
and would create an obligation of the Bank to repurchase the related Receivable
unless the breach is cured. See "The Certificates -- Conveyance of Receivables."
Under the laws of most states, the perfected security interest in a vehicle
continues for four months after a vehicle is moved to a state other than the
state which issued the certificate of title and thereafter until the vehicle
owner re-registers the vehicle in the new state. A majority of states require
surrender of a certificate of title to re-register a vehicle; accordingly, a
secured party must surrender possession if it holds the certificate of title to
the vehicle. Thus, the secured party would 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.
In the ordinary course of servicing receivables, the Bank takes 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, a
majority of states require surrender of a certificate of title to issue a
certificate of title in the name of the purchaser, in such states the Bank must
surrender possession of the certificate of title, if it holds the certificate of
title, and accordingly will have an opportunity to require satisfaction of the
related Receivable before release of the lien. Under the Pooling Agreement, the
Servicer is obligated to take appropriate steps, at its own expense, to maintain
perfection of security interests in the Vehicles.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for certain unpaid taxes take priority over even a perfected
security interest in a Vehicle. The Code also grants priority
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<PAGE>
to certain federal tax liens over the lien of a secured party. The laws of
certain states and federal law permit the confiscation of motor vehicles 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 motor
vehicle.
The Seller will represent that, as of the Closing Date, each security
interest in a Vehicle is or will be prior to all other present liens (other than
tax liens and liens that arise by operation of law) upon and security interests
in such Vehicle. However, liens for repairs or taxes, or the confiscation of a
Vehicle, could arise or occur at any time during the term of a Receivable. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises or confiscation occurs.
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.
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 below some requisite 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
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<PAGE>
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 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
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 specified in the Pooling Agreement.
Any loss relating to any such claim, to the extent not covered by a
withdrawal from the Reserve Account or from a payment under the Certificate
Insurance Policy could result in losses to the Certificateholders. 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
would constitute a breach of a representation and warranty under the Pooling
Agreement and would create an obligation of the Seller to repurchase the related
Receivable unless the breach were cured.
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<PAGE>
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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences of the purchase, ownership and disposition of the Certificates.
This summary is based upon laws, regulations, rulings and decisions currently in
effect, all of which are subject to change. The discussion does not deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. In addition, this summary is generally
limited to investors who are Beneficial Owners of the Certificates holding the
Certificates as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code (the "Code").
Investors should consult their own tax advisers to determine the federal, state,
local and other tax consequences of the purchase, ownership and disposition of
the Certificates. Prospective investors should note that no rulings have been or
will be sought from the Service with respect to any of the federal income tax
consequences discussed below, and no assurance can be given that the Service
will not take contrary positions.
TAX STATUS OF THE TRUST
In the opinion of Shaw, Pittman, Potts & Trowbridge, counsel to the Seller,
the Trust will be classified as a grantor trust and not as an association
taxable as a corporation for federal income tax purposes. Each Beneficial Owner
will be treated as owning its pro rata percentage interest in the principal of,
and interest (at the Pass-Through Rate) payable on, each Receivable.
TAXATION OF BENEFICIAL OWNERS
Subject to the discussion below under the heading "Discount and Premium,"
each Beneficial Owner is required to include for federal income tax purposes its
share of the gross income of the Trust, including interest and certain other
charges accrued on the Receivables and any gain upon collection or disposition
of the Receivables. Each Beneficial Owner is entitled to deduct its share of the
amount used to pay expenses of the Trust to the extent described below. Any
amounts received by a Certificateholder from the Reserve Account or the Yield
Maintenance Account will be treated for federal income tax purposes as having
the same characteristics as the payments they replace.
Each Beneficial Owner should report its share of the income of the Trust
under its usual method of accounting. Accordingly, interest is includible in a
Beneficial Owner's gross income when it accrues on the Receivables, or in the
case of Beneficial Owners who are cash basis taxpayers, when received by the
Servicer on behalf of the Beneficial Owners. Because (i) interest accrues on the
Receivables over differing monthly periods and is paid in arrears and (ii)
interest collected on a Receivable generally is paid to Beneficial Owners in the
following month, the amount of interest accruing to a Beneficial Owner during
any calendar month will not equal the interest distributed in that month.
Discount on a Receivable would be includible in income as described below.
Each Beneficial Owner will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust as provided in Section 162 or 212 of the Code. If
a Beneficial Owner is an individual, estate or trust, the deduction for such
Beneficial Owner's share of such fees will be allowed only to the extent that
all of such Beneficial Owner's miscellaneous itemized deductions, including such
Beneficial Owner's share of such fees, exceed 2% of such Beneficial Owner's
adjusted gross income.
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DISCOUNT AND PREMIUM
A Beneficial Owner that purchases a Certificate at a discount (I.E., for an
amount less than its face amount) must include such discount in income over the
life of the Certificates. Distinctions in the Code between original issue
discount and market discount generally are not relevant in the case of the
Certificates.
The rate at which discount must be included in income depends on whether it
is greater or less than a statutorily defined DE MINIMIS amount. Although not
entirely certain, it would appear that the DE MINIMIS computation can be done
for each Certificate overall and need not be done on a Receivable-by-Receivable
basis. Generally, discount is treated as DE MINIMIS if it is less than 1/4 of
one percent of the principal amount of the Certificate times the number of full
years remaining to the maturity date of the Certificate. It is not clear whether
the maturity date for this purpose is the final maturity date or the weighted
average maturity date (and whether expected prepayments are taken into account).
If the discount is DE MINIMIS (which should be the case for original
purchasers of Certificates), it would appear that such discount is includible in
income as principal payments are received on the Receivables and in proportion
to such principal payments. Although not entirely clear, the income attributable
to DE MINIMIS discount should be treated as capital gain.
If the discount is more than a DE MINIMIS amount, such discount must be
included in income as it accrues on the basis of the yield to maturity of the
Certificate to the particular purchaser. It is not clear whether a prepayment
assumption must be taken into account in computing this yield to maturity and
how actual prepayments will affect accruals of discount. Unless the Certificates
are originally issued with more than a DE MINIMIS amount of discount, the
Trustee will not be providing any information relating to the computation of the
accruals of discount by subsequent purchasers of Certificates.
In the event that a Receivable is treated as purchased at a premium (I.E.,
the purchase price thereof exceeds the portion of the remaining principal
balance of the Receivables allocable to the Beneficial Owners), such premium
will be amortizable by a Beneficial Owner as an offset to interest income (with
a corresponding reduction in the Beneficial Owner's basis) under a constant
yield method over the term of the Receivable if an election under Section 171 of
the Code is made (or was previously in effect) with respect to the Certificates.
Any such election will also apply to debt instruments held by the taxpayer
during the year in which the election is made and to all debt instruments
acquired thereafter.
SALE OF A CERTIFICATE
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale and the Beneficial Owner's
adjusted basis in the Receivables and any other assets held by the Trust. Such
gain or loss will be treated as capital gain or loss. A Beneficial Owner's
adjusted basis will equal the Beneficial Owner's cost for the Certificate,
increased by any discount previously included in income, and decreased by any
payments received that are attributable to accrued discount by any offset
previously allowed for accrued premium and by the amount of principal payments
previously received.
Except as provided in the discussion of backup withholding, a non-U.S.
Person (other than a nonresident alien individual present in the United States
for a total of 183 days or more during his or her taxable year) will not be
subject to federal income tax, and no withholding of such tax will be required,
with respect to any gain realized upon the disposition or retirement of a
Certificate.
FOREIGN OWNERS
Interest attributable to Receivables which is received by a person that is
not a U.S. Person (a "Foreign Owner") (other than a foreign bank and certain
other persons) generally will not be subject to the normal 30% withholding tax
(or lower treaty rate) imposed with respect to such payments, provided that such
Foreign Owner is not engaged in a trade or business in the United States and
that such Foreign Owner fulfills certain certification requirements. Under such
requirements, the holder must certify, under penalties of perjury, that it is
not a "U.S. Person" and provide its name and address. The Foreign Owner must
inform the Trustee (or the last intermediary in the chain between the Trustee
and the Foreign Owner) of any change in the information in the certification
within 30 days of such change. For this purpose, "U.S. Person" means a citizen
or resident of the United States, a corporation, partnership, or other entity
created or organized in or
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under the laws of the United States or any political subdivision thereof, or an
estate or trust that is subject to federal income tax, regardless of the source
of its income. Payments of interest on a Certificate that are effectively
connected with the conduct of a trade or business in the United States by a
Foreign Owner who is a non-U.S. Person, although exempt from the withholding
tax, may be subject to graduated federal income tax as if such amounts were
earned by a U.S. Person.
BACKUP WITHHOLDING
Backup withholding of federal income tax at a rate of 31% may apply to
payments made in respect of the Certificates, as well as payments of proceeds
from the sale of Certificates, to Beneficial Owners that are not "exempt
recipients" and that fail to provide certain identifying information (such as
the taxpayer identification number of the Beneficial Owner) to the Trustee or
its agent in the manner required. Individuals generally are not exempt
recipients, whereas corporations and certain other entities generally are exempt
recipients. Payments made in respect of the Certificates must be reported to the
Service, unless the recipient is an exempt recipient or establishes an
exemption. Any amounts withheld under the backup withholding rules from a
payment to a person would be allowed as a refund or a credit against such
person's federal income tax, provided that the required information is furnished
to the Service. Furthermore, certain penalties may be imposed by the Service on
a Beneficial Owner who is required to supply information but who does not do so
in the proper manner.
In addition, if a Certificate is sold before the stated maturity to (or
through) a "broker," the broker may be required to withhold 31% of the entire
sale price, unless either (i) the broker determines that the seller is a
corporation or other exempt recipient or (ii) the seller provides, in the
required manner, certain identifying information and, in the case of a non-U.S.
Person, certifies that such seller is a non-U.S. Person (and certain other
conditions are met). Such a sale also must be reported by the broker to the
Service, unless either (i) the broker determines that the seller is an exempt
recipient or (ii) the seller certifies its non-U.S. status (and certain other
conditions are met).
STATE, LOCAL AND FOREIGN TAXATION
The discussion above does not address the tax consequences of purchase,
ownership or disposition of the Certificates under any state, local or foreign
tax law. Investors should consult their own tax advisers regarding state, local
and foreign tax consequences.
THE FEDERAL INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN INVESTOR'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit pension, profit
sharing, or other employee benefit plans, individual retirement accounts or
annuities, employee annuity plans and Keogh plans subject to ERISA or Section
4975 of the Code (collectively referred to as "Benefit Plans") from engaging in
certain transactions involving "plan assets" with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the plan. ERISA also imposes certain duties on persons who are fiduciaries of
plans subject to ERISA. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a plan is
considered to be a fiduciary of such plan (subject to certain exceptions not
here relevant). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code for fiduciaries,
"parties in interest" and "disqualified persons."
Unless a statutory, regulatory or administrative exemption is available, a
violation of the prohibited transaction rules could occur if any Certificates
were to be acquired by a Benefit Plan or with "plan assets" of
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any Benefit Plan, and if any of the Transferor, the Trustee, the Underwriters or
any of their affiliates were a "party in interest" or a "disqualified person"
with respect to such Benefit Plan. The Seller, the Trustee and the Underwriter
are likely to be "parties in interest" or "disqualified persons" with respect to
many Benefit Plans.
Pursuant to the Final Regulation issued by the U.S. Department of Labor
("DOL") concerning the definition of what constitutes the "plan assets" of a
Benefit Plan, the assets and properties of certain entities in which a Benefit
Plan makes an equity investment could be deemed to be assets of the Benefit Plan
unless certain exceptions under the Final Regulation apply or an exemption is
available. There can be no assurance that any of the exceptions provided in the
Final Regulation will apply. If the underlying assets of the Trust or the Yield
Maintenance Account were deemed to be plan assets by reason of the acquisition
of Certificates by Benefit Plans, the Seller, the Servicer the Trustee and other
persons who provide services with respect to the Trust might be subject to the
fiduciary responsibility provisions of Title I of ERISA and the operations of
the Trust including those operations related to the Yield Maintenance Account
could result in prohibited transactions.
The DOL has granted to each of J.P. Morgan Securities Inc., CS First Boston
and Smith Barney Inc. an administrative exemption (Prohibited Transactions
Exemptions 90-23, 91-23 and 89-90), (collectively, the "Exemption") which
generally exempts from the application of the prohibited transaction provisions
of Section 406(a), Section 406(b)(1), Section 406(b)(2) and Section 407(a) of
ERISA and the excise taxes imposed pursuant to Sections 4975(a) and (b) of the
Code, certain transactions relating to the servicing and operation of asset
pools, including pools of motor vehicle installment obligations such as the
Receivables and the purchase, sale and holding of asset-backed pass-through
certificates, including pass-through certificates evidencing interests in
certain receivables, loans and other obligations, such as the Certificates,
provided that certain conditions set forth in the Exemption are satisfied. The
Seller believes that the Exemption will apply to the acquisition and holding of
Certificates by Benefit Plans and that all conditions of the Exemption other
than those within the control of the investors have been or will be met. The
Exemption sets forth the following six general conditions which must be
satisfied for a transaction to be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Benefit Plan is on terms
(including the price for the certificates) that are at least as favorable to
the Benefit Plan as they would be in an arm's length transaction with an
unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Benefit Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust;
(3) The Certificates acquired by the Benefit Plan have received a rating
at the time of such acquisition that is one of the three highest general
rating categories from either S&P, Moody's, Fitch or Duff & Phelps Credit
Rating Co.
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Certificates represents not more
than reasonable compensation for their services. The sum of all payments
made and retained by the Seller pursuant to the assignment of the
Receivables to the Trust represents not more than the fair market value of
such Receivables. The sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for such person's
services under the Pooling Agreement and reimbursement of such person's
reasonable expenses in connection therewith; and
(6) The Benefit Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act.
If the general conditions of the Exemption are satisfied, the Exemption
provides an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by
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Sections 4975(c)(1)(A) through (D) of the Code) in connection with the direct or
indirect sale, exchange or transfer of Certificates by Benefit Plans in the
initial issue of Certificates, the holding of Certificates by Benefit Plans or
the direct or indirect acquisition or disposition in the secondary market of
Certificates by Benefit Plans. However, no exemption is provided from the
restrictions of Section 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Certificates, an
Excluded Plan is a Benefit Plan sponsored by (1) an Underwriter, (2) the
Certificate Insurer, (3) the Issuer, (4) the Seller, (5) the Servicer, (6) the
Trustee, (7) any Obligor with respect to Receivables constituting more than 5%
of the aggregate unamortized principal balance of the Receivables as of the date
of initial issuance and (8) any affiliate or successor of a person described in
(1) to (7) above (the "Restricted Group").
If the specific conditions of Section I.B. of the Exemption are also
satisfied, the Exemption provides an exemption from the restrictions imposed by
Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in connection
with (1) the direct or indirect sale, exchange or transfer of Certificates in
the initial issuance of Certificates to a Benefit Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of plan assets in Certificates is (a) an Obligor with respect to 5%
or less of the fair market value of the Receivables or (b) an affiliate of such
a person, (2) the direct or indirect acquisition or disposition in the secondary
market of Certificates by Benefit Plans and (3) the holding of Certificates by
Benefit Plans. Among the specific conditions that must be satisfied is the
condition that the Benefit Plan acquires no more than 25% of the Certificates
and immediately after the acquisition of the Certificates no more than 25% of
the assets of the Benefit Plan with respect to which the person is a fiduciary
are invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity. As of the Cut-off Date, the Seller
believes no Obligor with respect to Receivables included in the Trust
constitutes more than 0.017% of the aggregate unamortized principal balance of
the Trust.
If the specific conditions of Section I.C. of the Exemption are also
satisfied, the Exemption provides an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
Trust.
Section I.D of the Exemption provides an exemption from the restrictions
imposed by Section 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a "party in interest" or a "disqualified person" with
respect to an investing Benefit Plan by virtue of providing services to the
Benefit Plan (or by virtue of having certain specified relationships to such a
person) solely as a result of such Benefit Plan's ownership of Certificates.
Assuming compliance with the otherwise applicable conditions of the
Exemption, the Seller believes that the specific exemptions provided by Section
I.C. of the Exemption are also available with respect to transactions
contemplated by the Yield Maintenance Payments, which transactions are provided
for in the Pooling Agreement. Before purchasing a Certificate based on the
Exemption, however, a fiduciary of a Benefit Plan should itself confirm (1) that
such Certificate constitutes a "certificate" for purposes of the Exemption and
(2) that the specific conditions and other requirements set forth in the
Exemption would be satisfied.
Prospective Benefit Plan investors in the Certificates should consult with
their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Exemption, and the potential consequences in their specific
circumstances, prior to making an investment in the Certificates. Moreover, each
Benefit Plan fiduciary should determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Certificates is appropriate for the Benefit Plan, taking into account the
overall investment policy of the Benefit Plan and the composition of the Benefit
Plan's investment portfolio.
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RATINGS
It is a condition to the issuance of the Certificates that they be rated in
the highest rating category by at least one of the Rating Agencies. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time. The ratings of Rating Agencies
assigned to Certificates addresses the likelihood of the receipt by the
Certificateholders of all distributions to which such Certificateholders are
entitled. The ratings do not address the timely or ultimate payment of any
withholding tax imposed. The ratings assigned to Certificates do not represent
any assessment of the likelihood that principal prepayments might differ from
those originally anticipated or address the possibility that Certificateholders
might suffer a lower than anticipated yield.
UNDERWRITING
Under the terms and subject to the conditions set forth in an Underwriting
Agreement dated June 18, 1996 (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters") have agreed to purchase from the Seller the
following respective principal amounts of the Certificates:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITERS CERTIFICATES
- --------------------------------------------------------------------------- -----------------
<S> <C>
J.P. Morgan Securities Inc................................................. $ 75,899,669.92
CS First Boston............................................................ $ 75,899,000.00
Smith Barney Inc........................................................... $ 75,899,000.00
-----------------
Total................................................................ $ 227,697,669.92
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the Certificates, if any are purchased.
The Seller has been advised by the Underwriters that the Underwriters
propose to offer the Certificates to the public initially at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of .150% of the principal amount per Certificate,
and the Underwriters and such dealers may allow a discount of .125% of such
principal amount per Certificate on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the Underwriters.
The Certificates are a new issue of securities with no established trading
market. The Underwriters have advised the Seller that they intend to act as
market makers for the Certificates. However, the Underwriters are not obligated
to do so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of any trading market for the
Certificates.
The Seller has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
Each Underwriter has represented and agreed that (a) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
and the Public Offers of Securities Regulations 1995 (the "Regulations") with
respect to anything done by it in relation to the Series 1996-1 Certificates in,
from or otherwise involving the United Kingdom; (b) it has only issued or passed
on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the Series 1996-1
Certificates if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom such document may otherwise lawfully be issued or passed
on; and (c) it has not offered or sold and, during the period of six months from
the date hereof, will not offer or sell any Series 1996-1 Certificates to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing, or
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<PAGE>
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Regulations.
In the ordinary course of their respective businesses, the Underwriters and
their respective affiliates have engaged and may in the future engage in
commercial banking and investment banking transactions with Chevy Chase Bank,
F.S.B. and its affiliates.
REPORT OF EXPERTS
The financial statements of the Certificate Insurer, MBIA Insurance
Corporation (formerly known as Municipal Bond Investors Assurance Corporation),
included in this Prospectus in Appendix A, as of December 31, 1994 and 1995, and
for the years ended December 31, 1995, 1994 and 1993 have been included in
reliance upon the report of Coopers & Lybrand L.L.P., independent certified
public accountants, appearing in Appendix A, and upon the authority of such firm
as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller and the Underwriters by Shaw,
Pittman, Potts & Trowbridge, Washington, D.C.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
asset-backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN A DTC SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
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excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depository to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depository, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depository, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of CEDEL Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). In the event that the CEDEL Participant or Euroclear Participant have a
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
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<PAGE>
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on debt issued in registered form
by U.S. Persons (as defined below), unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A Non-U.S. Person (as defined below), including a corporation or bank
that is a Non-U.S. Person, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States). Form 4224 may also be filed by the
Certificate Owner's Agent.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Owners or their agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. Owners of Global Securities
or, in the case of a Form 1001 or a Form 4224 filer, their agent, file by
submitting the appropriate form to the person through whom they hold (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one taxable year of the Owner.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof or (iii) an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
49
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Accounts........................................................................... 26
Agreement.......................................................................... 36
APR................................................................................ 7
Available Funds.................................................................... 28
Balloon Receivable................................................................. 14
Bank............................................................................... 1, 4, 13
Bank Receivables................................................................... 13
Beneficial Owners.................................................................. 5
Benefit Plans...................................................................... 42
BIF................................................................................ 17
Book-Entry Certificates............................................................ 20
Business Day....................................................................... 5, 36
Cede............................................................................... 2
CEDEL.............................................................................. 5
CEDEL Participants................................................................. 22
Certificate Account................................................................ 6
Certificate Insurance Policy....................................................... 2, 7
Certificate Insurer................................................................ 2, 35
Certificate Principal Balance...................................................... 5
Certificateholder.................................................................. 2
Certificates....................................................................... 1, 4
CFC................................................................................ 5, 13
CFC Receivables.................................................................... 5, 13
Citibank........................................................................... 20
Claim Date......................................................................... 28
Code............................................................................... 40
Collection Account................................................................. 6
Collection Period.................................................................. 5
Commission......................................................................... 2
Cooperative........................................................................ 22
Cut-Off Date....................................................................... 1
Dealers............................................................................ 13
Defaulted Receivable............................................................... 28
Deficiency Amount.................................................................. 36
Definitive Certificates............................................................ 23
Determination Date................................................................. 27
Distribution Date.................................................................. 5
DOL................................................................................ 43
DTC................................................................................ 2
DTC Participants................................................................... 22
Eligible Bank...................................................................... 26
Eligible Deposit Account........................................................... 26
Eligible Investments............................................................... 26
ERISA.............................................................................. 9
Euroclear.......................................................................... 5
Euroclear Operator................................................................. 22
Euroclear Participants............................................................. 22
European Depositaries.............................................................. 20
Excess Interest.................................................................... 6
Exchange Act....................................................................... 2
Exemption.......................................................................... 43
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
FDIC............................................................................... 17
Final Scheduled Distribution Date.................................................. 1
Financial Intermediary............................................................. 21
FIRREA............................................................................. 17
Fiscal Agent....................................................................... 35
Fitch.............................................................................. 9
Foreign Owner...................................................................... 41
FTC Rule........................................................................... 39
GAAP............................................................................... 34
Global Securities.................................................................. 47
Holders............................................................................ 23
Indirect DTC Participants.......................................................... 22
Initial Yield Maintenance Amount................................................... 7
Insolvency Event................................................................... 31
Insufficiency Amount............................................................... 28
Insured Payment.................................................................... 7, 36
Issuer............................................................................. 4
Late Payment Rate.................................................................. 28
Lenders............................................................................ 13
Liquidated Receivable.............................................................. 28
Liquidation Proceeds............................................................... 28
Monthly Interest................................................................... 28
Monthly Principal.................................................................. 28
Monthly Report..................................................................... 29
Moody's............................................................................ 9
Non-U.S. Person.................................................................... 49
Notice............................................................................. 36
Obligor............................................................................ 5
Optional Termination............................................................... 8
Original Certificate Principal Balance............................................. 5
OTS................................................................................ 17
Owner.............................................................................. 36
Participants....................................................................... 20
Pass-Through Rate.................................................................. 5
Pool Balance....................................................................... 28
Pool Factor........................................................................ 13
Pooling Agreement.................................................................. 1
Preference Amount.................................................................. 36
Purchase Amount.................................................................... 25
Purchased Receivable............................................................... 28
Rating Agencies.................................................................... 9
Receivable File.................................................................... 24
Receivables........................................................................ 1
Record Date........................................................................ 5
Recoveries......................................................................... 29
Registration Statement............................................................. 2
Reimbursement Amount............................................................... 29
Relevant Depositary................................................................ 20
Required Payments.................................................................. 29
Required Rate...................................................................... 7
Reserve Account.................................................................... 6
Reserve Initial Deposit............................................................ 6
Restricted Group................................................................... 44
</TABLE>
51
<PAGE>
<TABLE>
<S> <C>
Rules.............................................................................. 21
S&P................................................................................ 9
SAIF............................................................................... 17
SAP................................................................................ 34
Securities Act..................................................................... 2
Seller............................................................................. 1
Service............................................................................ 9
Servicer........................................................................... 1
Servicer Default................................................................... 31
Servicer's Certificate............................................................. 27
Servicing Fee...................................................................... 8
Servicing Fee Rate................................................................. 8
Specified Reserve Balance.......................................................... 6
Terms and Conditions............................................................... 22
Trust.............................................................................. 1, 4
Trust Property..................................................................... 4
Trustee............................................................................ 1
U.S. Person........................................................................ 41, 49
UCC................................................................................ 24
Underwriters....................................................................... 45
Underwriting Agreement............................................................. 45
Vehicles........................................................................... 1
Yield Maintenance Payments......................................................... 4
Yield Maintenance Amount........................................................... 7
</TABLE>
52
<PAGE>
APPENDIX A
AUDITED FINANCIAL STATEMENTS
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
AND FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
A-1
<PAGE>
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
MBIA Insurance Corporation:
We have audited the accompanying consolidated balance sheets of MBIA
Insurance Corporation and Subsidiaries as of December 31, 1995 and 1994, 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, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND L.L.P.
New York, New York
January 22, 1996
A-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Investments:
Fixed maturity securities held as available-for-sale at fair value
(amortized cost $3,428,986 and $3,123,838............................... $ 3,652,621 3,051,906
Short-term investments, at amortized cost (which approximates fair
value).................................................................. 198,035 121,384
Other investments........................................................ 14,064 11,970
----------------- -----------------
Total investments...................................................... 3,864,720 3,185,260
Cash and cash equivalents.................................................. 2,135 1,332
Accrued investment income.................................................. 60,247 55,347
Deferred acquisition costs................................................. 140,348 133,048
Prepaid reinsurance premiums............................................... 200,887 186,492
Goodwill (less accumulated amortization of $37,366 and $32,437)............ 105,614 110,543
Property and equipment, at cost (less accumulated depreciation of $12,137
and $9,501)............................................................... 41,169 39,648
Receivable for investments sold............................................ 5,729 945
Other assets............................................................... 42,145 46,552
----------------- -----------------
Total assets........................................................... $ 4,462,994 $ 3,759,167
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue................................................. $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves................................ 42,505 40,148
Deferred income taxes.................................................... 212,925 97,828
Payable for investments purchased........................................ 10,695 6,552
Other liabilities........................................................ 54,682 46,925
----------------- -----------------
Total liabilities...................................................... 1,937,122 1,703,664
----------------- -----------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized, issued and
outstanding -- 100,000 shares........................................... 15,000 15,000
Additional paid-in capital............................................... 1,021,584 953,655
Retained earnings........................................................ 1,341,855 1,134,061
Cumulative translation adjustment........................................ 2,704 427
Unrealized appreciation (depreciation) of investments, net of deferred
income tax provision (benefit) of $78,372 and $(25,334)................. 144,729 (47,640)
----------------- -----------------
Total shareholder's equity............................................. 2,525,872 2,055,503
----------------- -----------------
Total liabilities and shareholder's equity............................. $ 4,462,994 $ 3,759,167
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Gross premiums written.................................................... $ 349,812 $ 361,523 $ 479,390
Ceded premiums............................................................ (45,050) (49,281) (47,552)
---------- ---------- -----------
Net premiums written.................................................... 304,762 312,242 431,838
Increase in deferred premium revenue...................................... (88,365) (93,226) (200,519)
---------- ---------- -----------
Premiums earned (net of ceded premiums of $30,655, $33,340 and
$41,409)............................................................... 216,397 219,016 231,319
Net investment income..................................................... 219,834 193,966 175,329
Net realized gains........................................................ 7,777 10,335 8,941
Other income.............................................................. 2,168 1,539 3,996
---------- ---------- -----------
Total revenues.......................................................... 446,176 424,856 419,585
---------- ---------- -----------
Expenses:
Losses and loss adjustment expenses....................................... 10,639 8,093 7,821
Policy acquisition costs, net............................................. 21,283 21,845 25,480
Underwriting and operating expenses....................................... 41,812 41,044 38,006
---------- ---------- -----------
Total expenses.......................................................... 73,734 70,982 71,307
---------- ---------- -----------
Income before income taxes and cumulative effect of accounting changes...... 372,442 353,874 348,278
Provision for income taxes.................................................. 81,748 77,125 86,684
---------- ---------- -----------
Income before cumulative effect of accounting changes....................... 290,694 276,749 261,594
Cumulative effect of accounting changes..................................... -- -- 12,923
---------- ---------- -----------
Net income.................................................................. $ 290,694 $ 276,749 $ 274,517
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
COMMON STOCK ADDITIONAL CUMULATIVE (DEPRECIATION)
-------------------- PAID-IN RETAINED TRANSLATION OF
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS
--------- --------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993................. 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income............................... -- -- -- 274,517 -- --
Change in foreign currency translation... -- -- -- -- (729) --
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $(1,381)................ -- -- -- -- -- 2,461
Dividends declared (per common share
$500.00)................................ -- -- -- (50,000) -- --
Tax reduction related to tax sharing
agreement with MBIA Inc................. -- -- 11,851 -- -- --
--------- --------- ------------ ------------ ----------- -------------
Balance, December 31, 1993............... 100,000 15,000 943,794 895,312 (1,203) 4,840
--------- --------- ------------ ------------ ----------- -------------
Net income............................... -- -- -- 276,749 -- --
Change in foreign currency translation... -- -- -- -- 1,630 --
Change in unrealized depreciation of
investments net of change in deferred
income taxes of $27,940................. -- -- -- -- -- (52,480)
Dividends declared (per common share
$380.00)................................ -- -- -- (38,000) -- --
Tax reduction related to tax sharing
agreement with MBIA Inc................. -- -- 9,861 -- -- --
--------- --------- ------------ ------------ ----------- -------------
Balance, December 31, 1994............... 100,000 15,000 953,655 1,134,061 427 (47,640)
--------- --------- ------------ ------------ ----------- -------------
Exercise of stock options................ -- -- 5,403 -- -- --
Net income............................... -- -- -- 290,694 -- --
Change in foreign currency translation... -- -- -- -- 2,277 --
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $(103,707).............. -- -- -- -- -- 192,369
Dividends declared (per common share
$829.00)................................ -- -- -- (82,900) -- --
Capital contribution from MBIA Inc....... -- -- 52,800 -- -- --
Tax reduction related to tax sharing
agreement with MBIA Inc................. -- -- 9,726 -- -- --
--------- --------- ------------ ------------ ----------- -------------
Balance, December 31, 1995............... 100,000 $ 15,000 $ 1,021,584 $ 1,341,855 $ 2,704 $ 144,729
--------- --------- ------------ ------------ ----------- -------------
--------- --------- ------------ ------------ ----------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1995 1994 1993
----------- ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 290,694 $ 276,749 $ 274,517
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in accrued investment income................................ (4,900) (3,833) (5,009)
Increase in deferred acquisition costs............................... (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums............................. (14,395) (15,941) (6,143)
Increase in deferred premium revenue................................. 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves................ 2,357 6,413 8,225
Depreciation......................................................... 2,676 1,607 1,259
Amortization of goodwill............................................. 4,929 4,961 5,001
Amortization of bond (discount) premium, net......................... (2,426) 621 (743)
Net realized gains on sale of investments............................ (7,778) (10,335) (8,941)
Deferred income taxes................................................ 11,391 19,082 7,503
Other, net........................................................... 29,080 (8,469) 15,234
----------- ------------- -----------
Total adjustments to net income...................................... 117,738 90,709 213,015
----------- ------------- -----------
Net cash provided by operating activities............................ 408,432 367,458 487,532
----------- ------------- -----------
Cash flows from investing activities:
Purchase of fixed maturity securities, net of payable for investments
purchased........................................................... (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of receivable for investments
sold................................................................ 473,352 515,548 205,342
Redemption of fixed maturity securities, net of receivable for
investments redeemed................................................ 83,448 128,274 225,608
(Purchase) sale of short-term investments, net....................... (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net............................ (692) 87,456 (37,777)
Capital expenditures, net of disposals............................... (4,228) (3,665) (3,601)
----------- ------------- -----------
Net cash used in investing activities................................ (377,529) (328,873) (437,399)
----------- ------------- -----------
Cash flows from financing activities:
Capital contribution from MBIA Inc................................... 52,800 -- --
Dividends paid....................................................... (82,900) (38,000) (50,000)
----------- ------------- -----------
Net cash used by financing activities................................ (30,100) (38,000) (50,000)
----------- ------------- -----------
Net increase in cash and cash equivalents................................ 803 585 133
Cash and cash equivalents -- beginning of year........................... 1,332 747 614
----------- ------------- -----------
Cash and cash equivalents -- end of year................................. $ 2,135 $ 1,332 $ 747
----------- ------------- -----------
----------- ------------- -----------
Supplemental cash flow disclosures:
Income taxes paid...................................................... $ 50,790 $ 53,569 $ 52,967
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-6
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
- MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the insurance
company to Municipal Bond Investors Assurance Corporation. In April 1995,
the name was again changed to MBIA Insurance Corp. Prior to the
acquisition, all of the obligations of this company were reinsured and/or
indemnified by the former owner.
- Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA
Inc.'s reinsurance obligations were then assumed by MBIA Corp. The
participation of these four members aggregated approximately 89% of the
net insurance in force of the Association. The net assets transferred from
the predecessor included the cash transferred in connection with the
reinsurance agreements, the related deferred acquisition costs and
contingent commissions receivable, net of the related unearned premiums
and contingent commissions payable. The deferred income taxes inherent in
these assets and liabilities were recorded by MBIA Corp. Contingent
commissions receivable (payable) with respect to premiums earned prior to
the effective date of the reinsurance agreements by the Association in
accordance with statutory accounting practices, remained as assets
(liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the
outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company of
Bond Investors Guaranty Insurance Company ("BIG Ins."), which was subsequently
renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"), a
wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
A-7
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND ORGANIZATION (CONTINUED)
In 1993, MBIA Corp. assumed the remaining business from the fifth member of
the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp.
("SECO"), to provide fixed-income investment management services for MBIA Inc.'s
municipal cash management service businesses. In 1995, portfolio management for
a portion of MBIA Corp.'s insurance related investment portfolio was transferred
to SECO; the management of the balance of this portfolio was transferred in
January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp.,
MBIA Illinois, MBIA Assurance and BIG Services, Inc. All significant
intercompany balances have been eliminated. Certain amounts have been
reclassified in prior years' financial statements to conform to the current
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with
banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial
Accounting Standards ("SFAS") 115 "Accounting for Certain Investments in Debt
and Equity Securities." In accordance with SFAS 115, MBIA Corp. reclassified its
entire investment portfolio ("Fixed-maturity securities") as
"available-for-sale." Pursuant to SFAS 115, securities classified as
available-for-sale are required to be reported in the financial statements at
fair value, with unrealized gains and losses reflected as a separate component
of shareholder's equity. The cumulative effect of MBIA Corp.'s adoption of SFAS
115 was a decrease in shareholder's equity at December 31, 1994 of $46.8
million, net of taxes. The adoption of SFAS 115 had no effect on MBIA Corp.'s
earnings.
Bond discounts and premiums are amortized on the effective-yield method over
the remaining term of the securities. For pre-refunded bonds the remaining term
is determined based on the contractual refunding date. Short-term investments
are carried at amortized cost, which approximates fair value and include all
fixed-maturity securities with a remaining term to maturity of less than one
year. Investment income is recorded as earned. Realized gains or losses on the
sale of investments are determined by specific identification and are included
as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited partnerships
and a mutual fund which invests principally in marketable equity securities.
MBIA Corp. records dividends from its investment in marketable equity securities
and its share of limited partnerships and mutual funds as a component of
investment income. In addition, MBIA Corp. records its share of the unrealized
gains and losses on these investments, net of applicable deferred income taxes,
as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated
to each bond maturity based on par amount and are earned on a straight-line
basis over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
A-8
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily
to, and vary with, premium production. For business produced directly by MBIA
Corp., such costs include compensation of employees involved in marketing,
underwriting and policy issuance functions, certain rating agency fees, state
premium taxes and certain other underwriting expenses, reduced by ceding
commission income on premiums ceded to reinsurers. For business assumed from the
Association, such costs were comprised of management fees, certain rating agency
fees and marketing and legal costs, reduced by ceding commissions received by
the Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in
an amount equal to MBIA Corp.'s estimate of the identified and unidentified
losses, including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently or
likely to be in default, the present value of expected payments, including loss
and LAE associated with these issues, net of expected recoveries, is allocated
within the total loss reserve as case basis reserves. Management of MBIA Corp.
periodically evaluates its estimates for losses and LAE and any resulting
adjustments are reflected in current earnings. Management believes that the
reserves are adequate to cover the ultimate net cost of claims, but the reserves
are necessarily based on estimates, and there can be no assurance that the
ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the
Association's reinsurers under various reinsurance treaties and are accrued as
the related premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance companies to
deduct from taxable income additions to the statutory contingency reserve,
subject to certain limitations. The tax benefits obtained from such deductions
must be invested in non-interest bearing U. S. Government tax and loss bonds.
MBIA Corp. records purchases of tax and loss bonds as payments of Federal income
taxes. The amounts deducted must be restored to taxable income when the
contingency reserve is released, at which time MBIA Corp. may present the tax
and loss bonds for redemption to satisfy the additional tax liability.
A-9
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment
and MBIA Assurance's furniture, fixtures and equipment, which are recorded at
cost and, exclusive of land, are depreciated on the straight-line method over
their estimated service lives ranging from 4 to 31 years. Maintenance and
repairs are charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which
differs in certain respects from the statutory accounting practices prescribed
or permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
- premiums are earned only when the related risk has expired rather than
over the period of the risk;
- acquisition costs are charged to operations as incurred rather than as the
related premiums are earned;
- a contingency reserve is computed on the basis of statutory requirements
and reserves for losses and LAE are established, at present value, for
specific insured issues which are identified as currently or likely to be
in default. Under GAAP reserves are established based on MBIA Corp.'s
reasonable estimate of the identified and unidentified losses and LAE on
the insured obligations it has written;
- Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
- fixed-maturity securities are reported at amortized cost rather than fair
value;
- tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
- certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
A-10
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
GAAP shareholder's equity..................................... $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition................................... (328,450) (296,524) (242,577)
Deferral of acquisition costs................................. (140,348) (133,048) (120,484)
Unrealized (gains) losses..................................... (223,635) 71,932 --
Contingent commissions........................................ (1,645) (1,706) (1,880)
Contingency reserve........................................... (743,510) (620,988) (539,103)
Loss and loss adjustment expense reserves..................... 28,024 18,181 26,262
Deferred income taxes......................................... 205,425 90,328 99,186
Tax and loss bonds............................................ 70,771 50,471 25,771
Goodwill...................................................... (105,614) (110,543) (115,503)
Other......................................................... (12,752) (13,568) (11,679)
------------ ------------ ------------
Statutory capital and surplus............................... $ 1,274,138 $ 1,110,038 $ 977,736
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for
1995, 1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax
returns while emphasizing the preservation of capital and claims-paying
capability through maintenance of high-quality investments with adequate
liquidity. MBIA Corp.'s investment policies limit the amount of credit exposure
to any one issuer. The fixed-maturity portfolio is comprised of high-quality
(average rating Double-A) taxable and tax-exempt investments of diversified
maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1995
Taxable bonds
United States Treasury and Government Agency............. $ 6,742 $ 354 $ -- $ 7,096
Corporate and other obligations.......................... 592,604 30,536 (212) 622,928
Mortgage-backed.......................................... 389,943 21,403 (932) 410,414
Tax-exempt bonds
State and municipal obligations.......................... 2,637,732 175,081 (2,595) 2,810,218
------------ ----------- ----------- ------------
Total fixed-maturities................................. $ 3,627,021 $ 227,374 $ (3,739) $ 3,850,656
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
A-11
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1994
Taxable bonds
United States Treasury and Government Agency............ $ 15,133 -- (149) $ 14,984
Corporate and other obligations......................... 461,601 2,353 (23,385) 440,569
Mortgage-backed......................................... 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal obligations......................... 2,450,928 36,631 (77,998) 2,409,561
------------ ----------- ----------- ------------
Total fixed-maturities................................ $ 3,245,222 $ 42,030 $ (113,962) $ 3,173,290
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
Fixed-maturity investments carried at fair value of $8.1 million and $7.4
million as of December 31, 1995 and 1994, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturity
Within 1 year......................................... $ 178,328 $ 178,256
Beyond 1 year but within 5 years...................... 448,817 477,039
Beyond 5 years but within 10 years.................... 1,133,527 1,211,645
Beyond 10 years but within 15 years................... 742,790 804,421
Beyond 15 years but within 20 years................... 686,871 730,030
Beyond 20 years....................................... 46,745 38,851
------------ ------------
3,237,078 3,440,242
Mortgage-backed......................................... 389,943 410,414
------------ ------------
Total fixed-maturities and short-term investments... $ 3,627,021 $ 3,850,656
------------ ------------
------------ ------------
</TABLE>
A-12
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT INCOME AND GAINS AND LOSSES
Investment income consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed-maturities......................................... $ 216,653 $ 193,729 $ 173,070
Short-term investments................................... 6,008 3,003 2,844
Other investments........................................ 17 12 2,078
---------- ---------- ----------
Gross investment income............................ 222,678 196,744 177,992
Investment expenses...................................... 2,844 2,778 2,663
---------- ---------- ----------
Net investment income.............................. 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains................................................ 9,941 9,635 9,070
Losses............................................... (2,537) (8,851) (744)
---------- ---------- ----------
Net.................................................. 7,404 784 8,326
Other investments:
Gains................................................ 382 9,551 615
Losses............................................... (9) -- --
---------- ---------- ----------
Net.................................................. 373 9,551 615
---------- ---------- ----------
Net realized gains................................. 7,777 10,335 8,941
---------- ---------- ----------
Total investment income............................ $ 227,611 $ 204,301 $ 184,270
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Unrealized gains (losses) consist of:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------
1995 1994
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed-maturities:
Gains.............................................................. $ 227,374 $ 42,030
Losses............................................................. (3,739) (113,962)
---------- -----------
Net.............................................................. 223,635 (71,932)
Other investments:
Gains.............................................................. 287 --
Losses............................................................. (821) (1,042)
---------- -----------
Net.............................................................. (534) (1,042)
---------- -----------
Total............................................................ 223,101 (72,974)
Deferred income tax (benefit)........................................ 78,372 (25,334)
---------- -----------
Unrealized gains (losses) -- net................................. $ 144,729 $ (47,640)
---------- -----------
---------- -----------
</TABLE>
The deferred taxes in 1995 and 1994 relate primarily to unrealized gains and
losses on MBIA Corp.'s fixed-maturity investments, which are reflected in
shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s adoption
of SFAS 115.
A-13
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT INCOME AND GAINS AND LOSSES (CONTINUED)
The change in net unrealized gains (losses) consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
---------- ----------- ----------
IN THOUSANDS
<S> <C> <C> <C>
Fixed-maturities........................................ $ 295,567 $ (289,327) $ 101,418
Other investments....................................... 508 (8,488) 3,842
---------- ----------- ----------
Total................................................. 296,075 (297,815) 105,260
Deferred income taxes (benefit)......................... 103,706 (27,940) 1,381
---------- ----------- ----------
Unrealized gains (losses), net........................ $ 192,369 $ (269,875) $ 103,879
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
SFAS 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect
on tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Tax and loss bonds.................................................. $ 71,183 $ 50,332
Unrealized losses................................................... -- 25,334
Alternative minimum tax credit carry forwards....................... 39,072 22,391
Loss and loss adjustment expense reserves........................... 9,809 6,363
Other............................................................... 954 3,981
---------- ----------
Total gross deferred tax assets................................... 121,018 108,401
---------- ----------
Deferred tax liabilities
Contingency reserve................................................. 131,174 91,439
Deferred premium revenue............................................ 64,709 54,523
Deferred acquisition costs.......................................... 49,122 48,900
Unrealized gains.................................................... 78,372 --
Contingent commissions.............................................. 7,158 4,746
Other............................................................... 3,408 6,621
---------- ----------
Total gross deferred tax liabilities.............................. 333,943 206,229
---------- ----------
Net deferred tax liability...................................... $ 212,925 $ 97,828
---------- ----------
---------- ----------
</TABLE>
A-14
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Under SFAS 109, a change in the Federal tax rate requires a restatement of
deferred tax assets and liabilities. Accordingly, the restatement for the change
in the 1993 Federal tax rate resulted in a $5.4 million increase in the tax
provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current.................................. $ 70,357 $ 58,043 $ 66,086
Deferred................................. 11,391 19,082 20,598
--------- --------- ---------
Total.................................. $ 81,748 $ 77,125 $ 86,684
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes gives effect to permanent differences between
financial and taxable income. Accordingly, MBIA Corp.'s effective income tax
rate differs from the statutory rate on ordinary income. The reasons for MBIA
Corp.'s lower effective tax rates are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes computed on pre-tax financial income at statutory
rates................................................................ 35.0 % 35.0 % 35.0 %
Increase (reduction) in taxes resulting from:
Tax-exempt interest................................................. (12.5) (12.0) (10.6)
Amortization of goodwill............................................ 0.5 0.5 0.5
Other............................................................... (1.1) (1.7) --
----- ----- -----
Provision for income taxes........................................ 21.9 % 21.8 % 24.9 %
----- ----- -----
----- ----- -----
</TABLE>
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which can be
paid in any 12-month period, MBIA Corp. had approximately $44 million available
for the payment of dividends as of December 31, 1995. In 1995, 1994 and 1993,
MBIA Corp. declared and paid dividends of $83 million, $38 million and $50
million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which can be
paid in any 12-month period, MBIA Illinois may pay a dividend only with prior
approval as of December 31, 1995.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
A-15
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650
million with a group of major banks to provide loans to MBIA Corp. after it has
incurred cumulative losses (net of any recoveries) from September 30, 1995 in
excess of the greater of $500 million and 6.25% of average annual debt service.
The obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating $275
million. At December 31, 1995, MBIA Inc. had $18 million outstanding under these
facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on
municipal, asset-/mortgage-backed and other non-municipal securities. MBIA
Corp.'s ultimate exposure to credit loss in the event of nonperformance by the
insured is represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional commitments to
guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
As of December 31, 1995, insurance in force, net of cessions to reinsurers,
has a range of maturity of 1-43 years. The distribution of net insurance in
force by geographic location and type of bond, including $2.7 billion and $1.5
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1995 and 1994, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------------------------------------
1995 1994
-------------------------------------- --------------------------------------
NET NUMBER OF % OF NET NET NUMBER OF % OF NET
INSURANCE ISSUES INSURANCE IN INSURANCE ISSUES INSURANCE IN
GEOGRAPHIC LOCATION IN FORCE OUTSTANDING FORCE IN FORCE OUTSTANDING FORCE
- ------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
($ IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California.......................... $ 51.2 3,122 14.8% $ 43.9 2,832 14.3%
New York............................ 30.1 4,846 8.7 25.0 4,447 8.2
Florida............................. 26.9 1,684 7.7 25.4 1,805 8.3
Texas............................... 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania........................ 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey.......................... 16.4 1,730 4.7 15.0 1,590 4.9
Illinois............................ 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts....................... 9.3 1,070 2.7 8.6 1,064 2.8
Ohio................................ 9.1 1,017 2.6 8.3 996 2.7
Michigan............................ 7.9 1,012 2.3 5.7 972 1.9
----------- ----------- ----- ----------- ----------- -----
Subtotal.......................... 206.0 19,745 59.4 184.7 19,055 60.4
Other............................... 135.6 11,147 39.1 118.8 10,711 38.8
----------- ----------- ----- ----------- ----------- -----
Total U.S......................... 341.6 30,892 98.5 303.5 29,766 99.2
----------- ----------- ----- ----------- ----------- -----
International....................... 5.1 53 1.5 2.5 18 0.8
----------- ----------- ----- ----------- ----------- -----
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
----------- ----------- ----- ----------- ----------- -----
----------- ----------- ----- ----------- ----------- -----
</TABLE>
A-16
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. NET INSURANCE IN FORCE (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------------------------------------
1995 1994
-------------------------------------- --------------------------------------
NET NUMBER OF % OF NET NET NUMBER OF % OF NET
INSURANCE ISSUES INSURANCE IN INSURANCE ISSUES INSURANCE IN
TYPE OF BOND IN FORCE OUTSTANDING FORCE IN FORCE OUTSTANDING FORCE
- ---------------------------------------------- ----------- ----------- ------------ ----------- ----------- ------------
($ IN BILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Municipal
General Obligation.......................... $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities................................... 60.3 4,931 17.4 56.0 5,087 18.3
Health Care................................. 51.9 2,458 15.0 50.6 2,670 16.5
Transportation.............................. 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue............................. 24.4 1,445 7.0 22.7 1,291 7.4
Industrial development and pollution control
revenue.................................... 17.2 924 5.0 15.1 1,016 4.9
Housing..................................... 15.8 2,671 4.5 13.6 2,663 4.5
Higher education............................ 15.2 1,261 4.4 14.0 1,208 4.6
Other....................................... 7.3 134 2.1 3.8 124 1.2
----------- ----------- ----- ----------- ----------- -----
309.2 26,831 89.2 281.3 26,574 91.9
----------- ----------- ----- ----------- ----------- -----
Non-municipal
Asset/mortgage-backed....................... 20.2 256 5.8 12.8 151 4.2
Investor-owned utilities.................... 6.4 3,559 1.8 5.7 2,918 1.9
International............................... 5.1 53 1.5 2.5 18 0.8
Other....................................... 5.8 246 1.7 3.7 123 1.2
----------- ----------- ----- ----------- ----------- -----
37.5 4,114 10.8 24.7 3,210 8.1
----------- ----------- ----- ----------- ----------- -----
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
----------- ----------- ----- ----------- ----------- -----
----------- ----------- ----- ----------- ----------- -----
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
A-17
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. REINSURANCE (CONTINUED)
Amounts deducted from gross insurance in force for reinsurance ceded by MBIA
Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6 billion, at
December 31, 1995 and 1994, respectively. The distribution of ceded insurance in
force by geographic location and type of bond is set forth in the tables below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------------
1995 1994
-------------------------- --------------------------
CEDED % OF CEDED CEDED % OF CEDED
INSURANCE INSURANCE IN INSURANCE INSURANCE IN
GEOGRAPHIC LOCATION IN FORCE FORCE IN FORCE FORCE
- --------------------------------------------- ----------- ------------- ----------- -------------
(IN BILLIONS)
<S> <C> <C> <C> <C>
California................................... $ 8.8 17.5% $ 7.5 17.6%
New York..................................... 5.7 11.4 4.9 11.5
New Jersey................................... 3.1 6.1 2.0 4.7
Texas........................................ 2.8 5.6 2.5 5.9
Pennsylvania................................. 2.7 5.4 2.6 6.1
Florida...................................... 2.3 4.6 2.1 4.9
Illinois..................................... 2.2 4.5 2.3 5.4
District of Columbia......................... 1.5 3.0 1.6 3.8
Washington................................... 1.4 2.7 1.2 2.8
Puerto Rico.................................. 1.3 2.6 1.1 2.6
Massachusetts................................ 1.1 2.1 0.9 2.1
Ohio......................................... 1.0 2.1 0.9 2.1
----- ----- ----- -----
Subtotal................................... 33.9 67.6 29.6 69.5
Other........................................ 14.4 28.8 12.3 28.9
----- ----- ----- -----
Total U. S............................... 48.3 96.4 41.9 98.4
International................................ 1.8 3.6 0.7 1.6
----- ----- ----- -----
$ 50.1 100.0% $ 42.6 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
A-18
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. REINSURANCE (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------------
1995 1994
-------------------------- --------------------------
CEDED % OF CEDED CEDED % OF CEDED
INSURANCE INSURANCE IN INSURANCE INSURANCE IN
TYPE OF BOND IN FORCE FORCE IN FORCE FORCE
- --------------------------------------------- ----------- ------------- ----------- -------------
(IN BILLIONS)
<S> <C> <C> <C> <C>
Municipal
General obligation......................... $ 11.7 23.3% $ 9.7 22.8%
Utilities.................................. 9.0 18.0 8.5 20.0
Health care................................ 6.6 13.1 6.5 15.3
Transportation............................. 5.5 11.0 4.5 10.6
Special revenue............................ 3.2 6.4 2.7 6.3
Industrial development and pollution
control revenue........................... 3.0 6.0 2.9 6.8
Housing.................................... 1.4 2.8 1.0 2.3
Higher education........................... 1.2 2.4 1.2 2.8
Other...................................... 2.4 4.8 1.5 3.5
----- ----- ----- -----
44.0 87.8 38.5 90.4
----- ----- ----- -----
Non-municipal
Asset-/mortgage-backed..................... 3.6 7.2 2.7 6.3
International.............................. 1.8 3.6 0.7 1.6
Other...................................... 0.7 1.4 0.7 1.7
----- ----- ----- -----
6.1 12.2 4.1 9.6
----- ----- ----- -----
$ 50.1 100.0% $ 42.6 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Included in gross premiums written are assumed premiums from other insurance
companies of $11.7 million, $6.3 million and $20.4 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The percentages of the amounts
assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995, 1994 and 1993,
respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in 1993
related to the reassumption by MBIA Corp. of reinsurance previously ceded by the
Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
A-19
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFITS (CONTINUED)
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock. MBIA Corp. recorded $0.1
million of compensation expense in 1995 relating to this program.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred premium
revenue from a member of the Association which had not previously ceded its
insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4 million
of deferred premium revenue relating to one of the trusts which was previously
ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
Included in other assets at December 31, 1995 and 1994 is $1.1 million and
$14.5 million of net receivables from MBIA Inc. and other subsidiaries.
A-20
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the
following table have been determined by MBIA Corp. using available market
information and appropriate valuation methodologies. However, in certain cases
considerable judgment is necessarily required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amount MBIA Corp. could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES -- The fair value of fixed-maturity securities
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
SHORT-TERM INVESTMENTS -- Short-term investments are carried at amortized
cost which, because of their short duration, is a reasonable estimate of fair
value.
OTHER INVESTMENTS -- Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED -- The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS -- The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE -- The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The carrying amount is composed
of the present value of the expected cash flows for specifically identified
claims combined with an estimate for unidentified claims. Therefore, the
carrying amount is a reasonable estimate of the fair value of the reserve.
A-21
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INSTALLMENT PREMIUMS -- The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------
1995 1994
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Fixed-maturity securities.............................. $ 3,652,621 $ 3,652,621 $ 3,051,906 $ 3,051,906
Short-term investments................................. 198,035 198,035 121,384 121,384
Other investments...................................... 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance premiums........................... 200,887 174,444 186,492 159,736
Receivable for investments sold........................ 5,729 5,729 945 945
Liabilities:
Deferred premium revenue............................... 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment expense reserves.............. 42,505 42,505 40,148 40,148
Payable for investments purchased...................... 10,695 10,695 6,552 6,552
Off-balance-sheet instruments:
Installment premiums................................... -- 235,371 -- 176,944
</TABLE>
A-22
<PAGE>
APPENDIX B
UNAUDITED INTERIM FINANCIAL STATEMENTS
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED MARCH 31, 1996 AND 1995
B-1
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Balance Sheets -- March 31, 1996 (Unaudited) and December 31, 1995 (Audited).................. B-3
Consolidated Statements of Income -- Three months ended March 31, 1996 and 1995 (Unaudited)................ B-4
Consolidated Statement of Changes in Shareholder's Equity -- Three months ended March 31, 1996
(Unaudited)............................................................................................... B-5
Consolidated Statements of Cash Flows -- Three months ended March 31, 1996 and 1995 (Unaudited)............ B-6
Notes to Consolidated Financial Statements (Unaudited)..................................................... B-7
</TABLE>
B-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
MARCH 31, 1996 -----------------
-------------- (AUDITED)
(UNAUDITED)
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale at fair value
(amortized cost $3,664,571 and $3,428,986)................................. $ 3,784,836 $ 3,652,621
Short-term investments, at amortized cost
(which approximates fair value)............................................ 135,428 198,035
Other investments........................................................... 13,374 14,064
-------------- -----------------
Total investments......................................................... 3,933,638 3,864,720
Cash and cash equivalents..................................................... 2,499 2,135
Accrued investment income..................................................... 60,462 60,247
Deferred acquisition costs.................................................... 140,919 140,348
Prepaid reinsurance premiums.................................................. 206,383 200,887
Goodwill (less accumulated amortization of $38,590 and $37,366)............... 104,390 105,614
Property and equipment, at cost (less accumulated depreciation of $12,822 and
$12,137)..................................................................... 41,771 41,169
Receivable for investments sold............................................... 6,501 5,729
Other assets.................................................................. 51,534 42,145
-------------- -----------------
Total assets.............................................................. $ 4,548,097 $ 4,462,994
-------------- -----------------
-------------- -----------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue.................................................... $ 1,666,945 $ 1,616,315
Loss and loss adjustment expense reserves................................... 46,376 42,505
Deferred income taxes....................................................... 180,843 212,925
Payable for investments purchased........................................... 15,715 10,695
Other liabilities........................................................... 96,600 54,682
-------------- -----------------
Total liabilities......................................................... 2,006,479 1,937,122
-------------- -----------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized, issued and outstanding
-- 100,000 shares.......................................................... 15,000 15,000
Additional paid-in capital.................................................. 1,025,591 1,021,584
Retained earnings........................................................... 1,423,157 1,341,855
Cumulative translation adjustment........................................... 330 2,704
Unrealized appreciation of investments, net of deferred income tax provision
of $42,114 and $78,372..................................................... 77,540 144,729
-------------- -----------------
Total shareholder's equity................................................ 2,541,618 2,525,872
-------------- -----------------
Total liabilities and shareholder's equity................................ $ 4,548,097 $ 4,462,994
-------------- -----------------
-------------- -----------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Gross premiums written.................................................................. $ 121,011 $ 71,112
Ceded premiums.......................................................................... (14,715) (7,080)
---------- ----------
Net premiums written.................................................................. 106,296 64,032
Increase in deferred premium revenue.................................................... (45,532) (12,680)
---------- ----------
Premiums earned (net of ceded premiums of $9,220 and $7,839).......................... 60,764 51,352
Net investment income................................................................... 59,003 53,065
Net realized gains...................................................................... 2,692 1,724
Other income............................................................................ 969 908
---------- ----------
Total revenues........................................................................ 123,428 107,049
---------- ----------
Expenses:
Losses and loss adjustment expenses..................................................... 3,178 2,033
Policy acquisition costs, net........................................................... 5,900 5,140
Underwriting and operating expenses..................................................... 10,549 9,752
---------- ----------
Total expenses........................................................................ 19,627 16,925
---------- ----------
Income before income taxes................................................................ 103,801 90,124
Provision for income taxes................................................................ 22,499 19,476
---------- ----------
Net income................................................................................ $ 81,302 $ 70,648
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL CUMULATIVE APPRECIATION
-------------------- PAID-IN RETAINED TRANSLATION OF
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS
--------- --------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996........... 100,000 $ 15,000 $ 1,021,584 $ 1,341,855 $ 2,704 $ 144,729
Exercise of stock options.......... -- -- 1,179 -- -- --
Net income......................... -- -- -- 81,302 -- --
Change in foreign currency
transactions...................... -- -- -- -- (2,374) --
Change in unrealized appreciation
of investments net of change in
deferred income taxes of
$36,258........................... -- -- -- -- -- (67,189)
Tax reduction related to tax
sharing agreement with MBIA
Inc............................... -- -- 2,828 -- -- --
--------- --------- ------------ ------------ ----------- -------------
Balance, March 31, 1996............ 100,000 $ 15,000 $ 1,025,591 $ 1,423,157 $ 330 $ 77,540
--------- --------- ------------ ------------ ----------- -------------
--------- --------- ------------ ------------ ----------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................ $ 81,302 $ 70,648
Adjustments to reconcile net income to net cash provided by operating activities:
(Increase) decrease in accrued investment income.................................... (215) 960
Increase in deferred acquisition costs.............................................. (571) (1,634)
(Increase) decrease in prepaid reinsurance premiums................................. (5,496) 758
Increase in deferred premium revenue................................................ 51,028 11,922
Increase in loss and loss adjustment expense reserves............................... 3,871 1,885
Depreciation........................................................................ 719 630
Amortization of goodwill............................................................ 1,224 1,232
Amortization of bond discount, net.................................................. (1,014) (358)
Net realized gains on sale of investments........................................... (2,692) (1,724)
Deferred income taxes............................................................... 4,176 3,782
Other, net.......................................................................... 34,288 19,601
----------- -----------
Total adjustments to net income..................................................... 85,318 37,054
----------- -----------
Net cash provided by operating activities........................................... 166,620 107,702
----------- -----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net of payable for investments purchased....... (329,252) (182,603)
Sale of fixed-maturity securities, net of receivable for investments sold............. 146,729 92,890
Redemption of fixed-maturity securities, net of receivable for investments redeemed... 32,644 16,717
Purchase of short-term investments, net............................................... (15,259) (9,908)
Sale (purchase) of other investments, net............................................. 215 (863)
Capital expenditures, net of disposals................................................ (1,333) (817)
----------- -----------
Net cash used in investing activities............................................... (166,256) (84,584)
----------- -----------
Cash flows from financing activities:
Dividends paid........................................................................ -- (22,500)
----------- -----------
Net cash used by financing activities............................................... -- (22,500)
----------- -----------
Net increase in cash and cash equivalents............................................... 364 618
Cash and cash equivalents -- beginning of period........................................ 2,135 1,332
----------- -----------
Cash and cash equivalents -- end of period.............................................. $ 2,499 $ 1,950
----------- -----------
----------- -----------
Supplemental cash flow disclosures:
Income taxes paid..................................................................... $ 1,161 $ 1
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and include
the accounts of MBIA Insurance Corporation and its Subsidiaries (the "Company").
The statements do not include all of the information and disclosures required by
generally accepted accounting principles. These statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1995. The accompanying consolidated
financial statements have not been audited by independent accountants in
accordance with generally accepted auditing standards but in the opinion of
management such financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to summarize fairly the Company's
financial position and results of operations. The results of operations for the
three months ended March 31, 1996 may not be indicative of the results that may
be expected for the year ending December 31, 1996. The December 31, 1995
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
2. DIVIDENDS DECLARED
No dividends were declared by the Company during the three months ended
March 31, 1996.
B-7
