<PAGE> 1
As filed pursuant to Rule 424(b)(5)
under the Securities Act of 1933
Registration No. 33-73508
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JANUARY 26, 1996
FREMONT SMALL BUSINESS LOAN MASTER TRUST
VARIABLE RATE ASSET BACKED CERTIFICATES, SERIES D
$100,000,000 CLASS A CERTIFICATES
------------------------
FREMONT FUNDING INC.
TRANSFEROR
FREMONT FINANCIAL CORPORATION
SERVICER
------------------------
The Fremont Small Business Loan Master Trust (the "Trust") will issue
Variable Rate Asset Backed Certificates, Series D (the "Series D Certificates")
in an aggregate principal amount of $109,260,000. The Series D Certificates will
consist of $100,000,000 in aggregate principal amount of Variable Rate Asset
Backed Certificates, Series D, Class A (the "Class A Certificates") and
$9,260,000 in aggregate principal amount of Variable Rate Asset Backed
Certificates, Series D, Class B (the "Class B Certificates"). The Class A
Certificates are the only Certificates offered hereby. Information herein
contained relating to the Class B Certificates is provided only to provide more
complete information with respect to the Class A Certificates. Each Series D
Certificate will represent an undivided interest in the Trust created pursuant
to an Amended and Restated Pooling and Servicing Agreement dated as of April 1,
1997 (the "Pooling and Servicing Agreement"), among Fremont Funding Inc., as
transferor (the "Transferor"), Fremont Financial Corporation, as servicer (the
"Servicer"), and LaSalle National Bank, as trustee (the "Trustee"), as
supplemented by the Series D Supplement thereto (the "Series D Supplement"). The
property of the Trust includes, among other things, the right to repayment of
loan advances (such rights, the "Advances") generated from time to time in a
portfolio of revolving commercial finance loans (and related
cross-collateralized term loans) ("Contracts"), monies on deposit in the Excess
Funding Account and all monies due or to become due in payment of the Advances.
An undivided interest in the assets of the Trust (the "Trust Assets") will be
allocated to the Series D Certificateholders, including the right to receive a
varying percentage of each month's collections with respect to the Advances, at
the times and in the manner described herein. The Transferor will own the
remaining undivided interest in the Trust not represented by any series of
certificates. The Transferor from time to time may offer (so long as the
requirements set forth herein are satisfied) other series of certificates that
evidence undivided interests in certain assets of the Trust. The Trust has also
issued a variable funding certificate (the "Variable Funding Certificate") which
represents a fluctuating undivided interest in the Trust Assets. See
"Description of the Variable Funding Certificate" in this Prospectus Supplement.
Interest will accrue on the Class A Certificates at a variable annual rate
of interest (the "Class A Certificate Rate") equal to the lesser of (a) LIBOR +
0.23% and (b) the Weighted Average Coupon (each as defined and determined herein
and subject to adjustments under certain circumstances). The Class A Certificate
Rate will be determined on a monthly basis. Interest with respect to the Class A
Certificates will be distributed on May 15, 1997 and on the 15th day of each
month thereafter (or, if any such 15th day is not a business day, the next
succeeding business day, each a "Payment Date"). Principal is scheduled to be
distributed with respect to the Class A Certificates beginning on the April 2002
Payment Date (the "Series D Amortization Period Commencement Date") or earlier
in certain circumstances described herein. However, the timing of the principal
payments on the Class A Certificates will be uncertain and can occur at any time
during the Amortization Period (which is the period from the Series D
Amortization Period Commencement Date until April 15, 2004 (the "Series D
Termination Date")) or earlier upon the occurrence of certain Events of
Termination. See "Maturity Assumptions," "Description of the Class A
Certificates -- Principal Payments" and "Pooling and Servicing
Agreement -- Events of Termination" in this Prospectus Supplement.
There currently is no secondary market for the Class A Certificates and
there can be no assurance that one will develop.
------------------------
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR RECOURSE OBLIGATIONS OF THE TRANSFEROR, THE
SERVICER OR ANY AFFILIATE THEREOF. POTENTIAL INVESTORS SHOULD CONSIDER, AMONG
OTHER THINGS, THE INFORMATION SET FORTH IN "RISK FACTORS." COMMENCING AT PAGE 12
OF THE PROSPECTUS AND AT PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC(1) DISCOUNT(2) TRANSFEROR(1)(3)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Class A Certificate.......... 100.000% 0.375% 99.625%
Total............................ $100,000,000 $375,000 $99,625,000
</TABLE>
- ---------------
(1) Plus accrued interest, if any, from April 14, 1997.
(2) The Transferor and the Servicer have agreed to indemnify Goldman, Sachs &
Co. (the "Underwriters") against certain liabilities, including liabilities
under the Securities Act of 1933, as amended.
(3) Before deduction of expenses estimated to be $200,000 payable by the
Transferor.
------------------------
The Class A Certificates are offered subject to receipt and acceptance by
the Underwriters and to their right to reject any order in whole or in part and
to withdraw, cancel or modify the offer without notice. It is expected that
delivery of the Class A Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company ("DTC"), Cedel Bank,
societe anonyme, and the Euroclear System on or about April 14, 1997, against
payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus Supplement is April 3, 1997.
<PAGE> 2
This Prospectus Supplement does not contain complete information about the
offering of the Class A Certificates. Additional information is contained in the
Prospectus dated January 26, 1996 (the "Prospectus"), a copy of which is
attached hereto, and purchasers are urged to read both this Prospectus
Supplement and the Prospectus in full. Sales of the Class A Certificates may not
be consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
------------------
REPORTS TO CLASS A CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued, monthly reports,
containing information concerning the Trust and prepared by the Servicer, will
be sent on behalf of the Trust to Cede & Co. ("Cede"), as nominee of DTC and
registered holder of the Class A Certificates, pursuant to the Pooling and
Servicing Agreement. Such reports may be available to beneficial owners of Class
A Certificates in accordance with the regulations and procedures of DTC.
------------------
AVAILABLE INFORMATION
In addition to the locations identified under "Available Information" in
the Prospectus, the Securities and Exchange Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statement and
other information regarding registrants, including the Transferor, that file
electronically with the Securities and Exchange Commission.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A
CERTIFICATES, INCLUDING OVER-ALLOTMENT, STABILIZING, AND SHORT-COVERING
TRANSACTIONS IN SUCH CERTIFICATES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING OF THE CLASS A CERTIFICATES. FOR A DISCUSSION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
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<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the attached
Prospectus. Certain capitalized terms used herein are defined elsewhere in this
Prospectus Supplement or the Prospectus. See the "Index of Key Terms" in the
Prospectus and in this Prospectus Supplement for the location therein and herein
of certain capitalized terms. This Prospectus Supplement contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act"). Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth under the heading "Risk Factors" in
the Prospectus and this Prospectus Supplement.
Offered Securities......... $100,000,000 Variable Rate Asset Backed
Certificates, Series D, Class A.
Transferor................. Fremont Funding Inc. (the "Transferor"). The
principal executive offices of the Transferor are
located at 2020 Santa Monica Boulevard, Suite 500,
Santa Monica, California 90404-2023, telephone
number (310) 315-3988.
Series D Certificates...... The Fremont Small Business Loan Master Trust (the
"Trust") will issue Variable Rate Asset Backed
Certificates, Series D (the "Series D
Certificates") in an aggregate principal amount of
$109,260,000. The Series D Certificates will
consist of $100,000,000 in aggregate principal
amount of Variable Rate Asset Backed Certificates,
Series D, Class A (the "Class A Certificates") and
$9,260,000 in aggregate principal amount of
Variable Rate Asset Backed Certificates, Series D,
Class B (the "Class B Certificates"). The Class A
Certificates are the only Certificates offered
hereby. Information herein contained relating to
the Class B Certificates is provided only to
provide more complete information with respect to
the Class A Certificates. The Class A Certificates
will be available for purchase in minimum
denominations of $1,000 and in integral multiples
in excess thereof. The Class A Certificates
initially will be represented by one or more
certificates registered in the name of Cede, as the
nominee of DTC. As used herein, the term "Class A
Certificateholders" refers to Holders of the Class
A Certificates. The Holders of beneficial interests
in the Class A Certificates will not be entitled to
receive definitive certificates representing their
respective interests unless Definitive Certificates
are issued under the limited circumstances
described in the Prospectus. See "Description of
the Certificates -- Definitive Certificates" in the
Prospectus. Rights in the Trust's assets will be
allocated among (i) the interest of the Holders of
Series C Certificates (the "Series C
Certificateholders' Interest"), (ii) the interest
of the Holders of Series D Certificates (the
"Series D Certificateholders' Interest"), (iii) the
interest of the Holders of Series 1995-1
Certificates (the "Series 1995-1
Certificateholders' Interest"), (iv) the interest
of the Holders of any other Series issued in the
future pursuant to the Pooling and Servicing
Agreement (together with the Series C
Certificateholders' Interest, the Series D
Certificateholders' Interest, and the Series 1995-1
Certificateholders' Interest, the "Investor
Interest"), (v) the interest of the Holder of the
Variable Funding Certificate (the "Issuer
Interest"), and (vi) the interest of the Transferor
(the "Transferor Interest"), as described below.
The principal amount of the Transferor Interest
fluctuates as
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<PAGE> 4
the amount of outstanding Advances in the Trust and
the amount on deposit in the Excess Funding Account
change from time to time. The Transferor Interest
represents rights in the assets of the Trust not
allocated to the Investor Interest or to the Issuer
Interest.
No reduction of the aggregate principal amount of
the Class A Certificates is expected during the
"Series D Non-Amortization Period" (the period
beginning on the date of the issuance of the Series
D Certificates (the "Closing Date") and ending on
the day prior to the Series D Amortization Period
Commencement Date, or earlier upon the occurrence
of an Event of Termination with respect to the
Series D Certificates); provided, however, that the
aggregate principal amount of the Class A
Certificates may be reduced during the
Non-Amortization Period due to the allocation of
Charge-Off Amounts (as defined in the Prospectus)
to the Class A Certificates or upon the optional
repurchase of the Series D Certificates by the
Transferor. Charge-Off Amounts that are allocated
to the Series D Certificates shall be allocated as
follows: first, to the Series D Subordinated
Transferor Amount until such amount has been
reduced to zero, second, to the Class B Invested
Amount until such amount has been reduced to zero,
and finally, to the Class A Invested Amount. On
each Payment Date beginning on the Series D
Amortization Period Commencement Date, until the
earlier of the date the Class A Certificates are
paid in full or the Series D Termination Date (the
"Series D Amortization Period"), principal of the
Series D Certificates will be payable to the extent
Gross Collections allocable to the Series D
Certificates are available after payment of certain
non-principal amounts with respect to the Series D
Certificates. Payments of principal of the Class B
Certificates are subordinated in right of payment
to payments of principal then due and owing in
respect of the Class A Certificates. As a result,
payments of principal allocable to the Series D
Certificates shall first be made to the Class A
Certificateholders until the Class A Invested
Amount has been reduced to zero, and thereafter to
the Class B Certificateholders. In any event, funds
allocated to the Series D Certificates will be
applied to Servicing Fees and payments of interest
then due and payable in respect of the Class A
Certificates and the Class B Certificates, prior to
any allocation to principal of the Class A
Certificates. See "Description of the Class A
Certificates -- Principal Payments."
The Class A Certificates will evidence undivided
interests in the assets of the Trust designated as
the "Class A Certificateholders' Interest." Such
Class A Certificates will represent the right to
receive from such assets funds, up to (but not in
excess of): (i) the amounts required to make
payments of interest on the Class A Certificates at
a variable annual rate equal to the Class A
Certificate Rate which is equal to the lesser of
(a) one-month LIBOR (as defined and determined
herein) + 0.23% and (b) the weighted average of the
finance charges and fees that accrued on the
Advances during the relevant monthly period (the
"Settlement Period") minus the Servicing Fee
Percentage (as defined) (the "Weighted Average
Coupon"), and (ii) at any time during the Series D
Amortization Period, the payment of principal, to
the extent of the Class A Invested Amount (which is
generally equal to the unpaid principal amount of
the Class A
S-4
<PAGE> 5
Certificates, reduced to reflect unreimbursed
Charge-Off Amounts allocated to the Class A
Certificates). The "Monthly Servicing Fee" relating
to the Series D Investor Interest shall equal the
product of the Series D Invested Amount as of the
first day of the related Settlement Period and the
Servicing Fee Percentage multiplied by a fraction,
the numerator of which is equal to the actual
number of days in the related Settlement Period and
the denominator of which is equal to 360. The
"Servicing Fee Percentage" will be equal to 2%. See
"Description of the Class A
Certificates -- General."
Interest................... Interest on the Class A Certificates will be
distributed commencing on May 15, 1997, and on the
15th day of each month thereafter, or if such day
is not a Business Day (as such term is defined in
the Pooling and Servicing Agreement), on the next
succeeding Business Day (each, a "Payment Date"),
in an amount equal to the product of (i) LIBOR
+ 0.23% per annum in the case of the first Payment
Date, or (ii) the Class A Certificate Rate in the
case of all other Payment Dates, and the Class A
Invested Amount as of the immediately preceding
Payment Date (after giving effect to any payments
on, or reductions of, the Class A Invested Amount
on such Payment Date, or in the case of the first
Payment Date, the initial Class A Invested Amount)
multiplied by a fraction, the numerator of which is
equal to the actual number of days in the related
Interest Accrual Period (as defined below), and the
denominator of which is 360. Interest will accrue
from, and including, the Closing Date to, and
including, May 14, 1997 at a rate per annum equal
to LIBOR (determined as of two London business days
prior to the Closing Date) + 0.23%. Thereafter
interest will accrue at the Class A Certificate
Rate from, and including, each Payment Date to, and
including, the calendar day immediately preceding
the next succeeding Payment Date (each an "Interest
Accrual Period"). Payments of interest on the Class
B Certificates are subordinated in right of payment
to payments of interest then due and owing in
respect of the Class A Certificates.
Series D Amortization
Period Commencement Date... April 2002 Payment Date.
Series D Termination
Date....................... April 2004 Payment Date.
Principal Payments
A. Series D
Non-Amortization Period.... No principal will be payable to the Class A
Certificateholders until the Series D Amortization
Period Commencement Date or earlier upon the
occurrence of an Event of Termination. During the
Series D Non-Amortization Period, Gross Collections
(other than amounts required to be deposited into
the Collection Account (i) to pay interest on and
principal of any outstanding Series, (ii) to make
daily deposits with respect to the Variable Funding
Certificate, (iii) to pay the Servicing Fee, and
(iv) to make required deposits to be allocated to
the Excess Funding Account or payments with respect
to any Enhancements) will, subject to certain
limitations, be used on behalf of the Transferor to
purchase additional Advances from Fremont Financial
or be paid from the Trust to the Holder of the
Transferor Certificate.
S-5
<PAGE> 6
B. Series D Amortization
Period ..................... Principal payments will be made in respect of the
Class A Certificates (i) during the Series D
Amortization Period, (ii) under certain
circumstances after a Partial Amortization Event,
or (iii) pursuant to an optional repurchase by the
Transferor on or after the April 2001 Payment Date.
Payments of principal of the Class B Certificates
will be subordinated in right of payment to
payments of principal then due and owing in respect
of the Class A Certificates. In any event, funds
allocated to the Series D Certificates will be
applied to Servicing Fees and payments of interest
then due and payable in respect of the Class A
Certificates and the Class B Certificates, prior to
any allocation to principal of the Class A
Certificates. See "Description of the Class A
Certificates -- Principal Payments."
Series B Certificates...... On November 9, 1993, the Transferor issued $100
million principal amount of Series B Certificates.
The Transferor has elected to repurchase the
outstanding Series B Certificates and intends to
repurchase all of the Series B Certificates
contemporaneously with the issuance of the Series D
Certificates. See "Description of Repurchase" and
"Use of Proceeds."
Series C Certificates...... On February 14, 1996, the Transferor issued $135
million principal amount of Series C Certificates.
See "Description of Outstanding Investor
Certificates."
Variable Funding
Certificate................ The Trust has issued the Variable Funding
Certificate. The outstanding principal balance of
the Variable Funding Certificate may fluctuate from
time to time to absorb a portion of any increases
or decreases in the aggregate outstanding principal
balance of the Advances. The Holder of the Variable
Funding Certificate owns an undivided interest in
the Trust that is pari passu with the interests of
all Holders of the Series C Certificates, the
Series D Certificates and any other unsubordinated
Series of Investor Certificates that may be issued
in the future. Generally, payments of principal of
and interest on the Variable Funding Certificate
may be made more frequently than payments with
respect to the Series C Certificates, the Series D
Certificates and any other outstanding Series of
Investor Certificates. However, following an Event
of Termination, payments with respect to the
Variable Funding Certificate will only be made on a
pro rata basis with the Series C Certificates, the
Series D Certificates and any other outstanding
unsubordinated Series of Investor Certificates. See
"Description of the Variable Funding Certificate."
Series 1995-1
Certificates............... The Trust has issued an aggregate of $30 million
principal amount of Subordinated Variable Rate
Asset Backed Certificates, Series 1995-1 (the
"Series 1995-1 Certificates," and together with
certificates of any other similar subordinated
series, "Subordinated Investor Certificates").
Payments of principal and interest to the Holders
of the Subordinated Investor Certificates will be
subordinated to the Investor Interests of the
Holders of the Series C Certificates and any other
Series of Investor Certificates to which such
Subordinated Investor Certificates are expressly
subordinated and the Holder of the Variable Funding
Certificate, as each may be increased or decreased
from time to time, to the extent set forth in the
related Supplement.
S-6
<PAGE> 7
The Subordinated Investor Certificates will not be
expressly subordinated to the Series D Certificates
and therefore the Subordinated Investor
Certificates will not provide any credit
enhancement to the Series D Certificates, and
references to the Subordinated Investor
Certificates in the Prospectus should be
interpreted accordingly. The credit enhancement for
the Class A Certificates will be provided by the
portion of the Subordinated Transferor Interest
allocated to the Series D Certificates (which is
referred to as the "Series D Subordinated
Transferor Amount") and the subordination of the
Class B Invested Amount. The only credit
enhancement for the Class B Certificates will be
provided by the Series D Subordinated Transferor
Amount. Thus, the Class B Certificates will provide
credit enhancement for the benefit of the Class A
Certificates only and will not constitute
"Subordinated Investor Certificates." See
"Description of Outstanding Investor Certificates."
Transferor Certificate..... The Transferor holds the Transferor Certificate
which represents its retained interest (the
"Transferor Interest") in the Trust. The Transferor
has the right under the Pooling and Servicing
Agreement, subject to satisfying certain conditions
specified therein (including confirmation that such
issuance will not result in any Rating Agency
reducing or withdrawing its rating of any
outstanding Series or Class of Investor
Certificates), to cause the Trust to issue
additional Series or Classes of Investor
Certificates or reissue the Variable Funding
Certificate or to increase the Invested Amount or
the Issuer Amount of any outstanding Series or
Class of Investor Certificates or the Variable
Funding Certificate, in each case to the extent
provided in the related Supplement. See "Pooling
and Servicing Agreement -- New Certificates" in the
Prospectus and "Description of the Class A
Certificates -- Issuance of Additional Class A
Certificates" herein.
As the Holder of the Transferor Certificate, the
Transferor is entitled to receive, on each Business
Day, the amount of Gross Collections available for
such day that are not required to be deposited into
the Collection Account or used on behalf of the
Transferor to acquire additional Advances from
Fremont Financial; provided, however, that such
amount may not exceed the excess of the Transferor
Amount over the sum of (i) the Aggregate
Subordinated Minimum Transferor Amount and (ii) any
Defaulted Amounts for the current Settlement
Period, as determined in accordance with the
Pooling and Servicing Agreement. The Transferor's
right to receive such amounts is subject to the
subordination of the Transferor Interest as
described in the Prospectus.
Events of Termination...... Upon an Event of Termination, a partial or complete
amortization of the Series D Certificates will
occur. In this event, payments of principal of the
Class B Certificates will be subordinated in right
of payment to payments of principal then due and
owing in respect of the Class A Certificates.
However, funds allocated to the Series D
Certificates will be applied to Servicing Fees and
payments of interest then due and payable in
respect of the Class A Certificates and the Class B
Certificates, prior to any allocation to principal
of the Class A Certificates and the Class B
Certificates. See "Pooling and Servicing
S-7
<PAGE> 8
Agreement -- Events of Termination" and
"Description of the Class A
Certificates -- Principal Payments."
Cash Collateral Maintenance
Amount................... The Cash Collateral Maintenance Amount (as defined
herein) is to be funded out of Gross Collections
upon an Amortization of the Series D Certificates
and will be held on deposit in the Cash Collateral
Account pursuant to the terms of the Pooling and
Servicing Agreement. Thereafter, to the extent that
Gross Collections allocated to the Series D
Certificates are insufficient to pay interest on,
and the Monthly Servicing Fee with respect to, the
Series D Certificates, a withdrawal will be made
from the Cash Collateral Account for such purpose.
See "Pooling and Servicing Agreement."
Credit Enhancement for the
Series D Certificates.... The Aggregate Subordinated Transferor Amount will
provide credit enhancement to all Series of
Investor Certificates and the Variable Funding
Certificate. All Charge-Off Amounts allocable to
the Series D Certificates will first be allocated
to reduce to zero the portion of the Subordinated
Transferor Interest allocable to the Series D
Certificates. Charge-Off Amounts allocated to the
Series D Certificates will then be further
allocated to reduce to zero the Class B Invested
Amount, prior to any allocation to the Class A
Certificates. See "Pooling and Servicing
Agreement -- Determination and Allocation of
Charge-Offs and Subordination Amounts" and
"-- Deposits to Collection Account" in the
Prospectus.
Excess Funding Account..... On each Business Day, the Servicer will allocate to
the Excess Funding Account an amount (the "Excess
Funding Amount") which shall be equal, on any date
of determination, to the amount, if any, by which
(i) the sum of (A) the Invested Amount for each
outstanding Series, (B) the Issuer Amount, and (C)
the Aggregate Subordinated Minimum Transferor
Amount exceeds (ii) the sum of (A) the aggregate
unpaid principal balances of the Eligible Advances
(the "Aggregate Eligible Principal Advances"), (B)
the amount on deposit in the Excess Funding
Account, (C) the amounts on deposit in the
Collection Account in excess of any amounts
allocated for the payment of interest or servicing
fees on any Series of Investor Certificates or the
Variable Funding Certificate, and (D) the amounts
on deposit in the Concentration Accounts (subject
to a maximum amount equal to 3% of the Aggregate
Eligible Principal Advances, which may be increased
to 5% with the prior approval of each Rating
Agency).
The Excess Funding Account is designed to hold
Gross Collections not deposited in the Collection
Account until such amount can be invested on behalf
of the Transferor in additional Advances. Funds on
deposit in the Excess Funding Account may be
withdrawn and paid to the Transferor (subject to
the limitations described herein) or allocated to
one or more Series. In addition to the foregoing,
the Transferor may, at its option on any Business
Day, deposit funds in the Excess Funding Account to
the extent necessary to maintain the Aggregate
Subordinated Minimum Transferor Amount.
Optional Repurchase........ The Invested Amount of the Series D Certificates
will be subject to optional repurchase by the
Transferor on any Payment Date on or
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<PAGE> 9
after the April 2001 Payment Date. Upon such
optional repurchase, the Class A Certificateholders
will receive in cash an amount equal to the Class A
Invested Amount plus accrued and unpaid interest on
such Invested Amount through the day preceding the
Payment Date on which the repurchase occurs. The
Class B Certificateholders would receive in cash an
amount equal to the Class B Invested Amount plus
accrued and unpaid interest on the Class B
Certificates through the day preceding the Payment
Date on which the repurchase occurs. The Transferor
may not effect an optional repurchase of the Class
A Certificates unless all outstanding Series D
Certificates (including the Class B Certificates)
are concurrently repurchased.
Certain Federal Income Tax
Considerations........... In the opinion of Hunton & Williams, special tax
counsel to the Transferor ("Tax Counsel"), the
Class A Certificates will be characterized as debt
for federal income tax purposes. See "Certain
Federal Income Tax Consequences -- Characterization
of the Investor Certificates as Indebtedness" in
the Prospectus. Under the Pooling and Servicing
Agreement, the Transferor, the Trustee and the
Servicer will agree to treat the Class A
Certificates as debt for federal income tax
purposes. In addition, by acceptance of a Class A
Certificate, each Class A Certificateholder will be
deemed to have agreed to treat such Class A
Certificate as a debt instrument for purposes of
federal and state income tax, franchise tax and any
other tax measured in whole or in part by income.
Nonetheless, no ruling from the Internal Revenue
Service (the "Service") on the federal income tax
characterization of the arrangement between the
Transferor and the Class A Certificateholders has
been or will be sought. As a result, there can be
no guarantee that the Service will agree with Tax
Counsel's opinion of the characterization of that
arrangement. See "Certain Federal Income Tax
Consequences" in the Prospectus. At the offering
price set forth on the cover page hereof, the Class
A Certificates will not be issued with original
issue discount.
ERISA...................... The Employee Retirement Income Security Act of
1974, as amended ("ERISA") imposes certain
restrictions on those pension, profit sharing, and
other employee benefit plans to which it applies
("Plans"). Any Plan fiduciary who proposes to cause
a Plan to purchase Class A Certificates should
consult with its counsel with respect to the
potential applicability of ERISA and the Internal
Revenue Code of 1986, as amended (the "Code"), to
such investment. See "Employee Benefit Plan
Considerations" in the Prospectus.
Class A Certificate
Ratings.................... It is a condition to the issuance of the Class A
Certificates that they be rated "AAA" by Standard &
Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc., and by Duff & Phelps
Credit Rating Co. (collectively, the "Rating
Agencies"). See "Rating of the Class A
Certificates" herein and "Risk
Factors -- Certificate Rating" in the Prospectus.
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<PAGE> 10
RISK FACTORS
In addition to the other information in this Prospectus Supplement and the
Prospectus, the following should be considered carefully in evaluating an
investment in the Class A Certificates. See "Risk Factors" and "Certain Legal
Aspects of the Advances" in the Prospectus. This Prospectus Supplement contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and elsewhere in this Prospectus Supplement and
the Prospectus.
REPAYMENT OF SERIES C CERTIFICATES BEFORE SERIES D CERTIFICATES; SECOND IN
TIME. Principal is scheduled to be distributed to the Holders of Series C
Certificates beginning on the Series C Amortization Period Commencement Date
which is the May 2000 Payment Date. Thus, principal payments on the Series C
Certificates are scheduled to commence one year and eleven months prior to the
scheduled commencement of principal payments on the Series D Certificates and
could reduce the Trust's funds before principal becomes due on the Series D
Certificates. Also, the Series C Certificates are subject to optional repurchase
by the Transferor on and after the May 1999 Payment Date. The outstanding Issuer
Amount of the Variable Funding Certificate may fluctuate from time to time and
payments of principal on the Variable Funding Certificate may be due and payable
on any Payment Date. Thus, principal payments on the Variable Funding
Certificate could be made at any time and could reduce the Trust's funds before
principal becomes due on the Series D Certificates. See "Description of the
Certificates -- Variable Funding Certificate" in the Prospectus. Fremont
Financial will continue to need one or more internal or external sources of
working capital in order to fund the Advances and continue its operations.
Fremont Financial should be able to obtain a portion of such capital from the
sale of Advances to the Transferor and the Trust if the Trust is able to issue
additional Investor Certificates of a new or existing Series or Class or
increase the Variable Funding Certificate. If the Trust were unable to issue
additional Investor Certificates or increase the Variable Funding Certificate or
if other internal or external sources of capital were unavailable or
insufficient for Fremont Financial's working capital needs, Fremont Financial
would need to seek an alternative source of capital. If Fremont Financial were
unable to obtain an alternative source of capital, sufficient to continue to
make advances to its Obligors after a Series or Class of Certificates commenced
amortization, payments by Obligors could be adversely affected and an Event of
Termination could occur. See "Maturity Assumptions" herein and in the
Prospectus. If the Transferor were unable to issue additional Investor
Certificates or increase the Variable Funding Certificate, the Transferor might
seek, as an alternative source of funding, to sell a portion of the assets in
the Trust sufficient to pay principal of and accrued and unpaid interest on all
then-outstanding Investor Certificates and the Variable Funding Certificate.
There can be no assurance that such a strategy would be effective or would yield
sufficient proceeds to repay all then-outstanding Investor Certificates, or that
alternate financing would be available.
PAYMENTS AND MATURITY. The Advances may be paid at any time, and there is
no assurance that there will be any additional Advances created under the
Contracts (or that new Contracts will be created) or that any particular pattern
of Obligor repayments will occur. The full payment of the Series D Invested
Amount on any Payment Date on or after the Series D Amortization Period
Commencement Date is primarily dependent on the rate of repayment of the
Advances by Obligors and other factors described under "Maturity Assumptions"
herein and in the Prospectus. As a result, no assurance can be given that the
Class A Invested Amount will be paid on or before any particular date prior to
the Series D Termination Date. See "Description of the Class A
Certificates -- Principal Payments."
VOLATILITY OF LIBOR; BASIS RISK. The Class A Certificate Rate and the Class
B Certificate Rate may fluctuate from one Interest Accrual Period to another in
response to changes in LIBOR. From January 1987 to December 1996, LIBOR ranged
between a high of 10.31% and a low of 3.06%. The Transferor believes that LIBOR
will continue to fluctuate and no representation can be made as to what LIBOR
will be in the future. In addition, the Advances bear interest at the prime rate
plus a margin, while the Series D Certificates bear interest at a floating rate
based on LIBOR. To the extent that the prime rate decreases or does not increase
as fast as LIBOR, the interest rate payable on the Class A Certificates
S-10
<PAGE> 11
may be limited to the Weighted Average Coupon rate received on the Advances and
in the event such circumstances continue for more than three consecutive Payment
Dates, an Event of Termination will occur. See "Pooling and Servicing
Agreement -- Events of Termination." Further, if there is a decline in the prime
rate, the amount of finance charges and fees in the Trust may be reduced and,
even if there is a similar reduction in the floating rate applicable to any
Series or Class, there will not necessarily be a similar reduction in the other
amounts required to be funded out of such finance charges and fees (such as
Defaulted Amounts (as defined herein)). See "Description of the Class A
Certificates -- Interest Payments" and "Pooling and Servicing
Agreement -- Determination and Allocation of Charge-Offs and Subordinated
Amounts -- Defaulted Amount" in this Prospectus Supplement.
CERTAIN LEGAL ASPECTS; BANKRUPTCY CONSIDERATIONS. As described in the
Prospectus under "Risk Factors -- Certain Bankruptcy Considerations" and
"Certain Legal Aspects of the Advances," the transfer of Advances from Fremont
Financial to the Transferor is intended to be, and has been structured as, an
"absolute conveyance" or "true sale" of the Advances to the Transferor. In
Octagon Gas Systems, Inc. v. Rimmer (In re Meridian Reserve, Inc.), 995 F.2d 948
(10th Cir. 1993), cert. denied, 114 S.Ct. 554 (1993), the United States Court of
Appeals for the Tenth Circuit suggested that even a sale of accounts generally
constitutes a secured financing, and therefore, the accounts would be considered
property of the seller's estate in a bankruptcy of the seller. In June 1994, the
Permanent Editorial Board ("PEB") of the Uniform Commercial Code issued an
official comment, PEB Commentary No. 14, which criticized the Octagon decision,
but such commentary does not have the force of law. If a challenge were made to
the characterization of the transfer of Advances to the Transferor as an
"absolute conveyance" or a "true sale", a court could follow the Octagon
analysis or otherwise recharacterize the sale of the Advances, with the result
that the Advances would be considered property of Fremont Financial, and subject
to claims of creditors of Fremont Financial. In any such case, a court would
likely balance a number of factors to determine whether the substance of the
transaction warranted recharacterization. The court's analysis would probably
take into consideration the intent of the parties to treat the transaction as a
sale and the structure of the transaction as a sale. However, no assurance can
be given that such intent would be controlling. If the foregoing position were
to be argued before a court, such arguments, even if ultimately unsuccessful,
could prevent timely payments of amounts due on the Series D Certificates, and
if ultimately successful, could result in payment of reduced amounts on the
Series D Certificates.
THE TRUST
The assets of the Trust include, among other things, the Advances, monies
on deposit in the Excess Funding Account, and all monies due or to become due in
payment of the Advances. As of December 31, 1996, the balance of the Excess
Funding Account was approximately $15 million. Upon the closing of this offering
and the repurchase of the Series B Certificates, the balance of the Excess
Funding Account is expected to be approximately $10 million.
THE TRUST PORTFOLIO
The Trust Portfolio consists of Advances arising under Contracts originated
or purchased by Fremont Financial that have been transferred to the Trust. See
"The Transferor and Fremont Financial," "Asset-Based Lending" and "The Advances"
in the Prospectus.
As of December 31, 1996, with respect to the Advances in the Trust
Portfolio: (a) there were 135 Obligors with an aggregate principal balance of
$304.6 million under total lines of credit of $506.9 million; (b) the average
credit line per Obligor was $3.75 million and the average balance of principal
Advances per Obligor was $2.26 million; and (c) the length of time until
maturity of the Contracts with respect to the Advances ranged from 1 month to 49
months. For the year ended December 31, 1996, the average interest yield (net of
fees) over the average prime rate was 3.65%. At December 31, 1996, the prime
rate was 8.25%. See "Asset-Based Lending -- General" in the Prospectus.
S-11
<PAGE> 12
COMPOSITION OF ADVANCES BY CLASSIFICATION OF PRIMARY COLLATERAL
As of December 31, 1996, the composition by classification of Primary
Collateral of the Advances in the Trust Portfolio as a percentage of the total
principal outstanding on that date was as follows: 50.6% accounts receivable;
28.5% inventory; 15.0% machinery and equipment; and 5.7% real estate. In
addition, 0.2% of the Advances were classified as non-accrual.
The following table sets forth the composition of the Advances in the Trust
Portfolio by classification of Primary Collateral at the end of each indicated
month and as a percentage of the total principal outstanding at the dates
indicated.
<TABLE>
<CAPTION>
ACCOUNTS MACHINERY AND TOTAL TRUST
RECEIVABLE INVENTORY EQUIPMENT REAL ESTATE NON-ACCRUAL PORTFOLIO
---------- --------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
March 1993........... 64.8% 22.3% 10.4% 2.5% 0.0% $ 207,581,000
June 1993............ 63.5% 24.3% 9.8% 2.4% 0.0% 224,082,000
September 1993....... 59.0% 24.6% 13.9% 2.3% 0.2% 265,398,000
December 1993........ 60.8% 23.2% 13.1% 2.7% 0.2% 302,845,000
March 1994........... 57.1% 25.3% 13.9% 3.5% 0.2% 289,093,000
June 1994............ 56.6% 24.4% 14.9% 4.0% 0.1% 331,841,000
September 1994....... 57.4% 23.6% 15.1% 3.8% 0.1% 342,431,000
December 1994........ 56.0% 25.9% 14.6% 3.5% 0.0% 356,881,000
March 1995........... 55.8% 26.4% 14.7% 3.0% 0.1% 348,213,000
June 1995............ 56.2% 26.6% 13.0% 4.1% 0.1% 369,856,000
September 1995....... 55.5% 26.5% 13.2% 4.7% 0.1% 364,736,000
December 1995........ 52.8% 25.4% 15.2% 6.4% 0.2% 308,716,000
March 1996........... 50.4% 28.5% 14.3% 6.7% 0.1% 314,114,000
June 1996............ 50.3% 28.4% 14.8% 6.2% 0.3% 335,116,000
September 1996....... 54.1% 25.9% 13.2% 6.6% 0.2% 351,624,000
December 1996........ 50.6% 28.5% 15.0% 5.7% 0.2% 304,559,000
</TABLE>
The Primary Collateral is the collateral that Fremont Financial gives the
most emphasis in determining the amount to be advanced to a borrower. A loan, or
a portion thereof, is classified as non-accrual when, in Fremont Financial's
opinion, amounts due under the related contract may not be fully collected
because the value of the underlying collateral is insufficient and/or the
financial condition of the relevant borrower is uncertain. No assurance can be
given that Fremont Financial has correctly characterized the collectibility of
the Advances.
The table set forth above reflects the composition of the Trust Portfolio,
which has differed from time to time and may differ from the results for the
Fremont Portfolio, as described under "Asset-Based Lending" in the Prospectus.
The outstanding balance of the Trust Portfolio may increase or decrease based
upon such factors as the number of new Contracts added to the Trust, the number
of Contracts removed from the Trust, the number of Contracts paid off and
terminated by Obligors, and fluctuations in the amounts borrowed by existing
Obligors (which fluctuations may be due to various factors, including
seasonality and general business or industry specific conditions). For example,
under the Trust's concentration limits, any Advance constituting 3% or more of
the Aggregate Eligible Principal Advances will not be considered an Eligible
Advance to the extent of such excess. See "Pooling and Servicing
Agreement -- Representations and Warranties" in the Prospectus. Larger Advances
may therefore be retained by Fremont Financial rather than being sold to Fremont
Funding and transferred to the Trust or, if initially transferred to the Trust,
may be subsequently removed from the Trust. From the inception of the Trust
through December 31, 1996, Advances arising under five Contracts have been
removed from the Trust (in accordance with the conditions described in "Pooling
and Servicing Agreement -- Removal of Contracts" in the Prospectus). One of
these loans, in the principal amount of approximately $13.8 million, was removed
from the Trust in 1995, was assigned non-accrual status shortly thereafter and
subsequently a portion of the loan was charged off by Fremont Financial. This
resulted in an increase in
S-12
<PAGE> 13
the percentage of Advances on non-accrual status in the Fremont Portfolio as
well as an increase in the net charge-off percentage for the Fremont Portfolio,
but did not adversely impact the non-accrual and net charge-off percentages for
the Trust Portfolio. However, had the loan remained in the Trust Portfolio, it
would have adversely affected the non-accrual and net charge-off percentages for
the Trust Portfolio. See "Pooling and Servicing Agreement -- Removal of
Contracts," "Risk Factors -- Competition in the Small Business and Middle Market
Loan Industry," "Asset-Based Lending -- Composition of Collateral of the
Advances in the Fremont Portfolio" and "The Advances -- General" in the
Prospectus.
COMPOSITION OF ADVANCES BY LOAN BALANCE
The following table sets forth, as of December 31, 1996, with respect to
the Advances in the Trust Portfolio the number of Obligors with Advances within
certain defined ranges and the size of those Advances as a percentage of the
Trust Portfolio.
<TABLE>
<CAPTION>
NUMBER OF
LOAN BALANCE RANGE OBLIGORS PERCENTAGE TOTAL ADVANCES(1) PERCENTAGE
- -------------------------------------- --------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Under $1 Million...................... 32 24% $ 18,046,000 6%
$1 Million to $2 Million.............. 54 40% 75,785,000 24%
$2 Million to $3 Million.............. 22 16% 53,747,000 18%
$3 Million to $4 Million.............. 5 4% 18,028,000 6%
$4 Million to $5 Million.............. 8 6% 35,931,000 12%
$5 Million and above.................. 14 10% 103,022,000 34%
--- --- ------------ ---
Total............................... 135 100% $ 304,559,000 100%
=== === ============ ===
</TABLE>
- ---------------
(1) The largest amount of Advances outstanding to one Obligor in the Trust
Portfolio as of December 31, 1996 amounted to approximately $11.4 million.
COMPOSITION OF ADVANCES BY GEOGRAPHIC DISTRIBUTION
The following table provides the geographic distribution of the chief
operating office of each Obligor for the Advances in the Trust Portfolio on the
basis of Advances outstanding and the number of Obligors generating such
Advances as of December 31, 1996.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF TOTAL OF TOTAL
STATE OBLIGORS TOTAL LINES ADVANCES ADVANCES
- ----------------------------------------- --------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California............................... 44 $ 135,922 $ 89,676 29.4%
Michigan................................. 15 82,761 45,039 14.8%
Georgia.................................. 7 37,150 19,653 6.5%
Maryland................................. 6 30,700 18,480 6.1%
Minnesota................................ 8 25,960 13,250 4.4%
Missouri................................. 3 17,509 13,146 4.3%
Florida.................................. 2 19,000 11,960 3.9%
Texas.................................... 4 20,100 11,284 3.7%
Indiana.................................. 2 14,500 9,857 3.2%
New York................................. 5 12,650 9,426 3.1%
All other states(*)...................... 39 110,628 62,788 20.6%
--- -------- -------- -----
135 $ 506,880 $ 304,559 100.0%
=== ======== ======== =====
</TABLE>
- ---------------
* All other states, each with less than 3.00%.
S-13
<PAGE> 14
COMPOSITION OF ACCOUNTS BY TYPE OF OBLIGOR
The following table provides the composition of the Advances in the Trust
Portfolio on the basis of the type of business in which the Obligor is involved
as of December 31, 1996.
<TABLE>
<CAPTION>
STANDARD
INDUSTRIAL PERCENTAGE
CLASSIFICATION TOTAL TOTAL OF TOTAL
CODE CATEGORY LINES ADVANCES ADVANCES
- -------------- ------------------------------------------------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<C> <S> <C> <C> <C>
STANDARD INDUSTRIAL CLASSIFICATION CODE CATEGORIES OVER 2.00%
519 Wholesale trade/non-durable goods/misc. non-durable
goods................................................. $ 32,509 $ 22,615 7.43%
202 Manufacturing/food and kindred products/dairy
products.............................................. 30,350 20,692 6.79%
346 Manufacturing/fabricated metal products/metal forging
and stamping.......................................... 28,120 18,513 6.08%
251 Manufacturing/furniture and fixtures/household
furniture............................................. 32,750 17,899 5.88%
308 Manufacturing/rubber and misc. plastics products/misc.
plastics products..................................... 25,337 15,073 4.95%
275 Manufacturing/printing and publishing/commercial
printing.............................................. 22,840 13,834 4.54%
503 Wholesale trade/durable goods/lumber and construction
materials............................................. 20,600 13,661 4.49%
267 Manufacturing/paper and allied products/misc.
converted paper products.............................. 19,640 11,508 3.78%
571 Retail trade/furniture and home furnishings
stores/furniture and home furnishings stores.......... 20,000 11,360 3.73%
517 Wholesale trade/non-durable goods/petroleum and
petroleum products.................................... 21,328 11,325 3.72%
209 Manufacturing/food and kindred products/misc. food and
kindred products...................................... 19,500 11,216 3.68%
373 Manufacturing/transportation equipment/ship and boat
building and repairing................................ 15,000 11,041 3.63%
349 Manufacturing/fabricated metal products/misc.
fabricated metal products............................. 12,900 8,504 2.79%
514 Wholesale trade/non-durable goods/groceries and
related products...................................... 10,300 7,391 2.43%
506 Wholesale trade/durable goods/electrical goods........ 8,630 7,306 2.40%
--------
Sub-total............................................. $ 319,804 $ 201,938 66.32%
STANDARD INDUSTRIAL CLASSIFICATION CODE CATEGORIES UNDER 2.00%........ 187,076 102,621 33.68%
--------
Total................................................. $ 506,880 $ 304,559 100.00%
========
</TABLE>
S-14
<PAGE> 15
CHARGE-OFFS, RECOVERIES AND NET CHARGE-OFFS AND NON-ACCRUAL LOANS
The following table sets forth the amounts of charge-offs and non-accrual
loans for the Trust Portfolio at each of the dates and for each of the periods
shown. Loans, or portions thereof, are classified as non-accrual when, in
Fremont Financial's opinion, amounts due under a Contract will not be collected
because the value of the underlying collateral is insufficient or the financial
condition of the Obligor is uncertain. A non-accrual loan, or portion thereof,
is charged-off when the amount of an Advance that will not be realized becomes
more certain. A recovery represents amounts realized with respect to an Advance
that was charged off in any prior period. See "Risk Factors -- Competition in
the Small Business and Middle Market Loan Industry" and "Asset-Based Lending" in
the Prospectus. During March 1997, Fremont Financial placed one of the loans in
the Trust Portfolio, in the principal amount of approximately $3.5 million, on
non-accrual status and charged-off approximately $500,000 of the amount due
under the Contract. It is unknown at this time if and to what extent additional
charge-offs will be necessary with respect to this Contract.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
AS OF DECEMBER 31, 1996:
Performing Trust Portfolio.................................... $304,049
Portfolio on Non-Accrual Status............................... 510
--------
Total Trust Portfolio...................................... $304,559
========
Non-Accrual Loans as a Percentage of Trust Portfolio.......... 0.17%
========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Performing Trust Portfolio......... $ 318,670 $ 344,116 $ 318,143
Average Trust Portfolio on Non-Accrual
Status................................... 592 458 398
--------- ---------- ----------
Average Total Trust Portfolio............ $ 319,262 $ 344,574 $ 318,541
========= ========== ==========
Charge-Offs................................ $ 0 $ 0 $ 423
Recoveries................................. 0 (8) (17)
--------- ---------- ----------
Net Charge-Offs.......................... $ 0 $ (8) $ 406
========= ========== ==========
Net Charge-Off Percentage(1)............. 0% (0.002)% 0.13%
========= ========== ==========
</TABLE>
- ---------------
(1) Net Charge-Offs as a percentage of Average Total Trust Portfolio.
FREMONT FINANCIAL
Fremont Financial makes asset-based loans, to small and middle-market
businesses, that are primarily secured by accounts receivable and inventory.
Fremont Financial's total loan portfolio (the "Fremont Portfolio") grew from
$157 million at December 31, 1990 to $565 million at December 31, 1996. As used
herein, the term "Fremont Portfolio" includes information relating to all
commercial finance loans held by Fremont Financial, including information
relating to the Advances transferred to the Trust, as well as loan
participations, stand-alone term loans and other loans owned by Fremont
Financial. This growth has been achieved partly through development of Fremont
Financial's customer base and partly through purchases of loans originated by
others.
Fremont Financial is a wholly-owned subsidiary of Fremont General
Corporation, a publicly owned insurance and financial services holding company.
Fremont Financial has its headquarters in Santa Monica, California; regional
offices in Chicago, Illinois, Atlanta, Georgia, and New York, New York; and
S-15
<PAGE> 16
marketing offices in Boston, Massachusetts, Minneapolis, Minnesota, Cleveland,
Ohio, Detroit, Michigan, St. Louis, Missouri, Richmond, Virginia, Orange County,
California and San Francisco, California. Fremont Financial originates new
lending relationships under $1,000,000 through its Fremont Business Credit
division, which began its commercial finance operations in 1995. Fremont
Business Credit's operations are located in Santa Monica, California, with two
California marketing offices in Walnut Creek and Newport Beach. See "The
Transferor and Fremont Financial -- Fremont Financial" and "Asset-Based Lending"
in the Prospectus.
CERTAIN HISTORICAL INFORMATION RELATING TO THE FREMONT PORTFOLIO
The following tables set forth information relating to the Fremont
Portfolio with respect to all Advances outstanding as of the dates and for the
periods indicated (except where expressly provided otherwise). Actual
characteristics, composition, charge-off and non-accrual experience with respect
to the Trust Portfolio have been, and are likely to be, different. There can be
no assurance that the characteristics, composition, charge-off and non-accrual
experience for the Advances included in the Trust Portfolio from time to time
will be similar to the historical experience for the Fremont Portfolio set forth
below. See "Asset-Based Lending" in the Prospectus.
AVERAGE INTEREST YIELD OVER PRIME RATE
The average performing portfolio balance and gross interest yield over the
prime rate of the Fremont Portfolio for each of the fiscal years 1994, 1995, and
1996 is shown below. See "Asset-Based Lending -- Certain Historical Information
Relating to the Fremont Portfolio" in the Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Performing Fremont
Portfolio........................ $ 580,135 $ 548,820 $ 430,656
Average Prime Rate................. 8.27% 8.83% 7.14%
Gross Interest Yield over the Prime
Rate............................. 2.90% 3.59% 4.49%
</TABLE>
The gross interest yield over the average prime rate has fluctuated for the
period shown above for a variety of reasons. The decrease of this yield in 1995
and 1996 for the Fremont Portfolio is due primarily to a substantial increase of
participations in syndicated loans and of commercial mortgage loans in the
Fremont Portfolio, which on average have a lower interest yield than other loans
in the Fremont Portfolio. Such participations and loans are not included among
the Advances transferred to the Trust. In addition, due to increased competitive
pressures during the prior three years, Fremont Financial has reduced fees and
interest charges on certain Contracts to retain certain Obligors. See "Risk
Factors -- Competition in the Small Business and Middle Market Loan Industry" in
the Prospectus.
S-16
<PAGE> 17
COMPOSITION OF COLLATERAL OF THE ADVANCES IN THE FREMONT PORTFOLIO
The following table sets forth the composition of the Advances in the
Fremont Portfolio by classification of Primary Collateral at each of the dates
shown and as a percentage of the total principal outstanding at the dates
indicated. See "Asset-Based Lending -- Composition of Collateral of the Advances
in the Fremont Portfolio" in the Prospectus.
<TABLE>
<CAPTION>
ACCOUNTS MACHINERY AND TOTAL FREMONT
RECEIVABLE INVENTORY EQUIPMENT REAL ESTATE NON-ACCRUAL PORTFOLIO
---------- --------- ------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
December 1993........ 59.8% 22.7% 10.8% 5.6% 1.1% $ 387,474,000
March 1994........... 54.7% 26.8% 11.1% 5.9% 1.5% 391,244,000
June 1994............ 55.4% 24.6% 12.0% 7.3% 0.7% 449,036,000
September 1994....... 59.5% 22.8% 11.6% 5.9% 0.2% 482,648,000
December 1994........ 54.3% 21.6% 10.8% 13.2% 0.1% 543,907,000
March 1995........... 54.1% 23.7% 9.7% 12.4% 0.1% 552,048,000
June 1995............ 51.9% 25.6% 9.6% 12.8% 0.1% 585,875,000
September 1995....... 50.8% 25.3% 8.6% 12.9% 2.4% 599,267,000
December 1995........ 48.7% 27.8% 9.9% 11.8% 1.8% 532,693,000
March 1996........... 44.3% 27.6% 9.5% 18.1% 0.5% 570,017,000
June 1996............ 44.2% 27.5% 10.2% 17.4% 0.7% 584,623,000
September 1996....... 44.5% 26.6% 8.9% 19.4% 0.6% 646,773,000
December 1996........ 40.8% 28.0% 10.6% 20.2% 0.4% 564,537,000
</TABLE>
CHARGE-OFFS, RECOVERIES AND NET CHARGE-OFFS
The following table sets forth the amounts of charge-offs, recoveries and
net charge-offs at each of the dates, and for each of the periods, shown for the
Fremont Portfolio. See "Asset-Based Lending -- Charge-Offs, Recoveries and Net
Charge-Offs" in the Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Total Fremont Portfolio................. $ 584,509 $ 553,409 $ 434,232
Charge-Offs..................................... $ 5,401 $ 2,373 $ 3,287
Recoveries...................................... (20) (513) (66)
--------- --------- ---------
Net Charge-Offs................................. $ 5,381 $ 1,860 $ 3,221
========= ========= =========
Net Charge-Offs as a Percentage of Average Total
Fremont Portfolio............................. 0.92% 0.34% 0.74%
========= ========= =========
</TABLE>
MATURITY ASSUMPTIONS
Principal with respect to the Series D Certificates will not be payable
until the Series D Amortization Period Commencement Date, unless an Event of
Termination for the Series D Certificates has occurred. Payments of principal of
the Class B Certificates are subordinated in right of payment to payments of
principal then due and owing in respect of the Class A Certificates. Funds
allocated to the Series D Certificates will be applied to Servicing Fees and
payments of interest then due and payable in respect of the Class A Certificates
and the Class B Certificates, prior to any allocation to principal of the Class
A Certificates. The timing of the full amortization of the Series D Certificates
following the Series D Amortization Period Commencement Date is primarily
dependent on the rate of payment by Obligors of the Advances, the aggregate
outstanding amount of Investor Certificates (including the Series D
Certificates) and the Variable Funding Certificate, the principal repayment
provisions of those Certificates and the then-current size of the Transferor
Interest. The rate of payment on the Advances is unpredictable and is dependent
upon, among other things, receipt by Obligors of payment on the underlying
collateral and other matters relating to the business of Obligors. To the extent
that an Obligor
S-17
<PAGE> 18
does not receive payment on the underlying collateral or is otherwise
experiencing results of operations or sales performance below its projections or
plans, it is likely that an Obligor's ability to pay principal and interest on
the Advances would be limited. Therefore the timing of the principal payments on
the Series D Certificates will be uncertain and might occur at any time during
the Amortization Period. In addition to the non-payment of Advances due to
defaults on the collateral underlying such Advances, payments on Advances may be
affected by other circumstances. Although the Contracts state that the making of
Advances by Fremont Financial is discretionary, under certain circumstances
Fremont Financial might be deemed to have an obligation to continue to fund such
Advances pursuant to the related Contract. In the event that Fremont Financial
did not continue to fund the Advances, payments by Obligors would likely be
delayed and might even be reduced or terminated. Therefore payments on the
Series D Certificates could be adversely affected. See "Risk Factors -- Certain
Legal Aspects; Bankruptcy Considerations" in this Prospectus Supplement and
"Risk Factors -- Certain Legal Aspects of Contracts" and " -- Payments and
Maturity" in the Prospectus.
The Class A Invested Amount will also be subject to optional repurchase by
the Transferor in its sole discretion on any Payment Date on or after the April
2001 Payment Date. The Transferor shall not effect an optional repurchase of the
Class A Certificates unless all outstanding Series D Certificates (including the
Class B Certificates) are concurrently repurchased. Funds to be used to make
such repurchases shall be provided by the Transferor out of funds available to
it from distributions on the Transferor Certificate or from proceeds of sales of
additional Series or Classes of Investor Certificates or additional capital
contributions; however, the Transferor makes no assurance that it will have
sufficient funds at any time in the future to fund any such optional repurchases
or that any such optional repurchases will occur. The repurchase price of the
Class A Certificates will be equal to the Class A Invested Amount plus accrued
and unpaid interest on such Invested Amount through the day preceding the
Payment Date on which the repurchase occurs.
MONTHLY PRINCIPAL PAYMENT RATES FOR TRUST PORTFOLIO
The following table sets forth the highest and lowest monthly payment rates
for the Advances in the Trust Portfolio during any month for the years ended
December 31, 1994, 1995 and 1996, and the simple average monthly payment rate
for all the months during each of such periods. The payment rate with respect to
any Contract is determined on a monthly basis by dividing the total payments
received during a month with respect to such Contract by the total of the
outstanding Advances under such Contract as of the beginning of such month. The
monthly payment rates for the Advances in the Trust Portfolio generally declined
in 1995 and 1996 from the payment rates experienced during 1994. Although the
trend toward lower monthly payment rates illustrated below may be due to a
variety of reasons, a contributing factor is the decrease in the principal
amount of Advances for which accounts receivable are the primary collateral. To
the extent that the primary collateral for an Advance is inventory, machinery,
equipment, real estate or some other form of less liquid collateral, it is
expected that the payment rate for such Advances would be slower than for
Advances for which the primary collateral is accounts receivable. No assurance
can be given that any specific payment rate, whether higher or lower than the
current rates, will be achieved or maintained in the future. However, it can be
expected that to the extent payment rates on the Advances decrease or are lower
than anticipated, then the rate of payment of principal on the Series D
Certificates may also be slower than anticipated. For a further discussion of
these payment rates, see "Maturity Assumptions" in the Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Lowest Month.............................. 65.10% 69.73% 68.10%
Highest Month............................. 78.20% 84.47% 88.62%
Monthly Simple Average.................... 72.45% 76.48% 79.26%
</TABLE>
S-18
<PAGE> 19
DESCRIPTION OF THE CLASS A CERTIFICATES
The Class A Certificates will be issued pursuant to the Pooling and
Servicing Agreement as supplemented by the Series D Supplement. Pursuant to the
Pooling and Servicing Agreement and the Series D Supplement, the Transferor and
the Trustee may execute additional supplements in order to issue additional
Series or Classes of Investor Certificates. The following is a summary of the
terms of the Class A Certificates. Copies of the Pooling and Servicing Agreement
and the Series D Supplement will be available following the Closing Date from
the Trustee and will be filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K within 15 days of the Closing Date. See
"Pooling and Servicing Agreement" herein and in the Prospectus.
GENERAL
The Fremont Small Business Loan Master Trust (the "Trust") will issue
Variable Rate Asset Backed Certificates, Series D (the "Series D Certificates")
in an aggregate principal amount of $109,260,000. The Series D Certificates will
consist of $100,000,000 in aggregate principal amount of Variable Rate Asset
Backed Certificates, Series D, Class A (the "Class A Certificates") and
$9,260,000 in aggregate principal amount of Variable Rate Asset Backed
Certificates, Series D, Class B (the "Class B Certificates"). The Class A
Certificates are the only Certificates offered hereby. Information herein
contained relating to the Class B Certificates is provided only to provide more
complete information with respect to the Class A Certificates.
The Class A Certificates will represent undivided interests in the assets
of the Trust allocated to the Series D Investor Interest, including the right to
receive Collections on the Advances in the Trust up to, but not in excess of,
the amounts required to make payments of interest on and principal of the Class
A Certificates.
The Transferor owns the Transferor Certificate, which will be transferable
only as described below. The Transferor Certificate represents an undivided
interest in the Trust, a portion of which is subordinated to each Series of
Investor Certificates and the Variable Funding Certificate (the "Aggregate
Subordinated Transferor Interest"). The Aggregate Subordinated Transferor
Interest represents the right to receive Collections on the Advances remaining
after the allocation of the Collections to all Investor Certificates and the
Variable Funding Certificate then-outstanding. Any amounts represented by the
Transferor Certificate in excess of the Aggregate Subordinated Transferor
Interest represent an interest that is pari passu with any outstanding
unsubordinated Investor Certificates (including the Series C Certificates and
the Series D Certificates) and the Variable Funding Certificate; however, this
portion of the Transferor Interest is not entitled to the benefit of the
subordination provided by the Subordinated Transferor Interest. The Transferor
Certificate may be, subject to certain limitations and conditions set forth in
the Pooling and Servicing Agreement, exchanged in part for one or more new
Series of Investor Certificates or a Variable Funding Certificate and a reissued
Transferor Certificate. The Transferor Certificate may not be transferred for
any other purpose. See "Pooling and Servicing Agreement -- New Certificates" in
the Prospectus.
During the Series D Non-Amortization Period, the Class A Invested Amount
and the Class B Invested Amount in the Trust will remain constant except under
certain limited circumstances. The aggregate outstanding amount of Advances in
the Trust, however, will vary each day as new Advances are created and others
are paid. The amount of the Transferor Interest will fluctuate each day,
therefore, to reflect the changes in the aggregate outstanding amount of the
Advances in the Trust. During the Series D Amortization Period, the Class A
Invested Amount and Class B Invested Amount in the Trust will decline as
payments of principal are collected with respect to the Advances and held for
distribution (and then distributed) to the Class A Certificateholders and the
Class B Certificateholders as set forth herein. As a result, the Transferor
Interest during the Series D Amortization Period will generally increase each
month to reflect the reductions in the Invested Amounts of the Class A
Certificates and the Class B Certificates and will also change to reflect the
variations in the amount of the Advances in the Trust.
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<PAGE> 20
The Class A Certificates initially will be represented by global
certificates registered in the name of the nominee of DTC (together with any
successor depository selected by the Transferor, the "Depository"), except as
set forth below. Beneficial interests in the Class A Certificates will be
available for purchase in minimum denominations of $1,000 and in integral
multiples in excess thereof in book-entry form only directly or indirectly
through the facilities of DTC (in the United States) or Cedel Bank, societe
anonyme, or the Euroclear System (in Europe). The Transferor has been informed
by DTC that DTC's nominee will be Cede. Accordingly, Cede is expected to be the
holder of record of all Class A Certificates. No person acquiring a beneficial
interest in the Class A Certificates (a "Class A Certificate Owner") in
book-entry form will be entitled to receive a certificate representing such
person's interest in the Class A Certificates unless and until Definitive
Certificates are issued under the limited circumstances described in the
Prospectus. In such instance, all references herein to actions by Class A
Certificateholders shall refer to actions taken by the Depository upon
instructions from its participating organizations, and all references herein to
distributions, notices, reports, and statements to Class A Certificateholders
shall refer to distributions, notices, reports, and statements to the Depository
or its nominee, as the registered holder of the Class A Certificates, for
distribution to Class A Certificate Owners in accordance with the Depository's
procedures. See "Description of the Certificates -- Book-Entry Registration" and
"Description of the Certificates -- Definitive Certificates" in the Prospectus.
INTEREST PAYMENTS
Interest will accrue on the Class A Invested Amount from, and including,
the Closing Date through the day immediately preceding the initial Payment Date
at a per annum rate equal to LIBOR (determined as of the second London business
day prior to the Closing Date) + 0.23%. Interest thereafter will accrue at the
Class A Certificate Rate for each period from, and including, a Payment Date
through the calendar day immediately preceding the next Payment Date (each, an
"Interest Accrual Period"). Interest will be distributed to the Class A
Certificateholders in an amount equal to the product of (i) with respect to the
first Payment Date, the rate described in the first sentence of this paragraph,
or (ii) with respect to all Payment Dates thereafter, the Class A Certificate
Rate, each multiplied by a fraction, the numerator of which is the actual number
of days in the related Interest Accrual Period, and the denominator of which is
360, and the Class A Invested Amount as of the Closing Date or the immediately
preceding Payment Date, as the case may be. The "Class A Certificate Rate" will
be equal to the lesser of (i) LIBOR (as defined below) + 0.23% per annum, or
(ii) the Weighted Average Coupon (as defined below), each as determined for the
related Interest Accrual Period or Settlement Period as applicable.
LIBOR for each Interest Accrual Period will be established by the Trustee
as follows:
(i) On the second London business day prior to each Payment Date (the
"LIBOR Determination Date"), the Trustee will determine LIBOR for the next
succeeding Interest Accrual Period which shall be equal to the rate for
deposits in U.S. Dollars for a period of one month which appears on
Telerate Page 3750 as of 11:00 a.m. London time on such LIBOR Determination
Date. If such rate does not appear on Telerate Page 3750, the rate for that
day will be determined on the basis of the rates at which deposits in U.S.
Dollars are offered by the Reference Banks (as defined) at approximately
11:00 a.m. London Time on the LIBOR Determination Date to prime banks in
the London interbank market for a period of one month commencing on the
first day of such Interest Accrual Period. The Trustee will request the
principal London office of each of four major banks selected by the
Servicer (the "Reference Banks") to provide a quotation of its rate.
(ii) If at least two such quotations are provided, the rate for that
day will be the arithmetic mean of the quotations (rounded up, if
necessary, to the nearest multiple of 0.0625% per annum).
(iii) If fewer than two quotations are provided as requested, the rate
for that day will be the arithmetic mean (rounded as in (ii) above) of the
rates quoted by major banks in New York City, selected by the Servicer, at
approximately 11:00 a.m. New York City time on that date for loans in U.S.
Dollars to leading European banks for a period of one month commencing on
the first day of such Interest Accrual Period.
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<PAGE> 21
(iv) If the banks selected by the Servicer are not quoting as
described in (iii) above, LIBOR for such Interest Accrual Period will be
LIBOR as determined on the previous LIBOR Determination Date.
The "Weighted Average Coupon" for any Settlement Period will be equal to
the weighted average of the finance charges and fees that actually accrued on
the Advances minus 2% (the "Servicing Fee Percentage"). The Trustee will
determine the Weighted Average Coupon for a Settlement Period by the
Determination Date for such Settlement Period.
The Class A Certificate Rate has no stated minimum. The establishment of
LIBOR or the Weighted Average Coupon, as applicable, and the subsequent
calculation of the interest rate for each Interest Accrual Period by the
Trustee, in the absence of manifest error, will be final and binding. The
interest rates applicable to the then current and the immediately preceding
Interest Accrual Periods may be obtained by telephoning the Trustee at its
corporate trust office at (800) 246-5761.
PRINCIPAL PAYMENTS
During the Series D Non-Amortization Period (which begins on the Closing
Date and ends on the day before the Series D Amortization Period begins), no
principal payments will be made to the Class A Certificateholders. During the
Series D Amortization Period, principal of the Series D Certificates will be
payable monthly on each Payment Date with respect to such Amortization Period.
In the event of a Partial Amortization Event with respect to the Series D
Certificates, principal will be paid with respect to such Series D Certificates
on the next succeeding Payment Date. In any event, principal payments with
respect to the Series D Certificates shall first be allocated to the Class A
Certificates until the Class A Invested Amount has been reduced to zero, and
thereafter, to the Class B Certificates. Funds allocated to the Series D
Certificates will be applied to Servicing Fees and payments of interest then due
and payable in respect of the Class A Certificates and the Class B Certificates,
prior to any allocation to principal of the Class A Certificates.
On each Business Day during the Series D Amortization Period, the Servicer
will deposit to the Collection Account all amounts representing the proportional
interest in Gross Collections available on such day for the Series D
Certificates, which shall be equal to the product of (i) Gross Collections and
(ii) the Invested Percentage for the Series D Certificates. The Invested
Percentage for the Series D Certificates during their Amortization Period shall
be the decimal equivalent of a fraction, the numerator of which is the Invested
Amount for the Series D Certificates as of the opening of business on the first
day of the Amortization Period and the denominator of which is the greater of
(x) the Eligible Assets on the last day of the prior Settlement Period and (y)
the sum of the numerators then being used to determine the Invested Percentage
for each outstanding Series of Investor Certificates and the Issuer Percentage
for the Variable Funding Certificate.
ISSUANCE OF ADDITIONAL CLASS A CERTIFICATES
The Series D Supplement to the Pooling and Servicing Agreement allows the
Trust to issue additional Class A Certificates and Class B Certificates subject
to certain conditions including, among other conditions, receipt by the Trustee
of an opinion of counsel to the effect that for federal, California and Illinois
income and franchise tax purposes, such additional Certificates will either be
treated as indebtedness or will not cause the Trust to be taxed as a
corporation, and that such issuance will not adversely affect the federal and
state tax characterization of the Trust, any outstanding Series or Class of
Investor Certificates or the Variable Funding Certificate, and will not cause a
taxable event to Holders of any such Series or Class of Investor Certificates or
the Variable Funding Certificate. In addition, the Trustee must receive written
confirmation from each Rating Agency that issuance of the additional Class A
Certificates and Class B Certificates will not result in any Rating Agency
reducing or withdrawing its rating on the Class A Certificates, the Class B
Certificates, any then-outstanding Series or Class of Investor Certificates or
the Variable Funding Certificate. The Transferor shall also have delivered to
the Trustee, prior to the issuance of additional Class A Certificates and Class
B Certificates, a certificate of an officer of the Transferor to the effect that
the Transferor reasonably believes that such issuance will not at
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<PAGE> 22
the time of its occurrence or at a future date have a material adverse effect on
the Trust, any outstanding Series or Class of Investor Certificates or the
Variable Funding Certificate. See "Pooling and Servicing Agreement -- Additional
Certificates" in the Prospectus.
DESCRIPTION OF OUTSTANDING INVESTOR CERTIFICATES
The Series D Certificates will be the fifth Series of Investor Certificates
issued by the Trust. Immediately following the issuance of the Series D
Certificates and the repurchase of the Series B Certificates as described under
"Description of Repurchase," there will be outstanding the Series C
Certificates, the Series D Certificates, Class A and Class B, and the Series
1995-1 Certificates. The tables below describe the principal characteristics of
the Series C Certificates and the Series 1995-1 Certificates.
SERIES C CERTIFICATES
On February 14, 1996, the Transferor caused the Trust to issue an aggregate
of $135 million principal amount of Series C Certificates pursuant to the
Pooling and Servicing Agreement dated as of March 1, 1993 (the "Original Pooling
and Servicing Agreement" (which was amended and restated by the Pooling and
Servicing Agreement)) as supplemented by the Series C Supplement dated as of
February 1, 1996.
<TABLE>
<S> <C>
Initial Investor Amount.......................... $135,000,000
Certificate Rate................................. LIBOR + 0.34% per annum
Current Investor Amount.......................... $135,000,000
Series C Amortization Commencement Date.......... May 2000 Payment Date
Series C Termination Date........................ May 2002 Payment Date
Servicing Fee Percentage......................... 2.0%
Issuance Date.................................... February 14, 1996
Initial Optional Repurchase Date................. May 1999 Payment Date
Series C Subordinated Minimum Amount............. $31,666,667
</TABLE>
SERIES 1995-1 CERTIFICATES
On April 11, 1995, the Transferor caused the Trust to issue an aggregate of
$30 million principal amount of subordinated Series 1995-1 Certificates pursuant
to the Original Pooling and Servicing Agreement as supplemented by the Series
1995-1 Supplement dated as of March 1, 1995.
<TABLE>
<S> <C>
Initial Investor Amount.......................... $30,000,000
Certificate Rate................................. LIBOR + 0.95% per annum
Current Investor Amount.......................... $30,000,000
Series 1995-1 Amortization Commencement Date..... May 2000 Payment Date
Series 1995-1 Termination Date................... May 2002 Payment Date
Servicing Fee Percentage......................... 2.0%
Issuance Date.................................... April 11, 1995
Initial Optional Repurchase Date................. May 1999 Payment Date
</TABLE>
S-22
<PAGE> 23
DESCRIPTION OF REPURCHASE
SERIES B CERTIFICATES
On November 9, 1993, the Transferor caused the Trust to issue an aggregate
of $100 million principal amount of Series B Certificates pursuant to the
Original Pooling and Servicing Agreement as supplemented by the Series B
Supplement dated as of November 1, 1993. The table below describes the principal
characteristics of the Series B Certificates.
<TABLE>
<S> <C>
Initial Investor Amount......................... $100,000,000
Certificate Rate................................ LIBOR + 0.50% per annum
Current Investor Amount......................... $100,000,000
Series B Amortization Commencement Date......... October 1997 Payment Date
Series B Termination Date....................... October 1999 Payment Date
Servicing Fee Percentage........................ 2.0%
Issuance Date................................... November 9, 1993
Initial Optional Repurchase Date................ April 1997 Payment Date
Series B Subordinated Minimum Amount............ $23,456,791
</TABLE>
The Series B Certificates will be called for repurchase pursuant to the
optional repurchase provisions of the Original Pooling and Servicing Agreement
prior to the issuance of the Series D Certificates. The repurchase of the Series
B Certificates will occur on the Series B Payment Date immediately following the
date of this Prospectus Supplement (the "Repurchase Date"). To fund the
repurchase of the Series B Certificates the Transferor shall have deposited into
the Collection Account, on the Transfer Date (as defined in the Pooling and
Servicing Agreement) immediately preceding the Repurchase Date, an amount equal
to the Invested Amount of the repurchased Series B Certificates plus interest
accrued and unpaid thereon at the Series B Certificate Rate as applicable
through the date preceding the Repurchase Date. Amounts deposited for the
repurchase of the Series B Certificates will be paid to the Holders of the
Series B Certificates on the Repurchase Date. No Series B Certificates will
remain outstanding on the date following the Repurchase Date. The proceeds of
issuance of the Series D Certificates will be used to fund the repurchase of the
Series B Certificates.
DESCRIPTION OF THE VARIABLE FUNDING CERTIFICATE
Due to the fact that the amount of Principal Advances can fluctuate on a
daily basis, and that the Investor Certificates will generally represent a fixed
dollar amount, the Transferor Interest will increase or decrease on a daily
basis to accommodate these fluctuations. As a mechanism to fund a portion of
such fluctuations in the Transferor Interest, the Transferor has caused the
Trust to issue a Variable Funding Certificate. The Variable Funding Certificate
is currently held by Fremont VFC Funding Corporation, an affiliate of the
Transferor, which has established a program pursuant to which commercial paper
(which is supported by the Variable Funding Certificate, amounts received with
respect to the Variable Funding Certificate and liquidity from an outside source
of credit enhancement) is sold to investors. The outstanding balance on the
Variable Funding Certificate as of December 31, 1996 was $15 million; however,
the outstanding principal balance of the Variable Funding Certificate may
fluctuate from time to time in the future. During 1996, the outstanding balance
on the Variable Funding Certificate ranged from zero to $48 million. Repayments
on the Variable Funding Certificate could be made from time to time to reflect
decreases in the aggregate amount of Principal Advances in the Trust. In
addition, the Transferor may increase the principal amount of the Variable
Funding Certificate to fund a portion of the increases of the aggregate amount
of Principal Advances in the Trust. Payments to the Holder of the Variable
Funding Certificate will generally include principal and interest.
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<PAGE> 24
The Holder of the Variable Funding Certificate owns an undivided interest
in the Trust that is pari passu with the respective interests of each Series of
unsubordinated Investor Certificates presently outstanding (including the Series
D Certificates); however, payments of principal and interest on the Variable
Funding Certificate may be made more frequently than payments with respect to
any outstanding Series of Investor Certificates (including the Series D
Certificates). If an Event of Termination occurs, such more frequent payments
under the Variable Funding Certificate will cease and any payments will be made
only on a pro rata basis with any outstanding unsubordinated Series of Investor
Certificates (including the Series D Certificates). See "Description of the
Certificates -- Variable Funding Certificate" in the Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
Deposits and withdrawals from the Collection Account will be made as set
forth in the Prospectus. See "Pooling and Servicing Agreement" in the
Prospectus.
NON-AMORTIZATION PERIOD. On each Payment Date with respect to which the
Series D Certificates are not in their Amortization Period, the Trustee will
make the following payments in the priorities set forth below and to the extent
that there are amounts sufficient therefor in the Collection Account, including
certain amounts allocated to the Excess Funding Account:
First, to the Class A Certificateholders, aggregate interest in an amount
equal to the product of (i) the Class A Certificate Rate, (ii) the Class A
Invested Amount as of the immediately preceding Payment Date and (iii) a
fraction, the numerator of which is equal to the actual number of days in the
applicable Interest Accrual Period and the denominator of which is 360;
Second, to the Class B Certificateholders, aggregate interest in an amount
equal to the product of (i) the Class B Certificate Rate, (ii) the Class B
Invested Amount as of the immediately preceding Payment Date and (iii) a
fraction, the numerator of which is equal to the actual number of days in the
applicable Interest Accrual Period and the denominator of which is 360;
Third, to the Servicer, the Servicing Fee for the related Settlement
Period; and
Fourth, upon the occurrence of a Partial Amortization Event, the amounts on
deposit in the Excess Funding Account will be paid as principal to all the
outstanding unsubordinated Investor Certificateholders on a pro rata basis. Any
such amount allocated to the Series D Certificates shall be paid first to the
Class A Certificateholders until the Class A Certificates have been paid in
full, and second to the Class B Certificateholders. In addition, upon an
optional repurchase of the Series D Certificates by the Transferor, the Trustee
shall first pay the Class A Certificateholders in full prior to any principal
payments being made to the Class B Certificateholders.
AMORTIZATION PERIOD. The payments described above as payable during the
Series D Non-Amortization Period will also be made on Payment Dates during the
Series D Amortization Period, to the extent of available funds. In addition, the
Trustee will allocate available amounts to the Cash Collateral Account until the
balance thereof equals the Cash Collateral Maintenance Amount. Further, with
respect to a Payment Date relating to a Settlement Period during the Series D
Amortization Period, the Trustee will, to the extent there are amounts
sufficient therefor in the Collection Account after payment of the amounts
described above and the amounts allocated to the Excess Funding Account, make a
principal payment to the Series D Certificateholders, in an amount equal to the
Gross Collections deposited with respect to the Series D Certificates for the
related Settlement Period minus the interest accrued on such Certificates, the
allocable portion of the Servicing Fee payable on the related Payment Date and
amounts allocated to the Cash Collateral Account; provided that any such
principal payments allocated to the Series D Certificates shall first be made to
the Class A Certificateholders until the Class A Certificates have been repaid
in full, prior to any principal payments being made to the Class B
Certificateholders.
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<PAGE> 25
Principal paid to the Series D Certificateholders will reduce the Series D
Invested Amount by a corresponding amount as of the related Payment Date
(referred to herein as "Amortization"). The Trustee will make all required
withdrawals from the Collection Account on the related Transfer Date and will
pay such amounts to the Paying Agent. On each Payment Date, the Paying Agent
will distribute such amounts among the Class A Certificateholders and the Class
B Certificateholders as provided in the immediately preceding paragraph.
For the purposes of determining the rights and obligations of the parties
to the Pooling and Servicing Agreement as they relate to the Series D
Certificates, the following terms have the following meanings:
"Accounts Receivable Percentage" shall mean the percentage of the aggregate
amount of Principal Advances for which accounts receivable are the Primary
Collateral.
"Aggregate Subordinated Amount" shall be equal to the sum of the
Subordinated Amount established for each outstanding Series of unsubordinated
Investor Certificates and the Variable Funding Certificate, which amount is
currently equal to the sum of (i) the Series C Subordinated Amount which is
$31,666,667, (ii) the Series D Subordinated Amount which is $23,457,627 and
(iii) the Variable Funding Certificate Subordinated Amount, which was $3,518,519
at December 31, 1996.
"Aggregate Subordinated Minimum Amount" shall be equal to the sum of the
Subordinated Minimum Amount established for each outstanding Series of
unsubordinated Investor Certificates and the Variable Funding Certificate, which
amount is currently equal to the sum of (i) the Series C Subordinated Minimum
Amount which is $31,666,667, (ii) the Series D Subordinated Minimum Amount which
is $23,457,627 and (iii) the Variable Funding Certificate Subordinated Minimum
Amount, which was $3,518,519 at December 31, 1996.
"Cash Collateral Maintenance Amount" for the Series D Certificates at any
time during the Series D Amortization Period, shall be equal to the sum of (A)
nine-twelfths of the product of (i) the then-current Class A Certificate Rate
plus the Servicing Fee Percentage and (ii) the then-outstanding Class A Invested
Amount, (B) nine-twelfths of the product of (i) the then-current Class B
Certificate Rate plus the Servicing Fee Percentage and (ii) the then-outstanding
Class B Invested Amount and (C) the Cash Collateral Maintenance Amounts for each
other Series then in its Amortization Period.
"Daily Interest Amount" for any Business Day shall be equal to the sum of
(i) any Daily Interest Shortfall (to the extent not paid in the current
Settlement Period), plus (ii) the sum of (x) the Class A Invested Amount as of
the most recent Payment Date multiplied by the Monthly Class A Certificate Rate
as of such Payment Date, plus (y) the Class B Invested Amount as of the most
recent Payment Date multiplied by the Monthly Class B Certificate Rate as of
such Payment Date, plus (z) the Monthly Servicing Fee and minus (a) any amounts
already deposited into the Collection Account in the related Settlement Period
with respect to the Daily Interest Amount, divided by the number of Business
Days left in the Settlement Period.
"Daily Interest Shortfall" shall be equal to the amount of the Daily
Interest Amount as of the last Business Day of the immediately preceding
Settlement Period that was not paid or deposited on or for such day.
"Monthly Class A Certificate Rate" shall be equal to the product of the
Class A Certificate Rate multiplied by a fraction, the numerator of which is the
actual number of days in the related Interest Accrual Period, and the
denominator of which is 360. The "Class A Certificate Rate" shall be equal to
the lesser of (i) LIBOR + 0.23% per annum, or (ii) the Weighted Average Coupon,
each as determined for the related Interest Accrual Period or Settlement Period
as applicable.
"Monthly Class B Certificate Rate" shall be equal to the product of the
Class B Certificate Rate multiplied by a fraction, the numerator of which is the
actual number of days in the related Interest Accrual Period, and the
denominator of which is 360. The "Class B Certificate Rate" shall be equal to
the lesser of (i) LIBOR + 0.75% per annum, or (ii) the Weighted Average Coupon,
each as determined for the related Interest Accrual Period or Settlement Period
as applicable.
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<PAGE> 26
"Monthly Servicing Fee" shall be equal to the product of the Series D
Invested Amount as of the first day of the related Settlement Period and the
Servicing Fee Percentage multiplied by a fraction, the numerator of which is
equal to the total number of days in the related Settlement Period and the
denominator of which is equal to 360. The Servicing Fee Percentage shall be
equal to 2%.
"Series D Subordinated Amount" shall be equal to $23,457,627 as of the
Closing Date, as decreased due to allocations of Charge-Off Amounts or increased
due to allocations of Excess Finance Charge Collections as described in "Pooling
and Servicing Agreement -- Determination and Allocation of Charge-Offs and
Subordination Amounts -- Defaulted Amount" herein. The Series D Subordinated
Amount reflects the amount of credit enhancement provided to support the Class A
Certificates and, as of the Closing Date, is equal to the sum of the Series D
Subordinated Transferor Amount and the Class B Invested Amount.
"Series D Subordinated Minimum Amount" shall be equal to $23,457,627;
provided however, in the event of a Partial Amortization Event, the Series D
Subordinated Minimum Amount shall be equal to the product of 23.46% and the
aggregate Class A Invested Amount, immediately after giving effect to the
Partial Amortization Event.
"Series D Subordinated Transferor Amount" shall be equal to the initial
Series D Subordinated Transferor Amount (which is $14,197,627), as decreased due
to allocations of Charge-Off Amounts or increased due to allocations of Excess
Finance Charge Collections, in each case, in accordance with the Pooling and
Servicing Agreement and the Series D Supplement. The Series D Subordinated
Transferor Amount reflects the amount of credit enhancement provided to support
the Class B Certificates.
"Series D Subordinated Transferor Minimum Amount" shall be equal to (i)
when used during the Non-Amortization Period, the product of the Subordinate
Enhancement Percentage and the Initial Invested Amount for the Series D
Certificates for the Business Day preceding the date of determination, and (ii)
when used during the Amortization Period, the product of the Subordinate
Enhancement Percentage and the Initial Invested Amount for the Series D
Certificates as of the last day of the Settlement Period immediately preceding
the Amortization Period.
DETERMINATION AND ALLOCATION OF CHARGE-OFFS AND SUBORDINATED
AMOUNTS -- DEFAULTED AMOUNT
On each Determination Date, the Servicer will calculate the principal
amount of (i) Eligible Advances and (ii) Advances that have been classified as
"non-accrual" in accordance with the Servicer's normal servicing procedures, but
which would be Eligible Advances had they not been classified as "non-accrual"
for the preceding Settlement Period that will be charged off as uncollectible in
accordance with the Servicer's customary and usual policies and procedures (such
amount referred to as the "Defaulted Amount"); provided however, if an Event of
Termination has occurred and is continuing, Defaulted Amounts shall not include
the principal amount of Advances that are attributable to Advances classified as
non-accrual at the time the Event of Termination occurred. All Defaulted Amounts
not covered by finance charges (as described in "Pooling and Servicing
Agreement -- Determination and Allocation of Charge-Offs and Subordination
Amounts" in the Prospectus) will constitute Charge-Off Amounts which will be
allocated among the then-outstanding Series of Investor Certificates, the
Variable Funding Certificate and the Transferor Interest. All Charge-Off Amounts
allocable to the Series D Certificates will first be allocated to reduce to zero
the Series D Subordinated Transferor Amount and then to reduce the Class B
Invested Amount to zero, prior to any allocation of Charge-Off Amounts to the
Class A Certificates. In addition, the Series D Subordinated Amount will be
reduced by the amount of any Charge-Off Amounts allocated to reduce either the
Series D Subordinated Transferor Amount or the Class B Invested Amount, without
duplication. Moreover, the Subordinated Investor Certificates will not be
expressly subordinated to the Series D Certificates and therefore will not
provide any credit enhancement to the Series D Certificates. See "Pooling and
Servicing Agreement -- Determination and Allocation of Charge-Offs and
Subordination Amounts" in the Prospectus.
S-26
<PAGE> 27
EVENTS OF TERMINATION
Events of Termination for the Series D Certificates will include, among
other things, the occurrence of the following events: (i) as of any
Determination Date, the Series D Subordinated Amount is equal to or less than
20.48% of the then-outstanding Class A Invested Amount for the end of the
related Settlement Period; (ii) the Series D Subordinated Amount is less than
the Series D Subordinated Minimum Amount for any three consecutive Settlement
Periods; (iii) as of any Determination Date, the Series D Subordinated
Transferor Amount is equal to or less than 10.50% of the then-outstanding Series
D Invested Amount for the end of the related Settlement Period; (iv) the Series
D Subordinated Transferor Amount is less than the Series D Subordinated
Transferor Minimum Amount for any three consecutive Settlement Periods; (v) the
Class A Certificate Rate or the Class B Certificate Rate equals the Weighted
Average Coupon for more than three consecutive Interest Accrual Periods; (vi)
the three month rolling average of the Accounts Receivable Percentage is equal
to or less than 40%; (vii) a Partial Amortization Event (which occurs if the
average balance in the Excess Funding Account exceeds 30% of the Eligible Assets
(which includes (a) the total amount of unpaid principal for all Eligible
Advances (the "Aggregate Eligible Principal Advances"), (b) all cash in the
Collection Account in excess of amounts allocated to pay interest and servicing
fees, (c) all cash in the Excess Funding Account and (d) the lesser of the cash
in the Concentration Accounts and 3% of the Aggregate Eligible Principal
Advances (which may be increased to 5% with the prior approval of each Rating
Agency)) for a period of three consecutive Settlement Periods); (viii) failure
on the part of the Transferor or the Servicer to make any payment or deposit
required under the Pooling and Servicing Agreement or to perform their covenants
thereunder, in each case within certain specified grace periods; (ix) a material
breach of a representation or warranty of the Transferor made in the Pooling and
Servicing Agreement that is not remedied within specified cure periods; (x)
Fremont Financial or the Transferor voluntarily seeks, consents to or acquiesces
in the benefit of any debtor relief law or an involuntary petition is filed
under any debtor relief law and such petition is not dismissed within a
specified period of time; (xi) the Servicer fails to deliver the daily or
monthly reports required to be delivered by it, and such failure is not cured
within specified time periods; (xii) the Trust becomes an "investment company"
required to register within the meaning of the Investment Company Act of 1940,
as amended; (xiii) the Trustee has not accepted an eligible servicer within 60
days after any Servicer Default with respect to which a termination notice has
been issued; (xiv) the lien created in favor of the Trust on all the Trust
Assets ceases to be a perfected, first priority enforceable lien thereon
(subject to specified permitted liens), or the Transferor or Fremont Financial
so asserts in writing; and (xv) failure on the part of Fremont Financial to make
any payment or deposit required under the Purchase Agreement or to perform its
covenants thereunder, in each case within certain specified grace periods.
Upon an Event of Termination with respect to the Series D Certificates, a
partial or complete amortization of the Series D Certificates will occur.
However, in the case of any event described in subparagraph (xi), (xiii) or (xv)
either the Trustee or the Holders of Series D Certificates representing more
than 50% of the Series D Invested Amount must declare that an Event of
Termination has occurred with respect to the Series D Certificates. Notice by
the Series D Certificateholders of an Event of Termination should be given in
writing to the Trustee by personal delivery, certified or registered mail,
return receipt requested.
OPTIONAL REPURCHASE
The Series D Certificates will be subject to optional repurchase by the
Transferor in its sole discretion on any Payment Date on or after the April 2001
Payment Date. The Transferor may not effect an optional repurchase of the Class
A Certificates unless all outstanding Series D Certificates (including the Class
B Certificates) are concurrently repurchased. Funds to be used to make such a
repurchase shall be provided by the Transferor out of funds available to it from
distributions on the Transferor Certificate or from proceeds of sales of
additional Series or additional capital contributions or proceeds from the sale
of Trust Assets; however, the Transferor makes no assurance that it will have
sufficient funds at any time in
S-27
<PAGE> 28
the future to fund any such optional repurchase or that any such optional
repurchase will occur. The repurchase price with respect to the Class A
Certificates will be equal to the Class A Invested Amount plus accrued and
unpaid interest on the Class A Certificates through the day preceding the
Payment Date on which the repurchase occurs.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Trust will terminate on the earlier to occur of (i) the day following
the Payment Date on which the aggregate Invested Amounts for all outstanding
Series and the Issuer Amount for the Variable Funding Certificate are zero, if
the Transferor elects to terminate the Trust at such time, and (ii) December 31,
2013. Upon termination of the Trust, all right, title and interest in the
Advances and other property of the Trust (other than amounts in the Collection
Account for the final distribution of principal and interest to
Certificateholders) will be conveyed and transferred to the Transferor.
In any event, the last payment of principal and interest on the Series D
Certificates will be due and payable no later than the April 2004 Payment Date
(the "Series D Termination Date"). In the event that the Series D Invested
Amount is greater than zero on the Series D Termination Date, the Trustee will
sell or cause to be sold (and will apply the proceeds to the extent necessary to
pay such remaining amounts to the Series D Certificateholders, which amount may
not exceed the unpaid principal balance of the Series D Certificates and any
unpaid accrued interest thereon to the date of payment) all or that portion of
the interest in the Advances or certain Advances, as specified in the Pooling
and Servicing Agreement, as necessary to pay all principal of and accrued and
unpaid interest on any outstanding unsubordinated Series and on any other
outstanding Series that are pari passu with the Series D Certificates (after
giving effect to deposits and distributions otherwise to be made on the Series D
Termination Date). The net proceeds of such sale and any collections on the
Advances will be deposited in the Collection Account and allocated to Series D
Certificateholders on the Series D Termination Date as provided in the Pooling
and Servicing Agreement, allocated between the Class A Certificateholders and
the Class B Certificateholders in accordance with the priorities described
herein, and applied to the outstanding balance of the Class A Certificates and
the Class B Certificates.
USE OF PROCEEDS
The Trustee, on behalf of the Trust, will issue the Class A Certificates
and the Class B Certificates to or upon the order of the Transferor. The
proceeds of the sale of the Class A Certificates and the Class B Certificates
will be used to repurchase the Series B Certificates. See "Description of
Repurchase" herein. Any excess proceeds of the sale of the Series D Certificates
and the proceeds of future issuances of additional Series D Certificates, if
any, will be deposited into the Excess Funding Account as additional collateral
and will be available to purchase additional Advances, to repurchase outstanding
Investor Certificates or, to the extent permitted under the Pooling and
Servicing Agreement, released to the Transferor. The Transferor may from time to
time distribute any such amounts in excess of its working capital needs to
Fremont Financial, its sole shareholder. Fremont Financial will use any such
proceeds for general working capital purposes.
RATING OF THE CLASS A CERTIFICATES
It is a condition to the issuance of the Class A Certificates that they be
rated "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's"), and "AAA" by Duff & Phelps Credit Rating
Co. ("Duff & Phelps").
These ratings are based primarily on the value of the Advances, the
subordination of a portion of the Transferor Interest and the subordination of
the Class B Certificates to the Class A Certificates. These ratings are not a
recommendation to purchase, hold or sell Class A Certificates, inasmuch as such
ratings do not comment as to market price or suitability for a particular
investor. There is no assurance that any rating will remain for any given period
of time, or that any rating will not be lowered or withdrawn entirely
S-28
<PAGE> 29
by a rating agency if in its judgment circumstances so warrant, or that any
other rating agency will rate the Class A Certificates at the same level. A
reduction in the rating of the Class A Certificates below "AAA" or the decision
by another rating agency to rate the Class A Certificates below "AAA" would
reduce the number or type of investors who may purchase the securities which may
have an adverse effect on liquidity. See "Risk Factors--Limited Liquidity; No
Established Secondary Market" in the Prospectus. The Trust previously has issued
three Series of unsubordinated Investor Certificates, the Series A Certificates,
the Series B Certificates and the Series C Certificates on April 8, 1993,
November 9, 1993 and February 14, 1996, respectively. On April 11, 1995, the
Trust issued the subordinated Series 1995-1 Certificates. Subsequent to their
respective issuances, Moody's Investors Service ("Moody's") assigned unsolicited
investment grade ratings of "Baa1" with respect to the Series A Certificates and
Series B Certificates and an unsolicited below investment grade rating of "Ba2"
with respect to the Series 1995-1 Certificates, in comparison to the "AAA"
ratings assigned to the Series A Certificates and Series B Certificates and the
"BBB" ratings assigned to the Series 1995-1 Certificates by Duff & Phelps and
Standard & Poor's. Fremont Financial did not request Moody's to rate the Series
A Certificates, Series B Certificates or Series 1995-1 Certificates nor did it
participate in the Moody's rating process. Moody's did not have the same level
of access to information regarding Fremont Financial and the Trust Portfolio as
did Duff & Phelps and Standard & Poor's. It is uncertain what rating Moody's
would have assigned the Investor Certificates of those Series had it had the
same level of access to information as Duff & Phelps and Standard & Poor's. It
is possible Moody's or another rating service may rate the Class A Certificates
or future Series or Classes at lower levels than the ratings issued by Duff &
Phelps and Standard & Poor's. See "Risk Factors--Certificate Rating" in the
Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement") among the Transferor, the Servicer and the
Underwriters, the Transferor has agreed to cause the Trust to sell to the
Underwriters, and the Underwriters have agreed to purchase the Class A
Certificates offered hereby. The Underwriting Agreement provides that the
obligations of the Underwriters to pay for and accept delivery of the Class A
Certificates are subject to the approval of certain legal matters by their
counsel and to certain other conditions. All of the Class A Certificates offered
hereby will be issued if any are issued. Under the terms and conditions of the
Underwriting Agreement, the Underwriters are committed to take and pay for all
of the Class A Certificates offered hereby, if any are taken.
The Underwriters propose initially to offer the Class A Certificates to the
public at the public offering price set forth on the cover page of this
Prospectus Supplement and to certain dealers at such price less a concession not
in excess of 0.20% of the principal amount of the Class A Certificates. The
Underwriters may allow, and such dealers may reallow to other dealers, a
concession not in excess of 0.10% of such principal amount. After the initial
public offering, the public offering price and such concessions may be changed.
The Underwriting Agreement provides that the Transferor and the Servicer
will indemnify the Underwriters against certain liabilities, including
liabilities under applicable securities laws, or contribute to payments the
Underwriters may be required to make in respect thereof.
In connection with the offering of the Class A Certificates, the
Underwriters may purchase and sell the Class A Certificates in the open market.
These transactions may include over-allotment and stabilizing transactions and
purchases to cover short positions created by the Underwriters in connection
with the offering. Stabilizing transactions consist of certain bids or purchases
for the purpose of preventing or retarding a decline in the market price of the
Class A Certificates; and short positions created by the Underwriters involve
the sale by the Underwriters of a greater number of Class A Certificates than
they are required to purchase from the Trust in the offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to
broker-dealers in respect of the Class A Certificates sold in the offering may
be reclaimed by the Underwriters if such Class A Certificates are repurchased by
the Underwriters in stabilizing or covering transactions. These activities may
stabilize,
S-29
<PAGE> 30
maintain or otherwise affect the market price of the Class A Certificates, which
may be higher than the price that might otherwise prevail in the open market;
and these activities, if commenced, may be discontinued at any time. These
transactions may be effected in the over-the-counter market or otherwise.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Class A Certificates
will be passed upon for the Transferor by Wilson Sonsini Goodrich & Rosati, P.C.
Certain legal matters relating to the issuance of the Class A Certificates will
be passed upon for the Underwriters by Hunton & Williams. Hunton & Williams will
also deliver an opinion as to certain federal income tax consequences with
respect to the Class A Certificates.
S-30
<PAGE> 31
PROSPECTUS SUPPLEMENT
INDEX OF KEY TERMS
PAGE
----
Accounts Receivable Percentage............................................. S-25
Advances.................................................................... S-1
Aggregate Eligible Principal Advances................................. S-8, S-27
Aggregate Subordinated Amount.............................................. S-25
Aggregate Subordinated Minimum Amount...................................... S-25
Aggregate Subordinated Transferor Interest................................. S-19
Amortization............................................................... S-24
Cash Collateral Maintenance Amount......................................... S-25
Cede........................................................................ S-2
Class A Certificateholders' Interest........................................ S-4
Class A Certificate Owner.................................................. S-20
Class A Certificate Rate........................................ S-1, S-20, S-25
Class A Certificates............................................. S-1, S-3, S-19
Class B Certificate Rate................................................... S-25
Class B Certificates............................................. S-1, S-3, S-19
Closing Date................................................................ S-4
Code........................................................................ S-9
Contracts................................................................... S-1
Daily Interest Amount...................................................... S-25
Daily Interest Shortfall................................................... S-25
Defaulted Amount........................................................... S-26
Depository................................................................. S-20
DTC......................................................................... S-1
Duff & Phelps.............................................................. S-28
ERISA....................................................................... S-9
Excess Funding Amount....................................................... S-8
Fremont Portfolio.......................................................... S-15
Interest Accrual Period............................................... S-5, S-20
Investor Interest........................................................... S-3
Issuer Interest............................................................. S-3
LIBOR Determination Date................................................... S-20
Monthly Class A Certificate Rate........................................... S-25
Monthly Class B Certificate Rate........................................... S-25
Monthly Servicing Fee................................................. S-5, S-26
Moody's.................................................................... S-29
Original Pooling and Servicing Agreement....................................S-22
Payment Date........................................................... S-1, S-5
PEB........................................................................ S-11
Plans....................................................................... S-9
Pooling and Servicing Agreement............................................. S-1
Prospectus.................................................................. S-2
Rating Agencies............................................................. S-9
Reference Banks............................................................ S-20
Repurchase Date............................................................ S-23
Securities Act.............................................................. S-3
Securities Exchange Act..................................................... S-3
Series 1995-1 Certificateholders' Interest.................................. S-3
Series 1995-1 Certificates.................................................. S-6
S-31
<PAGE> 32
PAGE
Series C Certificateholders' Interest....................................... S-3
Series D Amortization Period................................................ S-4
Series D Amortization Period Commencement Date.............................. S-1
Series D Certificateholders' Interest....................................... S-3
Series D Certificates............................................ S-1, S-3, S-19
Series D Non-Amortization Period............................................ S-4
Series D Subordinated Amount............................................... S-26
Series D Subordinated Minimum Amount....................................... S-26
Series D Subordinated Transferor Amount............................... S-7, S-26
Series D Subordinated Transferor Minimum Amount............................ S-26
Series D Supplement......................................................... S-1
Series D Termination Date............................................. S-1, S-28
Service..................................................................... S-9
Servicer.................................................................... S-1
Servicing Fee Percentage.............................................. S-5, S-21
Settlement Period........................................................... S-4
Standard & Poor's.......................................................... S-28
Subordinated Investor Certificates.......................................... S-6
Tax Counsel................................................................. S-9
Transferor............................................................. S-1, S-3
Transferor Interest.................................................... S-3, S-7
Trust............................................................ S-1, S-3, S-19
Trust Assets................................................................ S-1
Trustee..................................................................... S-1
Underwriters................................................................ S-1
Underwriting Agreement..................................................... S-29
Variable Funding Certificate................................................ S-1
Weighted Average Coupon............................................... S-4, S-21
S-32
<PAGE> 33
PROSPECTUS
FREMONT SMALL BUSINESS LOAN MASTER TRUST
ASSET BACKED CERTIFICATES
------------------------
FREMONT FUNDING INC.
TRANSFEROR
FREMONT FINANCIAL CORPORATION
SERVICER
------------------------
Fremont Small Business Loan Master Trust (the "Trust") from time to time
issues Asset Backed Certificates (the "Certificates") which consist of one or
more series of investor certificates (the "Investor Certificates"), a variable
funding certificate (the "Variable Funding Certificate") and a transferor
certificate (the "Transferor Certificate"), each as more fully described herein
and in the related Prospectus Supplement. Each Certificate will represent an
undivided interest in the Trust created pursuant to the Pooling and Servicing
Agreement dated as of March 1, 1993, among Fremont Funding Inc., as transferor
(the "Transferor"), Fremont Financial Corporation, as servicer (the "Servicer"),
and LaSalle National Bank, as trustee (the "Trustee"), as amended and
supplemented from time to time (the "Pooling and Servicing Agreement"). The
property of the Trust includes the following: (i) the right to repayment of loan
advances (such rights, the "Advances") generated from time to time in a
portfolio of revolving commercial finance loans (and related,
cross-collateralized term loans) ("Contracts") and all monies due or to become
due in payment of the Advances; (ii) the rights, but not the obligations, under
each of the related Contracts; (iii) all liens, security interests and
collateral for the Advances (including, but not limited to, any guarantees,
agreements, documents and filings related thereto); and (iv) all proceeds of the
foregoing. The Investor Certificateholders will be allocated an undivided
interest in the assets of the Trust, including the right to receive a percentage
of each month's collections with respect to the Advances, at the times, in the
manner and in accordance with the priority described herein and in the related
Prospectus Supplement. The Transferor owns the remaining undivided interest in
the Trust not represented by the Investor Certificates or the Variable Funding
Certificate. The Transferor from time to time may offer Series of Certificates
that evidence additional undivided interests in certain assets of the Trust by
exchanging a portion of its interest in the Trust.
This Prospectus may not be used to consummate sales of any Series of
Investor Certificates unless accompanied by a Prospectus Supplement for that
Series. The Prospectus Supplement or Supplements relating to a Series of
Investor Certificates to be offered hereunder may set forth with respect to such
Series of Investor Certificates, among other things: (i) the aggregate principal
amount of such Series; (ii) the interest rate of, or the method by which such
interest rate may be determined for, such Series; (iii) the identity and
characteristics of any additional collateral or other enhancement which may be
provided for such Series; (iv) the method used to calculate the aggregate amount
of principal required to be paid on the Investor Certificates of such Series on
each Payment Date; (v) the rating agencies and investment ratings required with
respect to such Series; (vi) the extent, if any, to which deposits, withdrawals
or substitutions of any additional collateral identified for such Series may be
permitted; and (vii) additional information with respect to the plan of
distribution of such Series.
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH IN "RISK FACTORS" COMMENCING AT PAGE 12 OF THIS PROSPECTUS.
------------------------
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR RECOURSE OBLIGATIONS OF THE TRANSFEROR, THE SERVICER
OR ANY AFFILIATE THEREOF.
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.
GOLDMAN, SACHS & CO.
------------------------
The date of this Prospectus is January 26, 1996.
<PAGE> 34
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE INVESTOR
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Transferor, as originator of the Trust, has filed a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
with the Securities and Exchange Commission (the "Commission") on behalf of the
Trust with respect to the Investor Certificates offered pursuant to this
Prospectus. This Prospectus, which forms part of the Registration Statement,
does not contain all of the information contained in the Registration Statement
and the exhibits thereto. For further information, reference is made to the
Registration Statement and amendments thereof and exhibits thereto, which are
available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
7 World Trade Center, Suite 1300, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Fremont Funding Inc.,
on behalf of the Trust are incorporated in this Prospectus by reference: each
Annual Report on Form 10-K and Current Report on Form 8-K filed since the
formation of the Trust.
All documents and reports filed by the Transferor on behalf of the Trust
with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 424(b) of the
Securities Act subsequent to the date hereof and prior to the termination of the
offering of the Investor Certificates shall hereby be deemed to be incorporated
by reference into this Prospectus and to be a part hereof from the date of
filing of such documents. Any statement contained 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 or in the Prospectus Supplement
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Transferor on behalf of the Trust will provide without charge to each
person to whom this Prospectus is delivered, on written or oral request of such
person, a copy of any or all of the foregoing documents incorporated by
reference into this Prospectus (without exhibits to such documents other than
exhibits specifically incorporated by reference into such documents). Requests
for such copies should be directed to Richard C. Pugh, Jr. at Fremont Financial
Corporation, 2020 Santa Monica Boulevard, Suite 600, Santa Monica, California
90404-2023, telephone number (310) 315-5550.
2
<PAGE> 35
PROSPECTUS SUMMARY
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Certain capitalized terms used herein are defined elsewhere in this
Prospectus. A listing of the pages on which such terms are defined is found in
the "Index of Key Terms" in this Prospectus. This Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth under the heading "Risk Factors."
Type of Securities......... The Trust issues multiple series of Asset Backed
Certificates (the "Certificates") pursuant to a
Pooling and Servicing Agreement, which Certificates
may be designated as one or more series of senior
investor certificates (the "Senior Investor
Certificates," and each series of Senior Investor
Certificates, a "Senior Series"), one or more
series of subordinated investor certificates (the
"Subordinated Investor Certificates," and together
with the Senior Investor Certificates, the
"Investor Certificates" and each series of
Subordinated Investor Certificates, a "Subordinated
Series," and together with the Senior Series, the
"Series"), a variable funding certificate (the
"Variable Funding Certificate"), and a transferor
certificate (the "Transferor Certificate"). The
Transferor from time to time and at its sole
discretion may create additional series of
Certificates that evidence undivided interests in
certain assets of the Trust by exchanging a portion
of its interest in the Trust; provided, that the
Aggregate Subordinated Transferor Amount and the
Overcollateralization Enhancement Amount (each as
defined herein) each remain, after giving effect to
such exchange, at a level such that the creation of
such new Series will not result in the reduction or
withdrawal of the rating of any then-outstanding
Series or the Variable Funding Certificate. See
"Pooling and Servicing Agreement -- New
Certificates."
Transferor................. Fremont Funding Inc. (the "Transferor"). The
principal executive offices of the Transferor are
located at 2020 Santa Monica Boulevard, Suite 500,
Santa Monica, California 90404-2023, telephone
number (310) 315-3988.
Servicer................... Fremont Financial Corporation acts as servicer of
the Advances pursuant to the Pooling and Servicing
Agreement (in such capacity, the "Servicer"). The
principal executive offices of the Servicer are
located at 2020 Santa Monica Boulevard, Suite 600,
Santa Monica, California 90404-2023, telephone
number (310) 315-5550.
Trustee.................... LaSalle National Bank, a national banking
association (the "Trustee").
Trust...................... The Fremont Small Business Loan Master Trust (the
"Trust") was formed pursuant to the Pooling and
Servicing Agreement, dated as of March 1, 1993,
among the Transferor, the Servicer and the Trustee,
as amended from time to time by one or more
amendments thereto and as supplemented from time to
time by one or more Series supplements relating to
a Series (each, a "Supplement"). The term "Pooling
and Servicing Agreement," unless the context
requires otherwise, refers to the Pooling and
Servicing Agreement as amended and supplemented
from time to time. As used herein, the
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<PAGE> 36
term "Certificateholder" or "Holder" refers to a
holder of any Investor Certificate, Variable
Funding Certificate or Transferor Certificate.
Trust Assets............... The Trust assets include: (i) all Advances
outstanding on March 1, 1993 (the "Cut-Off Date")
and all Advances thereafter created by Fremont
Financial Corporation (in such capacity, "Fremont
Financial") and sold or otherwise transferred to
the Transferor pursuant to the Purchase Agreement
(as defined herein) after the Cut-Off Date; (ii)
all rights (but not the obligations) under the
commercial loan agreements pursuant to which
Advances were created (the "Contracts") and all
other evidences of the Advances, and all rights
(but not the obligations) relating to such Advances
including all of the Related Security (as defined
herein) and all monies due or to become due in
payment of the Advances; (iii) all liens, security
interests and collateral for the Advances
(including, but not limited to, any guarantees,
agreements, documents and filings related thereto);
(iv) all proceeds of the foregoing; and (v) amounts
on deposit in the Collection Account (including
amounts allocated to the Excess Funding Account and
the Cash Collateral Account) and Concentration
Accounts (net of investment earnings thereon). See
"The Advances."
The Contracts.............. The Contracts pursuant to which the Advances have
been or will be generated are revolving commercial
loans (in some cases accompanied by
cross-collateralized term loans), that are secured
by such assets as accounts receivables, inventory,
machinery and equipment, and, to a lesser extent,
real estate. The Contracts have been selected from
commercial loan agreements of Fremont Financial
that meet the criteria provided in the Pooling and
Servicing Agreement. Pursuant to the Pooling and
Servicing Agreement, the Transferor may, but is not
obligated to, transfer to the Trust from time to
time, Advances arising under additional commercial
loan contracts meeting such criteria (the
"Additional Contracts").
All Advances arising under a Contract or Additional
Contract, whether such Advances are then existing
or thereafter created, will be acquired by the
Transferor pursuant to the Purchase Agreement and
thereafter automatically transferred to the Trust.
See "The Contracts."
Further, pursuant to the Pooling and Servicing
Agreement, the Transferor has the right (subject to
certain limitations and conditions) to cause the
Advances from certain Contracts designated by the
Transferor (the "Removed Contracts") no longer to
be transferred to the Trust and to accept the
transfer from the Trust of all of the Advances
arising under the Removed Contracts, whether such
Advances are then existing or thereafter created.
Advances................... The Advances consist of specified rights to
repayment arising under a Contract, including all
amounts advanced to a borrower (each an "Obligor"),
all related monthly finance charges (including
amounts designated as interest), proceeds allocable
to finance charges, recoveries (net of collection
expenses) on Advances which were previously charged
off as uncollectible, all other fees billed to
Obligors on the Contracts, and the rights of a
secured creditor with respect
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<PAGE> 37
thereto. All Advances have been or will be
purchased by or contributed to the Transferor
pursuant to the Asset Sale and Contribution
Agreement, dated as of March 1, 1993 between
Fremont Financial Corporation, as seller (the
"Seller"), and Fremont Funding Inc., as buyer, (the
"Purchase Agreement") and thereafter have been and
will continue to be automatically transferred to
the Trust. Accordingly, the aggregate amount of
Advances fluctuates from day to day as new Advances
are generated and acquired by or contributed to the
Transferor and transferred to the Trust, and as
existing Advances are collected, written off as
uncollectible or otherwise adjusted.
Collections................ All amounts collected on Advances ("Gross
Collections") are deposited into one of the
concentration accounts (each a "Concentration
Account") established in the name of the Trustee
for the benefit of the Certificateholders in order
to collect payments on a daily basis on the
Advances from the Lock-Box Accounts, from the
Obligors directly, and from the Servicer as
received in payment from Obligors. The Transferor
may use any amounts in the Concentration Accounts
from time to time to purchase additional Advances
from Fremont Financial, to the extent that such
amounts are in excess of the amounts required to be
deposited into the Collection Account for (i) the
payment of interest, and if applicable, principal,
on the Certificates, (ii) the servicing fee and
(iii) deposits required with respect to the Cash
Collateral Account or the Excess Funding Account.
The amounts required to be deposited into the
Collection Account other than principal on a Series
are referred to herein as "Collections." The
Servicer will make all required deposits of
Collections, or Gross Collections in the event that
an Amortization Period has commenced with respect
to any Series or Variable Funding Certificate, to
the Collection Account for each Business Day as set
forth in the Pooling and Servicing Agreement no
later than the Business Day following the
availability of such Collections or Gross
Collections.
Prospectus Supplement...... The Prospectus Supplement relating to each Series
to be offered hereunder will set forth with respect
to such Series, among other things: (i) the
aggregate principal amount of such Series; (ii) the
interest rate of, or the method by which such
interest rate may be determined for, such Series;
(iii) the identity and characteristics of any
additional collateral or other enhancement which
may be provided for such Series; (iv) the method
used to calculate the aggregate amount of principal
required to be paid on the Investor Certificates of
such Series on each Payment Date; (v) the rating
agencies and investment ratings required with
respect to such Series; (vi) the extent, if any, to
which deposits, withdrawals or substitutions of any
additional collateral or enhancement provided for
the Investor Certificates of such Series may be
permitted; and (viii) additional information with
respect to the plan of distribution of such Series.
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<PAGE> 38
Interest................... Interest on each Series will be paid on the dates
specified in the Prospectus Supplement for such
Series (each a "Payment Date"). Each payment of
interest on the Investor Certificates on a Payment
Date will include all interest accrued during the
period specified in the related Prospectus
Supplement (each an "Interest Accrual Period") and
immediately preceding such Payment Date.
With respect to any Series that pays a variable
rate of interest, the related Prospectus Supplement
will set forth: (a) the initial certificate rate
(or the formula or manner for determining such
initial certificate rate) (the "Certificate Rate");
(b) the formula, index or other method by which the
Certificate Rate will be determined from time to
time; (c) the periodic intervals at which such
determination will be made; and (d) any maximum or
minimum rate for any such Series. With respect to
any Series that pays a fixed rate of interest, the
related Prospectus Supplement will set forth the
applicable rate.
Principal Payments
A. Non-Amortization
Period.................. No principal will be payable with respect to any
Series until the Amortization Period Commencement
Date for such Series (or earlier upon the
occurrence of an Event of Termination). During the
period with respect to which no Series is in its
Amortization Period, Gross Collections (other than
such amounts required to be deposited into the
Collection Account (i) to pay interest on any
outstanding Series, (ii) to make daily deposits
with respect to the Variable Funding Certificate,
if any, (iii) to pay the servicing fee, and (iv) to
make required deposits to be allocated to the
Excess Funding Account or payments with respect to
any Enhancements for any Series) will, subject to
certain limitations, be used on behalf of the
Transferor to purchase additional Advances from
Fremont Financial or be paid from the Trust to the
holder of the Transferor Certificate.
B. Amortization Period..... The principal amount of any Investor Certificates
will be payable only during the Amortization Period
for the relevant Series. Amortization Periods for
each Series may have different lengths and begin on
different dates. Thus, certain Series may be in
their Non-Amortization Periods, while others are in
their Amortization Periods. In addition, Investor
Certificates of different Series may pay principal
out of Gross Collections based upon different
investor percentages. One or more Series may be
designated as a Subordinated Series. Payments on
any Subordinated Series will be subject to the
prior right of payment of each outstanding Senior
Series and the Variable Funding Certificate, as set
forth in the Pooling and Servicing Agreement and
the Prospectus Supplement relating to such
Subordinated Series. See "Pooling and Servicing
Agreement -- New Certificates" in this Prospectus
for a discussion of the potential terms of a
Series.
Events of Termination...... Events of Termination for each Series will be as
set forth in the related Prospectus Supplement.
Events of Termination for a Series may include,
among other things, the occurrence of the following
events: (i) the Subordinated Amount falls below the
amount or percentage set forth in the related
Prospectus Supplement; (ii) to the extent set forth
in the related Prospectus Supplement, the
Subordinated
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<PAGE> 39
Amount for such Series is less than the
Subordinated Minimum Amount for such Series for any
three consecutive Settlement Periods as set forth
in the related Prospectus Supplement; (iii) to the
extent set forth in any Prospectus Supplement, the
variable interest rate on the Certificates is equal
to or greater than a designated maximum rate; (iv)
to the extent set forth in the related Prospectus
Supplement, the three-month rolling average
percentage of Principal Advances with accounts
receivables as the Primary Collateral falls below
the specified percentage for such Series as set
forth in the related Prospectus Supplement; (v) the
average balance of the Excess Funding Account
during a period of time set forth in the Prospectus
Supplement for such Series exceeds the Maximum
Excess Funding Account Balance as set forth in the
applicable Prospectus Supplement (a "Partial
Amortization Event"); (vi) failure on the part of
the Transferor or the Servicer to make any payment
or deposit required under the Pooling and Servicing
Agreement or to perform their covenants thereunder,
in each case within certain specified grace
periods; (vii) a material breach of a
representation or warranty of the Transferor made
in the Pooling and Servicing Agreement which is not
remedied within specified cure periods; (viii) the
Servicer or the Transferor voluntarily seeks,
consents to or acquiesces in the benefit of any
debtor relief law, or an involuntary petition is
filed under any debtor relief law and such petition
is not dismissed within a specified period of time;
(ix) the Servicer fails to deliver the daily or the
Settlement Date reports required to be delivered by
it, and such failure is not cured within specified
time periods; (x) the Trust becomes an "investment
company" required to register within the meaning of
the Investment Company Act of 1940, as amended;
(xi) the Trustee has not accepted an eligible
servicer within 60 days after any Servicer Default
with respect to which a termination notice has been
issued; (xii) the interest of the Trustee in all
the Trust Assets, if not an ownership interest,
ceases to be a perfected, first priority
enforceable lien thereon (subject to certain
specified permitted liens), or the Transferor shall
so assert in writing; and (xiii) failure on the
part of Fremont Financial to make any payment or
deposit required under the Purchase Agreement or to
perform its covenants thereunder, in each case
within certain specified grace periods.
Upon an Event of Termination with respect to a
Series, a partial or complete amortization of the
Investor Certificates of such Series will occur,
subject, however, to the subordination provisions
of certain Series.
Variable Funding
Certificate................ The Trust has issued the Variable Funding
Certificate. The outstanding principal balance of
the Variable Funding Certificate may fluctuate from
time to time to absorb a portion of any increases
or decreases in the aggregate outstanding principal
balance of the Advances over a specified period.
The Holder of the Variable Funding Certificate owns
an undivided interest in the Trust that is pari
passu with the interests of all Holders of Senior
Investor Certificates; however, payments of
principal of and interest on the Variable Funding
Certificate may be made more frequently than
payments with respect to Investor Certificates.
Following an Event of Termination, payments with
respect to the Variable Funding Certificate will
only be made on a pro rata basis
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<PAGE> 40
with all Senior Investor Certificates. See
"Description of the Certificates -- Variable
Funding Certificate."
Subordinated Investor
Certificates............. The Trust has issued, and may from time to time in
the future issue, one or more series of
Subordinated Investor Certificates. The rights of
the Holders of Subordinated Investor Certificates
to receive payments of principal and interest will
be subordinated to the Investor Interests of the
Holders of Senior Investor Certificates.
Transferor Certificate..... The Transferor holds the Transferor Certificate
which represents its retained interest (the
"Transferor Interest") in the Trust. The Transferor
has the right under the Pooling and Servicing
Agreement, subject to satisfying certain conditions
specified therein, including maintaining an
interest in the Trust at least equal to the
Aggregate Subordinated Minimum Transferor Amount,
to exchange portions of its Transferor Certificate
to permit the issuance of additional Series or an
additional Variable Funding Certificate, in each
case to be issued under Supplements relating
thereto. See "Pooling and Servicing
Agreement -- New Certificates."
As the Holder of the Transferor Certificate, the
Transferor is entitled to receive, on each Business
Day, the amount of Gross Collections available for
such day that are not required to be deposited into
the Collection Account or used on behalf of the
Transferor to acquire additional Advances from
Fremont Financial; provided, however, that such
amount may not exceed the excess of the Transferor
Amount over the sum of (i) the Aggregate
Subordinated Minimum Transferor Amount, and (ii)
any Defaulted Amounts for the current monthly
period (a "Settlement Period"), as determined in
accordance with the Pooling and Servicing
Agreement. The Transferor's right to receive such
amounts is subject to the subordination of the
Transferor Interest as described herein.
Subordination of Transferor
Interest and Subordinated
Series................... A portion of the Transferor's Interest constitutes
the "Aggregate Subordinated Transferor Amount."
Such Aggregate Subordinated Transferor Amount
provides credit enhancement to the Investor
Certificates and the Variable Funding Certificate
and will be reduced for any Charge-Off Amounts. The
rights of the Holders of Subordinated Investor
Certificates to receive payments of principal and
interest will be subordinated to the Investor
Interests of the Holders of Senior Investor
Certificates (the "Senior Investor Interest") and
the Issuer Interest of the Holder of the Variable
Funding Certificate, as each may be increased or
decreased from time to time. Before any Charge-Off
Amounts are allocated to the Senior Investor
Interests or the Issuer Interest, Charge-Off
Amounts generally will be applied first to reduce
the Subordinated Transferor Interest, and then to
reduce the Investor Interest of the Holders of
Subordinated Investor Certificates (the
"Subordinated Investor Interest"). See "Pooling and
Servicing Agreement -- Determination and Allocation
of Charge-Offs and Subordination Amounts" and
"-- Deposits to Collection Account."
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<PAGE> 41
Collection Account......... The Trustee has established a trust account for the
benefit of the Certificateholders (the "Collection
Account") into which the Collections or Gross
Collections, as appropriate, are deposited. The
Collection Account has three ledger sub-accounts,
consisting of a general account, a cash collateral
account (the "Cash Collateral Account") and an
excess funding account (the "Excess Funding
Account"). Unless otherwise specified, all
references to the "Collection Account" shall be
references to the general sub-account.
Cash Collateral Account.... To the extent provided in the related Supplement,
in the event and to the extent that the Gross
Collections are insufficient to pay interest and
the servicing fee with respect to any Series that
is in its Amortization Period, a withdrawal will be
made from the Cash Collateral Account, up to the
amount on deposit in the Cash Collateral Account.
See "Pooling and Servicing Agreement -- Cash
Collateral Account" in the related Prospectus
Supplement.
Excess Funding Account..... On each business day, the Servicer will allocate to
the Excess Funding Account the Excess Funding
Amount which shall be equal, on any date of
determination, to the amount, if any, by which (i)
the sum of the Invested Amount for each outstanding
Series, the Issuer Amount, and the Aggregate
Subordinated Minimum Transferor Amount exceeds (ii)
the sum of (1) the total of the unpaid principal
balances of the Eligible Advances (the "Aggregate
Eligible Principal Advances"), (2) the amounts on
deposit in the Excess Funding Account, (3) the
amounts on deposit in the Collection Account in
excess of any amounts allocated for the payment of
interest or servicing fees on any Series of
Investor Certificates or the Variable Funding
Certificate, and (4) the amounts on deposit in the
Concentration Accounts (subject to a maximum amount
equal to three percent of the Aggregate Eligible
Principal Advances, which may be increased to five
percent with the prior approval of each Rating
Agency).
The Excess Funding Account is designed to hold
Gross Collections not deposited in the Collection
Account until such amount can be invested on behalf
of the Transferor in additional Advances. Funds on
deposit in the Excess Funding Account may be
withdrawn and paid to the Transferor (subject to
the limitations described herein) or allocated to
one or more Series. In addition to the foregoing,
the Transferor may, at its option on any Business
Day, deposit funds in the Excess Funding Account to
the extent necessary to maintain the Aggregate
Subordinated Minimum Transferor Amount.
Enhancements............... The Prospectus Supplement may provide for one or
more forms of credit enhancement ("Enhancement").
Optional Repurchase........ The Invested Amount of the Investor Certificates of
a particular Series will be subject to optional
repurchase by the Transferor as set forth in the
related Prospectus Supplement.
Issuances of New Series.... The Pooling and Servicing Agreement provides that,
pursuant to one or more Supplements thereto, the
Transferor may cause the Trustee to issue one or
more new Series (a "New Issuance") or, if so
provided in the related Series Supplement, increase
the Invested Amount of any outstanding Series (an
"Additional Issuance"). How-
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<PAGE> 42
ever, at all times, the interest in the Principal
Advances represented by the Transferor Interest
must equal or exceed a specified amount with
respect to each Series. The issuance of a Series
pursuant to the Supplement related thereto will
constitute a New Issuance. The Pooling and
Servicing Agreement also provides that the
Transferor may specify, with respect to any Series,
the Principal Terms of the Series. "Principal
Advances" shall mean the unpaid balances of the
Advances.
Under the Pooling and Servicing Agreement, a New
Issuance or Additional Issuance may only occur upon
delivery to the Trustee of the following: (i) a
Supplement specifying the Principal Terms of such
Series (with respect to a New Issuance); (ii) an
opinion of counsel generally to the effect that,
for federal, Illinois and California income or
franchise tax purposes, (1) any newly issued
certificates will either (x) be treated as
indebtedness or (y) not cause the Trust to be taxed
as a corporation and (2) such issuance will not
have a material adverse effect on the tax
characterization of the Trust, or any outstanding
Series or the Variable Funding Certificate; and
(iii) letters from the Rating Agencies confirming
that the New Issuance or Additional Issuance will
not result in the reduction or withdrawal of the
rating of any Series then outstanding. See "Pooling
and Servicing Agreement -- New Certificates."
Certain Federal Income Tax
Considerations........... Except as otherwise provided in the related
Prospectus Supplement, in the opinion of Hunton &
Williams, special tax counsel to the Transferor
("Tax Counsel"), the Investor Certificates will be
characterized as debt for federal income tax
purposes. See "Certain Federal Income Tax
Consequences -- Characterization of the Investor
Certificates as Indebtedness" herein. Under the
Pooling and Servicing Agreement, the Transferor,
the Trustee, and the Servicer will agree to treat
the Investor Certificates as debt for federal
income tax purposes. In addition, by acceptance of
an Investor Certificate, each Investor
Certificateholder will be deemed to have agreed to
treat such Investor Certificate as a debt
instrument for purposes of federal and state income
tax, franchise tax, and any other tax measured in
whole or in part by income. Nonetheless, no ruling
from the Internal Revenue Service (the "Service")
on the federal income tax characterization of the
arrangement between the Transferor and the Investor
Certificateholders has been or will be sought. As a
result, there can be no guarantee that the Service
will agree with Tax Counsel's opinion of the
characterization of that arrangement. See "Certain
Federal Income Tax Consequences" herein.
Employee Benefit Plan
Considerations........... Any Plan (as defined herein) that invests in the
Investor Certificates may be treated as having
acquired a direct interest in the assets of the
Trust for purposes of the "plan asset" rules of the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Accordingly, the purchase or
holding of Investor Certificates may result in
unfavorable consequences for a Plan or its
fiduciaries under the Plan Asset Regulations or the
prohibited transaction provisions of ERISA or the
Code; consequently, certain Series of Investor
Certifi
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<PAGE> 43
cates will not be offered for sale to, and will not
be transferable to, Plans, a person acting on
behalf of a Plan, or a person using the assets of a
Plan (each a "Plan Investor").
Any Plan Investor who proposes to cause a Plan to
purchase Investor Certificates should consult with
its counsel with respect to the potential
applicability of ERISA and the prohibited
transaction provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), to such
investments. See "Employee Benefit Plan
Considerations" herein.
Certificate Ratings........ It is a condition to the issuance of each Series
that the Investor Certificates of such Series be
rated in one of the four highest rating categories
by one or more nationally recognized statistical
rating agencies. The Prospectus Supplement with
respect to each Series will set forth the rating
agency or rating agencies that have been requested
by the Transferor to rate such Series (each a
"Rating Agency" and collectively, the "Rating
Agencies").
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<PAGE> 44
RISK FACTORS
In addition to the other information in this Prospectus and the Prospectus
Supplement for each Series, the following should be considered carefully in
evaluating an investment in the Certificates. This Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and elsewhere in this Prospectus.
LIMITED LIQUIDITY; NO ESTABLISHED SECONDARY MARKET. Although certain
financial institutions currently make a market in participation certificates
which are in some respects similar to the Investor Certificates, there is no
established secondary market for the Investor Certificates. It is anticipated
that, to the extent permitted, the underwriters (the "Underwriters") of the
Investor Certificates will make a market in the Investor Certificates, but in no
event will any such Underwriter be under an obligation to do so. There is no
assurance that a secondary market will develop with respect to the Investor
Certificates of any Series offered hereby, or if it does develop, that it will
provide Investor Certificateholders with liquidity of investment or that it will
continue until the Investor Certificates are paid in full.
CERTAIN LEGAL ASPECTS OF ADVANCES. While the Transferor has transferred,
and will continue to transfer, Advances to the Trust, a court could treat such
transactions as an assignment of collateral as security for the benefit of
Holders of Certificates issued by the Trust. The Transferor represents and
warrants in the Pooling and Servicing Agreement that the transfer of the
Advances to the Trust is either a valid transfer and assignment of the Advances
to the Trust or the grant to the Trust of a security interest in the Advances.
The Transferor has taken and will take certain actions required to perfect the
Trust's security interest in the Advances and warrants that if the transfer to
the Trust is deemed to be a grant to the Trust of a security interest in the
Advances, the Trustee will have a first priority perfected security interest
therein. Nevertheless, if the transfer of the Advances to the Trust is deemed to
create a security interest therein under the California Uniform Commercial Code
(the "UCC"), a tax or government lien on property of the Transferor arising
before Advances come into existence may have priority over the Trust's interest
in such Advances, and in the event of the insolvency of the Transferor, certain
administrative expenses, including any financing obtained during the insolvency
process, may also have priority over the Trust's interest in such Advances. See
"Certain Legal Aspects of the Advances -- Transfer of Advances."
To the extent that the Transferor has granted a security interest in the
Advances to the Trust and that security interest was validly perfected before
any insolvency of the Transferor and was not granted or taken in contemplation
of insolvency or with the intent to hinder, delay, or defraud the Transferor or
its creditors, that security interest should not be subject to avoidance in the
event of insolvency and receivership, and payments to the Trust with respect to
the Advances should not be subject to recovery by a bankruptcy trustee or
receiver of the Transferor. If, however, such a bankruptcy trustee or receiver,
or any creditors of the Transferor, were to assert a contrary position, delays
in payments on the Certificates and possible reductions in the amount of those
payments could occur. In addition, to the extent Advances were transferred to
the Trust and any new consideration paid to the Transferor was not deemed to be
sufficient, the transfer of those additional Advances could be challenged as a
preferential transfer in the event of the bankruptcy or insolvency of the
Transferor or in contemplation thereof. If successful, such a challenge could
result in delays and possibly reductions in payments in respect of the
Certificates. In the event of a Servicer Default, if a bankruptcy trustee or
receiver were appointed for the Servicer, and if no Servicer Default other than
such bankruptcy or receivership or insolvency of the Servicer exists, the
bankruptcy trustee or receiver may have the power to prevent either the Trustee
or the majority of the Investor Certificateholders from effecting a transfer of
servicing to a successor Servicer.
CERTAIN BANKRUPTCY CONSIDERATIONS. The voluntary or involuntary petition
for relief under the United States Bankruptcy Code or any similar applicable
federal or state law (collectively, "Insolvency Laws") with respect to Fremont
Financial should not necessarily result in a similar petition with respect to
12
<PAGE> 45
the Transferor so long as the Transferor is solvent and does not reasonably
foresee becoming insolvent either by reason of Fremont Financial's insolvency or
otherwise. The Transferor has taken certain steps in structuring the
transactions contemplated hereby that are intended to make it unlikely that any
voluntary or involuntary petition for relief by or against Fremont Financial
under any Insolvency Law will result in the consolidation, pursuant to such
Insolvency Laws, of the assets and liabilities of the Transferor with those of
Fremont Financial. No assurance can be given, however, that such a consolidation
will not occur. In addition, the transfer of Advances from Fremont Financial to
the Transferor is intended to be, and has been structured as, an "absolute
conveyance" or "true sale" of the Advances to the Transferor. If a bankruptcy
trustee for Fremont Financial or a creditor of Fremont Financial were to take
the view that Fremont Financial and the Transferor should be substantively
consolidated or that the transfer of the Advances from Fremont Financial to the
Transferor should be recharacterized as a pledge of such Advances, then delays
in payments on the Certificates or (should the bankruptcy court rule in favor of
any such trustee, debtor in possession or creditor) reductions in such payments
could result. See "The Transferor and Fremont Financial" and "Certain Legal
Aspects of the Advances -- Certain Matters Relating to Bankruptcy."
If a bankruptcy trustee or receiver were appointed for the Transferor,
causing an Event of Termination, pursuant to the Pooling and Servicing
Agreement, new Advances would not be transferred to the Trust and the Trustee
would sell the portion of the Advances allocable to each Series in accordance
with the Pooling and Servicing Agreement (unless holders of more than 50% of the
principal amount of each Series then outstanding were to instruct otherwise),
thereby causing early termination of the Trust and a loss to Investor
Certificateholders if the net proceeds allocable to Investor Certificateholders
from such sale, if any, and the amount available under any applicable
Enhancement mechanism, as provided under a related Supplement, if any, were
insufficient to pay Investor Certificateholders in full. The net proceeds of any
such sale of the portion of the Advances allocated in accordance with the
Pooling and Servicing Agreement and Supplements thereto for each Series would
first be used to pay principal due and owing with respect to the
Certificateholders of each Senior Series and the Variable Funding Certificate
prior to any principal being allocated for the payment of principal of any
Subordinated Series or the Transferor Certificate, as described in the related
Prospectus Supplement. If the only Event of Termination to occur was either the
insolvency of the Transferor or the appointment of a bankruptcy trustee or
receiver for the Transferor, the bankruptcy trustee or receiver might have the
power to continue to require the Transferor to transfer new Advances to the
Trust and to prevent the early sale, liquidation, or disposition of the Advances
and the commencement of the Amortization Period. In addition, a bankruptcy
trustee or receiver for the Transferor might have the power to cause early
payment of the Investor Certificates. See "Certain Legal Aspects of the
Advances -- Certain Matters Relating to Bankruptcy."
Application of federal and state bankruptcy and debtor relief laws to the
obligations represented by the Advances could adversely affect the interests of
the Investor Certificateholders in the Advances if such laws resulted in any
Advances being written off as uncollectible. See "Pooling and Servicing
Agreement -- Defaulted Amounts."
CERTAIN LEGAL ASPECTS OF CONTRACTS. Although the terms of the Contracts
provide that Fremont Financial's funding obligations are discretionary, it is
possible that a court could determine that the Contracts actually contain
executory obligations under which Fremont Financial has, and is retaining,
certain funding obligations. In the event of a breach of these obligations by
Fremont Financial, the Obligors on the Contracts might be able to assert certain
defenses to payment. During disputes concerning these obligations, payments in
respect of the Advances would likely be delayed. In addition, if the Obligors
prevailed on claims against Fremont Financial, the payments in respect of the
Advances could be reduced. If such delays or reductions occurred, the interests
of the Investor Certificateholders could be adversely affected. If a court were
to determine that Fremont had an obligation to continue to fund loans under the
Contracts, such funding obligation would presumably continue even if one or more
Series were in an Amortization Period.
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<PAGE> 46
During an Amortization Period, unless it issued additional Investor
Certificates or increased the amount of the Variable Funding Certificate or an
outstanding Series, the Transferor might not have the resources available to
purchase additional Advances from Fremont Financial. In such case, Fremont
Financial might seek another means of funding new Advances such as financing
through a third party. If Fremont Financial were not able to locate an
alternative source of funding to continue to make the Advances, payments by
Obligors would likely be delayed and might even be reduced or terminated. No
assurance can be given that Fremont Financial would be able to obtain an
alternative source of financing. See "Maturity Assumptions."
PAYMENTS AND MATURITY. The Advances may be paid at any time, and there is
no assurance that there will be additional Advances created in the Contracts (or
that new Contracts will be created) or that any particular pattern of Obligor
repayments will occur. A significant decline in the amount of Advances generated
could result in the occurrence of a Partial Amortization Event for one or more
Series in which case the Investor Certificateholders of that Series would be
repaid (in full or in part) and Holders of the Certificates would be subject to
the risk of reinvestment at the then existing interest rate or yield to the
extent of principal repaid, which may differ from the applicable Certificate
Rate. See "Maturity Assumptions."
POSSIBLE CHANGES TO THE TERMS OF THE CONTRACT. Pursuant to the Pooling and
Servicing Agreement, the Transferor does not transfer to the Trust the
obligations under the Contracts, but only the Advances and related rights
arising pursuant to the Contracts. Fremont Financial (together with the
applicable Obligor) has the right to determine the monthly periodic finance
charges and other fees that will be applicable from time to time to the
Contracts, to alter the payments required on the Contracts and to change various
other terms with respect to the Contracts, including the term thereof. Under the
Purchase Agreement, Fremont Financial may change the terms of the Contracts or
its policies and procedures with respect to the servicing thereof (including
without limitation the reduction of the required minimum monthly payment and the
calculation of the amount or the timing of finance charges, fees, and
charge-offs), if such change would not, in the reasonable belief of Fremont
Financial, cause an Event of Termination to occur with respect to, or otherwise
have any material adverse effect on, the Investor Certificates. Except as
specified above, there are no restrictions on Fremont Financial's ability to
change the terms of the Contracts. There can be no assurance that changes in
applicable law, changes in the marketplace, or prudent business practice might
not result in a determination by Fremont Financial to take actions which would
change the terms of the Contracts.
MASTER TRUST CONSIDERATIONS. The Trust, as a master trust, is expected to
issue new Series from time to time, including one or more Series of Senior
Investor Certificates, one or more Series of Subordinated Investor Certificates
and a Variable Funding Certificate. See "Description of the Certificates." While
the Principal Terms of any Series will be specified in a Supplement to the
Pooling and Servicing Agreement, the provisions of a Supplement and, therefore,
the terms of any additional Series, will not be subject to the prior review or
consent of Holders of the Investor Certificates of any previously issued Series.
Such provisions may include methods for determining applicable investor
percentages and allocating collections, provisions creating different or
additional security or other credit enhancement, provisions creating different
classes of certificates (including one or more Series of Senior or Subordinated
Investor Certificates), provisions subordinating a Series to another Series (if
the Supplements relating to such Series so require) and any other amendment or
supplement to the Pooling and Servicing Agreement that is made applicable to
such Series. See "Pooling and Servicing Agreement -- New Certificates." It is a
condition precedent to the issuance of any additional Series that each Rating
Agency that has rated any outstanding Series at the request of the Transferor
deliver written confirmation to the Trustee that the creation of such new Series
will not result in such Rating Agency reducing or withdrawing its rating on any
outstanding Series. There can be no assurance, however, that the Principal Terms
or other provisions of any Series might not have an adverse impact on the timing
and amount of payments received by an Investor Certificateholder. See "Pooling
and Servicing Agreement -- New Certificates."
CERTIFICATE RATING. It is a condition to issuance of any Series that the
Investor Certificates of such Series be rated in one of the four highest rating
categories by one or more nationally recognized statistical
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<PAGE> 47
rating agencies. The ratings assigned by a rating agency address the likelihood
of full payment of principal and interest on such a Series. The ratings are not
a recommendation to purchase, hold or sell Investor Certificates of any Series,
inasmuch as such ratings do not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain
for any given period of time or that ratings will not be lowered or withdrawn by
a rating agency if in its judgment circumstances so warrant, or that any other
rating agency will rate the Investor Certificates at the same level. A reduction
in the rating of the Investor Certificates or the decision by another rating
agency to rate the Investor Certificates below then-existing levels may reduce
the number or type of investors who may purchase the securities, which may have
an adverse effect on liquidity. See "Risk Factors -- Limited Liquidity; No
Established Secondary Market."
The Trust has issued two Senior Series, the Series A Certificates and the
Series B Certificates, on April 8, 1993 and November 9, 1993, respectively (the
"Series A Certificates" and "Series B Certificates," respectively). On April 11,
1995 the Trust issued a Subordinated Series, Series 1995-1 (the "Series 1995-1
Certificates"). Subsequent to their respective issuances, Moody's Investors
Service ("Moody's") assigned unsolicited investment grade ratings of "Baa1" with
respect to the Series A Certificates and Series B Certificates, and a rating of
"Ba2" with respect to the Series 1995-1 Certificates, in comparison to the "AAA"
ratings assigned to the Series A Certificates and Series B Certificates and the
"BBB" ratings assigned to the Series 1995-1 Certificates by Duff & Phelps Credit
Rating Co. and Standard & Poor's Ratings Group. Fremont Financial Corporation
did not request Moody's to rate the Series A Certificates, Series B Certificates
or Series 1995-1 Certificates nor did it participate in the Moody's rating
process. Moody's did not have, prior to issuing its ratings, the same level of
access to information regarding Fremont Financial Corporation and the Trust
Portfolio as did Duff & Phelps Credit Rating Co. and Standard & Poor's Ratings
Group. It is uncertain what rating Moody's would have assigned the Investor
Certificates of those Series had it had the same level of access to information
as Duff & Phelps Credit Rating Co. and Standard & Poor's Ratings Group. It is
possible Moody's or another rating service may rate future Series at lower
levels than the ratings issued by Duff & Phelps Credit Rating Co. and Standard &
Poor's Ratings Group.
COMPETITION IN THE SMALL BUSINESS AND MIDDLE MARKET LOAN INDUSTRY. The
small business and middle market loan industry is competitive and includes banks
as well as other business lending companies that offer financing to smaller and
middle market companies. Such lenders may compete on the basis of loan pricing
and terms, advance rates, underwriting criteria and servicing quality. Fremont
Financial, as the originator and the Servicer of the Advances, may be required
by competitive pressures to reduce fees or interest rates on new or existing
Contracts to acquire or retain borrowers; for example, during 1994 and 1995
Fremont Financial has reduced fees and interest charges on certain contracts to
retain certain Obligors. To the extent that the interest rates or fees on the
Advances are reduced, the total interest yield of the Trust will be decreased,
thereby reducing the amount of Excess Finance Charge Collections available to
the Trust to offset any Defaulted Amounts incurred by the Trust. See "Pooling
and Servicing Agreement -- Determination and Allocation of Charge-Offs and
Subordination Amounts" and "Asset-Based Lending -- Certain Historical
Information Relating to the Fremont Portfolio."
If commercial borrowers choose to utilize competing sources of credit, the
amount of available additional Contracts and Advances generated may be reduced.
The size of the Trust will be dependent upon Fremont Financial's continued
ability to generate Additional Contracts and transfer additional Advances to the
Transferor. If the amount of additional Advances generated declines
significantly and new Contracts are not designated as Additional Contracts,
Advances available to be transferred to the Trust will decline. If the amount of
Advances generated declines to such an extent that the amount retained on
deposit in the Excess Funding Account exceeds the maximum amount permitted (as
specified for each Series in the related Series Supplement), a Partial
Amortization Event would occur. If a Partial Amortization Event were to occur
with respect to a Series or the Variable Funding Certificate, then Investor
Certificateholders of that Series, or, as the case may be, the Holder of the
Variable Funding Certificate would be repaid principal amounts earlier than
anticipated with respect to their Series (subject
15
<PAGE> 48
to the subordination of any Subordinated Series), or, as the case might be, the
Variable Funding Certificate. See "Pooling and Servicing Agreement -- Events of
Termination."
THE TRUST
The Trust was formed pursuant to the Pooling and Servicing Agreement dated
as of March 1, 1993, in accordance with the laws of the State of California. The
Trust was formed for the transactions described herein and similar transactions,
as contemplated by the Pooling and Servicing Agreement, and prior to formation
had no assets or obligations. The Trust does not, and will not, engage in any
business activity, other than as described herein, but will only acquire and
hold the Advances and certain rights under the Contracts, issue (or cause to be
issued) the Certificates and engage in related activities (including, with
respect to any Series, entering into any Enhancement and Enhancement agreement
relating thereto) and make payments thereon. As a consequence, the Trust is not
expected to have any need for additional capital resources.
THE TRANSFEROR AND FREMONT FINANCIAL
THE TRANSFEROR
Fremont Funding Inc. (the "Transferor") was incorporated in Delaware on
December 2, 1992 and is a wholly-owned subsidiary of Fremont Financial. The
Transferor was organized for the limited purpose of purchasing the Advances and
certain rights under the related Contracts and any Additional Contracts from
Fremont Financial, forming trusts such as the Trust, and transferring and
certain rights under related Contracts and the Advances to such trusts. The
Transferor has only a limited operating history. The principal executive offices
of the Transferor are located at 2020 Santa Monica Boulevard, Suite 500, Santa
Monica, California 90404-2023. Its telephone number is (310) 315-3988.
The Transferor has taken steps in structuring the transactions contemplated
hereby that are intended to make it unlikely that the voluntary or involuntary
application for relief by or against Fremont Financial under Insolvency Laws
would result in consolidation of the assets and liabilities of the Transferor
with those of Fremont Financial. These steps include the creation of the
Transferor as a separate, limited-purpose subsidiary pursuant to a certificate
of incorporation containing certain limitations (including restrictions on the
nature of the Transferor's business and a restriction on the Transferor's
ability to commence a voluntary case or proceeding under any Insolvency Law
without the unanimous affirmative vote of all of its directors). The
Transferor's Certificate of Incorporation includes a provision that requires the
Transferor to have two directors who qualify under the Certificate of
Incorporation as "Independent Directors." No assurance can be given, however,
that such a consolidation will not occur.
With respect to the acquisition by the Trust of Advances from time to time,
to the extent that the amounts available in the Trust are insufficient to pay
the entire purchase price of the Advances being sold to the Transferor at such
time, Fremont Financial (the owner of all the common stock of the Transferor)
will contribute Advances in an amount equal to any deficiency as additional
capital contributions to the Transferor.
FREMONT FINANCIAL
Fremont Financial is a wholly-owned subsidiary of Fremont General
Corporation, a publicly-owned insurance and financial services holding company
with approximately $4.1 billion in assets as of June 30, 1995. In 1979, Fremont
General Corporation acquired approximately 80% of Commonwealth Financial
Corporation ("Commonwealth"), a company incorporated in California in 1969. In
the mid-eighties, Fremont General Corporation acquired the remaining interest in
Commonwealth, and in 1989, Commonwealth's name was changed to Fremont Financial
Corporation. In addition to its headquarters in Santa Monica, California,
Fremont Financial has regional offices in Chicago, Atlanta and New York as well
as marketing offices in Boston, Minneapolis, Cleveland, Detroit, St. Louis,
Richmond, Newport Beach and
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<PAGE> 49
Charlotte. While the major avenue of growth for Fremont Financial remains the
origination of new lending relationships, Fremont Financial also purchased the
loan portfolios of three regional commercial finance lenders during 1991 and
1992 (Minneapolis-based Churchill Business Credit, Inc., Cleveland-based Dana
Business Credit and New York-based First New York Bank for Business). Fremont
Financial originates new lending relationships under $1,000,000 through its
Fremont Business Credit division, which began its commercial finance operations
in 1995.
Fremont General Corporation, a Nevada corporation incorporated in 1972, is
a holding company engaged through its subsidiaries in select insurance and
financial services businesses. Fremont General Corporation's principal lines of
business include workers' compensation insurance in California and Illinois
(which it underwrites through its wholly-owned subsidiaries Fremont Compensation
Insurance Company, Pacific Compensation Insurance Company and Casualty Insurance
Company), medical malpractice insurance, life insurance and varied financial
services provided to commercial and individual customers. Fremont General
Corporation's financial services operations commenced in 1979 with the
acquisition of its life insurance subsidiary, Commercial Bankers Life Insurance
Company, and Fremont Financial.
ASSET-BASED LENDING
GENERAL
Asset-based revolving loans permit a company, subject to satisfaction of
certain conditions, to borrow from the lender at any time during the term of the
loan agreement up to a maximum amount equal to a percentage of the amount of the
collateral (the "Advance Rate") which primarily secures such loans (the "Primary
Collateral"), not to exceed a set maximum amount for each loan. Under an
asset-based lending agreement, the borrower retains the credit and collection
risk with respect to the collateral in which the lender takes a security
interest. Cash collections received as often as daily by the borrower after the
loan is initially made are paid to the lender to reduce the loan balance.
Additional principal payments pursuant to an amortization schedule are generally
not required under an asset-based revolving loan, and payment in full is
generally not required until the maturity date under the loan agreement. The
borrower may request additional loan proceeds, up to maximum percentage and line
limitations determined as described above, from the lender. Because of the daily
fluctuations in the loan balance resulting from advances made to the borrower
and collections received by the lender from the liquidation of the collateral
securing the advances, asset-based revolving loans require the lender to monitor
the outstanding loan balance in relation to the collateral that secures such
loan. Occasionally, a lender may advance to a borrower an amount in excess of
the amount of the Advance Rate as applied against the Primary Collateral of the
borrower. Such an excess amount is referred to as an "Over-Advance."
Commercial finance loans made by Fremont Financial are primarily on a
revolving short-term basis (generally two or three years) and secured by assets
which primarily include accounts receivable, inventory, machinery and equipment
and, to a lesser extent, real estate and other types of collateral. In addition,
Fremont Financial also makes term loans secured primarily by equipment and real
estate. The term loans are cross-collateralized (i.e., the same collateral is
used to support both the term loans and all the related revolving loans) and
coterminous with the related revolving loan made to the same Obligor. The term
to maturity for the term loans is generally five years; however, certain term
loans are "balloon loans" that amortize over a longer period and therefore do
not amortize fully before their respective maturities. Loans outstanding to a
single Obligor generally range in size from $100,000 to $15,000,000. Interests
in larger loans may be participated out to other asset-based lenders or lending
institutions.
CERTAIN HISTORICAL INFORMATION RELATING TO THE FREMONT PORTFOLIO
The following tables set forth information relating to the Fremont
Portfolio with respect to all advances outstanding as of the dates and periods
indicated (except where expressly provided otherwise). Actual characteristics,
composition, charge-off and non-accrual experience with respect to
17
<PAGE> 50
the Advances transferred to the Trust from time to time pursuant to the Pooling
and Servicing Agreement (referred to herein as the "Trust Portfolio") are likely
to be different. There can be no assurance that the characteristics,
composition, charge-off and non-accrual experience for the Advances included in
the Trust Portfolio from time to time will be similar to the historical
experience for the Fremont Portfolio set forth below.
The majority of the Company's customer base consists of small to medium
size manufacturers and distributors that generally require financing for working
capital, debt restructuring, growth, seasonal shortfalls, leveraged
acquisitions, turnarounds and Chapter 11 financing. In addition to loans
originated by Fremont Financial and either transferred to the Transferor or held
for its own account, Fremont Financial also sells participation interests to
other lending institutions and purchases participation interests in syndicated
loans managed by other lenders, although no such participations are included
among the Advances transferred to the Trust. The term "Fremont Portfolio" as
used herein includes information relating to all commercial finance loans held
by Fremont Financial, including information relating to the Advances transferred
to the Trust, and loan participations and stand-alone term loans owned by
Fremont Financial.
While consideration is given to the net worth and profitability of a
client, asset-based loans are generally extended to borrowers who do not have
bank sources of credit readily available and are based on the estimated
liquidation value of the collateral pledged to secure the loan. Generally, loans
are provided on a floating rate basis at a spread over the prime rate, and each
account is supervised and regularly reviewed to monitor collateral sufficiency.
The average portfolio balance and gross interest yield over the prime rate of
the Fremont Portfolio for each of the fiscal years 1992, 1993, 1994 and 1995 is
shown below:
AVERAGE INTEREST YIELD OVER PRIME RATE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1995 1994 1993 1992
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average Performing Fremont
Portfolio.......................... $ 548,820 $ 430,656 $ 306,408 $ 236,549
Average Prime Rate................... 8.83% 7.14% 6.00% 6.25%
Gross Interest Yield over the Prime
Rate............................... 3.59% 4.49% 4.85% 4.72%
</TABLE>
The gross interest yield for a loan includes monthly interest charges, but
does not include amounts paid by the related borrowers as fees under the related
loan contract. Such fees include extension fees, servicing fees, facility fees,
overadvance fees, "over-limit" fees and all other similar fees paid by borrowers
under the loan contracts. The gross interest yield over the average prime rate
has fluctuated over the period shown above for a variety of reasons. The
decrease of this yield in 1994 and 1995 for the Fremont Portfolio is due
primarily to the substantial increase of participations in syndicated loans in
Fremont Financial's portfolio, which on average have a lower interest yield over
the prime rate. Such participations are not included among the Advances
transferred to the Trust. To the extent that the gross interest yield over the
prime rate decreases for Advances held by the Trust, the amount of Excess
Finance Charge Collections available to offset Defaulted Amounts may be reduced.
See "Pooling and Servicing Agreement -- Determination of Charge-Offs and
Subordination Amounts." There can be no assurance that the gross interest yield
over the prime rate will equal or maintain any particular level in the future.
In addition, it can be expected that such yield will continue to fluctuate and
may continue to decrease. See "Risk Factors -- Competition in the Small Business
and Middle Market Loan Industry."
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<PAGE> 51
COMPOSITION OF COLLATERAL OF THE ADVANCES IN THE FREMONT PORTFOLIO
The following table sets forth the composition of the Advances in the
Fremont Portfolio by classification of Primary Collateral at each of the dates
shown and as a percentage of the total principal outstanding at the dates
indicated.
<TABLE>
<CAPTION>
MACHINERY
ACCOUNTS AND TOTAL FREMONT
RECEIVABLE INVENTORY EQUIPMENT REAL ESTATE NON-ACCRUAL PORTFOLIO
---------- --------- --------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
March 1992............... 60.3% 23.1% 10.0% 5.3% 1.3% $ 215,374,000
June 1992................ 61.8% 22.6% 10.6% 4.0% 1.0% 256,061,000
September 1992........... 63.8% 21.3% 9.8% 4.0% 1.1% 255,596,000
December 1992............ 62.8% 21.4% 9.8% 4.3% 1.7% 284,483,000
March 1993............... 59.9% 23.0% 9.4% 6.0% 1.7% 281,949,000
June 1993................ 60.1% 24.3% 8.6% 5.5% 1.5% 297,657,000
September 1993........... 57.6% 23.7% 11.6% 6.0% 1.1% 347,232,000
December 1993............ 59.8% 22.7% 10.8% 5.6% 1.1% 387,474,000
March 1994............... 54.7% 26.8% 11.1% 5.9% 1.5% 391,244,000
June 1994................ 55.4% 24.6% 12.0% 7.3% 0.7% 449,036,000
September 1994........... 59.5% 22.8% 11.6% 5.9% 0.2% 482,648,000
December 1994............ 54.3% 21.6% 10.8% 13.2% 0.1% 543,907,000
March 1995............... 54.1% 23.7% 9.7% 12.4% 0.1% 552,048,000
June 1995................ 51.9% 25.6% 9.6% 12.8% 0.1% 585,875,000
September 1995........... 50.8% 25.3% 8.6% 12.9% 2.4% 599,267,000
December 1995............ 48.7% 27.8% 9.9% 11.8% 1.8% 532,693,000
</TABLE>
The Primary Collateral is the collateral that Fremont Financial gives the
most emphasis in determining the amount to be advanced to a borrower. A loan, or
a portion thereof, is classified as non-accrual when, in management's opinion,
amounts due under the related contract may not be fully collected because the
value of the underlying collateral is insufficient and/or the financial
condition of the relevant borrower is uncertain. No assurance can be given that
management has correctly characterized the collectibility of the Advances.
During 1994, Fremont Financial increased its portfolio of participations in
syndicated loans, and in particular, during December 1994, in loans secured by
commercial real estate mortgages and therefore increased the percentage of real
estate as Primary Collateral. Such participations, however, are not included
among the Advances transferred to the Trust. The increase to the non-accruals as
a percentage of the portfolio from 0.1% in June 1995 to 1.8% in December 1995 is
primarily attributable to the assignment of non-accrual status to a single loan
contract with outstanding advances of approximately $13.8 million in September
1995. The advances under that loan contract are not included in the Trust
Portfolio. See "Risk Factors -- Competition in the Small Business and Middle
Market Loan Industry."
CHARGE-OFFS, RECOVERIES AND NET CHARGE-OFFS
The following table sets forth the amounts of charge-offs, recoveries and
net charge-offs at each of the dates shown for the Fremont Portfolio. A
non-accrual loan, or portion thereof, is charged-off when the amount of an
Advance that will not be realized becomes more certain. A recovery represents
amounts realized with respect to an Advance that was charged-off in any prior
period.
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<PAGE> 52
CHARGE-OFFS, RECOVERIES AND NET CHARGE-OFFS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average Total Fremont
Portfolio...................... $ 553,409 $ 434,232 $ 311,098 $ 239,585
Charge-Offs...................... $ 2,373 $ 3,287 $ 1,783 $ 1,662
Recoveries....................... (513) (66) (301) (82)
-------- -------- -------- --------
Net Charge-Offs.................. $ 1,860 $ 3,221 $ 1,482 $ 1,580
======== ======== ======== ========
Net Charge-Offs as a Percentage
of Average Total Fremont
Portfolio...................... 0.34% 0.74% 0.48% 0.66%
======== ======== ======== ========
</TABLE>
The average total performing balance of the Fremont Portfolio has increased
each year primarily due to new business growth and, to a lesser extent,
portfolio acquisitions. Although Fremont Financial intends to continue to
emphasize new business growth, no assurance can be given that Fremont Financial
will be able to increase or sustain its level of growth. Net charge-offs as a
percentage of the average total Fremont Portfolio fluctuated over the period
shown in the table above for a variety of reasons including the difference in
timing of recoveries and charge-offs. Nevertheless, Fremont Financial does not
believe that the amount of charge-offs in any period is necessarily indicative
of future levels because a charge-off relating to a single loan could
significantly impact the level of charge-offs for any single year. Future
recoveries are dependent upon a variety of factors including general economic
conditions, various legal factors and the level of charge-offs in prior years.
LOAN ORIGINATION AND CREDIT APPROVAL PROCESS
The credit approval process at Fremont Financial is a multi-step process
that involves marketing, auditing, and regional and national credit approval.
Essentially, Fremont Financial marketing officers obtain referrals from
commercial banks, other asset-based lenders, investment bankers and other
sources. The marketing officer contacts the prospective Obligor and conducts an
investigation of the prospect, as well as an analysis of historical financial
statements.
The marketing officer compiles a "Prospect Review Report" that details the
information that is obtained from the prospective Obligor. In addition, the
marketing officer drafts a proposal (a "Proposal Letter") that, upon approval
from the regional marketing executive, is delivered to the prospective Obligor,
who, upon acceptance of the Proposal Letter, submits a good faith deposit to
Fremont Financial to cover expenses associated with the continued evaluation of
the prospective Obligor. The Proposal Letter does not commit Fremont Financial
to a transaction and certain Proposal Letters require national credit
administration approval before being delivered to a prospective Obligor.
Immediately upon the receipt of the good faith deposit, a senior credit officer
becomes responsible for submitting filings necessary to perfect security
interests in the prospective Obligor's assets, submitting a form of
representations and warranties of the prospective Obligor's officers, and
initiating a background investigation authorization to be completed by the
prospective Obligor. An audit is then scheduled with the national audit manager
and the senior credit officer in the particular regional office begins an
analysis of the Obligor and the collateral.
The initial audit process normally requires one to two weeks. The Fremont
Financial auditor visits the prospective Obligor's facilities and reviews
systems, books and records, as well as the physical collateral. The purpose of
the audit is to confirm the accuracy and completeness of the information
provided to Fremont Financial and analyze the quality and control of the
collateral.
The audit department reports directly to national credit administration
rather than the senior credit officer in the applicable regional office in order
to facilitate independence and provide a system of checks and balances.
Nevertheless, the auditors and senior credit officers act in cooperation with
each other to ensure that Fremont Financial has a complete understanding of the
proposed relationship.
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<PAGE> 53
A credit approval request package is then prepared by the senior credit
officer which includes documents such as UCC searches, certificates of good
standing, tax lien searches, bankruptcy searches, appraisals, title reports and
other information to be included, along with an auditor's report. The credit
approval request package is typically submitted within one week after the
completion of an audit. The package is routed from the regional office to
national credit administration for approval.
Once the package is reviewed and approved by national credit administration
and accepted by the prospective Obligor, documentation begins. After
documentation is approved by national credit administration and general counsel,
the loan can then be funded. The entire credit approval process generally
requires four to six weeks.
COLLATERAL ANALYSIS
Fremont Financial takes a security interest in assets that it believes will
be sufficient, upon default of the loan, to allow it to realize an amount equal
to the amount to be advanced under a loan as well as related termination costs.
Fremont Financial may also obtain a security interest, which may be a junior
interest, in substantially all of the other assets of the Obligor. If Fremont
Financial makes more than one loan to a particular Obligor, the loans are
cross-collateralized. The majority of Fremont Financial loans are personally
guaranteed by the principal stockholders of the Obligor. Most personal
guarantees are unsecured. However, when the situation warrants, Fremont
Financial perfects its position in specific assets of the guarantor(s).
As of December 31, 1995, Primary Collateral consisting of receivables and
inventory secured approximately 48.7% and 27.8%, respectively, of the total
Principal Advances outstanding on the Fremont Portfolio.
Advance Rates for receivables are generally computed based on a Historical
Dilution Percentage plus 15%, the sum of which is subtracted from 100%. The
"Historical Dilution Percentage" is defined as the percentage of receivables
that is expected to be retired by something other than cash such as credit
memos, chargebacks, returns, or bad-debt writeoffs. The Historical Dilution
Percentage provides an estimate for how much of the Obligor's net accounts
receivable are expected to be uncollectible in a liquidation. An additional
reserve of 15% is based on industry experience with typical accounts receivable
liquidations. In determining the eligibility of receivables, the additional
reserve may be increased for receivables perceived to be more risky in terms of
collectibility.
Before making inventory advances, Fremont Financial typically requires that
it be able to test on a regular basis the cost, count and categories of
inventory. Therefore, Fremont Financial requires an up-to-date perpetual
inventory system which can be tested by its auditors. There are a number of
items to be considered in determining an Advance Rate for inventory. Some of the
key issues are the number of potential liquidation buyers, gross profit margin,
brand name attachments, price stability and inventory turnover rate. As
inventory collateral valuations can vary dramatically from industry to industry
and between companies within an industry, there is no standard advance rate for
loans secured by inventory. Each Obligor's situation is examined independently.
For machinery and equipment loans, the collateral must be readily
marketable, standard for the industry, in good condition and well-maintained on
an on-going basis. Generally, unacceptable items include custom or homemade
equipment, limited use and/or single purpose equipment and equipment requiring
special care. An appraisal is conducted by an independent third-party appraiser
acceptable to Fremont Financial. The Advance Rate will generally not exceed
70-80% of the appraised net liquidation value.
For loans secured by real estate, Fremont Financial requires a recent
appraisal by an independent appraiser and generally obtains an environmental
survey of such real estate. The Advance Rate for real estate will generally not
exceed 75% of the appraised value of such real estate. In most instances, real
estate is secondary collateral.
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Inventory balances are reported and advanced against on a daily, weekly
and/or monthly basis. Loans secured by machinery, equipment, and real estate are
amortized over a predetermined number of years. Although the amortization period
for term loans may extend beyond the original term of the lending agreement with
Fremont Financial, these loans are not stand-alone loans, but are
cross-collateralized and are generally coterminous with the related revolving
loans. (The term loans are due in the event the loan contract is terminated for
any reason, including the event that Fremont Financial does not renew the
revolving loan.)
Under certain circumstances, Fremont Financial may make an Over-Advance to
an Obligor where the aggregate amount of borrowings under a loan exceeds the
Advance Rate multiplied by the amount of available Primary Collateral for such
loan. The portion of any Over-Advance that may be included in the Trust as an
Eligible Advance is limited, as described under "Pooling and Servicing
Agreement -- Representations and Warranties."
During the period shown in the tables above, the majority of Fremont
Financial's loans that have been liquidated or whose Obligor has entered
bankruptcy have been fully repaid. Fremont Financial attempts to work closely
with the Obligor through the liquidation or bankruptcy process to ensure
repayment of the loan. Fremont Financial seeks to maintain conservative
collateral valuations and perfection of Fremont Financial's security interest.
The largest percentage of realized losses has resulted from fraud or
collateral misrepresentations by the Obligor. Fremont Financial seeks to protect
itself against this risk through a comprehensive system of collateral monitoring
and control. Fremont Financial's operations employees, supervised by account
executives, review Obligors' sales assigned as receivables and collections
against those accounts on a daily basis. Verification of account balance is
requested from a percentage of each Obligor's customers on a monthly basis
through both phone and mail contacts. Significant sized invoices may be verified
during the month.
Receivables, inventory, payables and financial statements are reviewed on a
monthly basis by the account executives.
Fremont Financial's auditors perform auditing procedures of a prospective
Obligor's books and records and physically inspect the collateral prior to
approval and funding as well as approximately every 90 days during the term of
the loan. Auditors have established procedures to confirm the validity of
receivables and inventory and the existence and maintenance of equipment.
THE CONTRACTS
Fremont Financial's loans are generally made pursuant to a "Loan and
Security Agreement." The Loan and Security Agreement sets out the Obligor's
credit limit for revolving loans including, in some cases, a subline of credit
for inventory loans as well as Advance Rates for accounts receivable and
inventory loans. The Loan and Security Agreement provides that advances made
pursuant to these lines of credit are to be made in Fremont Financial's sole
discretion. The Loan and Security Agreement also provides definitions of
"eligible" accounts and "eligible" inventory and states that these definitions
are subject to revision in Fremont Financial's discretion.
An Obligor's grant of a blanket security interest in accounts receivable,
inventory, equipment and general intangibles and other personal property of the
Obligor is also contained in the Loan and Security Agreement. In the Loan and
Security Agreement, the Obligor makes certain warranties, representations and
covenants relating to its business and the collateral. Finally, the Loan and
Security Agreement defines certain events to be events of defaults and describes
Fremont Financial's rights upon an Obligor's default.
If as part of the revolving loan facility Fremont Financial extends a term
loan facility, Fremont Financial generally has the Obligor execute a "Secured
Promissory Note." The Secured Promissory Note
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is subject to the terms of the Loan and Security Agreement, and particularly
subject to the security interest granted therein.
As necessary, Fremont Financial may require an Obligor to execute other
documents such as mortgages or patent assignments. Fremont Financial also
obtains documents from third parties when necessary to properly execute a credit
approval. Such agreements include guaranties, subordination agreements and
non-offset agreements.
Although the terms of the Contracts provide that Fremont Financial's
funding obligations are discretionary, it is possible that a court could
determine that the Contracts actually contain executory obligations under which
Fremont Financial has, and is retaining, certain funding obligations. In the
event of a breach of those obligations by Fremont Financial, the Obligors on the
Contracts might be able to assert certain defenses to payment. See "Risk
Factors -- Certain Legal Aspects of Contracts" and "-- Certain Legal Aspects of
Advances."
THE ADVANCES
GENERAL
The Advances arise from loans originated or purchased by Fremont Financial.
As of the date of this Prospectus, the Advances included in the Trust Portfolio
represent the majority of the loans in the Fremont Portfolio. In order to be
included in the Trust Portfolio, each Advance must have arisen in the ordinary
course of Fremont Financial's business (or, with respect to Advances purchased
by Fremont Financial, believed by Fremont Financial to have arisen in the
ordinary course of the business of the originator of the Advance) and must meet
certain other criteria provided in the Pooling and Servicing Agreement. See
"Pooling and Servicing Agreement -- Representations and Warranties."
On a daily basis, Fremont Financial transfers the Advances originated under
any Contract to the Transferor in accordance with the Purchase Agreement. The
Transferor then transfers the Advances to the Trust pursuant to the Pooling and
Servicing Agreement. The Transferor and, pursuant to the Purchase Agreement,
Fremont Financial, have the right at their sole option to designate from time to
time additional qualifying contracts to be included as additional Contracts (the
"Additional Contracts") and to convey to the Trust any Advances created
thereunder. See "Pooling and Servicing Agreement -- Representations and
Warranties" and "-- Addition of Contracts." These Additional Contracts must meet
the eligibility criteria set forth in the Pooling and Servicing Agreement as of
the date such agreements are designated as Additional Contracts. Fremont
Financial conveys or will convey the Advances then existing or thereafter
created under such Additional Contracts to the Transferor, which in turn conveys
or will convey them to the Trust. In addition, as of the date the Advances under
any Additional Contract are to be included in the Trust and as of the date any
additional Advances are generated, Fremont Financial represents and warrants to
Transferor, and the Transferor represents and warrants to the Trust, that such
additional Advances meet the eligibility requirements set forth in the Pooling
and Servicing Agreement. Under certain circumstances specified in the Pooling
and Servicing Agreement, the Transferor has the right at its sole discretion to
remove Advances from the Trust provided that the aggregate Eligible Advances
remaining in the Trust Portfolio are sufficient to ensure that the Transferor
Amount will be equal to or greater than the Aggregate Subordinated Minimum
Transferor Amount, as such term is defined in the Pooling and Servicing
Agreement.
MATURITY ASSUMPTIONS
Principal with respect to any Series will not be payable until the date
specified for such Series in the relevant Prospectus Supplement (the
"Amortization Period Commencement Date"), unless an Event of Termination with
respect to such Series has occurred. (The period before such date is referred to
herein as the "Non-Amortization Period" and the period from and after such date
is referred to herein as the "Amortization Period"). The timing of the full
amortization of each Series following the Amortization
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Period Commencement Date for such Series is primarily dependent on the rate of
payment by Obligors of the Advances. The rate of payment on the Advances is
unpredictable and is dependent upon, among other things, receipt by Obligors of
payment on the underlying collateral and other matters relating to the business
of Obligors. To the extent that an Obligor does not receive payment on the
underlying collateral, it is likely that such Obligor's ability to pay principal
of and interest on the Advance would be limited. Therefore the timing of the
principal payments on the Certificates will be uncertain and can occur at any
time during an Amortization Period. In addition to the nonpayment of Advances
due to defaults on the collateral underlying such Advances, payments on Advances
may be affected by other circumstances. Notwithstanding the amortization of a
Series of Investor Certificates, Fremont Financial may have an obligation to
continue to fund the Advances pursuant to the related Contract. In the event
that Fremont Financial does not continue to fund the Advances, payment by
Obligors would likely be delayed and may even be reduced or terminated.
Therefore payments on the Certificates could be adversely affected. See "Risk
Factors -- Certain Legal Aspects of Contracts" and "-- Payments and Maturity."
In addition, the Invested Amount of a Series will be subject to optional
repurchase by the Transferor in its sole discretion at any time after the date
specified in the related Prospectus Supplement. Funds to be used to make such a
repurchase shall be provided by the Transferor out of funds available to the
Transferor from distributions on the Transferor Certificate or from proceeds of
the sale of additional Series or additional capital contributions; however, the
Transferor makes no assurance that it will have sufficient funds at any time in
the future to fund any such optional purchase or that any such optional purchase
will occur. The repurchase price will be equal to the Invested Amount plus
accrued and unpaid interest on the Investor Certificates through the day
preceding the Payment Date on which the repurchase occurs.
USE OF PROCEEDS
As more fully set forth in the related Prospectus Supplement, the
Transferor will apply the net proceeds received from the sale of each Series to
pay Fremont Financial the purchase price for the Advances pursuant to the
Purchase Agreement, to repurchase outstanding Certificates or to distribute as a
dividend any excess to Fremont Financial. In addition, a portion of the net
proceeds may be deposited in the Excess Funding Account as additional
collateral, in which case it would be available to purchase additional Advances.
Fremont Financial will use the proceeds received by it for general corporate
purposes, including the reduction of debt.
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DESCRIPTION OF THE CERTIFICATES
The Certificates for each Series have been and will be issued pursuant to
the Pooling and Servicing Agreement as amended by the Supplement pertaining to
such Series. The following is a summary of the Certificates as created pursuant
to the provisions of the Pooling and Servicing Agreement. See "Pooling and
Servicing Agreement."
GENERAL
The Investor Certificates will represent undivided interests in the assets
of the Trust allocated to the Investors (the "Investor Interest"), including the
right to receive from such Trust Assets, Collections on the Advances in the
Trust up to, but not in excess of, the amounts required to make payments of
interest on and principal of the Certificates.
The Transferor owns the Transferor Certificate, which generally will not be
transferable. The Transferor Certificate represents an undivided interest in the
Trust, a portion of which is subordinated to each Series of Investor
Certificates and the Variable Funding Certificate (the "Subordinated Transferor
Interest"). The Subordinated Transferor Interest represents the right to receive
Collections on the Advances remaining after the allocation of the Collections to
all Investor Certificates and the Variable Funding Certificate then outstanding.
Any amounts represented by the Transferor Certificate in excess of the
Subordinated Transferor Interest represent an interest that is pari passu with
Senior Investor Certificates; however, this portion of the Transferor Interest
is not entitled to the benefit of the subordination provided by Subordinated
Series and the Subordinated Transferor Interest. The Transferor Certificate may
be, subject to certain limitations and conditions set forth in the Pooling and
Servicing Agreement, exchanged in part for one or more new Series of Investor
Certificates or the Variable Funding Certificate and a reissued Transferor
Certificate. The Transferor Certificate may not be transferred for any other
purpose. See "Pooling and Servicing Agreement -- New Certificates."
During the period with respect to which no Series is in its Amortization
Period, the Invested Amount of each Series in the Trust will generally remain
constant except upon the occurrence of a Partial Amortization Event or upon the
amortization of a Series. The amount of Advances in the Trust, however, varies
each day as new Advances are created and others are paid or written off. The
amount of the Transferor Interest therefore fluctuates each day to reflect the
changes in the amount of the Advances in the Trust. During the Amortization
Period for a Series, the Invested Amount in the Trust for such Series will
decline as payments of principal are collected with respect to the Advances and
held for distribution, and then paid, to the Certificateholders for such Series.
As a result, the Transferor Interest during any Amortization Period will
generally increase each month to reflect the reductions in the Invested Amount
of the applicable Series and will also change to reflect the variations in the
amount of the Advances in the Trust. The Transferor Interest may be reduced as
the result of an issuance of a new Series.
INTEREST PAYMENTS
Interest on each Series will be distributed on the dates (each a "Payment
Date") and in the manner specified in the related Prospectus Supplement for such
Series. Each payment of interest on the Certificates on a Payment Date will
include all interest accrued during the period specified in the related
Prospectus Supplement (each, an "Interest Accrual Period") immediately preceding
such Payment Date.
With respect to any Series that pays a variable rate of interest, the
related Prospectus Supplement will set forth: (i) the initial Certificate Rate
(or the formula or manner for determining such initial Certificate Rate); (ii)
the formula, index or other method by which the Certificate Rate will be
determined from time to time; (iii) the periodic intervals at which such
determination will be made; and (iv) any maximum or minimum rate for any such
Series. With respect to any Series that pays a fixed rate of interest, the
related Prospectus Supplement will set forth the rate.
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PRINCIPAL PAYMENTS
During the period with respect to which any Series is not in its
Amortization Period, no principal payments will be made to Holders of Investor
Certificates of such Series except after the occurrence of a Partial
Amortization Event. During the Amortization Period for any Series, principal
will be payable monthly on each Payment Date starting on the Amortization Period
Commencement Date (or earlier if an Event of Termination occurs). The timing of
the full amortization of such Series depends on, among other things, repayment
by Obligors of the Advances and may not occur if Obligor's payments are
insufficient therefor. Principal will be paid to all Holders of Senior Investor
Certificates of a particular Series on a pro rata basis in an amount equal to
the amounts on deposit in the Excess Funding Account upon the occurrence of a
Partial Amortization Event. See "Maturity Assumptions."
VARIABLE FUNDING CERTIFICATE
Due to the fact that the principal balance of Advances can fluctuate on a
daily basis, and that the Investor Certificates will generally represent a fixed
dollar amount, the Transferor Interest will increase or decrease on a daily
basis to accommodate these collateral fluctuations. As a mechanism to fund a
portion of such fluctuations in the Transferor Interest, the Trust has issued
the Variable Funding Certificate.
The Holder of the Variable Funding Certificate owns an undivided interest
in the Trust that is pari passu with the interests of all Holders of Senior
Investor Certificates; however, payments of principal of and interest on the
Variable Funding Certificate may be made on a more frequent basis than the
Investor Certificates. However, if an Event of Termination has occurred,
payments under the Variable Funding Certificate will only be made on a pro rata
basis with all Senior Investor Certificates. The Variable Funding Certificate is
used to fund a portion of the fluctuations on the Advances. Therefore,
repayments on this certificate could be made from time to time to reflect
decreases in the aggregate amount of Principal Advances in the Trust.
Conversely, the Holder of the Variable Funding Certificate may purchase
additional Issuer Amounts to pay to the Trust an amount equal to the increases
of the balance of the Variable Funding Certificate due to increases in the
Advances (subject to the terms of such Variable Funding Certificate). Payments
to the Holder of the Variable Funding Certificate will generally include
principal and interest and will be senior in right of payment to all
Subordinated Investor Certificates.
BOOK-ENTRY REGISTRATION
If so specified in the Prospectus Supplement, Investor Certificates of any
Series may be issued in book-entry form through the facilities of The Depository
Trust Company ("DTC") (in the United States) or Cedel, societe anonyme ("Cedel")
or The Euroclear System (in Europe) ("Euroclear") if they are participants of
such systems, or indirectly through organizations which are participants in such
systems.
Cede & Co. ("Cede"), as nominee for DTC, will be the registered Holder of
the global Investor Certificates. Any person who is named as the owner of any
Certificate on the books of any clearing corporation or any other financial
intermediary is a certificate owner (a "Certificate Owner"). No Certificate
Owner will be entitled to receive a certificate representing such person's
interest in the Investor Certificates. Unless and until Definitive Certificates
are issued under the limited circumstances described below, all references
herein to actions by Certificate Owners shall refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants"), and all
references herein to distributions, notices, reports and statements to
Certificate Owners shall refer to distributions, notices, reports and statements
to Cede, as the registered Holder of the Investor Certificates, for distribution
to Certificate Owners, in accordance with DTC procedures.
Cedel and Euroclear will hold omnibus positions on behalf of their
participants ("Cedel Participants" and "Euroclear Participants," respectively)
through customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective Depositories which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
Citibank, N.A. ("Citibank") will act as depository for Cedel and Morgan Guaranty
Trust Company of New York
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("Morgan") will act as depository for Euroclear (in such capacities, each, a
"Depository" and collectively, the "Depositories").
Transfers between DTC Participants will occur in the ordinary way in
accordance with DTC rules. Transfers between Cedel Participants and Euroclear
Participants will occur in the ordinary way in accordance with their applicable
rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depository; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counter party in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depository to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositories.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a DTC participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participants 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 or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC. For additional information regarding clearance and settlement procedures
for the Investor Certificates, see Annex I hereto and for information with
respect to tax documentation procedures relating to the Investor Certificates,
see Annex I hereto and "Certain Federal Income Tax Consequences -- Federal
Income Tax Consequences to Foreign Investors."
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its Participants and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in accounts of its
Participants, thereby eliminating the need for physical movement of
certificates. Participants include underwriters, securities brokers and dealers
(including the Underwriters), banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Investor Certificates may do so only through Participants and Indirect
Participants. In addition, Certificate Owners receive all payments of principal
of and interest on the Investor Certificates from the Trustee through DTC and
its Participants. Under a book-entry format, Certificate Owners receive payments
after the related Payment Date, because while payments are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward such
payments to its Participants which thereafter will be required to forward them
to Indirect Participants or Certificate Owners. It is anticipated that the only
"Certificateholder" (as such term is used in the Pooling and Servicing Agreement
and the Prospectus Supplement) will be Cede, as nominee of DTC, and that
Certificate Owners will not be recognized by the Trustee as a Certificateholder
under the Pooling and Servicing Agreement and the Prospectus Supplement.
Certificate Owners are only permitted
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to exercise the rights of a Certificateholder indirectly through DTC (and its
Participants which in turn will exercise their rights through DTC).
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Investor Certificates and is
required to receive and transmit payments of principal of and interest on the
Investor Certificates. Participants and Indirect Participants with which
Certificate Owners have accounts with respect to the Investor Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Certificate Owners.
Because DTC can only act on behalf of Participants, which in turn act on
behalf of Indirect Participants and certain banks, the ability of Certificate
Owners to pledge Investor Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Investor Certificates, may be limited due to the lack of a physical certificate
for such Investor Certificates.
DTC has advised the Transferor that it will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement or the
Prospectus Supplement only at the direction of one or more Participants to whose
account with DTC the Investor Certificates are credited. Additionally, DTC has
advised the Transferor that it will take such actions with respect to specified
percentages of the Invested Amount only at the direction of and on behalf of
Participants whose holdings include undivided interests that satisfy such
specified percentages. DTC may take conflicting actions with respect to other
undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for 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 32 currencies, including United States dollars. Cedel
provides to its Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedel interfaces with domestic markets in
several countries. As a professional 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 and may include the Underwriters. Indirect access to Cedel
is also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for 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 32 currencies, including United States dollars. The Euroclear
System includes various other services, including securities lending and
borrowing, and interfaces with domestic markets in several countries generally
similar to the arrangements for cross-market transfers with DTC described above.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System 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 the Euroclear System on behalf of Euroclear Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries and may
include any underwriters, agents or dealers involved in the distribution of the
Investor Certificates. Indirect access to the Euroclear System is also available
to other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions with respect to Investor Certificates held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depository. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences." The Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder under the Pooling and Servicing Agreement or the
Prospectus Supplement on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to its
Depository's ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
With respect to any Series originally issued in book-entry form, the
Investor Certificates of such Series will be issued in fully registered,
certificated form to Certificate Owners or their nominees ("Definitive
Certificates"), rather than to DTC or its nominee, only if (i) the Transferor
advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as a depository with respect to the
Investor Certificates, and the Trustee or the Transferor is unable to locate a
qualified successor, (ii) the Transferor, at its option, advises the Trustee in
writing that it elects to terminate the book-entry system through DTC, or (iii)
after the occurrence of a Servicer Default, Certificate Owners representing not
less than 50% of the Invested Amount, advise the Trustee and DTC through
Participants in writing that the continuation of a book-entry system through DTC
is no longer in the best interest of the Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the Definitive Certificates representing the Investor Certificates and
instructions for reregistration, the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Pooling and Servicing
Agreement. In the event that Definitive Certificates are issued or DTC ceases to
be the clearing agency for the Certificates, the Pooling and Servicing Agreement
provides that the Certificateholders will be notified of such event.
Payments of principal of and interest on the Investor Certificates are made
by the Trustee directly to Holders of Definitive Certificates in accordance with
the procedures set forth herein and in the Pooling and Servicing Agreement.
Interest payments and any principal payments on each Payment Date are made to
Holders in whose names the Definitive Certificates were registered at the close
of business on the related Record Date. Payments are 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 Investor Certificate (whether Definitive Certificates
or the certificate or certificates registered in the name of Cede
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representing the Investor Certificates), however, will be made only upon
presentation and surrender of such Investor Certificate at the office or agency
specified in the notice of final payment to Certificateholders. The Trustee will
provide such notice to registered Certificateholders not later than the fifth
day of the month of such final payments.
Definitive Certificates are transferable and exchangeable at the offices of
the Transfer Agent and Registrar, which initially will be the Trustee. No
service charge is imposed for any registration of transfer or exchange, but the
Transfer Agent and Registrar may require payment of a sum sufficient to cover
any tax or other governmental charge imposed in connection therewith. The
Transfer Agent and Registrar are not required to register the transfer or
exchange of Definitive Certificates for a period of fifteen days preceding the
due date for any payment with respect to such Definitive Certificates.
POOLING AND SERVICING AGREEMENT
The Pooling and Servicing Agreement states that either the Transferor has
transferred and assigned to the Trust all of its right, title and interest in
and to the Advances and all Advances subsequently created under the Contracts
and purchased by or contributed to the Transferor, or the Transferor has granted
to the Trust a perfected security interest in such Advances.
In connection with the transfer of the Advances to the Trust, the
Transferor has delivered secured promissory notes and certain other instruments
to the Trustee, and the Transferor has caused certain interests under the
Contracts, Related Security (as defined in the Pooling and Servicing Agreement),
documents and any records or agreements relating to such documents or the
Advances to be marked as being transferred to the Trustee for the benefit of the
Trust. In addition, the Transferor has indicated in its hard copy, computer
files and microfiche lists that the Advances have been conveyed to the Trust,
and the Transferor has provided to the Trustee hard copy, computer files or
microfiche lists containing a true and complete list showing the aggregate
Advances to each Obligor, identified by name and by total outstanding balance on
the Cut-Off Date. The Transferor has caused to be filed a UCC financing
statement with respect to the Advances meeting the requirements of California or
other applicable law. See "Risk Factors -- Certain Legal Aspects of the
Advances" and "-- Certain Legal Aspects of the Contracts."
NEW CERTIFICATES
The Pooling and Servicing Agreement provides for the Trustee to issue three
types of Certificates: (i) Investor Certificates of one or more Series which are
transferable only in accordance with the relevant provisions of the Securities
Act and have the characteristics described below; (ii) a Variable Funding
Certificate; and (iii) the Transferor Certificate, which evidences the
Transferor Interest and generally is not transferable. The Transferor
Certificate may be, subject to certain limitations and conditions set forth in
the Pooling and Servicing Agreement, exchanged in part for one or more new
Series or the Variable Funding Certificate and a reissued Transferor
Certificate. The Transferor Certificate may not be transferred for any other
purpose. The Pooling and Servicing Agreement also provides that, pursuant to one
or more Supplements, the holder of the Transferor Certificate may (i) tender
only such certificate, or (ii) tender the Transferor Certificate in conjunction
with the certificates evidencing any Series or the Variable Funding Certificate,
to the Trustee in exchange for one or more new Series and/or a Variable Funding
Certificate and a reissued Transferor Certificate. Under the Pooling and
Servicing Agreement, the holder of the Transferor Certificate may define, with
respect to any newly issued Series, certain terms including: (i) its name or
designation; (ii) its initial Invested Amount (or method for calculating such
amount); (iii) its Certificate Rate (or formula for the determination thereof);
(iv) the closing date; (v) the rating agency or agencies rating the Series; (vi)
the interest payment date or dates and the date or dates from which interest
shall accrue; (vii) the name of the clearing agency, if any; (viii) the method
for allocating collections to Certificateholders of such Series and the method
by which the principal amount of such Series shall amortize; (ix) the
identification of any documents to be used in connection with such Series and
the terms governing the operation of any such documents; (x) the Subordinated
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Minimum Amount; (xi) the Enhancement provider, if applicable, and the terms of
any Enhancement with respect to such Series; (xii) the terms on which the
Certificates of such Series may be repurchased or remarketed to other investors;
(xiii) the termination date of such Series; (xiv) any deposit into any account
provided for such Series; (xv) the number of classes of such Series, and if more
than one class, the rights and priorities of each such class; (xvi) the priority
of such Series with respect to any other Series; (xvii) the rights, if any, of
the Holder of the Transferor Certificate that have been transferred to the
Holders of such Series; (xviii) the pool factor (consisting of an eleven-digit
decimal expressing the ratio of the investor interest to the initial investor
interest); (xix) whether such Series will be part of a group; and (xx) any other
relevant terms, including whether or not such Series will be pledged as
collateral for an issuance of any other securities, including commercial paper,
(all such terms, the "Principal Terms" of such Series). In order to issue an
additional Series, (a) the Overcollateralization Enhancement Amount (after
taking into account such new issuance) must be equal to or greater than the sum
of the Subordinated Minimum Amounts for each outstanding Series and the Variable
Funding Certificate and (b) the Aggregate Subordinated Transferor Amount (after
taking into account such new issuance) must be equal to or greater than the
Aggregate Subordinated Minimum Transferor Amount. None of the Transferor, the
Servicer, the Trustee or the Trust is required or intends to obtain the consent
of any Certificateholder to issue any additional Series. However, as a condition
of the issuance of a new Series, the Holder of the Transferor Certificate will
deliver to the Trustee written confirmation that such issuance will not result
in any Rating Agency reducing or withdrawing its rating of any outstanding
Series. The Transferor may offer any Series to the public under a disclosure
document in transactions either registered under the Securities Act or exempt
from registration thereunder directly, through one or more other underwriters or
placement agents, in fixed-price offerings or in negotiated transactions or
otherwise. Any such Series may be issued in fully registered or book-entry form
in minimum denominations determined by the Transferor.
The Pooling and Servicing Agreement provides that the holder of the
Transferor Certificate may cause the Trust to issue a new Series and define
Principal Terms such that each Series has a period during which amortization of
the principal amount thereof is intended to occur that may have a different
length and begin on a different date than such period for any other Series. The
new Series may be designated as Senior Investor Certificates and therefore
interest and principal payments with respect to such new Series will be senior
to the Subordinated Investor Certificates, or the new Series may be designated
as Subordinated Investor Certificates. Furthermore, one or more Series may be in
their Amortization Periods while other Series are not. Thus, certain Series may
not be amortizing while other Series are amortizing. Moreover, a Series may have
the benefit of an Enhancement that is available only to such Series. Under the
Pooling and Servicing Agreement, the Trustee shall hold any such form of
Enhancement only on behalf of the Series with respect to which it relates.
Likewise, with respect to each such form of Enhancement, the holder of the
Transferor Certificate may deliver a different form of Enhancement agreement.
The Pooling and Servicing Agreement also provides that the holder of the
Transferor Certificate may specify different coupon rates and monthly servicing
fees with respect to each Series or the Variable Funding Certificate (or a
particular class within such Series or the Variable Funding Certificate).
Collections not used to pay interest on the Certificates, the monthly servicing
fee or the Defaulted Amounts with respect to any Series may be allocated as
provided in such Enhancement agreement, if applicable. The Holder of the
Transferor Certificate also has the option under the Pooling and Servicing
Agreement to vary among Series and the Variable Funding Certificate the terms
upon which a Series or the Variable Funding Certificate (or a particular class
within such Series) may be repurchased by the Transferor or remarketed to other
investors. Additionally, certain Series may be subordinated to other Series, or
classes within a Series may have different priorities. There is no limit to the
number of different Series that may be created under the Pooling and Servicing
Agreement. The Trust will terminate only as provided in the Pooling and
Servicing Agreement.
Under the Pooling and Servicing Agreement and pursuant to a Supplement, the
Trust may issue additional Series or the Variable Funding Certificate only upon
the satisfaction of certain conditions provided in the Pooling and Servicing
Agreement. Upon satisfaction of such conditions, the Trustee will cancel the
existing Transferor Certificate, the Certificates of the exchanged Series or the
Variable
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Funding Certificate, if applicable, and authenticate the new Series, the
Variable Funding Certificate and a new Transferor Certificate.
ADDITIONAL CERTIFICATES
The Transferor may, subject to certain restrictions, cause the Trustee to
issue additional Investor Certificates ("Additional Certificates") of any
outstanding Series from time to time during the Non-Amortization Period, if so
specified in the related Series Supplement (each such issuance, an "Additional
Issuance"). When issued, the Additional Certificates will be identical in all
respects to the outstanding Investor Certificates of the same Series and will be
equally and ratably entitled to the benefits of the Pooling and Servicing
Agreement and the related Series Supplement without preference, priority or
distinction.
As a consequence of each Additional Issuance, the outstanding Initial
Invested Amount of the related Series will be increased. The increased Initial
Invested Amount may result in an increase in the Aggregate Subordinated Minimum
Transferor Amount and the Subordinated Minimum Amount.
Additional Certificates may be issued only upon the satisfaction of certain
conditions provided in the related Series Supplement, including the following:
(a) the Transferor shall have delivered to the Trustee an officer's certificate
requesting authentication of such Additional Certificates and stating the date
of the proposed issuance; (b) after giving effect to the Additional Issuance,
the Aggregate Subordinated Transferor Amount shall be at least equal to the
Aggregate Subordinated Minimum Transferor Amount; (c) the Trustee shall have
received confirmation from each Rating Agency that such Additional Issuance will
not result in the reduction or withdrawal of the rating assigned to any
outstanding Series or the Variable Funding Certificate; (d) the Transferor shall
have delivered to the Trustee a certificate of an authorized officer, dated the
date upon which the Additional Issuance is to occur, to the effect that the
Transferor reasonably believes that such issuance will not at the time of its
occurrence or at a future date cause an Event of Termination to occur or have a
material adverse effect on the Trust or any Series of Investor Certificates or
the Variable Funding Certificate; (e) as of the date of the Additional Issuance,
all amounts due and owing to the Holders of Investor Certificates shall have
been paid; (f) the excess of the principal amount of the Additional Certificates
over their issue price shall not exceed the maximum amount permitted under the
Code without the creation of original issue discount; and (g) the Transferor
shall have delivered to the Trustee an opinion of counsel generally to the
effect that, for federal, California and Illinois income and franchise tax
purposes, (1) following the Additional Issuance the Trust will not be an
association (or publicly traded partnership) taxable as a corporation, or (2)
the Additional Certificates will be properly characterized as debt and (3) the
Additional Issuance will not have a material adverse effect on the tax
characterization of the Trust, any outstanding Series, or the Variable Funding
Certificate and will not cause a taxable event to Holders of any such Investor
Certificates or the Variable Funding Certificate.
REPRESENTATIONS AND WARRANTIES
The Transferor has made certain representations and warranties with respect
to certain matters regarding itself to the Trust, including that, among other
things, (i) as of each date of issuance with respect to any Series (each a
"Closing Date"), the Transferor was duly incorporated and in good standing, and
that it has the authority to consummate the transactions contemplated by the
Pooling and Servicing Agreement and (ii) the Pooling and Servicing Agreement and
any amendments and supplements thereto constitute legal, valid and binding
obligations of the Transferor. In the event of a breach of any of the
representations and warranties in the Pooling and Servicing Agreement described
in this paragraph, either the Trustee or the Holders of Certificates evidencing
undivided interests in the Trust aggregating more than 50% of the Invested
Amount of any Series outstanding, or the Holder of the Variable Funding
Certificate or the liquidity agent for the Variable Funding Certificate, by
written notice to the Transferor (and to the Trustee and the Servicer if given
by the Certificateholders of all Series outstanding), may direct the Transferor
to purchase all of the outstanding Investor Certificates of such Series, or, as
the case may be, the Variable Funding Certificate, within 90 days of such
notice, or within
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such longer period specified in such notice. The Transferor will be obligated to
purchase such Certificates, on a Payment Date occurring within such applicable
period. Such purchase will not be required to be made, however, if at any time
during such applicable period, the representations and warranties shall then be
true and correct in all material respects. The deposit amount for such purchase
of all Series required to be repurchased will be equal to the Invested Amount
for each such Series on the last day of the Settlement Period preceding the
Payment Date on which the reassignment is scheduled to be made less the amount,
if any, previously allocated for payment of principal to the Certificateholders
of such Series on such Payment Date, plus an amount equal to all interest
accrued but unpaid on the affected Investor Certificates at the applicable
Certificate Rate through the last day preceding such Payment Date. If the
Trustee or Investor Certificateholders give notice as provided above, the
obligation of the Transferor to make any such deposit will constitute the sole
remedy respecting a breach of the representations and warranties available to
the Trustee or such Certificateholders.
The Transferor will also represent and warrant to the Trust certain matters
relating to the Advances including, among other things, that (i) as of the
Cut-Off Date (or as of the date of the designation of Additional Contracts),
each Contract was an Eligible Contract, as described below, and (ii) as of each
Closing Date, the transfer of Advances by it to the Trust under the Pooling and
Servicing Agreement constituted the grant of a first priority perfected security
interest in the Advances (except for certain tax liens), which is effective as
to each such Advance upon the creation thereof. In the event of an uncured
breach with respect to an Advance of any of the representations and warranties
described in this paragraph, such Advance will be removed from the Trust and
reconveyed to the Transferor. If such reconveyance causes the Transferor
Interest to fall below the Aggregate Subordinated Minimum Transferor Amount, as
described herein, the Transferor shall deposit the difference in cash in the
Collection Account for allocation to the Excess Funding Account. Pursuant to the
Purchase Agreement, Fremont Financial, as seller thereunder, is required to
repurchase some or all of the Advances from the Transferor in the event of the
breach of certain representations and warranties contained in the Purchase
Agreement. See "Description of the Asset Sale and Contribution
Agreement -- Representations and Warranties."
An "Eligible Contract" is defined to mean, as of the Cut-Off Date (or, with
respect to Additional Contracts, as of the date of designation for inclusion of
Advances arising thereunder in the Trust), each Contract (i) that was in
existence and maintained with Fremont Financial, (ii) that is payable in United
States dollars, (iii) that has not been sold or pledged to any other party, (iv)
the Advances arising under which have not been sold or pledged to any other
party, (v) for which the address of the principal executive office of the
Obligor is in the United States, (vi) that is a revolving commercial loan with
an original term of up to two to three years (plus any related,
cross-collateralized term loan), and (vii) that was originated or purchased by
Fremont Financial and complies with Fremont Financial's underwriting standards.
An "Eligible Advance" is defined to mean each Advance or portion of each
Advance: (i) that has arisen in Fremont Financial's ordinary course of business
(or, if acquired by Fremont Financial after its creation, that has arisen in the
ordinary course of business of the originator thereof and been purchased in the
ordinary course of business by Fremont Financial); (ii) with respect to which
the Obligor's obligation to pay is evidenced by a Contract and such Contract
provides for full payment of the amount thereof; (iii) that is not an Advance
that is recorded as a non-accrual Advance in accordance with Fremont Financial's
normal servicing procedures; (iv) that does not constitute an obligation of the
United States, any state or other political subdivision thereof, of any agency,
instrumentality or subdivision of any of the foregoing; (v) that was created in
compliance, in all material respects, with the Servicer's credit and collection
policy and all requirements of law applicable to Fremont Financial and pursuant
to a Contract that complies, in all material respects, with the Servicer's
credit and collection policy and all requirements of law applicable to Fremont
Financial and, as of the date of conveyance under the Purchase Agreement and the
Pooling and Servicing Agreement, the terms of which have not been extended or
modified except in accordance with the Servicer's credit and collection policy;
(vi) with respect to which all consents, licenses, approvals or authorizations
of, or registrations or declarations
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with, any governmental authority required to be obtained, effected or given by
Fremont Financial in connection with the creation of such Advance, or the
execution, delivery and performance by Fremont Financial of the related
Contract, have been duly obtained, effected or given and are in full force and
effect as of such date of creation; (vii) as to which, at the time of and at all
times after the creation of such Advance, Fremont Financial had good and
marketable title thereto free and clear of all liens (other than specified
permitted liens); (viii) that arises under a Contract that has been duly
authorized and which, together with such Advance, is in full force and effect
and such Contract, together with such Advance, constitutes the legal, valid and
binding payment obligation of the Obligor with respect thereto, enforceable
against such Obligor in accordance with its terms, except as such enforcement
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws, now or hereafter in effect, affecting the enforcement of
creditors' rights in general and except as such enforceability may be limited by
general principles of equity (whether considered in a suit at law or in equity);
(ix) that is not subject to any dispute, offset, defense or counterclaim with
respect to the underlying obligation that has been communicated to Fremont
Financial or about which Fremont Financial has knowledge and is not related to a
Contract that is so subject; (x) that is denominated and payable only in United
States dollars; (xi) the Obligor on which is located (within the meaning of
Section 9-103 of the applicable UCC) within the United States of America and is
not an affiliate of Fremont Funding; (xii) that constitutes a general intangible
or instrument under and as defined in Section 9-106 of the UCC as then in effect
in the State of California; (xiii) that conforms with the concentration limits
specified in the Pooling and Servicing Agreement, as amended from time to time,
which for each Advance is currently equal to three percent of the total amount
of Aggregate Eligible Principal Advances (calculated without taking into account
this clause (xiii) and clause (xiv) hereof); and (xiv) that is supported by
Primary Collateral and conforms with the Over-Advance limits specified in the
Pooling and Servicing Agreement, as amended from time to time, that includes,
among other limitations, a limitation on the aggregate amount of Over-Advances
that can be treated as Eligible Advances and which is currently equal to three
percent of the total amount of Aggregate Eligible Principal Advances (calculated
without taking into account this clause (xiv) and clause (xiii) hereof).
It is not required or anticipated that the Trustee will make any initial or
periodic general examination of the Advances or any records relating to the
Advances for the purpose of establishing the presence or absence of defects,
compliance with the Transferor's representations and warranties or for any other
purpose. The Servicer, however, will deliver to the Trustee at least twice a
year an opinion of counsel with respect to the validity of the security interest
of the Trust in and to the Advances and certain other components of the Trust.
ADDITION OF CONTRACTS
The Transferor has the right, but shall not be obligated, to designate from
time to time Additional Contracts to be included as Contracts, the Advances
arising under which may then be sold to the Transferor by Fremont Financial as
seller under the Purchase Agreement.
The Transferor will convey to the Trust its interest in all Advances
arising under such Additional Contracts, whether such Advances are then existing
or thereafter created, subject to the following conditions, among others: (i)
each such Additional Contract must be an Eligible Contract; and (ii) no
selection procedure believed by the Transferor to be materially adverse to the
interests of the Holders of any Investor Certificates, including the
Certificates, was used in selecting the Additional Contracts. Additional
Contracts need not be of the same credit quality as the initial Contracts.
Additional Contracts may have been originated by Fremont Financial using credit
criteria different from those that were applied by Fremont Financial to
Contracts transferred on the initial Closing Date or may have been acquired by
Fremont Financial and met Fremont Financial's credit criteria at the time of the
acquisition.
REMOVAL OF CONTRACTS
Once during any Settlement Period with respect to which no Series is in its
Amortization Period, the Transferor may at its sole discretion designate certain
Contracts to be removed from the Trust (the
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"Removed Contracts"). The Transferor may use any criteria it believes advisable
for the removal of a Contract provided that it believes that such criteria would
not adversely affect the interests of the Holders of any Investor Certificates.
Upon removal of a Removed Contract, the Trustee shall be deemed to have offered
to the Transferor the right to receive from the Trust all of the Trust's
interest in the Advances related to any such Removed Contract. The Transferor
has the ability to accept reassignment of such Advances from the Removed
Contracts only upon the satisfaction of certain conditions set forth in the
Pooling and Servicing Agreement, including, but not limited to, the requirements
that: (i) such reassignment will not cause an Event of Termination; (ii) the
Principal Advances relating to such Removed Contracts does not exceed 10% of the
aggregate amount of Principal Advances in the Trust; and (iii) no selection
procedure believed by the Transferor to be materially adverse to the interests
of the Holders of any Investor Certificates was used in selecting the Removed
Contracts.
COLLECTION AND OTHER SERVICING PROCEDURES
Pursuant to the Pooling and Servicing Agreement, the Servicer is
responsible for servicing and administering the Advances in accordance with the
Servicer's policies and procedures contained in its credit policies and
procedures manual. The Servicer is required to maintain fidelity bond coverage
insuring against losses through wrongdoing of its officers and employees who are
involved in the servicing of commercial loans covering such actions and in such
amounts as the Servicer believes to be reasonable from time to time.
The Transferor and the Servicer have set up a system of collecting payments
from the Obligors that may include tri-party agreements among an Obligor, the
Servicer and a bank (a "Lock-Box Bank") establishing an account (a "Lock-Box
Account"). The Trustee for the benefit of the Certificateholders has established
accounts (each, a "Concentration Account") at several banks (each a
"Concentration Bank") to collect payment from separate lock-boxes and also
directly from Obligors and the Servicer as received in payment from Obligors.
The Obligors have been or will be instructed by the Servicer or the Transferor
to make payments with respect to their Advances either by: (i) depositing such
payments into their designated Lock-Box Account at the respective Lock-Box Bank;
(ii) depositing such payments into a Concentration Account at a Concentration
Bank; or (iii) making a payment directly to the Servicer; provided, however,
that any payments received by the Servicer shall be deposited into a
Concentration Account or the Collection Account not later than one business day
following receipt.
Upon maturity of a Contract, the Servicer may either require repayment of
the remaining principal balance by the Obligor or extend the Contract.
Generally, if the Obligor is unable to immediately repay the Advances, the
Servicer may attempt to preserve the collectibility of the Advances by extending
the Contract for a limited period of time or otherwise modifying it.
TRUST ACCOUNTS
The Trustee has established the Collection Account into which the
Collections or Gross Collections, as appropriate, shall be deposited. The
Collection Account has three ledger sub-accounts, consisting of a general
account, the Cash Collateral Account and the Excess Funding Account. Unless
otherwise specified, all references to "Collection Account" shall be references
to the general sub-account.
CASH COLLATERAL ACCOUNT
To the extent provided in the related Series Supplement, in the event and
to the extent that the Gross Collections are insufficient to pay interest on,
and the servicing fee with respect to, any Series, a withdrawal will be made
from the Cash Collateral Account, up to the amount on deposit in the Cash
Collateral Account. See "Pooling and Servicing Agreement -- General" in the
related Prospectus Supplement.
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EXCESS FUNDING ACCOUNT
Funds on deposit in the Excess Funding Account may be withdrawn and paid to
the Transferor (subject to the limitations described herein) or allocated to one
or more Series of Certificates. On each Business Day, the Servicer will allocate
to the Excess Funding Account all amounts being deposited on such day (minus
that portion of such amounts to be deposited with respect to the Daily Interest
Amounts, as defined below, and the Variable Funding Certificate) up to the
Excess Funding Amount, as defined herein. Any funds on deposit in the Excess
Funding Account at the beginning of an Amortization Period for a Series will be
deposited in the Collection Account to the extent necessary for payment of
principal of the Certificates in accordance with the priorities set forth in the
Pooling and Servicing Agreement and the related Series Supplement. Also, no
funds will be deposited during any Amortization Period for any Series until the
Investor Certificates of such Series have been paid in full. To the extent set
forth in the related Prospectus Supplement, in the event that the amounts on
deposit in the Excess Funding Account exceed the Maximum Excess Funding Account
Balance set forth in such related Prospectus Supplement, a Partial Amortization
Event shall be deemed to occur and such excess amounts shall be paid to the
holders of the Investor Certificates in the priorities and the amounts set forth
in such Prospectus Supplement.
ALLOCATION OF COLLECTIONS
On each Business Day during which no Series is in its Amortization Period,
the Servicer will withdraw the Daily Interest Amount, any amounts required to be
deposited into the Excess Funding Account, and any amounts payable to the Holder
of the Transferor Certificate from the Concentration Accounts, and deposit such
amounts into the Collection Account. After the deposit of such amounts into the
Collection Account, the Servicer will withdraw an amount equal to the lesser of
(i) the amount of remaining Gross Collections remaining in the Concentration
Accounts, and (ii) the amount of Additional Advances originated on such Business
Day, and pay such amount to the Transferor to purchase such Additional Advances.
Any amounts remaining in the Concentration Accounts after such purchase
from the Transferor may be retained in the Concentration Accounts or may be
withdrawn by the Servicer and deposited into the Collection Account (such
amounts, together with the amounts deposited into the Collection Account earlier
in the day, referred to herein as "Collections"). On each Business Day during
the Amortization Period, the Servicer will withdraw the percentage of Gross
Collections allocable to the Certificates from the Concentration Accounts and
deposit such amounts into the Collection Account in accordance with the Pooling
and Servicing Agreement.
The Servicer will make all required deposits of Collections, or in the
event that an Amortization Period has commenced with respect to any Series or
Variable Funding Certificate, Gross Collections, to the Collection Account for
each Business Day as set forth in the Pooling and Servicing Agreement no later
than the Business Day following the availability of such Collections or Gross
Collections.
DEPOSITS TO COLLECTION ACCOUNT
On each Business Day, the Servicer will determine whether an Amortization
Period has commenced with respect to any Series or the Variable Funding
Certificate on or prior to such day.
NON-AMORTIZATION PERIOD. On each Business Day during the Non-Amortization
Period for a Series of Certificates, the Servicer will determine the amounts
required to be deposited to the Collection Account with respect to such Series
and shall deposit to the Collection Account from amounts held in the
Concentration Accounts and available for deposit on such day the amounts set
forth in the Prospectus Supplement for such Series. The amount required to be
deposited to the Collection Account with respect to each Series of Certificates
that is not in its Amortization Period may include the following:
(i) the Daily Interest Amount for each Series of Certificates;
(ii) the Excess Funding Amount;
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(iii) the Daily Variable Funding Certificate Deposit Amount, if any;
(iv) any required deposits for Enhancements as set forth in the
Prospectus Supplement for such Series; and
(v) any amounts requested by the Transferor to be deposited for the
benefit of the Holder of the Transferor Certificate.
AMORTIZATION PERIOD. On each Business Day during an Amortization Period
for a Series of Certificates, the Servicer will deposit to the Collection
Account all amounts representing the proportional interest in Gross Collections
available on such day for such Series of Certificates, to the extent and in the
percentage set forth in the Prospectus Supplement for such Series.
To the extent there are insufficient funds available in the Concentration
Accounts during an Amortization Period to make the deposits required with
respect to the Daily Interest Amounts, the Servicer will allocate from the Cash
Collateral Account to the Collection Account, an amount sufficient to make the
required deposit, provided there are sufficient amounts available in the Cash
Collateral Account on such day.
For the purposes hereof, the following terms have the following meanings:
"Aggregate Subordinated Minimum Amount," "Cash Collateral Maintenance
Amount," "Daily Interest Amount," "Daily Interest Shortfall," "Subordinated
Minimum Amount," and "Monthly Servicing Fees" for a Series will be set forth in
the Prospectus Supplement for each Series.
"Aggregate Subordinated Minimum Transferor Amount" shall mean the greater
of (a) the excess, if any, of (i) the Senior Enhancement Percentage of the
aggregate Initial Invested Amount of each outstanding Series of Senior Investor
Certificates and the Variable Funding Certificate over (ii) the aggregate
Initial Invested Amount of each outstanding Series of Subordinated Investor
Certificates and (b) the Subordinate Enhancement Percentage of the sum of the
aggregate Initial Invested Amounts for each outstanding Series of Investor
Certificates (including each Series of Subordinated Investor Certificates) and
the Variable Funding Certificate.
"Aggregate Subordinated Transferor Amount" shall mean the Aggregate
Subordinated Minimum Transferor Amount, which amount will be (a) decreased due
to allocations of Charge-Off Amounts, and (b) increased due to (i) allocations
of Excess Finance Charge Collections, (ii) repayment of one or more Series of
Subordinated Investor Certificates, and (iii) subordination of an additional
portion, if available, of the Transferor Interest if a Series of Subordinated
Investor Certificates is not paid in full on its Amortization Period
Commencement Date.
"Daily Variable Funding Certificate Deposit Amount" shall be the amount of
principal and interest payable with respect to the Variable Funding Certificate
and will be set forth in the related Variable Funding Supplement, if any.
"Excess Funding Amount" will be equal, on any date of determination, to the
amount by which (i) the sum of the Invested Amount for each Series of Investor
Certificates, the Issuer Amount for the Variable Funding Certificate and the
Aggregate Subordinated Minimum Transferor Amount exceeds (ii) the sum of (1) the
Aggregate Eligible Principal Advances, (2) the amounts on deposit in the Excess
Funding Account, (3) the amounts on deposit in the Collection Account in excess
of any amounts allocated for the payment of interest or servicing fees on any
Series of Investor Certificates or the Variable Funding Certificate and (4) the
amounts on deposit in the Concentration Accounts (subject to a maximum amount
equal to three percent of the Aggregate Eligible Principal Advances, which may
be increased to five percent with the prior approval of each Rating Agency).
"Initial Invested Amount" shall mean with respect to any Series, the
aggregate face amount of the Investor Certificates of such Series on the initial
issuance date, plus the amount of any subsequent additional issuance with
respect to such Series as described in "Pooling and Servicing Agreement -- New
Certificates."
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"Invested Amount" shall mean, for any day when used with respect to any
Series, an amount equal to (a) the Initial Invested Amount minus (b) the
aggregate amount of payments of principal paid with respect to such Series prior
to such day minus, after the Subordinated Amount applicable to such Series has
been reduced to zero, (c) the excess, if any, of the aggregate Charge-Off
Amounts allocated to such Series over the Excess Finance Charge Collections
which have been allocated to such Series.
"Issuer Amount" shall mean, for any day when used with respect to the
Variable Funding Certificate, an amount equal to (a) the initial issuer amount
specified in the Variable Funding Supplement, plus (b) the aggregate principal
amount of the purchases by the Holder of the Variable Funding Certificate of
additional amounts thereunder prior to such day, minus (c) the aggregate amount
of payments of principal paid to the Holder of the Variable Funding Certificate
prior to such day, minus (d) the excess, if any, of the Charge-Off Amounts
allocated to the Variable Funding Certificate over the Excess Finance Charge
Collections which have been allocated to the Variable Funding Certificate prior
to such day.
"Overcollateralization Enhancement Amount" shall be the sum of (i) the
Aggregate Subordinated Transferor Amount and (ii) the Invested Amount with
respect to all then outstanding Subordinated Series of Investor Certificates.
"Senior Enhancement Percentage" shall mean the weighted average of the
"Subordinated Percentages" as set forth in the related Series Supplement for
each Series of Senior Investor Certificates and the Variable Funding
Certificate, which is currently equal to 23.46%. The "Subordinated Percentage"
for each Senior Series and the Variable Funding Certificate is a percentage, the
numerator of which is the applicable overcollateralization percentage (currently
such overcollateralization percentage is equal to 19% for each outstanding
Senior Series and the Variable Funding Certificate) and the denominator of which
is 100% minus the applicable overcollateralization percentage for such Series.
"Subordinate Enhancement Percentage" shall be equal to the weighted average
of the "Subordinated Percentages" as set forth in the Series Supplement for each
Series of Subordinated Investor Certificates, which is currently equal to
12.99%. The "Subordinated Percentage" for each Subordinated Series is a
percentage, the numerator of which is the applicable overcollateralization
percentage (currently such overcollateralization percentage is equal to 11.5%
for each outstanding Subordinated Series) and the denominator of which is 100%
minus the applicable overcollateralization percentage for such Series.
WITHDRAWALS AND PAYMENTS FROM COLLECTION ACCOUNT
On each Business Day, with respect to (a) the amounts on deposit in the
Collection Account and certain amounts in the Excess Funding Account (not to
exceed the amount on deposit in the Excess Funding Account that is in excess of
the Excess Funding Amount for such day, as of the beginning of business on such
day), and (b) the amounts to be deposited into the Collection Account with
respect to the Variable Funding Certificate or the Transferor Certificate, the
Servicer will determine and instruct the Trustee as to the following:
(i) the amount to be withdrawn from the Excess Funding Account to be
deposited into one or more Concentration Accounts for the purchase of
Advances;
(ii) the amount to be withdrawn from the Collection Account and paid
to the Holder of the Variable Funding Certificate or the amount to be
withdrawn from the Collection Account to be deposited into one or more
Concentration Accounts as set forth in the related Variable Funding
Supplement, if any; and
(iii) the amount to be withdrawn from the Collection Account and paid
to the Holder of the Transferor Certificate.
On each Business Day, the Transferor may cause the Trust to pay to it, as
Holder of the Transferor Certificate, an amount not to exceed the sum of (i) the
excess of the Transferor Interest (calculated after giving effect to the
deposits and payments required to be made on such day) over the sum of the
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Aggregate Subordinated Minimum Transferor Amount and the aggregate of the
Defaulted Amounts for the current Settlement Period and (ii) any amounts in the
Cash Collateral Account in excess of the Cash Collateral Maintenance Amount.
However, the Transferor would not be entitled to receive such payments if, after
giving effect thereto, either (i) the Excess Funding Amount would be greater
than zero, or (ii) the total amount on deposit in the Collection Account and the
Concentration Account would be less than the sum of (A) an amount equal to two
months of interest on the outstanding Investor Certificates and the Variable
Funding Certificate, based on the then-current Invested Amount for Investor
Certificates of each outstanding Series, the Issuer Amount and the respective
interest rates applicable thereto, and (B) an amount equal to two months of
servicing fees, based on such Invested Amounts and the Issuer Amount. To the
extent that the Transferor elects not to direct such payments, such amounts will
be retained in the Concentration Accounts.
On each Determination Date, the Servicer will determine, and on each
Payment Date the Trustee will make, the following payments in the priorities set
forth below, subject to the subordination provisions of any Subordinated Series
and to the extent that there are amounts sufficient therefor in the Collection
Account, including certain amounts allocated to the Cash Collateral Account and
the Excess Funding Account:
(i) to the Certificateholders, interest in an amount equal to the
product of the Monthly Certificate Rates for each Series in effect for the
related Interest Accrual Period and the Invested Amount for such Series as
of the immediately preceding Payment Date;
(ii) to the Servicer, the servicing fee for the related Settlement
Period;
(iii) principal to the Investor Certificateholders as partial payment
of principal in the event of a Partial Amortization Event; and
(iv) with respect to a Payment Date relating to a Settlement Period
for which a Series of Investor Certificates is in an Amortization Period,
principal to the appropriate Certificateholders, in an amount equal to the
Gross Collections deposited with respect to such Series for the related
Settlement Period minus (x) the interest accrued on such Investor
Certificates and the allocable portion of the servicing fee payable on the
related Payment Date and (y) the amounts allocated to the Cash Collateral
Account with respect to such Series.
Principal paid to the Certificateholders of a Series will reduce the
Invested Amount for such Series by a corresponding amount as of the related
Payment Date (referred to herein as "Amortization"). The Trustee will make all
required withdrawals from the Collection Account on the related Transfer Date
and will pay such amounts to the Paying Agent. On each Payment Date, the Paying
Agent will distribute such amount to the Certificateholders.
DETERMINATION AND ALLOCATION OF CHARGE-OFFS AND SUBORDINATION AMOUNTS
On each Determination Date, the Servicer will determine with respect to the
related Settlement Period, the amount by which the Finance Charge Collections
plus Recoveries (each as defined herein) realized for the related Settlement
Period exceeds (or is less than) the sum of (i) the interest payable or paid on
each Series and the Variable Funding Certificate with respect to the related
Interest Accrual Period or Settlement Period, (ii) the servicing fee payable for
such Settlement Period, and (iii) the Defaulted Amount (as defined herein) with
respect to the related Settlement Period. To the extent that such amount is a
positive number, such amount is referred to as "Excess Finance Charge
Collections," and, to the extent that such amount is a negative number, such
amount is referred to as the "Charge-Off Amount."
The Servicer shall allocate any Charge-Off Amount among the various
interests in the Trust based upon: (i) with respect to each Series of Investor
Certificates, the applicable Invested Percentage of such Charge-Off Amount; (ii)
with respect to the Issuer Interest, the Issuer Percentage of such Charge-Off
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Amount; and (iii) with respect to the Transferor Interest, the Transferor
Percentage of such Charge-Off Amount, and shall apply such amounts as follows:
First, with respect to any Charge-Off Amount allocated to each Series
of Senior Investor Certificates and the Variable Funding Certificate, to
reduce the Subordinated Amount for such Investor or Variable Funding
Certificate until each such Subordinated Amount is equal to zero (with
respect to reductions in such Subordinated Amounts, such reductions will
first be allocated to reduce the Aggregate Subordinated Transferor Amount
until such amount has been reduced to zero, then to reduce the Invested
Amount for each Series of Subordinated Investor Certificates pro rata until
such amounts have been reduced to zero);
then, to reduce the Invested Amount for each Series, the Issuer Amount
and the Transferor Amount, in an amount equal to the portion of such
Charge-Off Amount allocated to such Series, Variable Funding Certificate or
Transferor Certificate, to the extent not allocated to the Subordinated
Amount as described above.
Second, with respect to any Charge-Off Amount allocated to each Series
of Subordinated Investor Certificates, to reduce the Aggregate Subordinated
Transferor Amount until such amount has been reduced to zero, then to
reduce the Invested Amount for each Series of Subordinated Investor
Certificates pro rata until such amounts have been reduced to zero.
The Servicer shall allocate any Excess Finance Charge Collections for each
Payment Date as follows:
First, to reinstate the Invested Amount for each Series of Senior
Investor Certificates and the Issuer Amount for the Variable Funding
Certificate (only to the extent that such interests have been reduced on a
prior Determination Date and have not been previously reinstated) up to an
amount equal to the proportional interest of Excess Finance Charge
Collections based upon the outstanding Invested Amount or Issuer Amount of
such Series or Variable Funding Certificate;
Second, to reinstate the Subordinated Amount for each Series and the
Variable Funding Certificate (only to the extent that such amounts have
been reduced on a prior Determination Date and have not been previously
reinstated), until the Subordinated Amount for each Series and the Variable
Funding Certificate is equal to the Subordinated Minimum Amount applicable
to such Series or the Variable Funding Certificate. With respect to
reinstatements of the Subordinated Amount for a Series of Senior Investor
Certificates or the Variable Funding Certificate, such reinstatement will
first be allocated to reinstate the Invested Amount for each Series of
Subordinated Investor Certificates (on a pro rata basis and only to the
extent that such interests have been reduced on a prior Determination Date
and have not been previously reinstated) and then to reinstate the
Aggregate Subordinated Transferor Amount; and
then, to the extent of any remaining Excess Finance Charge
Collections, to reinstate the Transferor Amount:
For the purposes hereof, the following terms have the following meanings:
"Finance Charge Collections" are the portion of Gross Collections
other than amounts representing principal and amounts that would have a
corresponding out-of-pocket expense for the Seller, which includes amounts
constituting interest, fees and other similar amounts.
"Recoveries" refer to all amounts received by the Servicer with
respect to defaulted Advances that were previously charged-off.
DEFAULTED AMOUNT. On each Determination Date, the Servicer will calculate
the principal amount of (i) Eligible Advances and (ii) Advances that have been
classified as "non-accrual" in accordance with the Servicer's normal servicing
procedures, but which would be Eligible Advances if they were not classified as
"non-accrual" for the preceding Settlement Period that will be charged off as
uncollectible in accordance with the Servicer's customary and usual policies and
procedures (such amount referred to as the "Defaulted Amount"); provided
however, if an Event of Termination has occurred and is
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continuing, Defaulted Amounts shall not include the principal amount of Advances
that are attributable to Advances classified as non-accrual at the time the
Event of Termination occurred. All Defaulted Amounts not covered by finance
charges will constitute Charge-Off Amounts. All Charge-Off Amounts allocated to
a Senior Series or the Variable Funding Certificate, up to the Subordinated
Amount for such Senior Series or Variable Funding Certificate, will first be
allocated to the Subordinated Transferor Interest until it is reduced to zero.
If the Subordinated Transferor Interest has been reduced to zero, such
Charge-Off Amounts will be allocated on a pro rata basis among any outstanding
Series of Subordinated Investor Certificates. If both the Subordinated
Transferor Interest and the Invested Amount of each Series of Subordinated
Investor Certificates have been reduced to zero, such Charge-Off Amounts will be
allocated to each Series of Senior Investor Certificates and the Variable
Funding Certificate in proportion to their respective Invested Percentage or
Issuer Percentage, as applicable.
EVENTS OF TERMINATION
Events of Termination for each Series will be as set forth in the related
Prospectus Supplement. Events of Termination may include, among others, the
occurrence of any one of the following events: (i) the Subordinated Amount falls
below a specified percentage for each Series as set forth in the related
Prospectus Supplement; (ii) the Subordinated Amount for such Series is less than
the Subordinated Minimum Amount for such Series for any three consecutive
Settlement Periods to the extent set forth in the related Prospectus Supplement;
(iii) to the extent set forth in any Prospectus Supplement, the variable
interest rate on the Certificates exceeds or maintains a maximum rate; (iv) the
three month rolling average percentage of Principal Advances with accounts
receivable as the Primary Collateral falls below the specified percentage for
such Series to the extent set forth in the related Prospectus Supplement; (v) a
Partial Amortization Event; (vi) failure on the part of the Transferor or the
Servicer to make any payment or deposit required under the Pooling and Servicing
Agreement or to perform their covenants thereunder, in each case within certain
specified grace periods; (vii) a material breach of a representation or warranty
of the Transferor made in the Pooling and Servicing Agreement which is not
remedied within specified cure periods; (viii) the Servicer or the Transferor
voluntarily seeks, consents to or acquiesces in the benefit of any Insolvency
Law or an involuntary petition is filed under any Insolvency Law and such
petition is not dismissed within a specified period of time; (ix) the Servicer
shall fail to deliver the daily or the Settlement Date reports required to be
delivered by it, and such failure is not cured within specified time periods;
(x) the Trust shall become an "investment company" required to register within
the meaning of the Investment Company Act of 1940, as amended; (xi) the Trustee
has not accepted an eligible servicer within 60 days after any Servicer Default
with respect to which a termination notice has been issued; (xii) the lien
created in favor of the Trust on all the Trust Assets shall cease to be a
perfected, first priority enforceable lien thereon, or the Transferor or Fremont
Financial shall so assert in writing; and (xiii) failure on the part of Fremont
Financial to make any payment or deposit required under the Purchase Agreement
or to perform its covenants thereunder, in each case within certain specified
grace periods.
Upon the occurrence of any Event of Termination, other than a Partial
Amortization Event, with respect to any Series, an Amortization Period will be
deemed to have commenced with respect to such Series. However, in the case of
any event described in subparagraph (ix), (xi) or (xiii) either the Trustee or
the Holders of any Investor Certificates representing more than 50% of the
Invested Amount of such Series must declare that an Event of Termination has
occurred with respect to such Series or all Series. Notice by the Investor
Certificateholders of an Event of Termination should be given in writing to the
Trustee by personal delivery, certified or registered mail, return receipt
requested.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Invested Amount of the Investor Certificates will be subject to
optional repurchase by the Transferor from time to time as set forth in the
related Prospectus Supplement. The termination date for each Series will be set
forth in the related Prospectus Supplement.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Pursuant to the Pooling and Servicing Agreement and any supplements
thereto, for its servicing of the Advances, the Servicer will receive servicing
compensation including the servicing fee for each Settlement Period (payable on
the next succeeding Payment Date) and investment earnings on amounts held in the
Collection Account. The total servicing fee for a Payment Date will be equal to
the product of (i) the greater of the weighted average of the servicing fee
Percentage for each Series as set forth in the applicable Prospectus Supplements
or 2% and (ii) the aggregate dollar amount of Principal Advances in the Trust
(the "Aggregate Principal Advances") on the first day of the Settlement Period
immediately preceding such Payment Date, such product multiplied by a fraction,
the numerator of which is equal to the actual number of days in the related
Settlement Period and the denominator of which is equal to 360. The Monthly
Servicing Fee represents the portion of the servicing fee allocated to any
Series of Certificates.
The servicing fee is intended to be compensation for customary loan
servicing activities to be performed by the Servicer for the Transferor and the
Trust, additional administrative services performed by the Servicer on behalf of
the Transferor and the Trust, and expenses paid by the Servicer on behalf of the
Transferor and the Trust, including the Trustee's fee.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement, except upon a determination that performance of
its duties is no longer permissible under applicable law. No such resignation
will become effective until the Trustee or a successor to the Servicer has
assumed the Servicer's responsibilities and obligations under the Pooling and
Servicing Agreement.
The Pooling and Servicing Agreement provides that the Servicer will
indemnify the Trust and the Trustee from and against any reasonable loss,
liability, expense, damage or injury suffered or sustained by reason of any acts
or omissions or alleged acts or omissions of the Servicer with respect to the
activities of the Trust or the Trustee; provided, however, that the Servicer
shall not indemnify: (i) the Trustee for liabilities imposed by reason of fraud,
negligence, or willful misconduct by the Trustee in the performance of its
duties under the Pooling and Servicing Agreement; (ii) the Trust or the
Certificateholders for liabilities arising from actions taken by the Trustee at
the request of Certificateholders; (iii) the Trust or the Certificateholders for
any losses, claims, damages or liabilities incurred by any of them in their
capacities as investors, including without limitation, losses incurred as a
result of defaulted Advances or Advances which are written off as uncollectible;
or (iv) the Trust or the Certificateholders for any liabilities, costs or
expenses of the Trust or the Certificateholders arising under any tax law,
including without limitation, any federal, state or local income or franchise
tax or any other tax imposed on or measured by income (or any interest or
penalties with respect thereto or arising from a failure to comply therewith)
required to be paid by the Trust or the Certificateholders in connection with
the Pooling and Servicing Agreement to any taxing authority.
In addition, the Pooling and Servicing Agreement provides that, subject to
certain exceptions, the Transferor will indemnify the Trust and the Trustee from
and against any reasonable loss, liability, expense, damage or injury suffered
or sustained by reason of any actual or alleged acts or omissions arising out of
or based upon the arrangement created by the Pooling and Servicing Agreement as
though the Pooling and Servicing Agreement created a partnership under the
California Revised Uniform Limited Partnership Law in which the Transferor is a
general partner.
The Pooling and Servicing Agreement provides that neither the Transferor
nor the Servicer nor any of their respective directors, officers, employees or
agents will be under any other liability to the Trust, the Certificateholders or
any other person for any action taken, or for refraining from taking any action,
in good faith pursuant to the Pooling and Servicing Agreement. Neither the
Transferor, the Servicer, nor any of their respective directors, officers,
employees or agents will be protected against any liability that would otherwise
be imposed by reason of willful misfeasance, bad faith or gross negligence of
the Transferor, the Servicer or any such person in the performance of its duties
or by reason of reckless disregard of obligations and duties thereunder. In
addition, the Pooling and Servicing Agreement provides
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that the Servicer is obligated to appear in, prosecute or defend any legal
action only when such appearance, prosecution or defense is incidental to its
servicing responsibilities under the Pooling and Servicing Agreement and which
in its opinion will not expose it to any expense or liability.
Any person into which, in accordance with the Pooling and Servicing
Agreement, the Transferor or the Servicer may be merged or consolidated or any
person resulting from any merger or consolidation to which the Transferor or the
Servicer is a party, or any person succeeding to the business of the Transferor
or the Servicer, upon execution of a supplement to the Pooling and Servicing
Agreement and delivery of an opinion of counsel with respect to the compliance
of the transaction with the applicable provisions of the Pooling and Servicing
Agreement, will be the successor to the Transferor or the Servicer, as the case
may be, under the Pooling and Servicing Agreement.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the Trustee
or Investor Certificateholders representing undivided interests aggregating more
than 50% of the aggregate Invested Amount for all outstanding Series, by written
notice to the Servicer (and to the Trustee if given by the Investor
Certificateholders), may terminate all of the rights and obligations of the
Servicer as servicer under the Pooling and Servicing Agreement and in and to the
Advances and the proceeds thereof, and the Trustee may appoint a new Servicer (a
"Service Transfer"). The rights and interest of the Transferor under the Pooling
and Servicing Agreement and in the Transferor Interest will not be affected by
such termination. The Trustee shall promptly appoint a successor Servicer. If no
such Servicer has been appointed and has accepted such appointment by the time
the Servicer ceases to act as Servicer, all authority, power and obligations of
the Servicer under the Pooling and Servicing Agreement shall pass to and be
vested in the Trustee. If the Trustee is unable to obtain any bids from eligible
servicers and the Servicer delivers an officer's certificate to the effect that
it cannot in good faith cure the Servicer Default that gave rise to a transfer
of servicing, and if the Trustee is legally unable to act as successor Servicer,
then the Trustee shall give the Transferor the right of first refusal to
purchase the Advances on terms equivalent to the best purchase offer as
determined by the Trustee.
A "Servicer Default" refers to any of the following events:
(i) failure by the Servicer to make any payment, transfer or deposit,
or to give instructions to the Trustee to make certain payments, transfers
or deposits, on the date the Servicer is required to do so under the
Pooling and Servicing Agreement or any Supplement (or within the applicable
grace period, which shall not exceed five business days);
(ii) failure on the part of the Servicer duly to observe or perform in
any respect any other covenants or agreements of the Servicer that has a
material adverse effect on the Certificateholders of any Series then
outstanding and that continues unremedied for a period of 90 days after
written notice and continues to have a material adverse effect on the
Certificateholders of any Series then outstanding for such period;
(iii) any representation, warranty or certification made by the
Servicer in the Pooling and Servicing Agreement, or in any certificate
delivered pursuant to the Pooling and Servicing Agreement, proves to have
been incorrect when made that has a material adverse effect on the
Certificateholders of any Series then outstanding, and that continues to be
incorrect in any material respect for a period of 60 days after written
notice and continues to have a material adverse effect on such
Certificateholders for such period; or
(iv) the occurrence of certain events of bankruptcy, insolvency or
receivership of the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to in clause (i) above for a period of five business days, or referred
to under clause (ii) or (iii) for a period of 30 business days, shall not
constitute a Servicer Default if such delay or failure could not be prevented by
the exercise of reasonable diligence by the Servicer and such delay or failure
was caused by an act of God or other similar occurrence. Upon the occurrence of
any such event, the Servicer shall not be relieved from using
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its best efforts to perform its obligations in a timely manner in accordance
with the terms of the Pooling and Servicing Agreement, and the Servicer shall
provide the Trustee, any provider of Enhancement, the Transferor, the Holder of
the Variable Funding Certificate and the Holders of Certificates of all Series
outstanding, prompt notice of such failure or delay by it, together with a
description of the cause of such failure or delay and its efforts to perform its
obligations.
In the event of a Servicer Default, if a conservator or receiver is
appointed for the Servicer and no Servicer Default other than such
conservatorship or receivership or the insolvency of the Servicer exists, the
conservator or receiver may have the power to prevent either the Trustee or the
majority of the Investor Certificateholders from effecting a Service Transfer.
REPORTS TO CERTIFICATEHOLDERS
On each Payment Date (including the Payment Date that corresponds to the
Amortization Period Commencement Date for a Series), the Trustee will forward to
each Investor Certificateholder of record a statement (the "Payment Date
Statement") prepared by the Servicer setting forth the following information
(which, in the case of (i), (ii) and (iv), below, will be stated on the basis of
an original principal amount of $1,000 per Investor Certificate if the
Amortization Period for such Series has commenced): (i) the aggregate amount of
Collections and Gross Collections, allocated to such Series during the
immediately preceding Settlement Period; (ii) the total amount paid on the
Certificates; (iii) the amount of such payment, if any, allocable to principal
of the Certificates; (iv) the amount of such payment allocable to interest on
the Certificates; (v) the Defaulted Amount for such Payment Date; (vi) the
amount of Recoveries for such Settlement Period; (vii) the amount of the
servicing fee for such Settlement Period; (viii) the "pool factor" for the
Certificates as of such Payment Date (consisting of an eleven-digit decimal
expressing the Invested Amount as of such Payment Date (determined after taking
into account any reduction in the Invested Amount that will occur on such
Payment Date) as a proportion of the initial Invested Amount); (ix) the
Aggregate Subordinated Transferor Amount for such Payment Date; (x) the Cash
Collateral Account balance, if any, for such date; and (xi) the Excess Funding
Account Balance for such date.
On or before January 31 of each calendar year, the Trustee will furnish (or
cause to be furnished) to each person who at any time during the preceding
calendar year was an Investor Certificateholder of record, a statement
containing the information required to be provided by an issuer of indebtedness
under the Code for such preceding calendar year or the applicable portion
thereof during which such person was an Investor Certificateholder, together
with such other customary information as is required to be provided by an issuer
of indebtedness under the Code and such other customary information as is
necessary to enable the Investor Certificateholders to prepare their tax
returns. See "Certain Federal Income Tax Consequences."
Three or more Holders holding Investor Certificates representing in the
aggregate at least 5% of the Invested Amount of any Series may obtain a list of
the Holders of such Series from the Trustee by applying in writing and stating
that the purpose is to communicate with other Investors with respect to their
rights under the Pooling and Servicing Agreement or under the Investor
Certificates. The request must be accompanied by a copy of the communication
that such Investor Certificateholders propose to transmit. In addition, the
Trustee must be indemnified to its satisfaction by such Investor
Certificateholders for its costs and expenses. Access to the most recent list of
Certificateholders held by the Trustee will be afforded such Investor
Certificateholders within five business days after the receipt of the
application.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides that the Servicer will cause a
firm of independent public accountants to furnish on an annual basis a report
relating to certain matters in connection with the servicing of the Trust
Portfolio.
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The Pooling and Servicing Agreement also provides for delivery to the
Trustee, on or before a certain date each year, of a statement signed by an
officer of the Servicer stating that the Servicer has fulfilled its obligations
under the Pooling and Servicing Agreement in all material respects throughout
the preceding twelve months or, if there has been a default in the fulfillment
of any such obligations, describing each such default.
AMENDMENTS
The Pooling and Servicing Agreement and any Supplement may be amended by
the Transferor, the Servicer and the Trustee, without the consent of
Certificateholders, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Pooling and Servicing
Agreement and Supplements or of modifying in any manner the rights of such
Certificateholders; provided that (i) the Servicer shall have provided an
officer's certificate to the effect that such action will not adversely affect
in any material respect the interests of such Certificateholders; (ii) the
Rating Agencies contracted to rate the Investor Certificates confirm that such
action will not result in a reduction or withdrawal of their rating of the
Investor Certificates; and (iii) such action will not, in the opinion of counsel
satisfactory to the Trustee, result in certain adverse tax consequences. In
addition, the Pooling and Servicing Agreement and any Supplement may be amended
from time to time by the Transferor, the Servicer and the Trustee, without the
consent of Investor Certificateholders, to add to or change any of the
provisions of the Pooling and Servicing Agreement to provide that bearer
certificates issued with respect to any subsequently issued Series may be
registrable as to principal, to change or eliminate any restrictions on the
payment of principal of or any interest on such bearer certificates, to permit
such bearer certificates to be issued in exchange for registered certificates or
bearer certificates of other authorized denominations or to permit the issuance
of uncertificated certificates. Moreover, any Supplement and any amendments
regarding the addition or removal of Advances from the Trust will not be
considered amendments requiring the consent of Investor Certificateholders under
the provisions of the Pooling and Servicing Agreement or any Supplement.
The Pooling and Servicing Agreement and any Supplement thereto may be
amended by the Transferor, the Servicer and the Trustee with the consent of the
Holders of Investor Certificates evidencing undivided interests aggregating not
less than 50% of the Investor Interests of each and every Series adversely
affected for the purpose of adding any provisions to, changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement, or any
Supplement thereto, or of modifying in any manner the rights of Investor
Certificateholders of any then outstanding Series. No such amendment, however,
may (i) reduce in any manner the amount of, or delay the timing of, payments
required to be made on any such Series, (ii) change the definition of or the
manner of calculating the interest of any Investor Certificateholder of such
Series, or (iii) reduce the aforesaid percentage of undivided interests the
Holders of which are required to consent to any such amendment, in each case
without the consent of all Investor Certificateholders of all Series adversely
affected. Promptly following the execution of any amendment to the Pooling and
Servicing Agreement, the Trustee will furnish written notice of the substance of
such amendment to each Investor Certificateholder.
THE TRUSTEE
LaSalle National Bank is the Trustee under the Pooling and Servicing
Agreement. The Transferor, the Servicer and their respective affiliates may from
time to time enter into normal banking and trustee relationships with the
Trustee and its affiliates. The Trustee, the Transferor, the Servicer and any of
their respective affiliates may hold Certificates in their own names. In
addition, for purposes of meeting the legal requirements of certain local
jurisdictions, the Trustee shall have the power to appoint a co-trustee or
separate trustees of all or any part of the Trust. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Pooling and Servicing Agreement shall be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or, in
any jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon
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such separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee may resign at any time, in which event the Transferor will be
obligated to appoint a successor Trustee. The Transferor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. In such
circumstances, the Transferor will be obligated to appoint a successor Trustee.
Any resignation or removal of the Trustee and appointment of a successor Trustee
does not become effective until acceptance of the appointment by the successor
Trustee.
DESCRIPTION OF THE ASSET SALE AND CONTRIBUTION AGREEMENT
The Advances transferred to the Trust by the Transferor have been or will
be purchased by or contributed to the Transferor from Fremont Financial pursuant
to the Asset Sale and Contribution Agreement (the "Purchase Agreement") entered
into between the Transferor, as purchaser of the Advances, and Fremont
Financial, as seller of the Advances. Under the Purchase Agreement, Fremont
Financial has agreed to sell or contribute the Advances then existing and
thereafter created in specified Contracts to the Transferor. Pursuant to the
Pooling and Servicing Agreement, such Advances will be immediately transferred
by the Transferor to the Trust, and the Transferor has assigned and will
continue to assign its rights in, to and under the Purchase Agreement with
respect to such Advances to the Trust. The following is a summary of certain
terms of the Purchase Agreement.
ABSOLUTE TRANSFER OF ADVANCES
Pursuant to the Purchase Agreement, Fremont Financial has made an absolute
transfer to the Transferor of all its right, title and interest in and to all of
the Advances in the Contracts as of the Cut-Off Date and all of the Advances
thereafter created in such Contracts. The purchase price of the Advances is the
unpaid balance thereof as of the time of their sale to the Transferor. To the
extent that the Transferor were not to have sufficient cash available to pay the
entire purchase price for any Advance, the remaining portion of the purchase
price (equal to the difference between the value of the Advances at the time of
sale to the Transferor and the cash proceeds paid to Fremont Financial by the
Transferor in exchange therefor) of the Advances would be contributed by Fremont
Financial to the capital of the Transferor.
In connection with the transfer of the Advances to the Transferor, Fremont
Financial has and will indicate in its books, microfiche and computer records
that the Advances have been sold or contributed to the Transferor by Fremont
Financial and that such Advances have been transferred by the Transferor to the
Trust. In addition, Fremont Financial has and will provide to the Transferor a
hard copy, computer file or a microfiche list containing a true and complete
list showing each Advance identified by name of Obligor and by total outstanding
balance on the Cut-Off Date or Date of Processing. Fremont Financial has filed
UCC financing statements with respect to the Advances, and those financing
statements meet and will continue to meet the requirements of law in such
jurisdictions as are necessary to perfect the transfer and assignment of the
Advances to the Trust. See "Risk Factors -- Certain Legal Aspects of the
Advances" and "-- Certain Legal Aspects of Contracts."
Fremont Financial and the Transferor may agree from time to time to
designate Additional Contracts under the Purchase Agreement. See "Pooling and
Servicing Agreements -- Removal of Contracts." The purchase price for accounts
so designated will be an amount equal to the unpaid balance thereon.
REPRESENTATIONS AND WARRANTIES
Fremont Financial has made certain representations and warranties to the
Transferor to the effect that, among other things, (i) as of the date of the
sale of each Advance (each such date, an "Addition Date") it is duly
incorporated and in good standing and that it has the authority to consummate
the transactions contemplated by the Purchase Agreement and (ii) as of such
Addition Date, each Advance arose out of Fremont Financial's performance in
accordance with the terms of the Contract giving rise to
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that Advance. In the event of a breach of any representation or warranty set
forth in this paragraph that results in the requirement that the Transferor
accept retransfer of such Advance as to which such breach relates (a "Reconveyed
Advance") pursuant to the Pooling and Servicing Agreement, Fremont Financial
shall repurchase such Reconveyed Advance from the Transferor on the date of such
retransfer. The purchase price for such Reconveyed Advance shall be its unpaid
balance as of the previous Business Day and shall be paid in cash.
Fremont Financial will also represent and warrant to the Transferor to the
effect, among other things, that as of each Advance Date: (i) the Purchase
Agreement constitutes a legal, valid and binding obligation of Fremont Financial
and (ii) the Purchase Agreement constitutes a valid and absolute transfer to the
Transferor of all right, title and interest of Fremont Financial in and to the
Advances, whether then existing or thereafter created in the Contracts and the
proceeds thereof which is effective as to each Advance upon the creation
thereof. If the breach of any of the representations and warranties described in
this paragraph results in the obligation of the Transferor under the Pooling and
Servicing Agreement to accept retransfer of all the outstanding Investor
Certificates for some or all of the Series, Fremont Financial will repurchase
the Investor Certificates transferred to the Transferor for an amount of cash
equal to the amount that the Transferor is required to deposit under the Pooling
and Servicing Agreement in connection with such transfer.
Fremont Financial has agreed to indemnify the Transferor and to hold the
Transferor harmless from and against any and all losses, damages and expenses
(including reasonable attorneys' fees) suffered or incurred by the Transferor if
the foregoing representations and warranties are materially false.
CERTAIN COVENANTS
In the Purchase Agreement, Fremont Financial has agreed that it will timely
and fully perform and comply with all material provisions, covenants and other
promises required to be observed by it under the Contracts relating to the
Advances.
Fremont Financial has further agreed that it will not extend, amend or
otherwise modify the terms of any Advances, or amend, modify or waive any term
or condition of any Contract related thereto in any manner that would have a
material adverse effect on the interests of the Transferor or Trust, and it will
comply in all material respects with its credit extension policies and
procedures and collection practices relating to the Advances and Contracts (the
"Credit and Collection Policy") in regard to each Advance and the related
Contract. Fremont Financial has also agreed that it will not make any change in
the Credit and Collection Policy that could reasonably be expected to have a
material adverse effect on the interests of the Transferor or its interests in
the Advances, or the ability of the Seller to perform its obligations under the
Pooling and Servicing Agreement.
In addition, Fremont Financial has expressly acknowledged and consented to
the Transferor's assignment of its rights relating to the Advances under the
Purchase Agreement to the Trustee for the benefit of the Certificateholders.
Fremont Financial has also agreed, for the benefit of the Trustee, that any
amounts payable by Fremont Financial to the Transferor pursuant to the Purchase
Agreement that are to be paid by the Transferor, to the Trustee for the benefit
of the Certificateholders may be paid by Fremont Financial, on behalf of the
Transferor, directly to the Trustee.
TERMINATION
The Purchase Agreement provides for a stated term of one year, renewable
automatically until the earlier of (i) the occurrence of any "insolvency event"
described in the next succeeding sentence, or (ii) the termination of the Trust.
An "insolvency event" will be deemed to have occurred if either Fremont
Financial or the Transferor becomes insolvent, fails to pay its debts generally
as they become due, voluntarily seeks, consents to, or acquiesces in the benefit
or benefits of any Insolvency Law, becomes a party to (or is made the subject
of) any proceeding provided for by any Insolvency Law, other than as a creditor
or claimant, and, in the event such proceeding is involuntary, the petition
instituting same is not dismissed within 60 days after its filing or becomes
unable for any reason to convey or reconvey
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Advances in accordance with the provisions of the Purchase Agreement. In the
event that the Purchase Agreement is terminated for any reason prior to the
termination of the Trust or the repayment in full of the Investor Certificates
and the Variable Funding Certificate, the principal amount of Advances would
decline and cash would be retained in the Excess Funding Account. Such retained
amounts would remain in the Excess Funding Account to be distributed to the
Certificateholders in accordance with their respective principal payment
mechanisms upon the occurrence of each Partial Amortization Event. See "Risk
Factors -- Certain Legal Aspects of Contracts," "-- Competition in the Small
Business and Middle Market Loan Industry" and "Maturity Assumptions."
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CERTAIN LEGAL ASPECTS OF THE ADVANCES
TRANSFER OF ADVANCES
The Transferor has represented and warranted in the Pooling and Servicing
Agreement that the transfer of Advances by it to the Trust constitutes either a
valid transfer and assignment to the Trust of all right, title and interest of
the Transferor in and to the Advances, except for the interest of the Transferor
as Holder of the Transferor Certificate, or the grant to the Trust of a security
interest in the Advances. The Transferor has also represented and warranted in
the Pooling and Servicing Agreement that, in the event the transfer of Advances
by the Transferor to the Trust is deemed to create a security interest under the
UCC, there will exist a valid, subsisting and enforceable first priority
perfected security interest in such Advances created thereafter in favor of the
Trust on and after their creation, except for certain tax and other governmental
liens. For a discussion of the Trust's rights arising from a breach of these
warranties, see "Pooling and Servicing Agreement -- Representations and
Warranties."
The Transferor has represented that the Advances are "general intangibles"
or "instruments" for purposes of the UCC. For assets classified as general
intangibles, the filing of an appropriate financing statement is required to
perfect the security interest of the Trust. Financing Statements covering the
Advances have been filed with the appropriate governmental authority to protect
the interests of the Trust in the Advances.
With respect to the Advances that are evidenced by promissory notes, which
are considered instruments, the Transferor has represented that all of these
instruments have been or will be delivered in pledge to the Trust. So long as
the Trustee is not aware of any adverse claims to the instruments and maintains
continuous possession of the instruments, the Trust will have a perfected
security interest, having priority over all other such interests except to the
limited extent discussed below, in such instruments.
In addition to the Advances, undivided interests in security interests in
certain other property securing the Advances (the "Additional Security") have
been or will be transferred to the Trust. In general, the perfection by Fremont
Financial of its security interests in the Additional Security and the
perfection of the Trust's security interest in the Advances (including the
rights of a secured creditor with respect to the Additional Security) are
sufficient to create a perfected security interest in the Additional Security in
favor of the Trust. Fremont Financial has represented and warranted in the
Purchase Agreement that all actions necessary to perfect its security interest
in the Additional Security have been taken. In addition to the foregoing, each
of Fremont Financial and the Transferor has filed UCC financing statements
perfecting their respective interests in the Additional Security. However, not
all items of Additional Security are governed by the UCC and therefore the
security interest of the Trust in such Additional Security may not be perfected
and may be subject to attack from third parties with interests therein.
Under the Pooling and Servicing Agreement, the Transferor has represented
and warranted that it has transferred the Advances to the Trust free and clear
of all liens (except for tax liens representing amounts not yet due, or the
assessments of which are being contested in good faith by appropriate
proceedings). However, pursuant to the Code, the United States government could
nonetheless assert a lien on the Advances and other assets of the Trust after
the Closing Date which would be legally entitled to priority over the interests
of the Trust. In addition, certain other federal or state governmental or
similar liens might arise after the Closing Date and be entitled to superior
priority under applicable federal or state law.
CERTAIN MATTERS RELATING TO BANKRUPTCY
The Transferor has agreed not to engage in any activities except purchasing
certain rights in respect of commercial loan advances from Fremont Financial,
forming trusts, transferring interests in such advances and related rights to
such trusts and engaging in activities incident to, or necessary or convenient
to accomplish the foregoing. The Transferor has represented and warranted that
it has no
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intention of filing a voluntary petition under the United States Bankruptcy Code
or any similar applicable state law so long as the Transferor is solvent and
does not reasonably foresee becoming insolvent. There can be no assurance that
the Transferor, Fremont Financial, or the Trust will not file a voluntary
petition, or become insolvent and be subject to the filing of an involuntary
petition under Insolvency Laws in the future.
The voluntary or involuntary petition for relief under the United States
Bankruptcy Code or any similar applicable state law with respect to Fremont
Financial should not necessarily result in a similar voluntary or involuntary
petition with respect to the Transferor so long as the Transferor is solvent and
does not reasonably foresee becoming insolvent either by reason of Fremont
Financial's insolvency or otherwise. The Transferor has taken certain steps in
structuring the transactions contemplated hereby that are intended to make it
unlikely that any voluntary or involuntary petition for relief by Fremont
Financial under the Insolvency Laws will result in the consolidation, pursuant
to the Insolvency Laws, of the assets and liabilities of the Transferor with
those of Fremont Financial. These steps include the formation of the Transferor
as a wholly-owned, special purpose subsidiary pursuant to charter documents
containing certain limitations (including restrictions on the nature of the
Transferor's business and on its ability to commence a voluntary case or
proceeding under any Insolvency Laws is without an affirmative vote of all of
its directors). While there is no direct bankruptcy law precedent for the
position, Fremont Financial and the Transferor believe that (i) subject to
certain assumptions (including the assumption that the books and records
relating to the assets and liabilities of Fremont Financial will at all times be
maintained separately from those relating to the assets and liabilities of the
Transferor, the Transferor will prepare its own balance sheets and financial
statements and the Advances will not appear as assets of Fremont Financial on
its balance sheets, and there will be no commingling of the assets of Fremont
Financial with those of the Transferor) the assets and liabilities of the
Transferor should not be substantively consolidated with the assets and
liabilities of Fremont Financial in the event of a petition for relief under the
United States Bankruptcy Code with respect to Fremont Financial and (ii) the
sale of Advances by Fremont Financial to the Transferor should constitute an
absolute transfer and, therefore, such Advances would not be property of Fremont
Financial in the event of the filing of a petition for relief by or against
Fremont Financial under the United States Bankruptcy Code. If a bankruptcy
trustee for Fremont Financial or a creditor of Fremont Financial were to take
the view that Fremont Financial and the Transferor should be substantively
consolidated or that the transfer of the Advances from Fremont Financial to the
Transferor should be recharacterized as a pledge of such Advances, then delays
in payments on the Certificates or (should the bankruptcy court rule in favor of
any such trustee, debtor in possession or creditor) reductions in such payments
could result.
The Pooling and Servicing Agreement provides that, upon the bankruptcy or
appointment of a receiver for the Transferor, the Transferor will promptly give
notice thereof to the Trustee, and an Event of Termination with respect to all
Series and the Variable Funding Certificate will occur. Under the Agreement, no
new Collections will thereafter be transferred to the Trust and, unless
otherwise instructed within a specified period by the Certificateholders
representing undivided interests aggregating more than 50% of the aggregate
Invested Amount of each Series and of the Variable Funding Certificate, the
Trustee will proceed to sell, dispose of or otherwise liquidate the Advances in
a commercially reasonable manner and on commercially reasonable terms. The
proceeds from the sale of the Advances would then be treated by the Trustee as
Collections on the Advances. If the only Event of Termination to occur is either
the insolvency of the Transferor or the appointment of a bankruptcy trustee or
receiver for the Transferor, the receiver or bankruptcy trustee for the
Transferor might have the power to continue to require the Transferor to
transfer new Collections to the Trust and to prevent the early sale, liquidation
or disposition of the Advances and the commencement of the Amortization Period.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the Investor
Certificates is based on the advice of Hunton & Williams, special tax counsel to
the Transferor ("Tax Counsel"). The summary is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and the judicial and administrative rulings and
decisions now in effect or (with respect to regulations) proposed, all of which
are subject to change or to possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this summary is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain categories of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily upon
investors who will hold Investor Certificates as "capital assets," (generally,
property held for investment) within the meaning of Section 1221 of the Code,
but much of the discussion is applicable to other investors as well.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
REGARD TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND
DISPOSITION OF INTERESTS IN THE INVESTOR CERTIFICATES, AS WELL AS THE TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, FOREIGN COUNTRY, OR OTHER
TAXING JURISDICTION.
CHARACTERIZATION OF THE INVESTOR CERTIFICATES AS INDEBTEDNESS
Except as otherwise provided in the Prospectus Supplement for each Series,
Tax Counsel will advise the Transferor that in its opinion the Investor
Certificates will be treated for federal income tax purposes as indebtedness of
the Transferor, and not as ownership interests in the assets of the Trust or
equity interests in the Transferor or in a separate association taxable as a
corporation. That opinion will be based upon the application of existing law to
the facts of the transaction as set forth in the Pooling and Servicing Agreement
and in other relevant documents, but there can be no assurance that the law will
not change or that contrary positions will not be taken by the Internal Revenue
Service (the "Service").
Under the Pooling and Servicing Agreement, the Transferor, the Trustee, and
the Servicer each agree to treat the Investor Certificates of each Series as
debt for federal income tax purposes. In addition, by acceptance of an Investor
Certificate, each Investor Certificateholder will be deemed to have agreed to
treat such Investor Certificate as a debt instrument for purposes of federal and
state income tax, franchise tax, and any other tax measured in whole or in part
by income.
One or more Series may be subordinated to one or more other Series. In
general, such subordination should not affect the federal income tax treatment
of either the Subordinated or the Senior Investor Certificates. However,
certificates that are Subordinated Investor Certificates will not be eligible
for the benefit of certain prohibited transaction exemptions issued by the
United States Department of Labor. See "Employee Benefit Plan Considerations"
herein.
No election will be made to treat the Transferor, the assets of the Trust,
or the arrangement by which the Investor Certificates are issued as a real
estate mortgage investment conduit (a "REMIC").
TAXABLE MORTGAGE POOL RULES
Taxable mortgage pool ("TMP") rules enacted as part of the Tax Reform Act
of 1986 (the "1986 Act") treat certain arrangements that securitize real estate
mortgages (other than REMICs) as taxable corporations that cannot file a
consolidated federal income tax return with any other corporation ("Stand-Alone
Corporations"). An entity will be characterized as a TMP and, therefore, will be
taxable as a Stand-Alone Corporation if: (i) 80% or more of its assets are debt
obligations and more than 50% of such debt
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obligations consist of real estate mortgages or interests therein, (ii) the
entity is the obligor under debt obligations with two or more maturities, and
(iii) payments on the debt obligations referred to in clause (ii) bear a
relationship to payments on the debt obligations referred to in clause (i).
It is expected that 80% or more of the assets of the Trust generally will
consist of the Advances, which constitute "debt obligations" as that term is
defined in the TMP rules. The Trust also will be considered the Obligor under
debt obligations with two or more maturities because it has issued (and intends
in the future to issue) Series of Investor Certificates that are treated as debt
obligations for federal income tax purposes and that have different stated
maturities and rights to principal payments. Furthermore, despite the initial
Non-Amortization Period associated with each Series of Investor Certificates,
payments on each Series of Certificates likely will be considered to bear a
relationship to payments on the Advances under the TMP rules, because once the
Non-Amortization Period for a Series ends, the timing and amount of payments on
such Series are based in large part on the timing and amount of payments
received on the Advances. Accordingly, the Trust can avoid being characterized
as a TMP and, therefore, being taxed as a Stand-Alone Corporation under the TMP
rules only if, on the date of issuance of the Variable Funding Certificate and
any Investor Certificates, no more than 50% of the Contracts held by the Trust
constituted or will constitute real estate mortgages as that term is defined in
the TMP rules.
Under the TMP rules, a real estate mortgage includes an obligation that is
principally secured by an interest in real property. An obligation is considered
principally secured by an interest in real property if the Equity Value (as
defined below) of the interest in real property securing the obligation was at
least equal to 80% of the issue price of the obligation at the time of
origination. For purposes of determining whether an obligation is principally
secured by an interest in real property, the Equity Value of the interest in
real property is equal to the fair market value of such interest, less the
amount of any lien on such interest that is senior to, or in parity with, the
obligation being tested. In addition, any interest in real property that secures
a guarantee or other form of credit enhancement is excluded in applying the
foregoing test. Because the Contracts are revolving credit lines, a Contract's
advance limit should be considered its issue price for purposes of determining
whether it is principally secured by an interest in real property and, in turn,
whether it constitutes a real estate mortgage under the TMP rules.
The Transferor and Fremont Financial each have made the following
representations in a certificate (the "Non-TMP Status Certificate") signed by
their authorized representatives and delivered to Tax Counsel: (i) on the
Closing Dates relating to all Series of Investor Certificates issued on or prior
to the date of this Prospectus and on the date of issuance of the Variable
Funding Certificate, no more than 50% of the Contracts held by the Trust,
measured by the advance limit associated with each such Contract, are or were
secured by interests in real property with an Equity Value equal to 80% or more
of the advance limit associated with such Contract at the time such Contract was
originated, and (ii) on the Closing Dates relating to all Series of Investor
Certificates issued after the date of this Prospectus, no more than 50% of the
Contracts held by the Trust, measured by the advance limit associated with each
such Contract, will be secured by interests in real property with an Equity
Value equal to 80% or more of the advance limit associated with such Contract at
the time such Contract was originated. Based on those representations, no more
than 50% of the assets of the Trust have consisted or will consist of "real
estate mortgages" as that term is defined in the TMP rules. Accordingly, the
Trust should not be characterized as a TMP and, therefore, should not be taxable
as a Stand-Alone Corporation. However, no attempt has been or will be made by
Tax Counsel to verify the accuracy of the representations made by the Transferor
and Fremont Financial in the Non-TMP Status Certificate. If the Trust were
characterized as a TMP and, therefore, were taxable as a Stand-Alone
Corporation: (i) such Corporation would be subject to federal income tax at
corporate rates on its net income from the Advances, which could result in a
deferral of or reduced distributions to Investor Certificateholders, (ii) such
Corporation would not be permitted to file a consolidated federal income tax
return with any other corporation and, therefore, losses of other corporations
could not be used to offset the income of such Corporation, (iii) distributions
on the Transferor Certificate and to the Holders of Investor Certificates that
are not characterized as debt of such Corporation ("Equity Certificates") would
not be deductible in computing the taxable income of such Corporation, and (iv)
distributions to the holders of Equity Certificates would be treated as dividend
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income to such holders to the extent of the current and accumulated earnings and
profits of such Corporation and, in the case of Foreign Investors, would be
subject to withholding tax. See "-- Federal Income Tax Consequences to Foreign
Investors" herein.
TAXATION OF INTEREST INCOME OF INVESTOR CERTIFICATEHOLDERS
Assuming that the Investor Certificates are classified as indebtedness for
federal income tax purposes, payments received by the Investor
Certificateholders on such Investor Certificates generally should be accorded
the same tax treatment under the Code as payments received on other taxable
corporate bonds. Except as described below for Investor Certificates issued with
original issue discount or premium, interest paid or accrued on an Investor
Certificate will be treated as ordinary income to the Certificateholder. In
general, interest paid to Holders of Investor Certificates who report their
income on the cash receipts and disbursements method should be taxable to them
when received. Interest earned by Holders of Investor Certificates who report
their income on the accrual method will be taxable when accrued, regardless of
when it is actually received. Interest received on the Investor Certificates
also may constitute "investment income" for purposes of certain limitations of
the Code concerning the deductibility of investment interest expense. The
Trustee will report annually to the Service and to the holders of record of the
Investor Certificates with respect to interest paid or accrued and original
issue discount, if any, accrued on the Investor Certificates.
TAXATION OF ORIGINAL ISSUE DISCOUNT INCOME OF INVESTOR CERTIFICATEHOLDERS
An Investor Certificate will be issued with original issue discount ("OID")
if its "stated redemption price at maturity" (generally, its principal amount)
exceeds its "issue price." Under regulations that were issued by the Treasury on
January 27, 1994 (the "OID Regulations"), an Investor Certificate's stated
redemption price at maturity is equal to the sum of all payments provided for by
the Investor Certificate other than "qualified stated interest" ("Deemed
Principal Payments"). Qualified stated interest, in general, is stated interest
that is unconditionally payable in cash or property (other than debt instruments
of the issuer) at least annually at (i) a single fixed rate or (ii) a variable
rate that meets certain requirements set out in the OID Regulations. The issue
price of an Investor Certificate generally will equal the initial price at which
a substantial amount of such Investor Certificates are sold to the public. The
related Prospectus Supplement will indicate whether a particular Series of
Investor Certificates is issued with original issue discount.
If an Investor Certificate is issued with original issue discount, the
amount of original issue discount required to be included in the Investor
Certificateholder's income in any taxable year will be computed in accordance
with Section 1272(a)(6) of the Code, which provides rules for the accrual of
original issue discount under a constant yield method for certain debt
instruments, such as the Investor Certificates, that are subject to prepayment
by reason of prepayments of underlying obligations. Under section 1272(a)(6),
the amount and rate of accrual of original issue discount generally is to be
calculated based on the prepayment assumptions and the reinvestment rate on
amounts held pending distribution that were assumed in pricing the Investor
Certificates (the "Pricing Prepayment Assumptions"). The Trustee will report
annually to the Service and to the Holders of record of the Investor
Certificates with respect to OID accrued on the Investor Certificates.
Under a de minimis rule, an Investor Certificate will be considered to have
no original issue discount if the amount of its original issue discount is less
than 0.25% multiplied by the product of its stated redemption price at maturity
and its weighted average maturity ("WAM"). For that purpose, the WAM of an
Investor Certificate is the sum of the amounts obtained by multiplying the
amount of each Deemed Principal Payment by a fraction, the numerator of which is
the number of complete years from the Investor Certificate's issue date until
the relevant Deemed Principal Payment is made, and the denominator of which is
the Investor Certificate's stated redemption price at maturity. Although
Treasury regulations have not been issued under the relevant Code provisions, it
is expected that the WAM of a debt instrument such as an Investor Certificate
should be computed using the related Pricing Prepayment Assumptions.
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TAXATION OF MARKET DISCOUNT INCOME OF INVESTOR CERTIFICATEHOLDERS
A subsequent purchaser of an Investor Certificate who purchases such
Investor Certificate at a discount from its outstanding principal amount (or, in
the case of an Investor Certificate having original issue discount, its
"adjusted issue price") will acquire such Investor Certificate with market
discount. Such purchaser generally will be required to recognize the market
discount (in addition to any original issue discount remaining with respect to
the Investor Certificate) as ordinary income. A person who purchases an Investor
Certificate at a price lower than such Investor Certificate's outstanding
principal amount but higher than its adjusted issue price does not acquire such
Investor Certificate with market discount, but will be required to report
original issue discount, appropriately adjusted to reflect the excess of the
price paid over the adjusted issue price. An Investor Certificate will not be
considered to have market discount if the amount of such market discount is de
minimis. Although no Treasury regulations have been issued under the relevant
Code provisions, it is expected that market discount on a debt instrument such
as an Investor Certificate will be considered de minimis if it is less than the
product of (i) 0.25% of the remaining principal amount of such Investor
Certificate (or, in the case of an Investor Certificate having original issue
discount, the adjusted issue price of such Investor Certificate), and (ii) the
WAM of such Investor Certificate (determined as for original issue discount)
remaining after the date of purchase. Regardless of whether the subsequent
purchaser of an Investor Certificate with more than a de minimis amount of
market discount is a cash-basis or an accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of an Investor Certificate having original issue discount, any Deemed
Principal Payments) are received in an amount equal to the lesser of (i) the
amount of the principal payment received and (ii) the amount of market discount
that has "accrued" (as described below), but that has not yet been included in
income. The purchaser may make a special election, which generally applies to
all market discount instruments acquired by the purchaser in the taxable year of
election or thereafter, to recognize market discount currently on an uncapped
accrual basis (the "Current Recognition Election"). In addition, the purchaser
generally may elect to include in gross income all stated interest, market
discount , and de minimis market discount as it accrues on an Investor
Certificate under the constant yield method used to account for original issue
discount that is set forth in the OID Regulations (the "All OID Election"). An
All OID Election is irrevocable unless the Holder obtains the consent of the
Service. In addition, if an All OID Election is made for a debt instrument with
market discount, the Holder will be deemed to have made an election to include
in income currently the market discount on all of its other debt instruments
with market discount acquired in the taxable year of election or thereafter.
Until the Treasury promulgates applicable regulations, the purchaser of an
Investor Certificate with market discount generally may elect to accrue the
market discount either: (i) on the basis of a constant interest rate, (ii) in
the case of any Investor Certificate not issued with original issue discount, in
the ratio of stated interest payable in the relevant period to the total stated
interest remaining to be paid from the beginning of such period, or (iii) in the
case of an Investor Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the total
remaining original issue discount at the beginning of such period. The Pricing
Prepayment Assumptions should be used to calculate the accrual of market
discount under the constant interest rate method. A Holder who has acquired an
Investor Certificate with market discount generally will be required to treat a
portion of any gain on the sale or exchange of such Investor Certificate as
ordinary income to the extent of the market discount accrued up to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial principal payments were
received. Moreover, such Holder generally must defer interest deductions
attributable to any indebtedness incurred or continued to purchase or carry the
Investor Certificate to the extent these deductions exceed income on the
Investor Certificate. Any such deferred interest expense, in general, is allowed
as a deduction not later than the year in which the related market discount
income is recognized. If the Holder of an Investor Certificate makes a Current
Recognition Election or an All OID Election, the interest deferral rule will not
apply.
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<PAGE> 87
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
For example, the treatment of an Investor Certificate subject to redemption at
the option of the Transferor that is acquired at a market discount is unclear.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that may develop for the Investor Certificates. Prospective investors in
Investor Certificates should consult their tax advisors regarding the
application of the market discount rules to those Investor Certificates.
AMORTIZABLE PREMIUM
A subsequent purchaser of an Investor Certificate who purchases such
Investor Certificate at a premium over the total of its Deemed Principal
Payments may elect to amortize such premium under a constant yield method that
reflects compounding based on the interval between payments on such Investor
Certificate. The legislative history of the 1986 Act indicates that such premium
is to be accrued in the same manner as market discount (as described above).
Accordingly, it appears that the accrual of premium on an Investor Certificate
will be calculated using the Pricing Prepayment Assumptions. Under the Code,
except as otherwise provided in Treasury regulations yet to be issued, amortized
premium would be treated as an offset to interest income on an Investor
Certificate and not as a separate deduction item. If a Holder were to make an
election to amortize premium on an Investor Certificate, such election would
apply to all taxable debt instruments (including all Investor Certificates) held
by the Holder at the beginning of the taxable year in which the election is
made, and to all taxable debt instruments acquired thereafter by such Holder,
and would be irrevocable without the consent of the Service. In addition, a
Holder that elected to amortize premium on an Investor Certificate would be
required to reduce its tax basis in such Investor Certificate by the amount of
the aggregate deductions (or interest offsets) allowable for amortizable
premium. Investors who pay a premium for the Investor Certificates should
consult their tax advisors regarding the election to amortize premium and the
method to be employed.
Amortizable premium on an Investor Certificate that is subject to
redemption at the option of the Transferor generally must be amortized as if the
optional redemption price and date were such Investor Certificate's principal
amount and maturity date if doing so would result in a smaller amount of premium
amortization during the period ending with the optional redemption date. Thus,
the Holder of an Investor Certificate will not be able to amortize any premium
on such Investor Certificate if such Investor Certificate is subject to optional
redemption at a price equal to or greater than the Holder's acquisition price
unless and until the redemption option expires. In cases where premium must be
amortized on the basis of the price and date of an optional redemption, an
Investor Certificate will be treated as having matured on the redemption date
for the redemption price and then having been reissued on that date for that
price. Any premium remaining on the Investor Certificate at the time of the
deemed reissuance will be amortized on the basis of (i) the original principal
amount and maturity date or (ii) the price and date of any succeeding optional
redemption, under the principles described above.
If an Investor Certificate is purchased for less than its stated principal
amount, but more than its adjusted issue price, it is acquired with acquisition
premium (i.e., the excess of purchase price over adjusted issue price).
Acquisition premium is amortized in the same manner as, and is treated as an
offset to, original issue discount.
DISPOSITION OF INVESTOR CERTIFICATES
In general, an Investor Certificateholder will recognize gain or loss upon
the sale, exchange, redemption, or other disposition of an Investor Certificate
equal to the difference between (i) the amount of cash and the fair market value
of any property received (other than amounts attributable to, and taxable as,
accrued stated interest) and (ii) the Holder's adjusted tax basis in the
Investor Certificate. A Holder's adjusted tax basis in an Investor Certificate
generally will equal the cost of such Investor Certificate, increased by any
original issue discount or market discount previously includible in the Holder's
gross income with respect to such Investor Certificate and reduced by the
portion of the basis of
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such Investor Certificate allocable to payments previously received on such
Investor Certificate (other than qualified stated interest) and by any amortized
premium or acquisition premium. Similarly, the Holder of an Investor Certificate
who receives a scheduled or prepaid principal payment with respect to such
Investor Certificate will recognize gain or loss equal to the difference between
the amount of the payment and the allocable portion of his adjusted basis in
such Investor Certificate. Subject to the market discount rules discussed above
and to the one-year holding requirement for long-term capital gain treatment,
any such gain or loss generally will be long-term capital gain, provided that
the Investor Certificate was held as a capital asset. If the Holder of an
Investor Certificate is a bank, thrift, or similar institution described in
Section 582 of the Code, any gain or loss on the sale or exchange of an Investor
Certificate will be treated as ordinary income or loss. The federal income tax
rates applicable to capital gains for taxpayers other than individuals, estates
and trusts are currently the same as those applicable to ordinary income;
however, the maximum statutory ordinary income rate for individuals, estates and
trusts is generally 39.6%, whereas the maximum long-term capital gains rate for
such taxpayers is 28%. Moreover, capital losses generally may be used only to
offset capital gains.
A portion of any gain from the sale of an Investor Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
such Investor Certificate is held as part of a "conversion transaction" within
the meaning of Section 1258 of the Code. A conversion transaction generally is
one in which the taxpayer has taken two or more positions in Investor
Certificates or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in such transaction. The amount of gain realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate "applicable federal rate" (which rate
is computed and published monthly by the Service) at the time the taxpayer
entered into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income from the transaction.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
In general, under the Code, interest and OID income (including accrued
interest and OID recognized on a sale or exchange) paid or accrued with respect
to an Investor Certificate held by or on behalf of a nonresident alien
individual, foreign corporation, foreign partnership, or other foreign person
(each a "Foreign Investor") will be treated as "portfolio interest" and
therefore will not be subject to any United Stated federal income tax, provided
that (i) such interest is not effectively connected with a trade or business in
the United States of such Foreign Investor and (ii) the Transferor (or other
person who would be required to withhold tax from such payments) is provided
with the required statement that the beneficial owner of the Investor
Certificate is a Foreign Investor. Interest (including principal payments
attributable to original issue discount) paid on an Investor Certificate to a
Holder who is a Foreign Investor will not be subject to withholding if such
interest is effectively connected with a United States business conducted by
such Foreign Investor. Such interest (and original issue discount), however,
generally will be subject to the regular United States income tax. The rules
governing United States federal income taxation of Foreign Investors are
complex, and no attempt is made herein to provide more than a brief synopsis of
those rules. Accordingly, prospective Foreign Investors should consult with
their tax advisors to determine the United States federal, state, and local
income and estate tax consequences of an investment in Investor Certificates.
BACKUP WITHHOLDING
An Investor Certificate may, under certain circumstances, be subject to
"backup withholding" at the rate of 31% with respect to "reportable payments,"
which include certain interest and principal payments on, and distributions of
proceeds from a sale of, Investor Certificates. This withholding generally will
apply if the Holder of an Investor Certificate (i) fails to furnish the Trustee
with its taxpayer identification number ("TIN"); (ii) furnishes the Trustee or
the Issuer an incorrect TIN; (iii) fails to report properly interest, dividends,
or other "reportable payments" as defined in the Code; or (iv) under certain
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circumstances, fails to provide the Trustee or the Issuer or such Holder's
securities broker with a certified statement, signed under penalty of perjury,
that the TIN is its correct number and that the Holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect to
payments made to certain Holders of Investor Certificates, including payments to
certain exempt recipients (such as corporations and exempt organizations) and to
Foreign Investors that comply with the requisite certification procedures.
Holders of Investor Certificates should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
Within a reasonable time after the end of each calendar year, the Trustee
will report to the Holders of the Investor Certificates and to the Service each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Investor
Certificates.
FOREIGN TAXATION
The discussion above does not address the tax treatment of the Trust, the
Investor Certificates, or the Investor Certificateholders under foreign income
tax laws. Prospective investors are urged to consult their own tax advisors
regarding the foreign income tax treatment of the Trust and the Investor
Certificates, and the consequences of the purchase, ownership, and disposition
of the Investor Certificates under any foreign tax law.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO THE
HOLDERS OF INVESTOR CERTIFICATES AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS
WITH RESPECT TO MANY ASPECTS OF THOSE RULES, ALL POTENTIAL INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION,
OWNERSHIP, AND DISPOSITION OF SUCH INVESTOR CERTIFICATES.
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<PAGE> 90
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" above, potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Investor Certificates.
CALIFORNIA. Some of the activities to be undertaken by the Servicer in
servicing and collecting the Advances will take place in California. The
California Bank and Corporation Tax Law imposes a franchise tax on banks and
financial corporations doing business in the State of California measured by
their net income allocated and apportioned to California.
Assuming the Investor Certificates are treated as indebtedness for federal
income tax purposes, this treatment also will apply for California income tax
purposes. Pursuant to this treatment, Investor Certificateholders not otherwise
subject to California tax and not holding Investor Certificates for use in a
California trade or business would not become subject to such tax solely because
of their ownership of the Investor Certificates. Investor Certificateholders
already subject to taxation in California or holding Investor Certificates for
use in a California trade or business, however, could be required to pay tax on
the income generated from ownership of the Investor Certificates.
This discussion is based upon present provisions of California law and
regulations, and applicable judicial or ruling authority, all of which are
subject to change that may be retroactive. No ruling on any of the issues
discussed above will be sought from the California Franchise Tax Board.
OTHER JURISDICTIONS. The acquisition, ownership, and disposition of the
Investor Certificates may result in tax consequences in additional
jurisdictions, including Illinois, the location of the Trustee. State income tax
law may differ substantially from the corresponding federal and California law,
and the discussion herein does not purport to describe any aspect of the income
tax laws of any other states. No opinion of counsel has been sought concerning
the tax consequences of the arrangement between the Transferor and the holders
of the Investor Certificates, or the acquisition, ownership, and disposition of
the Investor Certificates under the laws of any state other than California.
THEREFORE, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE VARIOUS STATE TAX CONSEQUENCES OF AN INVESTMENT IN THE INVESTOR
CERTIFICATES.
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EMPLOYEE BENEFIT PLAN CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
imposes certain restrictions on those pension, profit sharing, and other
employee benefit plans to which it applies ("Plans") and on those persons who
are fiduciaries or have certain specified relationships to such Plans ("Parties
in Interest"). Under ERISA, any person who exercises any authority or control
with respect to 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). In considering an investment of the assets of a Plan in Investor
Certificates, a fiduciary should consider, among other things: (i) the purposes,
requirements, and liquidity needs of such Plan; (ii) the definition of Plan
assets under ERISA and the applicable United States Department of Labor ("DOL")
regulations; (iii) whether the investment satisfies the diversification
requirements of Section 404(a)(1)(C) of ERISA; and (iv) whether such an
investment is appropriate for the Plan and prudent, considering the nature of
the investment. The prudence of a particular investment must be determined by
the responsible fiduciary (usually the trustee or investment manager) with
respect to each Plan taking into account all of the facts and circumstances of
the investment.
Sections 406 and 407 of ERISA and Section 4975 of the Code prohibit certain
transactions that involve (i) a Plan and any party in interest under ERISA or
"disqualified person" under the Code with respect to the Plan and (ii) Plan
assets. If a Plan were deemed to have acquired indirect ownership rights in the
Transferor or its assets, certain transactions involving the operations of the
Transferor might be deemed to be prohibited transactions under ERISA and the
Code. Under DOL Regulations set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations"), "plan assets" include not only securities held by a Plan but also
the underlying assets of the issuer of any equity securities held by a Plan (the
"Look-Through Rule"), unless one or more exceptions specified in the Plan Asset
Regulations are satisfied. The Plan Asset Regulations define an equity security
as a security other than a security that is treated as debt for state law
purposes and that has no substantial equity features. Because the Investor
Certificates will be issued in the form of trust certificates rather than in the
form of bonds, they may be treated as equity securities for purposes of the Plan
Asset Regulations. Nevertheless, the Look-Through Rule would not apply to a
Plan's purchase of the Investor Certificates if one or more of the exceptions
specified in the Plan Asset Regulations are satisfied. One exception to the
Look-Through Rule applies to securities that are (i) freely transferable, (ii)
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another, and (iii) either (A) part of a class of
securities registered under section 12(b) or 12(g) of the Exchange Act, or (B)
sold to the Plan as part of an offering of securities to the public pursuant to
an effective registration statement under the Securities Act and the class of
securities of which such security is a part is registered under the Exchange
Act, within 120 days (or such later time as may be allowed by the Commission)
after the end of the fiscal year of the issuer during which the offering of such
securities to the public occurred (the "Publicly Offered Exception"). Another
exception to the Look-Through Rule applies to securities purchased by a Plan if,
immediately after the most recent acquisition of an equity interest in the
issuing entity, benefit plan investors (which include government plans and
individual retirement accounts) do not own 25% or more of the value of any class
of equity interests issued by such entity (the "Insignificant Participation
Exception").
The Investor Certificates will be sold as part of an offering pursuant to
an effective registration statement under the Securities Act, and then will be
timely registered under the Exchange Act. In addition, it is anticipated that
there will be no restrictions imposed on the transfer of the Investor
Certificates. However, no assurances can be given that the Investor Certificates
will be held by at least 100 persons at the conclusion of the offering.
Accordingly, no assurances can be given that the Investor Certificates will meet
the criteria of the Publicly Offered Exception. In addition, no assurances can
be given that the Insignificant Participation Exception will apply to a Plan's
purchase of Investor Certificates.
The DOL has granted to Goldman, Sachs & Co. an administrative exception
(Prohibited Transaction Exception 89-88, Fed. Reg. 42,581 (1989)) (the
"Exemption") from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding, and the subsequent resale by Plans
of certificates representing interests in asset-backed pass-through trusts that
consist of certain
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secured receivables, loans, and other obligations that meet the conditions and
requirements of the Exemption. Those requirements may not be met in the case of
the Investor Certificates, and no separate exemption ruling has been sought from
the DOL with respect to the Investor Certificates. There also are certain class
exemptions issued by the DOL that could apply to transactions involving the
Trust's assets, including, but not limited to: (i) Prohibited Transaction Class
Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts, (ii) PTCE 91-38, regarding investments by bank collective
investment funds, and (iii) PTCE 84-14, regarding transactions effected by a
"qualified professional asset manager." However, a purchaser of Investor
Certificates should be aware that certain exemptions noted above do not apply to
the purchase, sale, or holding of subordinated certificates. Moreover, a
purchaser of Investor Certificates also should be aware that even if the
conditions specified in one or more of such exemptions are met, the scope of the
relief provided by an exemption might not cover all acts that might be construed
as prohibited transactions.
In light of the foregoing, fiduciaries of a Plan considering the purchase
of Investor Certificates should consult their own counsel as to whether the
assets of the Trust which are represented by the Investor Certificates would be
considered "plan assets," the consequences that would apply if the Trust's
assets were considered "plan assets," and the applicability of exemptive relief
from the prohibited transaction rules.
BECAUSE THE PURCHASE OR HOLDING OF INVESTOR CERTIFICATES MAY RESULT IN
UNFAVORABLE CONSEQUENCES FOR A PLAN OR ITS FIDUCIARIES UNDER THE PLAN ASSET
REGULATIONS OR THE PROHIBITED TRANSACTION PROVISIONS OF ERISA OR THE CODE,
CERTAIN SERIES OF INVESTOR CERTIFICATES WILL NOT BE OFFERED FOR SALE TO, AND
WILL NOT BE TRANSFERABLE TO, PLAN INVESTORS.
PLAN OF DISTRIBUTION
The Transferor may offer Certificates of each Series either directly,
through Goldman, Sachs & Co. or through one or more underwriters in underwriting
syndicates (the "Underwriters"). The Prospectus Supplement relating to each
Series of Certificates will set forth the specific terms of the offering of such
Series of Certificates, the names of the Underwriters, the name of the managing
underwriter, the proceeds to the Transferor from such sale, any securities
exchange on which the Investor certificates may be listed and, if applicable,
the initial public offering prices, the discounts and commissions to the
Underwriters and any discounts and concessions allowed or reallowed to certain
dealers. The expected place and time of delivery of each Series of Certificates
will also be set forth in the related Prospectus Supplement.
The Certificates of a Series may be acquired by Underwriters for their own
accounts and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale or at the time of commitment
therefor. Firm commitment underwriting and public reoffering by underwriters
will be through underwriting syndicates led by one or more managing underwriters
or through one or more firms acting alone. The specific managing underwriter or
underwriters, if any, with respect to the offer and sale of a particular Series
of Investor Certificates will be set forth on the cover of the related
Prospectus Supplement, and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement. The obligations of any Underwriters
or Purchasers will be subject to certain conditions precedent, and such
Underwriters will be severally obligated to purchase all the Investor
Certificates of a Series described in the related Prospectus Supplement, if any
are purchased. If Certificates of a Series are offered other than through
Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the Transferor and the purchasers of Certificates of such Series.
In connection with the sale of the Investor Certificates, underwriters may
receive compensation from the Transferor or from purchasers of the Investor
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distributions of the Investor Certificates may
be deemed to be underwriters in connection with such Investor Certificates and
any discounts or
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commissions received by them may be deemed to be underwriting discounts and
commissioned under the Securities Act.
The Prospectus Supplement with respect to any Series of Certificates
offered other than through Underwriters will contain information concerning the
nature of such offering and any agreements to be entered into between the Issuer
and dealers of the Certificates for such Series.
Purchasers of Investor Certificates, including dealers, may, depending on
the facts and circumstances of such purchasers, be deemed to be "underwriters"
within the meaning of the Securities Act in connection with reoffers and sales
by them of Investor Certificates. Certificateholders should consult with their
legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Investor Certificates
will be passed upon for the Transferor by Wilson, Sonsini, Goodrich & Rosati,
P.C. Certain legal matters relating to the issuance of the Investor Certificates
will be passed upon for the Underwriters by Hunton & Williams. Hunton & Williams
will also deliver an opinion as to certain federal income tax consequences with
respect to the Investor Certificates.
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PROSPECTUS
INDEX OF KEY TERMS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Addition Date...................................................................... 46
Additional Certificates............................................................ 32
Additional Contracts............................................................... 4, 23
Additional Issuance................................................................ 9, 32
Additional Security................................................................ 49
Advance Rate....................................................................... 17
Advances........................................................................... 1
Aggregate Eligible Principal Advances.............................................. 9
Aggregate Principal Advances....................................................... 42
Aggregate Subordinated Minimum Amount.............................................. 37
Aggregate Subordinated Minimum Transferor Amount................................... 37
Aggregate Subordinated Transferor Amount........................................... 8, 37
Amortization....................................................................... 39
Amortization Period................................................................ 23
Amortization Period Commencement Date.............................................. 23
Cash Collateral Account............................................................ 9
Cash Collateral Maintenance Amount................................................. 37
Cede............................................................................... 26
Cedel.............................................................................. 26
Cedel Participants................................................................. 26
Certificateholder.................................................................. 4, 27
Certificate Owner.................................................................. 26
Certificate Rate................................................................... 6
Certificates....................................................................... 1, 3
Charge-Off Amount.................................................................. 39
Citibank........................................................................... 26
Closing Date....................................................................... 32
Code............................................................................... 11, 51
Collection Account................................................................. 9, 35
Collections........................................................................ 5, 36
Commission......................................................................... 2
Commonwealth....................................................................... 16
Concentration Account.............................................................. 5, 35
Concentration Bank................................................................. 35
Contracts.......................................................................... 1
Cooperative........................................................................ 28
Credit and Collection Policy....................................................... 47
Cut-Off Date....................................................................... 4
Daily Interest Amount.............................................................. 37
Daily Interest Shortfall........................................................... 37
Daily Variable Funding Certificate Deposit Amount.................................. 37
Defaulted Amount................................................................... 40
Definitive Certificates............................................................ 29
Depository......................................................................... 27
DOL................................................................................ 59
</TABLE>
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PROSPECTUS
INDEX OF KEY TERMS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
DTC................................................................................ 26
Eligible Advance................................................................... 33
Eligible Contract.................................................................. 33
Enhancement........................................................................ 9
ERISA.............................................................................. 10, 59
Euroclear.......................................................................... 26, 28
Euroclear Operator................................................................. 28
Euroclear Participants............................................................. 26
Excess Finance Charge Collections.................................................. 39
Excess Funding Account............................................................. 9
Excess Funding Amount.............................................................. 37
Exchange Act....................................................................... 2
Finance Charge Collections......................................................... 40
Fremont Financial.................................................................. 4
Fremont Portfolio.................................................................. 18
Gross Collections.................................................................. 5
Historical Dilution Percentage..................................................... 21
Holder............................................................................. 4
Indirect Participants.............................................................. 27
Initial Invested Amount............................................................ 37
Insolvency Laws.................................................................... 12
Interest Accrual Period............................................................ 6, 25
Invested Amount.................................................................... 38
Investor Certificates.............................................................. 1, 3
Investor Interest.................................................................. 25
Issuer Amount...................................................................... 38
Loan and Security Agreement........................................................ 22
Lock-Box Account................................................................... 35
Lock-Box Bank...................................................................... 35
Monthly Servicing Fees............................................................. 37
Moody's............................................................................ 15
Morgan............................................................................. 27
New Issuance....................................................................... 9
Non-Amortization Period............................................................ 23
OID................................................................................ 53
OID Regulations.................................................................... 53
Obligor............................................................................ 4
Over-Advance....................................................................... 17
Overcollateralization Enhancement Amount........................................... 38
Partial Amortization Event......................................................... 7
Participants....................................................................... 26
Payment Date....................................................................... 6, 25
Payment Date Statement............................................................. 44
Plan Asset Regulations............................................................. 59
</TABLE>
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PROSPECTUS
INDEX OF KEY TERMS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Plan Investor..................................................................... 11
Plans............................................................................. 59
Pooling and Servicing Agreement................................................... 1
Primary Collateral................................................................ 17
Principal Advances................................................................ 10
Principal Terms................................................................... 31
Proposal Letter................................................................... 20
Prospect Review Report............................................................ 20
Purchase Agreement................................................................ 5, 46
Rating Agencies................................................................... 11
Reconveyed Advance................................................................ 47
Recoveries........................................................................ 40
REMIC............................................................................. 51
Removed Contracts................................................................. 4, 35
Secured Promissory Note........................................................... 22
Securities Act.................................................................... 2
Seller............................................................................ 5
Senior Enhancement Percentage..................................................... 38
Senior Investor Certificates...................................................... 3
Senior Investor Interest.......................................................... 8
Senior Series..................................................................... 3
Series............................................................................ 3
Series 1995-1 Certificates........................................................ 15
Series A Certificates............................................................. 15
Series B Certificates............................................................. 15
Service........................................................................... 10, 51
Servicer.......................................................................... 1, 3
Servicer Default.................................................................. 43
Service Transfer.................................................................. 43
Settlement Period................................................................. 8
Subordinate Enhancement Percentage................................................ 38
Subordinated Investor Certificates................................................ 3
Subordinated Investor Interest.................................................... 8
Subordinated Minimum Amount....................................................... 37
Subordinated Percentage........................................................... 38
Subordinated Series............................................................... 3
Subordinated Transferor Interest.................................................. 25
Supplement........................................................................ 3
Tax Counsel....................................................................... 10, 51
Terms and Conditions.............................................................. 29
TMP............................................................................... 51
Transferor........................................................................ 1, 3, 16
Transferor Certificate............................................................ 1, 3
Transferor Interest............................................................... 8
Trust............................................................................. 1, 3
</TABLE>
64
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PROSPECTUS
INDEX OF KEY TERMS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Trustee............................................................................ 1, 3
Trust Portfolio.................................................................... 18
UCC................................................................................ 12
Underwriters....................................................................... 12, 60
Variable Funding Certificate....................................................... 1, 3
</TABLE>
65
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
If so specified in the relevant Prospectus Supplement, globally offered
Investor Certificates (the "Global Securities") will be available 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 holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through Citibank and Morgan as the respective
depositaries of Cedel and Euroclear and as participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S. withholding
taxes, provided that 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 as nominee of DTC. Investors' interest in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their Participants through their respective Depositories,
which in turn will hold such positions in accounts as Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to book-entry securities previously issued
by the Trust. 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 book entry
securities previously issued by the Trust in same-day funds.
TRADING BETWEEN CEDEL PARTICIPANTS AND/OR EUROCLEAR
PARTICIPANTS. Secondary market trading between Cedel Participants and/or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Participant at least one
I-1
<PAGE> 99
business day prior to settlement. Cedel or Euroclear will instruct Citibank or
Morgan, respectively, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date. For transactions settling on the 31st day of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by Citibank or Morgan to the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The Global Securities credit
will appear the next day (European time) and the cash 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 debit will be valued instead as of the actual
settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to 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 accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, 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
this result will depend on each Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
Citibank or Morgan for the benefit of Cedel Participants and Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
Citibank or Morgan, to a DTC Participant. The seller will send instructions to
Cedel or Euroclear through a Participant at least one business day prior to
settlement. In these cases, Cedel or Euroclear will instruct Citibank or Morgan,
as appropriate, to deliver the bonds to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date. For
transactions settling on the 31st day 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 the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participants or Euroclear Participant's account would be backvalued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participants or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debit in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft charges incurred over that one-day period. If
settlement is not completed on the intended value date (i.e., the trade fails),
receipt of the cash proceeds in the Cedel Participants or Euroclear
Participant's account would instead be valued as of the actual settlement date.
I-2
<PAGE> 100
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(1) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures:
(2) 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
(3) 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 Holder 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. holding withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
persons, unless such Holder takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSON (FORM W-8). Non-U.S. persons that are
beneficial owners can obtain a complete exemption from the withholding tax by
filing a signed Form W-8 (Certificate of Foreign Status).
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. persons that are beneficial owners 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 Certification). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that time unless the filer
alternatively files Form W-8. Form 1001 may be filed by the beneficial owner or
his 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 (Request for Taxpayer
Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Global Security holder,
or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom he holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of federal income tax
withholding that may be relevant to foreign Holders of these Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of these Global Securities.
I-3
<PAGE> 101
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS AND PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS OR
PROSPECTUS SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR PROSPECTUS SUPPLEMENT NOR
ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports to Class A Certificateholders..... S-2
Available Information..................... S-2
Prospectus Supplement Summary............. S-3
Risk Factors.............................. S-10
The Trust................................. S-11
The Trust Portfolio....................... S-11
Fremont Financial......................... S-15
Maturity Assumptions...................... S-17
Description of the Class A Certificates... S-19
Description of Outstanding Investor
Certificates............................ S-22
Description of Repurchase................. S-23
Description of the Variable Funding
Certificate............................. S-23
Pooling and Servicing Agreement........... S-24
Use of Proceeds........................... S-28
Rating of the Class A Certificates........ S-28
Underwriting.............................. S-29
Legal Matters............................. S-30
Prospectus Supplement Index of Key
Terms................................... S-31
PROSPECTUS
Available Information..................... 2
Incorporation of Certain Documents by
Reference............................... 2
Prospectus Summary........................ 3
Risk Factors.............................. 12
The Trust................................. 16
The Transferor and Fremont Financial...... 16
Asset-Based Lending....................... 17
The Contracts............................. 22
The Advances.............................. 23
Maturity Assumptions...................... 23
Use of Proceeds........................... 24
Description of the Certificates........... 25
Pooling and Servicing Agreement........... 30
Description of the Asset Sale and
Contribution Agreement.................. 46
Certain Legal Aspects of the Advances..... 49
Certain Federal Income Tax Consequences... 51
State Tax Considerations.................. 58
Employee Benefit Plan Considerations...... 59
Plan of Distribution...................... 60
Legal Matters............................. 61
Prospectus Index of Key Terms............. 62
Annex I: Global Clearance, Settlement and
Tax Documentation Procedures............ I-1
</TABLE>
======================================================
======================================================
$100,000,000
FREMONT
SMALL BUSINESS LOAN
MASTER TRUST
VARIABLE RATE
ASSET BACKED CERTIFICATES,
SERIES D, CLASS A
[LOGO]
FREMONT FUNDING INC.
TRANSFEROR
FREMONT FINANCIAL CORPORATION
SERVICER
----------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------
GOLDMAN, SACHS & CO.
======================================================
