<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 29, 1999)
$96,900,000
[LOGO]
THE MONEY STORE SBA LOAN-BACKED
ADJUSTABLE RATE CERTIFICATES
SERIES 1999-1
The Money Store Investment Corporation and The Money Store of
New York, Inc. will form a trust fund and the trust fund will
issue The Money Store SBA Loan-Backed Adjustable Rate
Certificates Series 1999-1. We are offering for sale the two
classes of certificates listed in the table below:
<TABLE>
<CAPTION>
INITIAL CERTIFICATE
CLASS BALANCE REMITTANCE RATE
<S> <C> <C>
Class A............ 94,$012,000 (1)
Class M............ 2,$888,000 (1)
Total.............. 96,$900,000
</TABLE>
(1) The remittance rate on this class will be based upon the
prime rate, subject to certain adjustments, as described
under "Description of the Agreement and the
Certificates--Interest Distribution Amounts" in this
prospectus supplement.
The Trust Fund will consist primarily of the unguaranteed
interests in a pool of loans made to small businesses
pursuant to Section 7(a) of the Small Business Act, as
amended. ALTHOUGH A PORTION OF EACH LOAN IS GUARANTEED BY THE
UNITED STATES SMALL BUSINESS ADMINISTRATION, THIS PORTION HAS
BEEN SOLD PREVIOUSLY. THEREFORE, EXCEPT FOR CERTAIN INTEREST
PAYMENTS, THE PORTION OF THE LOANS INCLUDED IN THE TRUST FUND
IS NOT GUARANTEED BY THE UNITED STATES SMALL BUSINESS
ADMINISTRATION OR ANY OTHER PERSON OR ENTITY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE
OFFERED CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE
UNITED STATES SMALL BUSINESS ADMINISTRATION HAS NOT APPROVED
OR DISAPPROVED OF THE OFFERED CERTIFICATES AND THE UNITED
STATES SMALL BUSINESS ADMINISTRATION HAS NOT PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
Subject to the satisfaction of certain conditions, the
underwriters named below will purchase the Class A and Class M
certificates from us. See "Underwriting" in this prospectus
supplement. The underwriters will offer the Class A and Class
M certificates to the public from time to time in negotiated
transactions or otherwise at varying prices to be determined
at the time of sale. The underwriters will pay us an amount
equal to approximately 99.61% of the aggregate principal
balance of the Class A and Class M certificates, plus accrued
interest, before deducting issuance expenses payable by us
estimated to be $330,000.
First Union Capital Markets Corp. expects to enter into market
making transactions in the Class A and Class M certificates
and may act as principal or agent in any such transactions.
Any such purchases or sales will be made at prices related to
prevailing market prices at the time of sale. This prospectus
supplement and the prospectus may be used by First Union
Capital Markets Corp. in connection with such transactions.
The Class A and Class M certificates will be delivered in book-entry form only
through the Same Day Funds Settlement System of The Depository Trust Company in
the United States or Cedelbank, societe anonyme or the Euroclear System in
Europe on or about March 31, 1999.
------------------------
FIRST UNION CAPITAL MARKETS CORP. PRUDENTIAL SECURITIES
<PAGE>
March 29, 1999
CONSIDER CAREFULLY
THE RISK FACTORS
BEGINNING ON PAGE
S-6 IN THIS
PROSPECTUS
SUPPLEMENT AND ON
PAGE 21 IN THE
PROSPECTUS.
The certificates
represent
obligations of the
trust only and do
not represent an
interest in or
obligation of The
Money Store
Investment
Corporation or The
Money Store of New
York, Inc.
This prospectus
supplement may be
used to offer and
sell the offered
certificates only if
accompanied by the
prospectus.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
We provide information to you about the Class A certificates and the Class M
certificates (the "offered certificates") in two separate documents that provide
progressively more detail:
- the prospectus, which provides general information, some of which may not
apply to the offered certificates; and
- this prospectus supplement, which describes the specific terms of your
series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT
DIFFERS FROM THE RELATED DESCRIPTION IN THE PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal Terms"
beginning on page S-53 in this prospectus supplement.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further discussions about related topics. The following table of contents
provides the pages on which these captions are located. Any capitalized terms
that are used but not defined in this prospectus supplement are defined in the
accompanying prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
<S> <C>
PAGE
---------
Summary.................................. S-1
Risk Factors............................. S-6
The SBA Loan Pool........................ S-9
The SBA Loan Program..................... S-23
Yield, Maturity and Prepayment
Considerations......................... S-24
The Sellers.............................. S-27
Description of the Agreement and the
Certificates........................... S-29
The Trustee.............................. S-46
Federal Income Tax Consequences.......... S-47
ERISA Considerations..................... S-51
Legal Investment......................... S-51
Underwriting............................. S-51
Ratings.................................. S-52
Legal Matters............................ S-52
Financial Information.................... S-52
Index of Principal Terms................. S-53
Certain Definitions...................... S-57
Annex I.................................. A-1
<CAPTION>
PROSPECTUS
PAGE
---------
<S> <C>
Prospectus Supplement.................... 3
Available Information.................... 3
Reports to Securityholders............... 4
Incorporation of Certain Documents by
Reference.............................. 4
Summary of Terms......................... 5
Risk Factors............................. 21
The Trusts............................... 26
Use of Proceeds.......................... 32
The Representative and the Originators... 32
The SBA Loan Lending Program............. 32
Description of the Securities............ 40
Credit Enhancement....................... 47
Maturity, Prepayment and Yield
Considerations......................... 52
The Agreements........................... 54
Certain Legal Aspects of the SBA Loans... 66
Federal Income Tax Consequences.......... 71
ERISA Considerations..................... 97
Legal Investment Considerations.......... 99
Plan of Distribution..................... 100
Legal Matters............................ 101
Financial Information.................... 101
Rating................................... 101
Index of Principal Terms................. 102
</TABLE>
(ii)
<PAGE>
SUMMARY
- - This summary highlights selected information from this prospectus supplement
and does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of the
offering of the offered certificates, you should carefully read this entire
prospectus supplement and the accompanying prospectus.
- - This summary provides an overview of certain information to aid your
understanding and is qualified by the full description of this other
information in this prospectus supplement and the accompanying prospectus.
PRINCIPAL PARTIES
THE TRUST
- - The Money Store SBA
Loan-Backed Trust 1999-1
SELLERS AND SERVICERS
- - The Money Store Investment Corporation
- - The Money Store of New York, Inc.
REPRESENTATIVE
- - The Money Store Inc.
TRUSTEE
- - HSBC Bank USA (f/k/a Marine Midland Bank)
CUSTODIAN
- - Colson Services Corp.
SPREAD ACCOUNT DEPOSITOR
- - TMS SBA Holdings, Inc.
LETTER OF CREDIT PROVIDER
- - First Union National Bank
DATES
CUT-OFF DATE
February 28, 1999. The trust will receive payments made on the unguaranteed
interests in the SBA loans after this date.
CLOSING DATE
March 31, 1999
REMITTANCE DATES
The 15(th) day of each month, or if such day is not a business day, the next
business day, beginning in April 1999.
RECORD DATES
The last day of the calendar month immediately preceding a remittance date.
FINAL SCHEDULED REMITTANCE DATE
July 15, 2025.
DESCRIPTION OF THE SECURITIES
CLASSES
The trust is offering the following classes of The Money Store SBA Loan-Backed
Adjustable Rate Certificates Series 1999-1 pursuant to this prospectus
supplement and the accompanying prospectus:
- - Class A certificates in the aggregate principal amount of $94,012,000; and
- - Class M certificates in the aggregate principal amount of $2,888,000.
The trust also will issue Class B certificates in the aggregate principal amount
of approximately $4,189,247. The Class B certificates are not being offered to
the public. They will be retained by a subsidiary of ours.
DENOMINATIONS
The offered certificates will be issued in book-entry form in minimum
denominations of $1,000 and in multiples of $1,000 in excess thereof.
You may hold your offered certificates through The Depository Trust Company,
Cedelbank, societe anonyme or the Euroclear System.
S-1
<PAGE>
INTEREST
- - INTEREST ACCRUAL PERIOD--The period beginning on the 15(th) day of the month
preceding a remittance date and ending on the 14(th) day of the month of such
remittance date.
- - INTEREST CALCULATIONS--30/360
- - INTEREST RATES--The interest rate on each class of certificates will adjust
every three months based on the prime lending rate published in the Money Rate
Section of THE WALL STREET JOURNAL on the applicable reference dates. Subject
to certain adjustments, the interest rate for each class of offered
certificates will equal the rate set forth below:
<TABLE>
<CAPTION>
CLASS INTEREST RATE
- --------- ----------------------------------------------
<S> <C>
A Prime minus 2.20%
M Prime minus 1.68%
</TABLE>
Please see "Description of the Agreement and the Certificates--Interest
Distribution Amounts" in this prospectus supplement for a complete description
of how the interest rate for each class of certificates is calculated and the
adjustments that may be made for each remittance date.
PRINCIPAL
On each remittance date, each class of certificates will be entitled to receive
its respective percentage interest of the unguaranteed interest of all principal
payments. However (x) the Class M certificates will not receive any principal
until the Class A certificates receive all the principal they are entitled to
receive on a remittance date and (y) the Class B certificates will not receive
any principal until the Class A and Class M certificates receive all the
principal they are entitled to receive on a remittance date.
Principal payments on the certificates will be made from:
1. principal collections received on the unguaranteed interests in the SBA
loans;
2. excess interest received on the SBA loans;
3. amounts in the spread account; and
4. draws on the letter of credit.
The percentage interest for each class of certificates will be as follows:
Class A: 93.00%
Class M: 2.86%
Class B: 4.14%
Please see "Description of the Agreement and the Certificates--Class Principal
Distribution Amounts" in this prospectus supplement for a complete description
of the amount of principal payable on each remittance date.
PRIORITY OF PAYMENTS
On each remittance date amounts available to make distributions on the
certificates will be applied in the following order of priority:
1. interest to the Class A certificates;
2. interest to the Class M certificates;
3. interest to the Class B certificates;
4. principal to the Class A certificates;
5. principal to the Class M certificates;
6. principal to the Class B certificates;
7. fees owed to the trustee;
8. reimbursements to the servicer;
9. deposits into the spread account until the amount then on deposit equals
certain specified levels; and
10. any remainder to the spread account depositor.
ADVANCES
The servicer will make cash advances with respect to delinquent payments of
interest (but not principal) on the SBA loans unless the servicer determines
that such advance would not be recovered from future payments on the SBA loans.
These advances are only intended to maintain a regular flow of scheduled
interest payments on the certificates and are not intended to guarantee or
insure against losses.
S-2
<PAGE>
COMPENSATING INTEREST
If an SBA loan prepays in full or, in certain instances, in part, the servicer
will pay a portion of its servicing fee to the trust so that certificateholders
receive a full month's interest on such SBA loan.
PRE-FUNDING ACCOUNT
On the closing date we will deposit approximately $16,946,639 into a pre-funding
account. We will use these funds over the next three months to acquire the
unguaranteed interests in additional SBA loans that meet certain criteria. We
will distribute to the certificateholders any amounts remaining in the
pre-funding account that are not used to acquire unguaranteed interests in
additional SBA loans. Please see "Description of the Agreement and the
Certificates--Pre-Funding Account" in the prospectus supplement for a more
detailed description of the pre-funding account.
DESCRIPTION OF SBA LOANS
GENERAL
The trust will include the unguaranteed interests in the SBA loans. Although a
portion of each SBA loan is guaranteed by the United States Small Business
Administration, this portion has been sold previously. THEREFORE, EXCEPT FOR
CERTAIN INTEREST PAYMENTS, THE PORTION OF THE SBA LOANS INCLUDED IN THE TRUST IS
NOT GUARANTEED BY THE UNITED STATES SMALL BUSINESS ADMINISTRATION OR ANY OTHER
PERSON OR ENTITY.
Each payment of principal on an SBA loan received by a servicer will be
allocated between the trust and the holder of the guaranteed interest pro rata,
based upon the unguaranteed and the guaranteed percentages. For each SBA loan,
these percentages are determined when the loan is originated and they do not
change during the life of such loan. However, these percentages vary from loan
to loan based upon several factors.
Similarly, losses realized on an SBA loan will be allocated between the trust
and the holder of the guaranteed interest pro rata based upon the unguaranteed
and guaranteed percentages.
Each payment of interest on an SBA Loan received by a servicer also will be
allocated based upon the unguaranteed and guaranteed percentages. However, the
interest paid on the guaranteed portion of each SBA loan exceeds the interest
owed to the holder of the guaranteed interest. This excess, less certain fees
and expenses, will belong to the trust and be available for credit support. See
"Description of the Agreement and the Certificates-Class Interest Distribution
Amounts" in this Prospectus Supplement.
CHARACTERISTICS OF THE SBA LOANS
The SBA loans that will be deposited into the trust on the closing date had the
following characteristics as of the close of business on the cut-off date:
Number of SBA Loans: 558
Aggregate unguaranteed
interests: $84,142,607.25
Range of unguaranteed
interests: $1,375.22 -- $1,249,161.39
Average unguaranteed
interest: $150,793.20
Range of current
interest rates: 8.25% -- 11.00%
Weighted average
interest rate: 9.73%
Weighted average
LTV: 105.15%
Weighted average
original term to
maturity (months): 229.65
Range of remaining
amortization term
(months): 26 -- 300
Weighted average
remaining
amortization
term (months): 223.44
Range of gross
margins: 0.50%--2.75%
S-3
<PAGE>
Weighted average
gross margin: 1.97%
Range of debt service coverage
ratios: 0.00 -- 7.57
Weighted average
debt service coverage ratios: 1.41
CREDIT ENHANCEMENT
The credit enhancement for the offered certificates will consist primarily of
the following:
- - Subordination;
- - Excess interest;
- - Spread account; and
- - Letter of credit
SUBORDINATION
Payments on the Class B certificates will be subordinate to payments on the
Class A and Class M certificates, and payments on the Class M certificates will
be subordinate to payments on the Class A certificates. This subordination will
be effected through the priority of payments described under "Description of the
Agreement and the Certificates--Flow of Funds" in this prospectus supplement.
EXCESS INTEREST
The interest due on each SBA loan exceeds the sum of (1) the interest due on the
certificates, (2) the interest due the holder of the guaranteed interest and (3)
fees and expenses payable to the servicer, the trustee and the custodian. This
excess interest will be available each month to offset the unguaranteed
percentage of losses realized on the SBA loans. Any remaining excess interest
will be transferred to the spread account until the spread account reaches
certain predetermined levels.
SPREAD ACCOUNT
On each remittance date the trustee will deposit into a spread account the cash,
if any, remaining after payment of interest and principal to the holders of the
certificates and payment of certain fees and expenses until the spread account
reaches the sum of:
1. the outstanding principal balance of the unguaranteed interests of all SBA
loans 180 or more days delinquent; and
2. 2.0% of the aggregate principal balance of the SBA loans on the cut-off
date.
However, the amount required to be in the spread account will never exceed the
then-outstanding principal balance of the certificates. Also, adjustments may be
made to the above requirement under the circumstances described in "Description
of the Agreement and the Certificates--Spread Account" in this prospectus
supplement.
LETTER OF CREDIT
First Union National Bank will issue a letter of credit for the benefit of the
certificateholders. The amount available under the letter of credit will vary,
but it will never exceed 18% of the then outstanding aggregate principal balance
of all classes of certificates. Each month, if there is not enough money to pay
the certificateholders all amounts they are owed, we first will transfer funds
from the spread account to make-up this insufficiency. If more funds are needed,
we will draw upon the letter of credit an amount equal to the lesser of:
1. the amount of the shortfall; and
2. the amount available under the letter of credit.
See "Description of the Agreement and the Certificates--Letter of Credit" in
this prospectus supplement for a more complete description of the letter of
credit and the amounts that will be available.
OPTIONAL TERMINATION
The servicer may, at its option, terminate the trust on any date on which the
then-outstanding aggregate principal balance of the unguaranteed interests in
the SBA loans is less than 10% of the sum of (1) the aggregate principal balance
of the unguaranteed interests in the initial SBA loans as of the cut-off date
and (2) the original amount deposited into the pre-funding account by
S-4
<PAGE>
purchasing, on the next succeeding remittance date, all of the unguaranteed
interests and any other assets in the trust at a price equal to the sum of (1)
100% of the then outstanding principal balances of the certificates, and (2) 30
days' interest thereon at the then-applicable remittance rates. See "Description
of the Agreement and the Certificates--Termination; Purchase of SBA Loans" in
this prospectus supplement.
TAX CONSIDERATIONS
No real estate mortgage investment conduit election will be made for the trust.
Stroock & Stroock & Lavan LLP, special Federal tax counsel, will give its
opinion that the trust will be classified as a "grantor trust" for federal
income tax purposes. See "Federal Income Tax Consequences" herein and "Federal
Income Tax Consequences" in the Prospectus.
It is not anticipated that the certificates will be treated as issued with
original issue discount.
Special considerations may apply to cash method holders of Class M certificates
by reason of the subordination of the Class M certificates. Also, special
considerations may apply to individuals and certain pass-through entities that
hold Class A certificates or Class M certificates. See "Risk Factors--Federal
Income Tax Considerations for Class M Certificateholders" and "Federal Income
Tax Consequences" herein and "Federal Income Tax Consequences" in the
Prospectus.
ERISA CONSIDERATIONS
No certificates may be purchased for, or on behalf of, any employee benefit plan
or other retirement arrangement which is subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended, and/or Section 4975 of the
Internal Revenue Code of 1986, as amended, or any entity whose underlying assets
include plan assets by reason of such plan or account investing in such entity
(including insurance company separate or general accounts and collective
investment funds). By its acceptance of a certificate, each certificateholder
will be deemed to have represented and warranted that it is not subject to the
foregoing limitations. See "ERISA Considerations" herein and in the prospectus.
LEGAL INVESTMENT
The certificates will NOT be mortgage related securities for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
RATINGS
The offered certificates will not be issued unless they receive the following
ratings from Moody's Investors Service, Inc. ("Moody's") and Duff & Phelps
Credit Rating Co. ("DCR").
<TABLE>
<CAPTION>
CLASS MOODY'S DCR
- --------- ---------- ---------
<S> <C> <C>
A Aaa AAA
M A2 A
</TABLE>
S-5
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase any class of offered certificates unless you
understand the prepayment, credit, liquidity and market risks associated with
that class.
An investment in the offered certificates involves significant risks. Before
you decide to invest, you should consider carefully the following risk factors
and the risk factors discussed under the heading "Risk Factors" in the
prospectus.
<TABLE>
<S> <C>
YOU MAY HAVE DIFFICULTY SELLING We will not list the offered certificates on any
YOUR CERTIFICATES securities exchange. As a result, if you want to sell
your certificates you must locate a purchaser that is
willing to purchase those certificates. The underwriters
intend to make a secondary market for the offered
certificates. The underwriters will do so by offering to
buy the offered certificates from investors that wish to
sell. However, the underwriters will not be obligated to
make offers to buy the offered certificates and may stop
making offers at any time. In addition, the prices
offered, if any, may not reflect prices that other
potential purchasers would be willing to pay, were they
to be given the opportunity. There have been times in
the past where there have been very few buyers of asset
backed securities (i.e., there has been a lack of
liquidity), and there may be such times in the future.
As a result, you may not be able to sell your
certificates when you want to do so or you may not be
able to obtain the price that you wish to receive.
THE TRUST HAS LIMITED ASSETS TO The unguaranteed interests in the SBA loans, the spread
MAKE PAYMENTS ON YOUR account and the letter of credit will be the sole
CERTIFICATES sources of payment for the certificates. Monies to be
deposited in the spread account and the amount available
under the letter of credit are limited and will be
reduced, subject to a specified minimum, as the
aggregate principal amount of the certificates is
reduced. If the spread account and the letter of credit
are exhausted, the trust will depend solely on payments
with respect to the unguaranteed interests in the SBA
loans to make payments on the certificates and you could
suffer a loss.
RISKS RELATING TO COLLATERAL OF PRINCIPAL BALANCE OF SBA LOAN MAY EXCEED VALUE OF
SBA LOANS COLLATERAL. Many of the SBA loans are secured primarily
by liens on machinery and equipment and other business
assets. The market value for this type of collateral
generally declines with age or obsolescence.
Accordingly, if any such SBA loan defaults, the net
proceeds from the sale of the collateral may be
significantly less than the outstanding amount of the
SBA loan. The unguaranteed portion of any such shortfall
will be allocated to the trust.
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
TRUSTEE MAY HAVE AN UNPERFECTED SECURITY INTEREST IN
COLLATERAL. In originating SBA loans secured by
collateral other than real estate, we obtain and file
financing statements where such action is necessary to
perfect a security interest in such collateral. Because
of the administrative burden and expense that would be
entailed in so doing, we will not assign these financing
statements to the trustee. Therefore, if we become
debtors under the federal bankruptcy code or similar
applicable state laws, a creditor or trustee in
bankruptcy might be able to defeat the trustee's
security interest in such collateral.
DEFAULTS ON JUNIOR LIENS MAY RESULT IN MORE SEVERE
LOSSES. Many of the SBA loans are secured by junior
liens on the related collateral. If a borrower on such a
loan defaults, the trust's right to liquidation proceeds
are subordinate to the rights of the holders of the
prior liens. There may be insufficient proceeds to pay
the holders of the prior liens and the trust.
RISK OF GEOGRAPHIC CONCENTRATION Approximately 20.84%, 9.03%, 7.40% and 5.43% of the SBA
loans (by cut-off date principal balance) were
originated to businesses located in the states of
California, Florida, Arizona and Texas, respectively.
These states may suffer economic problems to a greater
degree than other states. This may lead to higher levels
of delinquencies and losses than would be the case if
the pool of SBA loans were more geographically
diversified. In addition, California is more likely to
experience natural disasters, such as earthquakes and
floods, than are other parts of the country.
RISK OF ADJUSTMENT TO CERTIFICATE Each month the certificates will receive all interest
INTEREST RATES collected on the SBA loans during the preceding month
less:
- interest payable to the holder of the guaranteed
interest;
- fees payable to the servicer, the trustee and other
parties; and
- a fixed percentage (which will vary from loan to loan)
that will be used for credit support.
For each SBA loan, the fixed percentage was determined
so that the interest rate on each class of certificates
for the first remittance date equals the prime rate
minus the applicable margin. However, due to the way the
interest rates adjust on the SBA loans, the actual
interest you receive on subsequent remittance dates may
be more or less than interest calculated at the prime
rate less your margin. Please see "Description of the
Agreement and the Certificates" in this prospectus
supplement for a discussion of the adjustments that will
be made each month to the amount of interest you will
receive.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
THE CLASS M CERTIFICATES HAVE A If the trust has insufficient funds to make all required
GREATER RISK OF LOSS THAN THE distributions, the Class A certificates will receive
CLASS A CERTIFICATES full interest payments prior to the Class M
certificates. Also, if each class of certificate
receives its full interest payment, the Class A
certificates will receive full principal payments prior
to the Class M certificates. Losses will be borne first
by the Class B certificates, then by the Class M
certificates and, finally, by the Class A certificates.
FEDERAL INCOME TAX CONSIDERATIONS Due to the payment priorities of the certificates, in
FOR CLASS M CERTIFICATES any month the Class M certificates may receive less than
their percentage interest of the payments being
distributed. For federal income tax purposes, the Class
M certificates may be treated as if they had received
their full percentage interest in such distributions and
paid over a portion to the Class A certificates. Under
this analysis, holders of Class M certificates may be
deemed to have taxable income on this portion even
though the cash is paid over to the Class A
certificates. Please see "Federal Income Tax
Consequences--Effect of Subordination" in this
prospectus supplement for a more detailed discussion.
RISK OF COMPUTER PROBLEMS IN THE As is the case with most companies using computers in
YEAR 2000 their operations, we are faced with the task of
completing our compliance goals in connection with the
year 2000 issue. The year 2000 issue is the result of
prior computer programs being written using two digits,
rather than four digits, to define the applicable year.
Any of our computer programs that have time-sensitive
software may recognize a date using "00" as the year
1900 rather than the year 2000. Any such occurrence
could result in major computer system failures or
miscalculations. We are presently engaged in various
procedures to ensure that our computer systems and
software will be year 2000 compliant. However, if we, or
any of our suppliers, customers, brokers or agents, do
not successfully and timely achieve year 2000
compliance, the performance of our obligations under the
pooling and servicing agreement could be materially
adversely affected.
</TABLE>
S-8
<PAGE>
THE SBA LOAN POOL
GENERAL
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are approximations and are measured by the aggregate principal
balances of loans made to small business concerns pursuant to Section 7(a) of
the Small Business Act, as amended, and Title 13 of the Code of Federal
Regulations, as amended (referred to herein as either the "SBA Section 7(a)
Loans" or the "SBA Loans") in a preliminary pool of SBA Section 7(a) Loans
expected to be delivered to HSBC Bank USA (f/k/a Marine Midland Bank) (the
"Trustee") on March 31, 1999 (the "Closing Date"), and the Unguaranteed
Interests or the Guaranteed Interests therein (both as defined below), as the
case may be, at the close of business on the Cut-Off Date and all dollar amounts
are based on the principal balances thereof at the close of business on the
Cut-Off Date. While the statistical distribution of the characteristics of the
actual pool of SBA Section 7(a) Loans (the "SBA Loan Pool") delivered on the
Closing Date may vary somewhat from the statistical distribution of such
characteristics for the preliminary pool presented in this Prospectus
Supplement, The Money Store Inc. (the "Representative") does not believe that
the characteristics of the pool of SBA Loans delivered on the Closing Date will
differ materially. As used herein, the term "Cut-Off Date" means February 28,
1999 with respect to each SBA Section 7(a) Loan originated on or prior to such
date and the applicable date of origination for each SBA Section 7(a) originated
after such date. All of the SBA Loans were originated or acquired by The Money
Store Investment Corporation ("TMSIC" or the "Servicer") and The Money Store of
New York, Inc. ("MSNY" and collectively with TMSIC, the "Sellers") and consist
of adjustable-rate loans, evidenced by promissory notes (the "SBA Notes") and
partially guaranteed by The United States Small Business Administration (the
"SBA"). The principal portion of the Unguaranteed Interests of the SBA Section
7(a) Loans in the preliminary pool aggregated approximately $84,142,607.25 as of
the Cut-Off Date.
Historically, most of the SBA Section 7(a) Loans originated by the Sellers
were loans primarily secured by first liens on commercial real property used by
the related borrower or its affiliates in the conduct of their business.
Commencing in 1995, the Sellers increased their focus on originating loans to
targeted franchisees, health care professionals and other professionals, such as
attorneys and accountants, and for financing business acquisitions. These loans
generally are secured by second liens on personal real estate, personal
guarantees, liens on machinery and equipment and other business assets. The
Sellers believe that this approach is consistent with their philosophy of
expanding into selected markets that present opportunities for growth. In
originating these loans, the Sellers concentrate on analyzing the underlying
business and the borrower's ability to repay the related loan. The Sellers
believe that at the time of origination each such loan is adequately secured by
one or more items of Collateral. See "The SBA Loan Lending Program--Underwriting
Criteria for SBA Section 7(a) Loans" in the Prospectus.
As to any SBA Section 7(a) Loan, the right to receive the guaranteed portion
of the principal balance thereof together with interest thereon at a per annum
rate in effect from time to time (which rate is less than the rate paid by the
obligor on the related SBA Section 7(a) Loan (the "Obligor") and the fee (the
"FTA's Fee") payable to the SBA's fiscal and transfer agent (the "FTA")) is
referred to herein as the "Guaranteed Interest." With respect to SBA Section
7(a) Loans for which the Guaranteed Interest was sold in the secondary market on
or after September 1, 1993 (unless the related SBA Section 7(a) Loan was
approved by the SBA on or after October 12, 1995) and SBA Section 7(a) Loans
approved by the SBA on or after October 12, 1995, regardless of whether they
were sold in the secondary market (collectively, the "Additional Fee SBA
Loans"), a fee equal to 40 basis points and 50 basis points, respectively, per
annum on the outstanding balance of the Guaranteed Interest of such Additional
Fee SBA Loans (the "Additional Fee") is required to be paid by the related
Seller to the SBA. Although the Additional Fee is the responsibility of the
related Seller, the Additional Fee will be funded from the interest received by
the related Obligor on the SBA Section 7(a) Loans. Accordingly, any such
Additional Fee will reduce the Excess Spread (as defined herein) on the related
SBA Loan. The Guaranteed Interest varies from SBA
S-9
<PAGE>
Section 7(a) Loan to SBA Section 7(a) Loan, is not included in the trust fund
(the "Trust Fund") and Certificateholders have no right or interest therein. As
described herein, the portion of the principal guaranteed by the SBA for each
SBA Section 7(a) Loan varies depending upon the program under which such SBA
Section 7(a) Loan was originated. However, the SBA imposes a maximum per
borrower guaranty of $750,000. See "The SBA Loan Program-Section 7(a) Loan
Parameters."
Pursuant to policies of the SBA, the Servicer is required to retain for each
SBA Section 7(a) Loan an amount equal to 0.60% per annum on the outstanding
balance of the related Guaranteed Interest (such amount is referred to herein as
the "Premium Protection Fee" for the related SBA Section 7(a) Loan). The Premium
Protection Fee is not included in the Trust Fund and Certificateholders have no
right or interest therein.
The "Unguaranteed Interest" will equal all payments and other recoveries on
such SBA Section 7(a) Loan not constituting the Guaranteed Interest or the
Premium Protection Fee therein. As stated above, the interest accrued on the
guaranteed portion of the principal balance of each SBA Section 7(a) Loan
exceeds the sum of the interest payable to the holder of the Guaranteed
Interest, the FTA's Fee, the Premium Protection Fee, the Servicing Fee and with
respect to the Additional Fee SBA Loans, the Additional Fee attributable to the
Guaranteed Interest. Such excess (the "Excess Spread"), which is paid by the SBA
for up to 120 days of accrued interest (at a rate up to the applicable SBA Loan
Interest Rate less 1.00%), is included in the Unguaranteed Interest and will be
available to pay interest and principal on the Certificates and the Servicing
Fee to the Servicer, and to fund the reserve account (the "Spread Account")
established by TMS SBA Holdings, Inc. (the "Spread Account Depositor").
The "Unguaranteed Percentage" for each SBA Section 7(a) Loan will equal the
fraction, expressed as a percentage, the numerator of which is the principal
portion of the Unguaranteed Interest as of the Cut-Off Date and the denominator
of which is the sum of the principal portion of the Unguaranteed Interest and
the principal portion of the Guaranteed Interest of such SBA Section 7(a) Loan
as of the Cut-Off Date. The Unguaranteed Percentage for any given loan will not
change over time.
PAYMENTS ON THE SBA LOANS
The SBA Loans have payments of principal and interest due on the first day
of the month with interest payable in arrears at a rate equal to the lowest
prime lending rate as published in the Money Rate Section of THE WALL STREET
JOURNAL (the "Prime Rate") on the first business day of the related calendar
quarter, plus the appropriate margin (subject to applicable lifetime floors and
caps). For example, the Prime Rate on July 1st is used to determine the interest
rate paid for the months of July, August and September. Since interest is paid
in arrears, interest and principal for these months is scheduled to be received
in August, September and October, respectively. The Monthly Payment received is
apportioned between interest and principal based upon a "simple interest" basis,
which means that payments are applied as they are received first to accrued
interest, then to principal, with interest calculated on the number of days
between the current and previous payments. If a monthly payment is received
prior to its Due Date, less of such payment will be allocated to interest than
would be the case if such payment were received on its Due Date. Conversely, if
a Monthly Payment is received after its Due Date, more of such payment will be
allocated to interest than would be the case if such payment were received on
its Due Date. None of the SBA Loans is a balloon loan and each is fully
amortizing in accordance with its terms. However, the Monthly Payments are
re-calculated each quarter to reflect changes in interest rates, the
then-current principal balance and the then-remaining term to maturity.
S-10
<PAGE>
CERTAIN CHARACTERISTICS OF THE SBA LOAN POOL
Set forth in the following pages is a description of certain characteristics
of the preliminary pool of SBA Section 7(a) Loans expected to constitute the SBA
Loan Pool as of the Closing Date. It is expected that the Sellers will sell to
the Trust Fund on the Closing Date and during the Funding Period SBA Section
7(a) Loans having overall characteristics substantially similar to the SBA
Section 7(a) Loans described herein. The "Funding Period" is the period from the
Closing Date until the earliest of (i) the date on which the amount on deposit
in the Pre-Funding Account is less than $100,000, (ii) the date on which an
Event of Default occurs under the Pooling and Servicing Agreement (the
"Agreement") or (iii) the close of business on June 25, 1999. Certain of the
percentage columns may not sum to 100.00% due to rounding.
S-11
<PAGE>
The geographic distribution of the SBA Section 7(a) Loans by state as of the
Cut-Off Date was as follows:
GEOGRAPHICAL DISTRIBUTION OF BUSINESSES
<TABLE>
<CAPTION>
AGGREGATE
CURRENT PERCENTAGE OF
UNGUARANTEED CUT-OFF DATE
NUMBER OF PRINCIPAL CURRENT UNGUARANTEED PERCENTAGE OF
STATE LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------- ------------- ---------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
AK.......................................... 1 $ 946,178.78 1.12% 0.18%
AL.......................................... 9 731,354.96 0.87 1.61
AR.......................................... 2 400,623.92 0.48 0.36
AZ.......................................... 42 6,228,417.21 7.40 7.53
CA.......................................... 107 17,531,537.95 20.84 19.18
CO.......................................... 27 4,258,936.95 5.06 4.84
CT.......................................... 9 579,393.30 0.69 1.61
DC.......................................... 1 36,740.53 0.04 0.18
DE.......................................... 1 132,428.99 0.16 0.18
FL.......................................... 43 7,601,294.28 9.03 7.71
GA.......................................... 9 1,455,585.23 1.73 1.61
IA.......................................... 1 37,185.94 0.04 0.18
ID.......................................... 6 596,304.56 0.71 1.08
IL.......................................... 14 1,188,424.54 1.41 2.51
IN.......................................... 9 1,548,552.83 1.84 1.61
KS.......................................... 3 166,838.79 0.20 0.54
KY.......................................... 13 2,558,874.49 3.04 2.33
LA.......................................... 2 429,842.94 0.51 0.36
MA.......................................... 17 1,288,141.13 1.53 3.05
MD.......................................... 12 2,313,583.29 2.75 2.15
MI.......................................... 14 1,690,435.91 2.01 2.51
MN.......................................... 2 96,326.61 0.11 0.36
MO.......................................... 6 882,436.16 1.05 1.08
MS.......................................... 1 562,065.80 0.67 0.18
MT.......................................... 3 280,652.44 0.33 0.54
NC.......................................... 21 4,017,865.56 4.78 3.76
NE.......................................... 2 133,973.95 0.16 0.36
NH.......................................... 1 144,753.91 0.17 0.18
NJ.......................................... 19 1,604,540.53 1.91 3.41
NM.......................................... 8 954,247.80 1.13 1.43
NV.......................................... 1 145,351.37 0.17 0.18
NY.......................................... 10 475,824.90 0.57 1.79
OH.......................................... 16 4,037,997.41 4.80 2.87
OK.......................................... 9 814,444.80 0.97 1.61
OR.......................................... 7 2,097,955.63 2.49 1.25
PA.......................................... 22 3,562,237.38 4.23 3.94
RI.......................................... 3 199,587.25 0.24 0.54
SC.......................................... 9 1,425,534.60 1.69 1.61
TN.......................................... 3 1,290,862.77 1.53 0.54
TX.......................................... 36 4,565,644.78 5.43 6.45
UT.......................................... 1 78,750.00 0.09 0.18
VA.......................................... 18 2,825,984.07 3.36 3.23
VT.......................................... 2 270,519.89 0.32 0.36
WA.......................................... 9 1,181,458.16 1.40 1.61
WI.......................................... 5 683,720.66 0.81 0.90
WV.......................................... 1 59,594.01 0.07 0.18
WY.......................................... 1 29,600.29 0.04 0.18
--- ---------------- ------ ------
TOTAL:...................................... 558 $84,142,607.25 100.00% 100.00%
</TABLE>
S-12
<PAGE>
The interest rates borne by the SBA Notes (the "Note Rates") were
distributed as of the Cut-Off Date as follows:
NOTE INTEREST RATE RANGE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
INTEREST RATE LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
8.001%-8.500%.................................... 2 $ 14,641.17 0.02% 0.36%
8.501-9.000...................................... 11 3,479,917.00 4.14 1.97
9.001-9.500...................................... 146 32,354,396.19 38.45 26.16
9.501-10.000..................................... 245 34,010,686.11 40.42 43.91
10.001-10.500..................................... 153 14,184,466.78 16.86 27.42
10.501-11.000..................................... 1 98,500.00 0.12 0.18
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
The margins added to the Prime Rate on each Interest Adjustment Date to
determine the new Note Rates were distributed as of the Cut-Off Date as follows:
DISTRIBUTION OF MARGINS
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
GROSS MARGIN LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
0.001%-0.500%..................................... 2 $ 14,641.17 0.02% 0.36%
0.501-1.000....................................... 2 733,869.45 0.87 0.36
1.001-1.500....................................... 87 21,169,232.19 25.16 15.59
1.501-2.000....................................... 236 39,473,842.16 46.91 42.29
2.001-2.500....................................... 158 18,376,522.04 21.84 28.32
2.501-2.750....................................... 73 4,374,500.24 5.20 13.08
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
The minimum lifetime Note Rates borne by the SBA Section 7(a) Loans were as
follows:
LOAN SUMMARY STRATIFIED BY LIFE FLOOR
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
LIFETIME FLOOR LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
None (1).......................................... 447 $ 61,220,569.85 72.76% 80.11%
3.501%-4.000%..................................... 1 717,994.94 0.85 0.18
4.001-4.500....................................... 3 1,395,959.29 1.66 0.54
4.501-5.000....................................... 20 5,017,664.25 5.96 3.58
5.001-5.500....................................... 66 13,032,933.79 15.49 11.83
5.501-6.000....................................... 18 2,559,757.24 3.04 3.23
6.001-6.500....................................... 3 197,727.89 0.23 0.54
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
- ------------------------
(1) Loans without stated life floors have the applicable margin as a floor.
S-13
<PAGE>
The maximum lifetime Note Rates borne by the SBA Section 7(a) Loans were as
follows:
LOAN SUMMARY STRATIFIED BY LIFE CAP
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
LIFETIME CAP LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
Capless Loans..................................... 447 $ 61,220,569.85 72.76% 80.11%
13.501%-14.000%................................... 1 717,994.94 0.85 0.18
14.001-14.500..................................... 8 1,820,301.70 2.16 1.43
14.501-15.000..................................... 29 5,961,534.28 7.09 5.20
15.001-15.500..................................... 48 10,157,791.56 12.07 8.60
15.501-16.000..................................... 23 4,092,273.01 4.86 4.12
16.001-16.500..................................... 2 172,141.91 0.20 0.36
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
The distribution of the number of remaining months to maturity of the SBA
Section 7(a) Loans as of the Cut-Off Date was as follows:
REMAINING MONTHS TO STATED MATURITY
(IN MONTHS)
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
REMAINING TERM (IN MONTHS) LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
25-36............................................. 1 $ 1,375.22 0.00% 0.18%
61-72............................................. 1 15,874.51 0.02 0.18
73-84............................................. 9 306,087.93 0.36 1.61
85-96............................................. 9 568,797.40 0.68 1.61
97-108............................................ 11 524,781.01 0.62 1.97
109-120........................................... 191 16,193,443.57 19.25 34.23
121-132........................................... 3 148,692.77 0.18 0.54
133-144........................................... 7 565,486.38 0.67 1.25
145-156........................................... 4 283,218.91 0.34 0.72
157-168........................................... 8 1,088,668.58 1.29 1.43
169-180........................................... 10 1,152,367.55 1.37 1.79
181-192........................................... 13 3,632,110.44 4.32 2.33
193-204........................................... 5 673,384.60 0.80 0.90
205-216........................................... 8 987,122.91 1.17 1.43
217-228........................................... 11 3,018,738.00 3.59 1.97
229-240........................................... 34 5,993,005.37 7.12 6.09
241-252........................................... 18 3,350,529.88 3.98 3.23
253-264........................................... 20 3,453,269.83 4.10 3.58
265-276........................................... 25 6,609,474.69 7.86 4.48
277-288........................................... 31 9,834,658.12 11.69 5.56
289-300........................................... 139 25,741,519.58 30.59 24.91
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
S-14
<PAGE>
The distribution of the number of months since origination of the SBA
Section 7(a) Loans as of the Cut-Off Date was as follows:
AGE OF LOAN
(IN MONTHS)
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
AGE (IN MONTHS) LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
Less than 1....................................... 10 $ 2,147,461.52 2.55% 1.79%
1-12.............................................. 535 81,342,252.07 96.67 95.88
13-24............................................. 2 311,704.35 0.37 0.36
37-48............................................. 1 13,968.07 0.02 0.18
97-108............................................ 1 119,276.02 0.14 0.18
109-120........................................... 1 76,031.30 0.09 0.18
121-132........................................... 1 34,132.65 0.04 0.18
157-168........................................... 1 16,336.73 0.02 0.18
169-180........................................... 1 17,259.11 0.02 0.18
181-192........................................... 2 33,669.75 0.04 0.36
193-204........................................... 2 29,140.46 0.03 0.36
205-216........................................... 1 1,375.22 0.00 0.18
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
The years in which the SBA Section 7(a) Loans were originated were as
follows:
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
YEAR OF ORIGINATION LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
1981.............................................. 1 $ 1,375.22 0.00% 0.18%
1982.............................................. 2 29,140.46 0.03 0.36
1983.............................................. 2 33,669.75 0.04 0.36
1984.............................................. 1 17,259.11 0.02 0.18
1985.............................................. 1 16,336.73 0.02 0.18
1988.............................................. 1 34,132.65 0.04 0.18
1989.............................................. 1 76,031.30 0.09 0.18
1990.............................................. 1 119,276.02 0.14 0.18
1995.............................................. 1 13,968.07 0.02 0.18
1997.............................................. 1 123,548.19 0.15 0.18
1998.............................................. 529 80,601,240.48 95.79 94.80
1999.............................................. 17 3,076,629.27 3.66 3.05
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
S-15
<PAGE>
The Unguaranteed Percentages of the SBA Section 7(a) Loans as of the Cut-Off
Date were as follows:
UNGUARANTEED LOAN PERCENTAGE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
UNGUARANTEED PERCENTAGE LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
5.01%-10.00%...................................... 7 $ 97,781.27 0.12% 1.25%
10.01-15.00....................................... 2 110,163.95 0.13 0.36
15.01-20.00....................................... 13 334,193.82 0.40 2.33
20.01-25.00....................................... 462 42,755,871.18 50.81 82.80
25.01-30.00....................................... 14 3,736,367.67 4.44 2.51
30.01-35.00....................................... 10 3,598,598.73 4.28 1.79
35.01-40.00....................................... 12 5,041,176.17 5.99 2.15
40.01-45.00....................................... 12 6,544,439.19 7.78 2.15
45.01-50.00....................................... 7 4,110,837.50 4.89 1.25
50.01-55.00....................................... 7 5,523,939.44 6.56 1.25
55.01-60.00....................................... 7 6,247,296.79 7.42 1.25
60.01-65.00....................................... 5 6,041,941.54 7.18 0.90
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
The distribution of the debt-service coverage ratios at origination of the
SBA Section 7(a) Loans was as follows:(1)
DEBT SERVICE COVERAGE RATIO
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
DEBT SERVICE COVER RATIO LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
0.0 (2)........................................... 43 $ 5,391,584.41 6.41% 7.71%
0.01-0.50......................................... 39 9,461,024.36 11.24 6.99
0.51-1.00......................................... 46 7,281,684.38 8.65 8.24
1.01-1.50......................................... 238 40,215,797.02 47.79 42.65
1.51-2.00......................................... 101 12,352,930.84 14.68 18.10
2.01-2.50......................................... 52 6,745,910.06 8.02 9.32
2.51-3.00......................................... 13 1,082,236.55 1.29 2.33
3.01-3.50......................................... 12 796,189.09 0.95 2.15
3.51-4.00......................................... 5 287,463.73 0.34 0.90
4.01-4.50......................................... 3 129,744.15 0.15 0.54
4.51-5.00......................................... 1 33,279.36 0.04 0.18
5.01-5.50......................................... 2 212,134.31 0.25 0.36
6.01-6.50......................................... 1 35,862.59 0.04 0.18
6.51-7.00......................................... 1 30,139.47 0.04 0.18
7.51-8.00......................................... 1 86,626.93 0.10 0.18
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
- ------------------------
(1) Represents the ratio of the pro forma annual net operating income to annual
debt service payments.
(2) For these SBA Section 7(a) Loans, the Borrower had a negative net operating
income for the fiscal year for which the related ratio was determined. The
Sellers believed that based upon the projected net operating income and
certain other factors, it was appropriate to originate such SBA Section 7(a)
Loan.
S-16
<PAGE>
The distribution of the number of months of the original terms to maturity
of the SBA Section 7(a) Loans was as follows:
ORIGINAL TERM
(IN MONTHS)
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
ORIGINAL TERM (IN MONTHS) LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
73-84............................................. 9 $ 306,087.93 0.36% 1.61%
85-96............................................. 8 554,829.33 0.66 1.43
97-108............................................ 9 482,358.97 0.57 1.61
109-120........................................... 189 16,154,797.26 19.20 33.87
121-132........................................... 3 145,401.73 0.17 0.54
133-144........................................... 6 549,149.65 0.65 1.08
145-156........................................... 4 283,218.91 0.34 0.72
157-168........................................... 8 1,088,668.58 1.29 1.43
169-180........................................... 9 1,076,336.25 1.28 1.61
181-192........................................... 13 3,632,110.44 4.32 2.33
193-204........................................... 4 554,108.58 0.66 0.72
205-216........................................... 8 987,122.91 1.17 1.43
217-228........................................... 11 3,018,738.00 3.59 1.97
229-240........................................... 36 6,028,513.24 7.16 6.45
241-252........................................... 18 3,350,529.88 3.98 3.23
253-264........................................... 18 3,141,565.48 3.73 3.23
265-276........................................... 28 6,937,053.55 8.24 5.02
277-288........................................... 31 9,785,230.75 11.63 5.56
289-300........................................... 146 26,066,785.81 30.98 26.16
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
S-17
<PAGE>
The distribution of the original balances of the SBA Section 7(a) Loans was
as follows:
ORIGINAL AGGREGATE LOAN AMOUNTS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE CURRENT CURRENT
NUMBER OF UNGUARANTEED UNGUARANTEED PERCENTAGE OF
ORIGINAL AGGREGATE LOAN AMOUNT LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE LOAN COUNT
- ---------------------------------------------- ------------- -------------------- ----------------- -------------
<S> <C> <C> <C> <C>
$50,001-$100,000.............................. 12 $ 214,917.80 0.26% 2.15%
100,001-150,000............................... 61 1,899,820.36 2.26 10.93
150,001-200,000............................... 63 2,720,339.36 3.23 11.29
200,001-250,000............................... 56 3,017,358.86 3.59 10.04
250,001-300,000............................... 54 3,665,593.14 4.36 9.68
300,001-350,000............................... 42 3,288,082.70 3.91 7.53
350,001-400,000............................... 35 3,189,186.13 3.79 6.27
400,001-450,000............................... 23 2,405,533.08 2.86 4.12
450,001-500,000............................... 20 2,344,458.42 2.79 3.58
500,001-550,000............................... 18 2,276,694.64 2.71 3.23
550,001-600,000............................... 20 2,985,832.48 3.55 3.58
600,001-650,000............................... 14 2,170,919.24 2.58 2.51
650,001-700,000............................... 17 2,820,225.14 3.35 3.05
700,001-750,000............................... 9 1,865,205.77 2.22 1.61
750,001-800,000............................... 15 2,881,435.53 3.42 2.69
800,001-850,000............................... 5 1,011,257.21 1.20 0.90
850,001-900,000............................... 12 2,809,652.15 3.34 2.15
900,001-950,000............................... 7 1,624,118.33 1.93 1.25
950,001-1,000,000............................. 8 2,100,302.12 2.50 1.43
1,000,001-1,050,000........................... 8 2,337,867.70 2.78 1.43
1,050,001-1,100,000........................... 9 2,864,730.73 3.40 1.61
1,100,001-1,150,000........................... 5 1,872,560.87 2.23 0.90
1,150,001-1,200,000........................... 7 2,925,539.30 3.48 1.25
1,200,001-1,250,000........................... 4 1,887,309.21 2.24 0.72
1,250,001-1,300,000........................... 5 2,761,009.70 3.28 0.90
1,300,001-1,350,000........................... 6 3,441,053.84 4.09 1.08
1,350,001-1,400,000........................... 2 1,319,585.80 1.57 0.36
1,400,001-1,450,000........................... 4 2,690,439.61 3.20 0.72
1,450,001-1,500,000........................... 1 742,191.81 0.88 0.18
1,500,001-1,550,000........................... 1 774,009.12 0.92 0.18
1,550,001-1,600,000........................... 3 2,495,237.98 2.97 0.54
1,600,001-1,650,000........................... 1 867,587.15 1.03 0.18
1,650,001-1,700,000........................... 3 2,828,770.97 3.36 0.54
1,700,001-1,750,000........................... 2 1,902,352.98 2.26 0.36
1,800,001-1,850,000........................... 1 1,099,486.48 1.31 0.18
1,850,001-1,900,000........................... 1 1,148,453.70 1.36 0.18
1,900,001-1,950,000........................... 1 1,167,003.39 1.39 0.18
1,950,001-2,000,000........................... 3 3,726,484.45 4.43 0.54
--- -------------------- ------ ------
TOTAL:........................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
S-18
<PAGE>
The distribution of the original principal balances of the Unguaranteed
Interests of the SBA Section 7(a) Loans was as follows:
ORIGINAL UNGUARANTEED LOAN BALANCE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
ORIGINAL UNGUARANTEED LOAN BALANCE LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- ------------------------------------------- --------------- ---------------- ----------------------- -------------
<S> <C> <C> <C> <C>
$1--$25,000................................ 16 $ 261,884.60 0.31% 2.87%
25,001--50,000............................. 126 4,671,437.09 5.55 22.58
50,001--75,000............................. 108 6,669,654.95 7.93 19.35
75,001--100,000............................ 75 6,490,027.02 7.71 13.44
100,001--125,000........................... 43 4,749,991.50 5.65 7.71
125,001--150,000........................... 35 4,789,525.13 5.69 6.27
150,001--175,000........................... 30 4,871,868.36 5.79 5.38
175,001--200,000........................... 23 4,329,954.94 5.15 4.12
200,001--225,000........................... 16 3,411,114.56 4.05 2.87
225,001--250,000........................... 15 3,540,686.83 4.21 2.69
250,001--275,000........................... 2 522,414.89 0.62 0.36
275,001--300,000........................... 6 1,680,932.99 2.00 1.08
300,001--325,000........................... 5 1,539,457.73 1.83 0.90
325,001--350,000........................... 3 986,428.68 1.17 0.54
350,001--375,000........................... 2 686,922.43 0.82 0.36
375,001--400,000........................... 4 1,524,482.76 1.81 0.72
400,001--425,000........................... 9 3,683,957.58 4.38 1.61
425,001--450,000........................... 2 880,889.02 1.05 0.36
450,001--475,000........................... 2 916,976.80 1.09 0.36
475,001--500,000........................... 2 970,332.41 1.15 0.36
500,001--525,000........................... 1 520,229.80 0.62 0.18
525,001--550,000........................... 3 1,571,669.65 1.87 0.54
550,001--575,000........................... 2 1,114,398.28 1.32 0.36
575,001--600,000........................... 4 2,326,655.56 2.77 0.72
600,001--625,000........................... 1 601,590.86 0.71 0.18
650,001--675,000........................... 2 1,323,079.63 1.57 0.36
675,001--700,000........................... 3 2,036,470.23 2.42 0.54
700,001--725,000........................... 1 717,994.94 0.85 0.18
725,001--750,000........................... 1 742,191.81 0.88 0.18
750,001--775,000........................... 1 774,009.12 0.92 0.18
825,001--850,000........................... 2 1,653,270.58 1.96 0.36
850,001--875,000........................... 1 841,967.40 1.00 0.18
875,001--900,000........................... 1 867,587.15 1.03 0.18
925,001--950,000........................... 1 933,882.40 1.11 0.18
950,001--975,000........................... 4 3,797,241.55 4.51 0.72
1,100,001--1,125,000....................... 1 1,099,486.48 1.31 0.18
1,150,001--1,175,000....................... 2 2,315,457.09 2.75 0.36
1,225,001--1,250,000....................... 3 3,726,484.45 4.43 0.54
--- ---------------- ------ ------
TOTAL:..................................... 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
S-19
<PAGE>
The distribution of the principal balances of the SBA Section 7(a) Loans as
of the Cut-Off Date was as follows:
CURRENT AGGREGATE LOAN AMOUNTS
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
CURRENT AGGREGATE LOAN BALANCE LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- -------------------------------------------------- ------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
$1-$50,000........................................ 2 $ 15,343.29 0.02% 0.36%
50,001-100,000.................................... 13 238,805.45 0.28 2.33
100,001-150,000................................... 64 1,998,004.64 2.37 11.47
150,001-200,000................................... 65 2,791,026.56 3.32 11.65
200,001-250,000................................... 55 3,078,009.30 3.66 9.86
250,001-300,000................................... 54 3,702,087.00 4.40 9.68
300,001-350,000................................... 41 3,363,068.21 4.00 7.35
350,001-400,000................................... 30 2,830,627.91 3.36 5.38
400,001-450,000................................... 25 2,625,787.05 3.12 4.48
450,001-500,000................................... 18 2,124,204.45 2.52 3.23
500,001-550,000................................... 21 2,741,249.24 3.26 3.76
550,001-600,000................................... 17 2,618,879.89 3.11 3.05
600,001-650,000................................... 14 2,170,919.24 2.58 2.51
650,001-700,000................................... 17 2,874,561.20 3.42 3.05
700,001-750,000................................... 10 2,051,072.22 2.44 1.79
750,001-800,000................................... 14 2,714,858.77 3.23 2.51
800,001-850,000................................... 5 1,030,814.15 1.23 0.90
850,001-900,000................................... 12 2,821,288.84 3.35 2.15
900,001-950,000................................... 7 1,631,378.29 1.94 1.25
950,001-1,000,000................................. 7 1,868,946.76 2.22 1.25
1,000,001-1,050,000............................... 9 2,645,503.68 3.14 1.61
1,050,001-1,100,000............................... 9 2,905,172.86 3.45 1.61
1,100,001-1,150,000............................... 6 2,326,937.12 2.77 1.08
1,150,001-1,200,000............................... 5 2,123,084.94 2.52 0.90
1,200,001-1,250,000............................... 4 1,887,309.21 2.24 0.72
1,250,001-1,300,000............................... 5 2,761,009.70 3.28 0.90
1,300,001-1,350,000............................... 7 4,042,644.70 4.80 1.25
1,350,001-1,400,000............................... 3 2,032,820.21 2.42 0.54
1,400,001-1,450,000............................... 2 1,375,614.34 1.63 0.36
1,450,001-1,500,000............................... 1 742,191.81 0.88 0.18
1,500,001-1,550,000............................... 1 774,009.12 0.92 0.18
1,550,001-1,600,000............................... 3 2,495,237.98 2.97 0.54
1,600,001-1,650,000............................... 1 867,587.15 1.03 0.18
1,650,001-1,700,000............................... 4 3,778,084.18 4.49 0.72
1,700,001-1,750,000............................... 1 953,039.77 1.13 0.18
1,800,001-1,850,000............................... 1 1,099,486.48 1.31 0.18
1,850,001-1,900,000............................... 1 1,148,453.70 1.36 0.18
1,900,001-1,950,000............................... 1 1,167,003.39 1.39 0.18
1,950,001-2,000,000............................... 3 3,726,484.45 4.43 0.54
--- ---------------- ------ ------
TOTAL:............................................ 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
S-20
<PAGE>
The distribution of the principal balances of the Unguaranteed Interests of
the SBA Section 7(a) Loans as of the Cut-Off Date was as follows:
CURRENT UNGUARANTEED LOAN BALANCE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
CURRENT CUT-OFF DATE
UNGUARANTEED CURRENT
NUMBER OF PRINCIPAL UNGUARANTEED PERCENTAGE OF
CURRENT UNGUARANTEED LOAN BALANCE LOANS BALANCE PRINCIPAL BALANCE LOAN COUNT
- --------------------------------------------- ------------- ---------------- --------------------- -------------
<S> <C> <C> <C> <C>
$1-$25,000................................... 21 $ 350,554.79 0.42% 3.76%
25,001-50,000................................ 125 4,748,431.81 5.64 22.40
50,001-75,000................................ 107 6,724,289.64 7.99 19.18
75,001-100,000............................... 72 6,269,727.42 7.45 12.90
100,001-125,000.............................. 44 4,869,267.52 5.79 7.89
125,001-150,000.............................. 34 4,670,249.11 5.55 6.09
150,001-175,000.............................. 31 5,045,480.44 6.00 5.56
175,001-200,000.............................. 23 4,349,244.63 5.17 4.12
200,001-225,000.............................. 16 3,442,308.19 4.09 2.87
225,001-250,000.............................. 14 3,316,591.43 3.94 2.51
250,001-275,000.............................. 4 1,069,819.96 1.27 0.72
275,001-300,000.............................. 4 1,133,527.92 1.35 0.72
300,001-325,000.............................. 5 1,539,457.73 1.83 0.90
325,001-350,000.............................. 5 1,673,351.11 1.99 0.90
375,001-400,000.............................. 4 1,524,482.76 1.81 0.72
400,001-425,000.............................. 9 3,683,957.58 4.38 1.61
425,001-450,000.............................. 2 880,889.02 1.05 0.36
450,001-475,000.............................. 2 916,976.80 1.09 0.36
475,001-500,000.............................. 2 970,332.41 1.15 0.36
500,001-525,000.............................. 3 1,566,735.51 1.86 0.54
525,001-550,000.............................. 1 525,163.94 0.62 0.18
550,001-575,000.............................. 3 1,688,798.17 2.01 0.54
575,001-600,000.............................. 3 1,752,255.67 2.08 0.54
600,001-625,000.............................. 1 601,590.86 0.71 0.18
650,001-675,000.............................. 3 1,983,935.52 2.36 0.54
675,001-700,000.............................. 2 1,375,614.34 1.63 0.36
700,001-725,000.............................. 1 717,994.94 0.85 0.18
725,001-750,000.............................. 1 742,191.81 0.88 0.18
750,001-775,000.............................. 1 774,009.12 0.92 0.18
825,001-850,000.............................. 3 2,495,237.98 2.97 0.54
850,001-875,000.............................. 1 867,587.15 1.03 0.18
925,001-950,000.............................. 4 3,778,084.18 4.49 0.72
950,001-975,000.............................. 1 953,039.77 1.13 0.18
1,075,001-1,100,000.......................... 1 1,099,486.48 1.31 0.18
1,125,001-1,150,000.......................... 1 1,148,453.70 1.36 0.18
1,150,001-1,175,000.......................... 1 1,167,003.39 1.39 0.18
1,225,001-1,250,000.......................... 3 3,726,484.45 4.43 0.54
--- ---------------- ------ ------
TOTAL:....................................... 558 $ 84,142,607.25 100.00% 100.00%
</TABLE>
S-21
<PAGE>
SUBSEQUENT SBA LOANS
The Unguaranteed Interests in the additional SBA Loans (the "Subsequent SBA
Loans") to be included in the Trust Fund are expected to have the following
characteristics as of their related Subsequent Cut-Off Dates (unless otherwise
indicated).(1)
<TABLE>
<S> <C>
Maximum original Unguaranteed Interest.................. $1,500,000
Range of ages........................................... 0 mo. - 48 mo.
Range of original terms................................. 48 mo. - 300 mo.
Range of remaining terms................................ 1 mo. - 300 mo.
Range of gross margins.................................. 0.0% - 2.75%
Range of original debt service coverage ratios.......... 0.0 - 8.00
</TABLE>
Following the Funding Period, the initial SBA Loans transferred to the Trust
Fund on the Closing Date and the Subsequent SBA Loans are expected to have the
following aggregate characteristics measured as of the Cut-Off Date or the
related Subsequent Cut-Off Date, as the case may be:
<TABLE>
<S> <C>
Range of Average Unguaranteed Interests................. $135,000 - $165,000
Range of Weighted Average Gross Margins................. 1.93% - 2.00%
Range of Weighted Average Original Terms................ 220 mo. - 235 mo.
Maximum Weighted Average original LTV ratio............. 110.00%
Minimum Weighted Average original debt service coverage
ratio................................................. 1.30
</TABLE>
- ------------------------
(1) The actual characteristics of the Subsequent SBA Loans to be included in
the Trust Fund may vary somewhat for the characteristics presented.
S-22
<PAGE>
THE SBA LOAN PROGRAM
GENERAL
The Small Business Act of 1953 (the "Act"), which created the Small Business
Administration, also established the general business loan program under Section
7(a) of the Act (the "Section 7(a) Program"). The Section 7(a) Program was
intended to encourage lenders to provide loans to qualifying small businesses.
Loans made under the Section 7(a) Program can be used to construct, expand or
convert facilities, to purchase building equipment or materials or to finance
machinery and equipment, business acquisitions and inventory. Money lent under
the Section 7(a) Program also can be used for working capital.
THE SECTION 7(A) LOAN GUARANTY PROGRAMS
The SBA administers three levels of lender participation in the Section 7(a)
Program. Under the first level, known as the Guaranteed Participant Program, the
lender gathers and processes data from applicants and forwards it, along with a
request for the SBA's guaranty, to a local SBA office. The SBA then completes an
independent analysis and decides whether to guarantee the loan. SBA turnaround
time on such applications varies greatly, depending on its backlog of loan
applications.
Under the second level of lender participation, known as the Certified
Lender Program, the lender (the "Certified Lender") gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the lender's
credit analysis, which generally is completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio and volume
criteria before authorizing them to participate in the Certified Lender Program.
Under the third level of lender participation, known as the Preferred Lender
Program, the lender (the "Preferred Lender") has the authority to approve a loan
and obligate the SBA to guarantee the loan without submitting an application to
the SBA for credit review. The lender is required to notify the SBA of the
approved loan and submit certain documents. The standards established for
participants in the Preferred Lender Program are more stringent than those for
participants in the Certified Lender Program and involve meeting additional
portfolio quality and volume requirements. The granting of Preferred Lender
status is based upon a lender's ability to originate and service loans in a
particular territory to the satisfaction of the SBA.
SECTION 7(A) LOAN PARAMETERS
Under each of the Guaranteed Participant, Certified Lender and Preferred
Lender Programs, the SBA guarantees loans of $100,000 or less up to 80%, and
loans in excess of $100,000 up to 75%, subject to a per borrower guaranty
maximum of $750,000. Loans originated under the Section 7(a) Program can bear
either fixed or adjustable rates of interest, as negotiated between the lender
and the borrower at origination. Adjustable rate loans generally adjust on the
first business day of each calendar quarter based on a specified margin over the
lowest prime rate, as published in THE WALL STREET JOURNAL. For loans made
pursuant to the Guaranteed Participant, Certified Lender or Preferred Lender
Programs, this margin generally does not exceed 2.75% per annum.
Terms to maturity for guaranteed loans vary depending upon the use of
proceeds and an evaluation of the borrower's ability to repay the loan. For
instance, working capital loans are limited to seven year terms unless an
extension is obtained, which can increase the term to a maximum of 10 years.
Real estate loans generally have terms up to 25 years, and machinery and
equipment loans generally have a maximum term of 15 years. If the loan proceeds
are to be used for multiple qualifying purposes, a blended term based on the
foregoing criteria may be offered by the Lender.
S-23
<PAGE>
THE SELLERS' PARTICIPATION IN SBA SECTION 7(A) PROGRAM
The Sellers are Preferred Lenders in almost all major SBA loan markets in
which they operate (except for newly established offices). The Sellers are
attempting to be upgraded to Preferred Lender status in the remaining major SBA
Loan markets in which they operate. However, it is unknown if or when such
upgradings will occur. See "The Sellers" herein.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The value of an investment in the Certificates may be affected by, among
other things, a change in interest rates. If interest rates fall below the
then-current Note Rates on the SBA Loans, the rate of prepayment on such SBA
Loans may increase. Prepayments, delinquencies and defaults may also be
influenced by a number of other factors including economic conditions.
On each Remittance Date, the Certificateholders are entitled to receive 30
days' interest on the Class A, Class M or Class B Principal Balance, as the case
may be, immediately prior to such Remittance Date at the applicable Class A,
Class M or Class B Remittance Rate (as defined herein under "Description of the
Agreement and the Certificates--Class Interest Distribution Amounts"), subject
to the adjustments described under "Description of the Agreement and the
Certificates--Class Interest Distribution Amounts" herein. This is the case even
if Principal Prepayments or Curtailments are received with respect to the SBA
Loans during the related Due Period. With respect to such Principal Prepayments
and Curtailments, the Servicer will remit to the Trustee for deposit in the
Certificate Account, from amounts otherwise payable to it as servicing
compensation, Compensating Interest as described under "Description of the
Agreement and the Certificates--Payments on the SBA Loans; Distributions on the
Certificates" herein.
For the Certificates, the net effect of each distribution respecting
interest generally will be the pass-through on each Remittance Date to each
Certificateholder of an amount which is equal to 30 days' interest at the Class
A, Class M or Class B Remittance Rate, as the case may be, subject to the
adjustments described herein.
The Excess Spread on the guaranteed portions of the SBA Section 7(a) Loans
will be available to make up shortfalls in amounts to which Certificateholders
are entitled on Remittance Dates. The amount of Excess Spread varies from loan
to loan and will be eliminated when a borrower prepays a loan in full. However,
the Excess Spread will not be affected by any applicable lifetime interest rate
caps on the SBA Section 7(a) Loans. This is because the Guaranteed Interests are
sold with lifetime interest rate caps equal to the cap on the related SBA
Section 7(a) Loan less the sum of the Excess Spread, the fee payable to the FTA,
the Premium Protection Fee and, with respect to the Additional Fee SBA Loans,
the Additional Fee. In addition, the Excess Spread on an SBA Section 7(a) Loan
in default will be paid by the SBA until the purchase by the SBA of the related
Guaranteed Interest (up to 120 days of accrued interest).
Unscheduled payments, delinquencies and defaults on the SBA Loans and
distributions from the Pre-Funding Account, if any, on the Remittance Dates in
April, May and June 1999 and June 29, 1999 (the "Special Remittance Date") will
affect the amount of funds available to make distributions on each Remittance
Date. In addition, the Servicer may, at its option, on any date on which the
then-outstanding aggregate principal balance of the Unguaranteed Interests is
less than 10% of the sum of (i) the aggregate principal balance, as of the
Cut-Off Date, of the Unguaranteed Interests in the SBA Section 7(a) Loans
delivered to the Trustee on the Closing Date (the "Original Pool Principal
Balance") and (ii) the original amount deposited in the Pre-Funding Account (the
"Pre-Funded Amount"), purchase from the Trust Fund all of the Unguaranteed
Interests and any other assets in the Trust Fund at a price equal to the sum of
(x) 100% of the then-outstanding Class A, Class M and Class B Principal
Balances, and (y) 30 days' interest thereon at the then-applicable Class A,
Class M and Class B Remittance Rates (the "Termination Price"). See "Description
of the Agreement and the Certificates--
S-24
<PAGE>
Termination; Purchase of SBA Loans" herein. However, because the SBA Loans may
prepay, the weighted average life of the Certificates or the date on which the
outstanding aggregate principal balances of the Unguaranteed Interests will be
less than 10% of the sum of (i) the Original Pool Principal Balance and (ii) the
original Pre-Funded Amount, cannot be determined.
None of the SBA Loans is a balloon loan and each is fully amortizing in
accordance with its terms. The SBA Loans may be prepaid at any time without
payment of a prepayment fee or penalty, provided that written notice of the
borrower's intention to prepay more than 20% of the outstanding SBA Loan must be
given twenty-one (21) days prior to the date of such prepayment. In general,
when the level of prevailing interest rates for similar loans significantly
declines, the rate of prepayment is likely to increase, although the prepayment
rate is influenced by a number of other factors, including general economic
conditions. Prepayments, liquidations and purchases of the Unguaranteed
Interests will result in distributions to Certificateholders of amounts which
would otherwise be distributed over the remaining terms of the SBA Loans.
The final scheduled Remittance Date for the Class A and Class M Certificates
(the "Offered Certificates") is July 15, 2025, which is the date on which the
principal balances of the Offered Certificates would be reduced to zero,
assuming that no prepayments are received on the SBA Loans and that
distributions of principal of and interest on each of the SBA Loans are timely
received. The weighted average life of the Certificates is likely to be shorter
than would be the case if payments actually made on the SBA Loans conformed to
the foregoing assumptions, and the final Remittance Date with respect to the
Certificates could occur significantly earlier than the final scheduled
Remittance Date because (i) prepayments are likely to occur and (ii) the
Servicer may cause a termination of the Trust Fund as described above.
The "weighted average life" of a Certificate refers to the average amount of
time that will elapse from the Closing Date to the date on which each dollar in
respect of principal of such Certificate is repaid. The weighted average lives
of the Certificates will be influenced by, among other factors, the rate at
which principal payments (including Monthly Payments, Principal Prepayments,
Excess Payments and Curtailments) are made on the SBA Loans.
Prepayments on loans are commonly measured relative to a prepayment standard
or model. The model used in this Prospectus Supplement, the Constant Prepayment
Rate ("CPR"), represents an assumed constant rate of prepayment per annum
relative to the then-outstanding principal balance of a pool of new SBA loans.
The CPR does not purport to be either a historical description of the prepayment
experience of any pool of SBA loans or a prediction of the anticipated rate of
prepayment of any pool of SBA loans, including the SBA Loans.
The Sellers make no representation as to the particular factors that will
affect the prepayment of the SBA Loans, as to the percentage of the principal
balance of the SBA Loans that will be paid as of any date or as to the overall
rate of prepayment on the SBA Loans.
Greater than anticipated prepayments of principal will increase the yield on
Certificates purchased at a price less than par. Greater than anticipated
prepayments of principal will decrease the yield on Certificates purchased at a
price greater than par. The effect on an investor's yield due to principal
prepayments on the SBA Loans occurring at a rate that is faster (or slower) than
the rate anticipated by the investor in the period immediately following the
issuance of the Certificates will not be entirely offset by a subsequent like
reduction (or increase) in the rate of principal payments. The weighted average
lives of the Certificates will also be affected by the amount and timing of
delinquencies and defaults on the SBA Loans and the recoveries, if any, on
defaulted SBA Loans and foreclosed properties. Delinquencies and defaults will
generally slow the rate of payment of principal to the Certificateholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted SBA Loans and foreclosed properties result in principal payments on
the Certificates faster than otherwise scheduled.
S-25
<PAGE>
DESCRIPTION OF THE AGREEMENT AND THE CERTIFICATES
GENERAL
The Certificates will be issued by a Trust Fund organized and existing under
the laws of the State of New York. Each Certificate represents a certain
fractional undivided ownership interest in the Trust Fund created and held
pursuant to the Agreement, subject to the limits and the priority of
distribution described therein. The Trust Fund consists primarily of the right
to receive the Unguaranteed Interests in such SBA Loans as are from time to time
subject to the Agreement, together with all proceeds thereof and certain related
assets.
The Certificates will not represent obligations of the Sellers or the SBA.
The Offered Certificates will be issued in book-entry form in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof,
except that one Certificate of each Class may be issued in a different
denomination and, if so issued, will be held in physical form.
The Servicer will be responsible for ensuring that each SBA Loan is serviced
in accordance with the Agreement and the SBA Rules and Regulations. However,
MSNY will service the SBA Loans originated or acquired by it.
PAYMENTS ON THE SBA LOANS; DISTRIBUTIONS ON THE CERTIFICATES
The Agreement requires that the Servicer cause an account (the "Principal
and Interest Account") to be established and maintained at one or more
Designated Depository Institutions (which may include First Union National
Bank).
All funds in the Principal and Interest Account are required to be held (i)
uninvested, up to the limits insured by the FDIC (as defined under "Certain
Definitions") or (ii) invested in Permitted Instruments. Any investment earnings
on funds held in the Principal and Interest Account are for the account of the
Servicer.
The Servicer is required to deposit in the Principal and Interest Account
(within two Business Days of receipt): (i) all payments received after the
Cut-Off Date on account of interest on the SBA Loans (net of the portion thereof
required to be paid to the holders of the Guaranteed Interest, the FTA's Fee,
the Premium Protection Fee, the Additional Fee and the Servicing Fee and other
servicing compensation payable to the Servicer as permitted by the Agreement),
(ii) the Unguaranteed Percentage of all payments received after the Cut-Off Date
on account of principal on the SBA Loans, including the Unguaranteed Percentage
of all Excess Payments, Principal Prepayments, Curtailments, Net Liquidation
Proceeds, Insurance Proceeds (other than amounts to be applied to the
restoration or repair of the related Mortgaged Property, or to be released to
the Obligor) and Released Mortgaged Property Proceeds, (iii) any amounts paid in
connection with the repurchase of the Unguaranteed Interest of an SBA Loan and
the amount of any adjustment for substituted SBA Loans, (iv) the amount of any
losses incurred in connection with investments in Permitted Instruments and (v)
certain amounts relating to insufficient insurance policies and Foreclosed
Property.
The Servicer may make withdrawals from the Principal and Interest Account
only for the following purposes:
(i) to remit to the Trustee on each Determination Date (as defined
below) for deposit in the Certificate Account, the portion of the Available
Funds for the related Remittance Date that is net of Compensating Interest,
Monthly Advances and amounts then on deposit in the Spread Account (and,
with respect to the Determination Dates occurring in April, May and June
1999, net of amounts then on deposit in the Pre-Funding Account and the
Capitalized Interest Account);
S-29
<PAGE>
(ii) to reimburse itself for any accrued unpaid Servicing Fees and
Premium Protection Fees, unreimbursed Monthly Advances and for unreimbursed
Servicing Advances to the extent deposited in the Principal and Interest
Account (and not netted from Monthly Payments received). The Servicer's
right to reimburse itself for unpaid Servicing Fees and Premium Protection
fees, and, except as provided in the following sentence, Servicing Advances
and Monthly Advances shall be limited to Liquidation Proceeds, Released
Mortgaged Property Proceeds, Insurance Proceeds and such other amounts as
may be collected by the Servicer from the Mortgagor or otherwise relating to
the SBA Loan in respect of which such unreimbursed amounts are owed. The
Servicer's right to reimbursement for Monthly Advances and Servicing
Advances in excess of such amounts shall be limited to any late collections
of interest received on the SBA Loans generally, including Liquidation
Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and any
other amounts. The Servicer's right thereto shall be subordinate to the
rights of the Certificateholders and the holders of the Guaranteed Interest
and may be exercised only if the Spread Balance equals the then-applicable
Specified Spread Account Requirements;
(iii) to withdraw any amount received from an Obligor that is
recoverable and sought to be recovered as a voidable preference by a trustee
in bankruptcy pursuant to the United States Bankruptcy Code in accordance
with a final, nonappealable order of a court having competent jurisdiction;
(iv) (a) to make investments in Permitted Instruments and (b) to pay
itself interest paid in respect of Permitted Instruments or by a Designated
Depository Institution on funds deposited in the Principal and Interest
Account;
(v) to withdraw any funds deposited in the Principal and Interest
Account that were not required to be deposited therein or were deposited
therein in error;
(vi) to pay itself servicing compensation or interest as permitted under
the definition of Excess Proceeds; and
(vii) to clear and terminate the Principal and Interest Account upon the
termination of the Agreement.
Not later than the close of business on each Determination Date, the
Servicer will remit to the Trustee for deposit in the Certificate Account any
required Monthly Advance and/or Compensating Interest.
The Servicer is required to pay all reasonable and customary "out-of-pocket"
costs and expenses incurred in the performance of its servicing obligations,
including, but not limited to, the cost of (i) the preservation, restoration and
protection of the Mortgaged Property or other Collateral, (ii) any enforcement
or judicial proceedings, including foreclosures, and (iii) the management and
liquidation of Mortgaged Property acquired in satisfaction of the related
Mortgage. Each such expenditure will constitute a "Servicing Advance." The
Servicer is obligated to make the Servicing Advances incurred in the performance
of its servicing obligations. The Servicer may recover Servicing Advances to the
extent set forth in clause (ii) above.
On the 15th day of each month commencing in April 1999, or, if such 15th day
is not a Business Day, the first Business Day immediately following (each such
day being a "Remittance Date"), until the principal balances of the Class A,
Class M and Class B Certificates are reduced to zero, the Trustee or Paying
Agent will be required to distribute to each person in whose names a Certificate
is registered at the close of business on the last day of the month immediately
preceding the month of the related Remittance Date (the "Record Date") such
Certificateholder's Percentage Interest multiplied by the amount to be
distributed to the Class A, Class M or Class B Certificateholders, as the case
may be, on such Remittance Date as described below under "--Flow of Funds".
S-30
<PAGE>
Additionally, any Pre-Funded Amount remaining at the close of business on
June 25, 1999 (together with accrued interest thereon at the applicable
Remittance Rates) will be distributed by or on behalf of the Trustee on the
Special Remittance Date to the Class A, Class M and Class B Certificates. Such
distribution will be made to each person in whose name a Certificate of the
applicable Class is registered on May 31, 1999.
On each Remittance Date, the Trustee will mail to each Certificateholder a
statement setting forth, among other things, certain information as to the
distribution being made on such Remittance Date, the fees to be paid to the
Servicer and Trustee and the loss and delinquency status of the SBA Loans.
Although the information contained in such statements will be prepared by the
Servicer, neither such information nor any other financial information furnished
to Certificateholders will be examined and reported upon, and an opinion will
not be expressed by, an independent public accountant.
TRANSFER OF ASSETS
Each Note will be endorsed by the applicable Seller by means of an allonge
(i.e., a separate piece of paper attached to the Note) and delivered to the FTA.
On or before the Closing Date (or, with respect to a Subsequent SBA Loan, on or
before the related Subsequent Closing Date), the FTA will acknowledge receipt of
each such Note for each SBA Loan in the SBA Loan Pool and that each such Note
has been endorsed as follows: "Pay to the order of HSBC Bank USA, and its
successors and assigns, as trustee under that certain Pooling and Servicing
Agreement dated as of February 28, 1999, for the benefit of the United States
Small Business Administration and holders of The Money Store SBA Loan-Backed
Certificates, Series 1999-1, Class A, Class M and Class B, as their respective
interests may appear, without recourse."
With respect to each SBA Loan in the SBA Loan Pool, the applicable Seller
will be required to deliver the following additional documentation to the
Trustee on or prior to the Closing Date (or, with respect to a Subsequent SBA
Loan, on or prior to the related Subsequent Closing Date):
(a) For each SBA Loan secured by commercial real property or residential real
property:
(1) Original recorded Mortgage, or if the original is unavailable, a copy
thereof certified to be true and complete by the applicable Seller.
(2) Certified copy of the Assignment of the Mortgage endorsed as follows:
"HSBC Bank USA, ("Assignee") its successors and assigns, as trustee under
the Pooling and Servicing Agreement dated as of February 28, 1999,
subject to the Multi-Party Agreement dated as of February 28, 1999." The
original assignments will be transmitted by the applicable Seller for
recording promptly following the Closing Date.
(3) Original recorded intervening assignments, if any, or if the original is
unavailable, copies thereof certified by the applicable Seller to be true
and complete.
(4) Originals or certified copies of all title insurance policies or other
evidence of lien position, including but not limited to PIRT policies,
limited liability reports and lot book reports, to the extent the Sellers
obtain such policies or other evidence of lien position in accordance
with the criteria described herein.
(b) For all SBA Loans:
(1) Blanket assignment of all collateral securing the SBA Loan, including
without limitation, all rights under applicable guarantees and insurance
policies.
(2) Irrevocable power of attorney of the applicable Seller to the Trustee to
execute, deliver, file or record and otherwise deal with the collateral
for the SBA Loans in accordance with the Agreement. The power of attorney
will be delegable by the Trustee to the Servicer and any
S-31
<PAGE>
successor servicer and will permit the Trustee or its delegate to
prepare, execute and file or record UCC financing statements and notices
to insurers.
(3) Blanket Uniform Commercial Code ("UCC") UCC-1 financing statements
identifying by type all collateral for the SBA Loans in the SBA Loan Pool
and naming the Trustee and the SBA as Secured Parties and the applicable
Seller as the Debtor. See "The Agreements--Sale of SBA Loans" in the
Prospectus.
The Trustee will be required to provide an interim certification as to the
receipt of such documents within 90 days after the Closing Date and to provide a
final certification within one year after the Closing Date.
CERTIFICATE ACCOUNT
The Trustee has agreed to establish and maintain in its trust department a
non-interest-bearing trust account (the "Certificate Account").
PRE-FUNDING ACCOUNT
Approximately $16,946,639 will be deposited on the Closing Date into the
Pre-Funding Account. Amounts in the Pre-Funding Account may be used only (i) to
acquire the Unguaranteed Interests in the Subsequent SBA Loans, and (ii) to make
accelerated payments of principal on the Certificates. During the Funding Period
amounts will, from time to time, be withdrawn from the Pre-Funding Account to
purchase Subsequent SBA Loans in accordance with the Agreement. Any Pre-Funded
Amount remaining at the end of the Funding Period will be distributed as a
principal prepayment on the next Remittance Date to the Certificates. However,
any Pre-Funded Amount remaining at the close of business on June 25, 1999 will
be distributed as a principal prepayment on the Special Remittance Date.
All funds in the Pre-Funding Account are required to be held (i) uninvested,
up to the limits insured by the Federal Deposit Insurance Corporation or (ii)
invested in instruments designated as "Permitted Instruments" in the Agreement.
Any investment earnings on funds in the Pre-Funding Account will be applied to
payment of interest on the Certificates.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Representative also will make a cash deposit into
the Capitalized Interest Account. The amount, if any, deposited therein will be
used by the Trustee on the Remittance Dates occurring in April, May and June
1999 to fund the excess, if any, of (i) the amount of interest accrued for each
such Remittance Date at the weighted average on the portion of the Class A,
Class M and Class B Certificates having principal balances exceeding the
principal balances of the Unguaranteed Interests, over (ii) the amount of any
earnings on funds in the Pre-Funding Account that are available to pay interest
on the Certificates on each such Remittance Date. Additionally, if a principal
prepayment is made on the Special Remittance Date to any Class of Certificates,
such Class of Certificates also will receive on such date, from the Capitalized
Interest Account, accrued interest at the applicable Remittance Rate on the
amount of such principal prepayment. Any amounts remaining in the Capitalized
Interest Account on the Special Remittance Date and not used for such purposes
are required to be paid directly to the Representative on such Special
Remittance Date.
All funds in the Capitalized Interest Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds in the Capitalized Interest Account will be applied to payment of
interest on the Certificates.
S-32
<PAGE>
FLOW OF FUNDS
The Agreement requires the Servicer to withdraw on each Determination Date
that portion of the Available Funds in the Principal and Interest Account and to
remit such amount, together with the Monthly Advances and Compensating Interest
for the related Remittance Date, to the Trustee for deposit in the Certificate
Account. Upon receipt on each Determination Date of such amount, the Trustee is
required to deposit such amount into the Certificate Account.
On each Remittance Date the Trustee is required to withdraw from the
Certificate Account the sum of (i) that portion of the Available Funds received
from the Servicer, (ii) the amounts, if any, deposited therein from the Spread
Account as described below under "--Spread Account", (iii) payments, if any
received from the letter of credit as described below under "--Letter of Credit"
and (iv) with respect to the Remittance Dates in April, May and June 1999, the
amounts, if any, deposited therein from the Pre-Funding Account and the
Capitalized Interest Account, and make distributions thereof in the following
order of priority:
(i) First, to the Class A Certificates in an amount up to the Class
Interest Distribution Amount for the Class A Certificates;
(ii) Second, to the Class M Certificates in an amount up to the Class
Interest Distribution Amount for the Class M Certificates;
(iii) Third, to the Class B Certificates in an amount up to the Class
Interest Distribution Amount for the Class B Certificates;
(iv) Fourth, to the Class A Certificates in an amount up to the sum of
(a) the Class Principal Distribution Amount for the Class A Certificates and
(b) the Class Carry Forward Amount for the Class A Certificates;
(v) Fifth, to the Class M Certificates, in an amount up to the sum of
(a) the Class Principal Distribution Amount for the Class M Certificates and
(b) the Class Carry-Forward Amount for the Class M Certificates;
(vi) Sixth, to the Class B Certificates, in an amount up to the sum of
(a) the Class Principal Distribution Amount for the Class B Certificates and
(b) the Class Carry-Forward Amount for the Class B Certificates;
(vii) Seventh, to the Expense Account in an amount up to one-twelfth of
the Annual Expense Escrow Amount plus any amount required to be paid to the
Trustee pursuant to the Agreement resulting from insufficiencies in the
Expense Account;
(viii) Eighth, to the Servicer in an amount up to the Reimbursable
Amounts;
(ix) Ninth, to the Spread Account, any remainder unless and until the
amount therein equals the Specified Spread Account Requirement; and
(x) Tenth, to the Spread Account Depositor, any amounts in excess of the
Specified Spread Account Requirement.
Notwithstanding the foregoing, the Servicer shall not be entitled to receive
Reimburseable Amounts pursuant to clause (viii) above until the first Remittance
Date on which the Spread Balance equals the then-applicable Specified Spread
Account Requirement.
CLASS INTEREST DISTRIBUTION AMOUNTS
To the extent of the Available Funds, and prior to payments of principal, on
each Remittance Date the Class A, Class M and Class B Certificateholders, in
that order, will be entitled to receive interest accrued for the related
Interest Accrual Period at the then-applicable Class A, Class M or Class B
S-33
<PAGE>
Remittance Rate on the Class A, Class M or Class B Principal Balance, as the
case may be, outstanding immediately prior to such Remittance Date, subject to
the adjustment set forth below. If, on any Remittance Date, a Class of
Certificates does not receive the full amount of interest to which it is
entitled, such shortfall, plus interest thereon at the then-applicable Class
Remittance Rate, compounded monthly, will be added to the amount of interest it
is entitled to receive on succeeding Remittance Dates. The aggregate amounts of
interest payable to a Class of Certificates on each Remittance Date are referred
to herein as the "Class Interest Distribution Amount" for such Class.
Interest will accrue on the Certificates on the basis of a 360-day year
consisting of twelve 30-day months at a per annum rate (the "Class A Remittance
Rate," the "Class M Remittance Rate" and "Class B Remittance Rate,"
respectively) equal to:
Class A: During the initial Interest Accrual Period, 5.550% per annum.
During each subsequent Interest Accrual Period, the Prime Rate in effect on
the preceding Adjustment Date (as defined below) minus 2.20% per annum,
subject to the adjustments described below.
Class M: During the initial Interest Accrual Period, 6.070% per annum.
During each subsequent Interest Accrual Period, the Prime Rate in effect on
the preceding Adjustment Date minus 1.68% per annum, subject to the
adjustments described below.
Class B: During the initial Interest Accrual Period, 7.050% per annum.
During each subsequent Interest Accrual Period, the Prime Rate in effect on
the preceding Adjustment Date minus 0.70% per annum, subject to the
adjustments described below.
The Class Remittance Rates for the Certificates will be adjusted on the
first day of each Interest Accrual Period occurring in January, April, July and
October, commencing July 1999 (each, an "Adjustment Date"). For each Adjustment
Date, the Prime Rate will equal the lowest prime lending rate as published in
the Money Rate Section of THE WALL STREET JOURNAL on the first Business Day of
the month of the applicable Adjustment Date. The amount of interest paid on the
Certificates on each Remittance Date will be based upon the amount of interest
due on the SBA Loans in the month preceding such Remittance Date. For each such
Monthly Payment, the related SBA Loan interest rate on the SBA Loans is based on
the Prime Rate in effect for such SBA Loan in the month preceding the month such
Monthly Payment is due. For example, the Monthly Payment due on an SBA Loan in
August 1999 will be based upon the Prime Rate in effect for such SBA Loan in
July, 1999 (which, because the SBA Loans adjust quarterly, generally will be the
Prime Rate in effect on July 1, 1999). This monthly payment will be distributed
to Certificateholders on the Remittance Date in September 1999. For the
September 1999 Remittance Date, interest on the Certificates will accrue based
upon the Prime Rate in effect on the first Business Day of July, 1999.
For each Remittance Date, the Certificate will receive as payments of
interest the aggregate amount of interest payable with respect to each of the
SBA Loans in accordance with their terms, net of the interest payable to the
holders of the Guaranteed Interest, the Excess Spread (other than the portion
thereof allocated to the Servicing Fee on the Guaranteed Interest), the
Servicing Fee, the Premium Protection Fee, the FTA's Fee, the Additional Fee
(with respect to the Additional Fee SBA Loans), the Extra Interest (as defined
below) and the fees and expenses of the Trustee allocable to such interest. For
each Remittance Date, this amount, for the reasons described below, might exceed
or be less than the interest accrued on the SBA Loans at the weighted average
Class A, Class M and Class B Remittance Rates. Any such excess or shortfall will
be allocated to the Class A, Class M and Class B Certificates pro rata in
accordance with the amount of interest each such Class of Certificates would
otherwise be entitled to receive but for such adjustment.
With respect to each SBA Loan, the "Extra Interest Percentage" will equal
the excess of (i) the Note Rate that would be in effect for such SBA Loan as of
the Cut-Off Date without giving effect to any applicable lifetime floor or cap
over (ii) the sum of the rates used in determining the Servicing Fee
S-34
<PAGE>
and the Trustee's fees and expenses and the initial weighted average Class A,
Class M and Class B Remittance Rates without giving effect to any applicable
lifetime floor or cap.
For each Remittance Date, the "Extra Interest" for an SBA Loan will equal
the product of (i) the principal portion of the Unguaranteed Interest of such
SBA Loan for such Remittance Date and (ii) one-twelfth of the applicable Extra
Interest Percentage.
The initial Class A, Class M and Class B Remittance Rates were determined so
that the actual interest being distributed to the Certificates on the first
Remittance Date will be based upon the Prime Rate minus the applicable margin.
However, for the following reasons the interest payable on subsequent Remittance
Dates might be more or less than interest calculated at the Prime Rate minus the
applicable margin:
(x) For the Remittance Dates occurring in the months of February, May,
August and November, the Certificates will accrue interest based upon the
Prime Rate reported on the first Business Day of the preceeding January,
April, July and October, respectively, while the SBA Loan payments being
distributed will have accrued interest based upon the Prime Rate reported on
the first Business Day of the preceeding October, January, April and July,
respectively.
(y) Certain of the SBA Loans contain minimum and/or maximum interest rate
provisions. Therefore, if the then current Prime Rate plus the applicable
margin would exceed the applicable maximum interest rate, or fall below the
applicable minimum interest rate, the actual interest rate borne by such SBA
Loan will be less than or greater than, respectively, the interest rate that
such SBA Loan would bear if such limits were not in effect.
(z) While the Certificates accrue interest on the basis of a 360 day year
consisting of 12 months of 30 days each, the SBA Loans accrue interest on
the basis of a 365 day year consisting of the actual number of days
contained in each interest period.
S-35
<PAGE>
CLASS PRINCIPAL DISTRIBUTION AMOUNTS
With respect to each Remittance Date, the "Class Principal Distribution
Amount" for each Class of Certificates will equal the Class A, Class M or Class
B Percentage (as defined below) as the case may be, multiplied by the total of
(i) the Unguaranteed Percentage of all payments and other recoveries of
principal of an SBA Loan (net of amounts reimbursable to the Servicer pursuant
to the Agreement) received by the Servicer or any Subservicer during the related
Due Period, excluding amounts received with respect to SBA Loans which have been
delinquent 24 months or have been determined to be uncollectible, in whole or in
part, by the Servicer to the extent that the applicable Class of
Certificateholders, have previously received the Class A, Class M or Class B
Percentage, as the case may be, of the principal portion of the Unguaranteed
Interest of such SBA Loans; (ii) the principal portion of any Unguaranteed
Interest actually purchased by a Seller for breach of a representation and
warranty or other defect and actually received by the Trustee as of the related
Determination Date; (iii) any adjustments with respect to substitutions of SBA
Loans for which a Seller has breached a representation or warranty deposited in
the Principal and Interest Account and transferred to the Certificate Account as
of the related Determination Date; (iv) the Unguaranteed Percentage of all
losses on SBA Loans which were finally liquidated during the applicable Due
Period; and (v) the Unguaranteed Percentage of the then-outstanding principal
balance of any SBA Loan which, as of the first day of the related Due Period, is
delinquent 24 months or determined by the Servicer to be uncollectible in whole
or in part; and (vi) amounts, if any, released from the Pre-Funding Account on
the April, May and June 1999 Remittance Dates and the Special Remittance Date.
The Class A Percentage equals approximately 93.00%, the Class M Percentage
equals approximately 2.86% and the Class B Percentage equals approximately
4.14%.
The following chart sets forth an example of distributions on the
Certificates, based upon the assumption that the Certificates will be issued in
March 1999 with a February 28, 1999 Cut-Off Date and that distributions on the
Certificates are made on the 15th day of each month (or, if such 15th day is not
a Business Day, the next succeeding Business Day):
<TABLE>
<S> <C>
February 28......... Cut-Off Date. The Original Pool Principal Balance will be the
aggregate principal amount of the Unguaranteed Interests of the SBA
Loans at the close of business on February 28, 1999 after application
of all payments collected on or before such date.
March 1-31.......... The Subservicers remit to the Servicer for deposit in the Principal
and Interest Account all amounts received on account of the
Unguaranteed Interests of the SBA Loans.
March 31............ First Record Date. Distribution on April 15, 1999 will be made to
Certificateholders of record on the Closing Date. Subsequent record
dates will be the last day of the month preceding the Remittance
Date.
April 12............ Determination Date. The Servicer determines the amount of principal
and interest that will be distributed to the Certificateholders on
April 15, and transfers funds in the Principal and Interest Account
to the Trustee for deposit in the Certificate Account together with
any Monthly Advances, Compensating Interest and, to the extent
necessary, amounts from the Spread Account.
April 15............ Remittance Date. The Trustee or the Paying Agent will distribute to
Certificateholders the amounts required to be distributed pursuant to
the Agreement.
</TABLE>
S-36
<PAGE>
SPREAD ACCOUNT
On the Closing Date, the Spread Account Depositor a special purpose,
bankruptcy remote Delaware corporation will establish the Spread Account with
the Trustee. The Spread Account will not be a part of the Trust Fund but will be
pledged to the Trustee as security for the obligations of the Spread Account
Depositor under the Agreement pursuant to an agreement (the "Spread Account
Agreement") between the Spread Account Depositor and the Trustee. On each
Remittance Date the Trustee will deposit into the Spread Account the Available
Funds, if any, remaining after payment of interest and principal to the holders
of the Certificates, amounts required to be deposited into the Expense Account
and certain amounts reimbursable to the Servicer, each as described above, until
the aggregate amount then on deposit in the Spread Account (the "Spread
Balance") equals the sum of (i) the then-outstanding principal balance of the
Unguaranteed Interests of all SBA Loans 180 days or more delinquent and (ii)
2.0% of the Original Pool Principal Balance; provided, however, that there shall
be excluded the principal portion of the Unguaranteed Interest of SBA Loans
which have been delinquent 24 months or have been determined to be
uncollectible, in whole or in part, by the Servicer, to the extent that the
Certificateholders have previously received the Unguaranteed Portion of the
principal balance of such SBA Loans. In no event shall the Spread Account
Balance exceed the then-outstanding aggregate principal balance of the
Certificates (the sum of such amounts is referred to herein as the "Specified
Spread Account Requirement").
On each Remittance Date, to the extent funds are available therefor, the
Trustee will withdraw from the Spread Account for deposit into the Certificate
Account the amount, if any, by which (i) the sum of (a) the Class A, Class M and
Class B Interest Distribution Amounts, (b) the Class A, Class M and Class B
Principal Distribution Amounts and (c) the Class A, Class M and Class B
Carry-Forward Amounts exceeds (ii) the Available Funds for such Remittance Date
(but excluding from such definition, amounts in the Spread Account and amounts
available to be drawn under the Letter of Credit).
On each Remittance Date, Available Funds remaining after payment of interest
and principal to the Class A, Class M and Class B Certificates and payment of
the Trustee's fees and expenses will be deposited in the Spread Account and, to
the extent amounts in the Spread Account would exceed the then applicable
Specified Spread Account Requirement, such excess will be distributed to the
Spread Account Depositor. To the extent that the Spread Account Balance exceeds
the Specified Spread Account Requirement, such excess will be distributed to the
Spread Account Depositor. The Spread Account Depositor will not be required to
refund any amounts previously properly distributed to it, regardless of whether
there are sufficient funds on a subsequent Remittance Date to make a full
distribution to holders of the Certificates on such Remittance Date.
The funding and maintenance of the Spread Account is intended to enhance the
likelihood of timely payment of principal and interest to the holders of the
Certificates; however, if the SBA Loan Pool experiences levels of delinquencies
and losses above the scenarios used to obtain the ratings on the Class M
Certificates, the Spread Account could be depleted, and shortfalls could result.
LETTER OF CREDIT
On the Closing Date, First Union National Bank will issue a letter of credit
(the "Letter of Credit") in favor of the Trust. For each Remittance Date, if the
amount required to be distributed to the Certificateholders exceeds the
Available Funds for such Remittance Date (other than the portion attributable to
the Letter of Credit) the Trustee will make a draw under the Letter of Credit
equal to the lesser of (i) the amount of such shortfall and (ii) the LOC
Available Amount.
For each Remittance Date, the "LOC Available Amount" will be determined as
follows:
LOC Available Amount=(AxB)-(C-D)-E
S-37
<PAGE>
Where:
<TABLE>
<S> <C>
A = the Applicable Percentage (as defined below)
B = the aggregate outstanding principal amount of the Certificates immediately prior to
such Remittance Date
C = the amount on deposit in the Spread Account immediately prior to such Remittance Date
D = the portion of the amount in the Spread Account attributable to SBA Loans 180 or more
days delinquent
E = the amount of all prior draws under the Letter of Credit
</TABLE>
For the first 12 Remittance Dates, the "Applicable Percentage" will equal
the product of 1.5% and the number of months since the Closing Date (I.E., 1.5%
for the first Remittance Date, 3.0% for the second Remittance Date, etc.). For
each Remittance Date thereafter, the Applicable Percentage will equal 18.0%.
If First Union National Bank (the "Bank") has its long-term unsecured debt
rating lowered to below "A2" by Moody's or its short-term unsecured debt rating
lowered to below "P-1" by Moody's, then the Bank shall either (i) deposit into
the Spread Account an amount equal to the then applicable LOC Available Amount
(assuming the Applicable Percentage equals 18.0%) or (ii) provide a replacement
letter of credit or other credit support satisfactory to Moody's. Additionally,
the Bank may terminate the Letter of Credit or substitute it for another letter
of credit or other credit support if, in either event, each of Moody's and DCR
indicates in writing that such termination or substitution will not cause it to
lower its ratings then assigned to any class of Certificates.
The Bank is a subsidiary of First Union Corporation (the "Corporation"),
whose principal office is located in Charlotte, North Carolina. The Corporation
is the sixth largest bank holding company in the United States based on
approximately $237 billion in total assets as of December 31, 1998.
The Bank is a national banking association with its principal office in
Charlotte, North Carolina and is subject to examination and primary regulation
by the Office of the Comptroller of the Currency of the United States. The Bank
is a commercial bank offering a wide range of banking, trust and other services
to its customers. As of December 31, 1998, the Bank had total assets of
approximately $222 billion, total net loans of approximately $133 billion, total
deposits of approximately $145 billion and stockholder's equity of approximately
$19 billion.
The Bank submits quarterly to the Federal Deposit Insurance Corporation (the
"FDIC") certain reports called "Consolidated Reports of Condition and Income for
a Bank With Domestic and Foreign Offices" (each, a "Call Report", and
collectively, the "Call Reports"). The publicly available portions of the Call
Reports with respect to the Bank are on file with the FDIC, and copies of such
portions of the Call Reports may be obtained from the FDIC, Disclosure Group,
Room F5I8, 550 17th Street, N.W., Washington, D.C. 20429, at prescribed rates.
In 1989, the United States Congress passed comprehensive financial
institutions legislation known as the Financial Institutions Reform, Recovery
and Enforcement Act ("FIRREA"). Pursuant to the provisions of FIRREA, an
FDIC-insured financial institution sharing common ownership with a failed
institution can be required to indemnify the FDIC for its losses resulting from
the insolvency of the failed institution, even if such indemnification causes
the affiliated institution also to become insolvent. As a result, the Bank may
under certain circumstances, be obligated for the liabilities of the banking
subsidiaries of the Corporation.
NO BANKING OR OTHER AFFILIATE CONTROLLED BY THE CORPORATION, EXCEPT THE
BANK, IS OBLIGATED TO MAKE PAYMENTS UNDER THE LETTER OF CREDIT.
S-38
<PAGE>
The information contained in this section relates to and has been obtained
from the Bank and is furnished solely to provide limited introductory
information regarding the Bank and does not purport to be comprehensive.
Information regarding the Bank is qualified in its entirety by the detailed
information appearing in the documents and financial statements referenced
above.
The delivery hereof shall not create any implication that there has been no
change in the affairs of the Bank since the date hereof, or that the information
contained in this section is correct as of any time subsequent to its date.
MULTI-PARTY AGREEMENT
TMSIC and MSNY, as Sellers, the Servicer, the Trustee, the FTA and the SBA
will enter into a Multi-Party Agreement, dated as of February 28, 1999 (the
"Multi-Party Agreement"), which will set forth the relationship of the parties
with respect to the SBA Section 7(a) Loans and the proceeds thereof and the
consent of the SBA to the transactions contemplated by the Agreement.
MONTHLY ADVANCES
The Servicer is required to remit to the Trustee no later than the third
Business Day prior to each Remittance Date (the "Determination Date") for
deposit in the Certificate Account the amount (the "Monthly Advance"), if any,
by which (i) 30 days' interest at a rate equal to the then-applicable weighted
average Class A, Class M and Class B Remittance Rates plus the rate used in
determining certain expenses of the Trust Fund (the "Adjusted SBA Loan
Remittance Rate") on the aggregate Class A, Class M and Class B Principal
Balances immediately prior to the related Remittance Date (as the amount
calculated pursuant to this clause (i) may be adjusted in accordance with the
limits described under "Description of the Agreement and the
Certificates--Interest Distribution Amounts" herein) exceeds (ii) the amount
received by the Servicer as of the related Record Date in respect of interest on
the SBA Loans minus the interest payable to the holders of the Guaranteed
Interest, the Additional Fee, the Premium Protection Fee, the Servicing Fee and
the FTA's Fee (plus, for the Remittance Dates in April, May and June 1999, the
sum of (a) all funds to be transferred to the Certificate Account from the
Capitalized Interest Account for such Remittance Date and (b) certain investment
earnings on amounts in the Pre-Funding Account for the applicable Remittance
Date). The Servicer is not required to make Monthly Advances which it
determines, in good faith, would be nonrecoverable from amounts received in
respect of the SBA Loans.
Monthly Advances are reimbursable in the first instance from late
collections of interest, Liquidation Proceeds, Insurance Proceeds and proceeds
received by the Servicer in connection with condemnation, eminent domain or a
release of lien ("Released Mortgaged Property Proceeds") collected with respect
to the related SBA Loan as to which the Monthly Advances were made. The
Servicer's right to reimbursement for such advances in excess of such amounts is
limited to late collections of interest received on the SBA Loans generally;
PROVIDED, HOWEVER, that the Servicer's right to such reimbursement is
subordinate to the rights of the Certificateholders, the holder of the Premium
Protection Fee and the holders of the Guaranteed Interest. Monthly Advances are
intended to provide sufficient funds for the payment of interest to the
Certificateholders at the then-applicable Class A, Class M or Class B Remittance
Rate, plus an additional amount, if any, required to pay the fees and expenses
of the Trustee.
COMPENSATING INTEREST
Not later than each Determination Date, with respect to each SBA Loan as to
which a Principal Prepayment or a Curtailment was received during the related
Due Period, the Servicer is required to remit to the Trustee, from amounts
otherwise payable to the Servicer as servicing compensation (other than the
Premium Protection Fee and the Servicing Fee with respect to the Guaranteed
Interest), an
S-39
<PAGE>
amount ("Compensating Interest") equal to any excess of (a) 30 days' interest on
the Unguaranteed Percentage of the related principal balance at the Adjusted SBA
Loan Remittance Rate over (b) that portion of the amount of interest actually
received in respect of the related SBA Loan during such Due Period and available
to be paid to the Certificateholders.
SERVICING OF THE SBA LOANS
MSNY will service the SBA Loans sold by it to the Trust Fund and TMSIC will
service the SBA Loans sold by it to the Trust Fund, in each case, in accordance
with the Agreement, the SBA Rules and Regulations and the Multi-Party Agreement,
and will cause the SBA Loans to be serviced with the same care as it customarily
employs and exercises in servicing and administering small business loans for
its own account, giving due consideration for the reliance of the Trustee on the
Servicer. Such servicing includes, without limitation, the right to release
and/or substitute collateral for an SBA Loan. The Servicer is entitled to a
servicing fee of 0.40% per annum (the "Servicing Fee") of the unpaid principal
balance of each SBA Loan, calculated and paid monthly from the interest portion
of monthly payments, Liquidation Proceeds and certain other proceeds collected.
SERVICING ADVANCES
The Servicer will be entitled to reimbursement for amounts advanced by it
constituting "out-of-pocket" costs and expenses relating to (i) the preservation
and restoration of any related Mortgaged Property or other collateral, (ii)
enforcement proceedings, including foreclosures and (iii) certain other
customary amounts described in the Agreement. Such advances ("Servicing
Advances") are generally reimbursable to the Servicer from Liquidation Proceeds,
Released Mortgaged Property Proceeds, Insurance Proceeds and such other amounts
as may be collected by the Servicer from the related Borrower or otherwise
relating to the SBA Loan in respect of which such amounts are owed; PROVIDED,
HOWEVER, that Servicing Advances in excess of such amounts are reimbursable to
the same extent and from the same sources as Monthly Advances.
REGISTRATION OF CERTIFICATES
The Offered Certificates will initially be registered in the name of Cede &
Co., the nominee of The Depository Trust Company ("DTC"). Certificates
registered in the name of Cede & Co. are referred to as the "Book-Entry
Certificates." Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners") will hold their Offered Certificates through
(i) DTC, in the United States, or (ii) Cedelbank, societe anonyme ("Cedel") or
the Euroclear System ("Euroclear") (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Certificates will be issued in one or more certificates
which equal the aggregate principal balance of the respective Class of
Certificates. Cedel and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank N.A. will act as depositary for Cedel and Morgan Guaranty
Trust Company of New York, Brussels Office, will act as depositary for Euroclear
(in such capacities individually, the "Relevant Depositary" and collectively,
the "European Depositaries").
Because of time zone differences, credits of securities received in Cedel or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
S-40
<PAGE>
relevant Cedel or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
DTC management is aware that some computer applications, systems, and the
like for processing dates ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to Issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the information set forth in the preceding two paragraphs
about DTC has been provided to the Industry by DTC for informational purposes
only and is not intended to serve as a representation, warranty or contract
modification of any kind.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and
S-41
<PAGE>
settlement of securities transactions between Cedel Participants through
electronic book-entry changes in accounts of Cedel Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars. Cedel
provides to its Cedel Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel interfaces with domestic
markets in several countries. As a professional depository, Cedel is subject to
regulation by the Luxembourg Monetary Institute. Cedel Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Cedel Participant, either directly
or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("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 be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible 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.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel or Euroclear will be credited to the cash accounts of Cedel
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical
S-42
<PAGE>
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
DTC has advised the Trustee that DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates, Cedel or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Cedel. Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Class A or Class B Certificates which conflict with actions taken with respect
to other Class A or Class B Certificates.
CERTIFICATES REGISTERED THROUGH DTC. DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the 1934 Act. See "Description of the
Certificates-- Book-Entry Registration" in the Prospectus.
CERTIFICATES NOT REGISTERED THROUGH DTC. With respect to (i) any Offered
Certificate not originally registered through DTC, or (ii) any Definitive
Certificate issued in exchange for a Book-Entry Certificate in connection with
the events described above (together, "Physical Certificates"), the Trustee will
be required to make payments and furnish reports directly to the related
Certificateholder.
If (i) any mutilated Physical Certificate is surrendered to the Certificate
Registrar (as defined under "Certain Definitions"), or the Trustee and the
Certificate Registrar receive satisfactory evidence of the destruction, loss or
theft of any Physical Certificate, and (ii) there is delivered to the Servicer,
the Trustee and the Certificate Registrar such security or indemnity as may be
required by each of them to save each of them harmless, then, in the absence of
notice to the Servicer, the Trustee and the Certificate Registrar that such
Physical Certificate has been acquired by a bona fide purchaser, the Servicer
shall execute and deliver, and the Trustee shall authenticate, in exchange for
or in lieu of any such mutilated, destroyed, lost or stolen Physical
Certificate, a new Physical Certificate of like tenor and Percentage Interest,
but bearing a number not contemporaneously outstanding. Upon the issuance of any
such new Physical Certificate, the Servicer and the Trustee may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in relation thereto and any other expenses connected therewith.
Any such duplicate Physical Certificate shall constitute complete and
indefeasible evidence of ownership in the Trust Fund, as if originally issued,
whether or not the mutilated, destroyed, lost or stolen Physical Certificate
shall be found at any time.
Physical Certificates will be transferable and exchangeable at the corporate
trust office of the Trustee or, at the election of the Trustee, at the office of
the Certificate Registrar. No service charge will be made for any registration
of exchange or transfer, but the Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge.
Prior to due presentation of a Physical Certificate for registration of
transfer, the Servicer, the Trustee, the Sellers, the Paying Agent and the
Certificate Registrar may treat the Person in whose name any Physical
Certificate is registered as the owner of such Physical Certificate for the
purpose of receiving distributions with respect to such Certificate and for all
other purposes whatsoever, and the Servicer, the Trustee, the Seller and the
Certificate Registrar shall not be affected by notice to the contrary.
S-43
<PAGE>
All Physical Certificates surrendered for registration of transfer or
exchange are required, if surrendered to any Person other than the Trustee, to
be delivered to the Trustee and to be promptly canceled by it. No Physical
Certificate is to be authenticated in lieu of or in exchange for any Physical
Certificate so canceled, except as expressly permitted by the Agreement. All
canceled Certificates may be held by the Trustee in accordance with its standard
retention policy.
REMOVAL AND RESIGNATION OF SERVICER
The Majority Certificateholders, by notice in writing to the Servicer, may,
pursuant to the Agreement, remove the Servicer upon the occurrence of any of the
following events:
(i) (A) the failure by the Servicer to make any required Servicing
Advance, to the extent such failure materially or adversely affects the
interests of the Certificateholders; (B) the failure by the Servicer to make
any required Monthly Advance to the extent such failure materially or
adversely affects the interests of the Certificateholders; (C) the failure
by the Servicer to remit any Compensating Interest to the extent such
failure materially or adversely affects the interests of the
Certificateholders; or (D) any failure by the Servicer to remit to
Certificateholders, or to the Trustee for the benefit of the
Certificateholders, any payment required to be made under the terms of the
Agreement, which continues unremedied (in the case of the events described
in clauses (i)(A), (i)(C) and (i)(D), for 30 days) after the date upon which
written notice of such failure, requiring the same to be remedied, shall
have been given to the Servicer by the Trustee or to the Servicer and the
Trustee by any Certificateholder; or
(ii) failure by the Servicer or the Sellers duly to observe or perform,
in any material respect, any other covenants, obligations or agreements of
the Servicer or the Sellers, as set forth in the Agreement, which failure
continues unremedied for a period of 60 days after the date on which written
notice of such failure, requiring the same to be remedied, shall have been
given to the Servicer or the Sellers, as the case may be, by the Trustee or
to the Servicer, or the Sellers, as the case may be, and the Trustee by any
Certificateholder; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or liquidation
of its affairs, shall have been entered against the Servicer and such decree
or order shall have remained in force, undischarged or unstayed for a period
of 60 days; or
(iv) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating to the
Servicer or of or relating to all or substantially all of the Servicer's
property; or
(v) the Servicer shall admit in writing its inability to pay its debts
as they become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, or voluntarily suspend payment of its obligations.
The Servicer may not assign the Agreement nor resign from the obligations
and duties thereby imposed on it except by mutual consent of the Servicer, the
SBA, the Trustee and the Majority Certificateholders, or upon the determination
that the Servicer's duties thereunder are no longer permissible under applicable
law or administrative determination and such incapacity cannot be cured by the
Servicer. No such resignation shall become effective until a successor has
assumed the Servicer's responsibilities and obligations in accordance with the
Agreement.
Upon removal or resignation of the Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"). If, however, the Trustee is
unable to act as Successor Servicer, or if the SBA so requests, the Trustee may
appoint, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution acceptable to the SBA, Moody's
and DCR having a net
S-44
<PAGE>
worth of not less than $15,000,000 and which is an approved SBA guaranteed
lender in good standing, operating pursuant to an effective Loan Guaranty
Agreement as the Successor Servicer in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer.
OPTIONAL REPURCHASE
The Servicer has the right, but not the obligation, to repurchase the
Unguaranteed Interest of any Defaulted SBA Loan for the purchase price and in
the manner described in the Prospectus under "The Agreements--Representations
and Warranties of the Seller." A "Defaulted SBA Loan" is any SBA Loan as to
which the related Obligor has failed to make payment in full of three or more
consecutive Monthly Payments. In no event, however, may the aggregate principal
balance of the Unguaranteed Interests of Defaulted SBA Loans so purchased
pursuant to this provision exceed 10% of the sum of (i) the Original Pool
Principal Balance and (ii) the initial Pre-Funded Amount.
TERMINATION; PURCHASE OF SBA LOANS
The Agreement will terminate upon notice to the Trustee of the earlier of
either: (a) the final payment or other liquidation of the last SBA Loan, or the
disposition of all property acquired upon foreclosure of any SBA Loan and the
remittance of all funds due thereunder or (b) mutual consent of the Servicer and
all Certificateholders in writing; provided, however, that in no event will the
trust established by the Agreement terminate later than twenty-one years after
the death of the last surviving lineal descendant of Joseph P. Kennedy, late
Ambassador of the United States to the Court of St. James, alive as of the
Cut-Off Date.
The Servicer may, at its option, terminate the Agreement on any date on
which the then-outstanding aggregate principal balance of the Unguaranteed
Interests is less than 10% of the sum of (i) the Original Pool Principal Balance
and (ii) the original Pre-Funded Amount, if any, by purchasing, on the next
succeeding Remittance Date, all of the Unguaranteed Interests and any other
assets in the Trust Fund at a price equal to the sum of (i) 100% of the
then-outstanding Class A, Class M and Class B Principal Balances, and (ii) 30
days' accrued interest thereon at the then-applicable Class A, Class M and Class
B Remittance Rates (the "Termination Price"). Notwithstanding the prior
sentence, if at the time the Servicer determines to exercise such option, and
the unsecured long term debt obligations of the Servicer are not rated at least
Baa3 by Moody's and BBB- by Duff & Phelps, if such Rating Agencies are still
rating the Certificates, the Servicer shall give such Rating Agencies prior
written notice of the Servicer's determination to exercise such option and shall
not exercise such option without the consent of each such Rating Agency with an
opinion of counsel, in form and substance reasonably satisfactory to each such
Rating Agency, that the exercise of such option would not be deemed a fraudulent
conveyance by the Servicer; provided, however, that under certain other
circumstances set forth in the Agreement, the Servicer may not take such action
prior to providing Moody's and Duff & Phelps with an opinion of counsel that
such termination would not be deemed a fraudulent conveyance by the Servicer.
S-45
<PAGE>
THE TRUSTEE
HSBC Bank USA (f/k/a Marine Midland Bank), a trust company located in New
York, New York, has been named Trustee pursuant to the Agreement.
The Agreement requires that the Trustee shall at all times (i) be a national
banking association or banking corporation or trust company organized and doing
business under the laws of the United States of America or of any State, (ii) be
authorized under such laws to exercise corporate trust powers, (iii) having a
combined guaranteed capital and surplus of at least $30,000,000, (iv) have
unsecured and unguaranteed long-term debt obligations rated at least Baa3 by
Moody's and BBB- by DCR (provided DCR is rating the unsecured and unguaranteed
long-term debt obligations of the Trustee), or such other ratings as is
acceptable to the SBA, (v) be subject to supervision or examination by a federal
or state authority, (vi) be an approved SBA guaranteed lender in good standing,
operating pursuant to an effective Loan Guaranty Agreement, and (vii) be
reasonably acceptable to the SBA. If at any time the Trustee shall cease to be
eligible in accordance with the provisions described in this paragraph, it shall
resign upon request of the Majority Certificateholders in the manner and with
the effect specified in the Agreement.
The Trustee, or any trustee or trustees hereafter appointed, may resign at
any time in the manner set forth in the Agreement. Upon receiving notice of
resignation, the Servicer shall promptly appoint a successor trustee or trustees
meeting the eligibility requirements set forth above in the manner set forth in
the Agreement. If no successor trustee shall have been appointed and have
accepted appointment within 60 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
No resignation or removal of the Trustee and no appointment of a successor
trustee shall become effective until the acceptance of appointment by a
successor trustee.
The Majority Certificateholders with the consent of the SBA, Moody's and
DCR, or the SBA, may remove the Trustee under the conditions set forth in the
Agreement and appoint a successor trustee in the manner set forth therein.
The Servicer shall give notice of each removal of the Trustee to the
Certificateholders, which notice shall include the name of the successor trustee
and the address of its corporate trust office.
Upon acceptance of appointment by a successor trustee in the manner provided
in the Agreement, the Servicer shall give notice thereof to the
Certificateholders.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more Persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such Person or Persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Agreement, such powers, duties, obligations, rights and trusts
as the Servicer and the Trustee may consider necessary or desirable.
Neither the Trustee, its authorized agent(s) nor representative(s) will
conduct an independent review and assessment on whether SBA Loans should be
foreclosed or the underlying property should be liquidated when a default has
occurred with respect thereto.
S-46
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Stroock & Stroock & Lavan
LLP, special Federal tax counsel ("Federal Tax Counsel"), as to the anticipated
material federal income tax consequences of the purchase, ownership and
disposition of Certificates. The discussion, and the opinions referred to below,
are based on laws, regulations, rulings and decisions now in effect (or, in the
case of certain regulations, proposed), all of which are subject to change or
possibly differing interpretations. Investors should consult their own tax
advisors in determining the federal, state, local and other tax consequences to
them of the purchase, ownership and disposition of Certificates. For purposes of
this tax discussion (except with respect to information reporting, or where the
context indicates otherwise), the terms "Certificateholder" and "Holder" mean
the beneficial owner of a Certificate.
TAX STATUS OF THE TRUST FUND
Upon the issuance of the Certificates, Federal Tax Counsel will deliver its
opinion to the effect that, under then-current law, assuming compliance with the
Agreement, the Trust Fund will be classified for federal income tax purposes as
a grantor trust and not as an association taxable as a corporation or a taxable
mortgage pool. Accordingly, each Certificateholder will be subject to federal
income taxation as if it owned directly its interest in each asset owned by the
Trust Fund and paid directly its share of expenses paid by the Trust Fund.
For purposes of federal income tax, the Spread Account Depositor will be
deemed to have retained a fixed portion of the interest due on each SBA Loan
(the "Spread"). The Spread will be treated as "stripped coupons" within the
meaning of Section 1286 of the Code. The Servicer may also be deemed to have
retained a "stripped coupon" if and to the extent that the Servicing Fee is
determined to be unreasonable. In addition, because the Remittance Rates for the
Class M and Class B Certificates exceed the Class A Remittance Rate, a portion
of the interest accrued on each SBA Loan will be treated as a "stripped coupon"
purchased by each of the Class M and Class B Certificateholders. Accordingly,
each Class A Certificateholder will be treated as owning its pro rata percentage
interest in the principal of, and interest payable on, the Unguaranteed Interest
of each SBA Loan (minus the portion of the interest payable on such SBA Loan
that is treated as Spread, as a stripped coupon retained by the Servicer or as a
stripped coupon purchased by each of the Class M and Class B
Certificateholders), and such interest in the Unguaranteed Interest of each SBA
Loan will be treated as a "stripped bond" within the meaning of Section 1286 of
the Code. Similarly, each Class M and Class B Certificateholder will be treated
as owning its pro rata percentage interest in the principal of the Unguaranteed
Interest of each SBA Loan, plus a disproportionate share of the interest payable
on each SBA Loan.
CLASS A CERTIFICATEHOLDERS
Because Class A Certificates represent stripped bonds, they will be subject
to the original issue discount ("OID") rules of the Code. Accordingly, the tax
treatment of a Class A Certificateholder will depend upon whether the amount of
OID on a Class A Certificate is less than a statutorily defined DE MINIMIS
amount.
In general, under regulations issued under Section 1286 of the Code, the
amount of OID on an SBA Loan treated as a "stripped bond" will be DE MINIMIS if
it is less than 0.25 percent of the stated redemption price at maturity, as
defined in Section 1273(a)(2) of the Code, multiplied by the number of years
remaining after the purchase date until the maturity of the SBA Loan. The
maturity date is based on the weighted average maturity date (and a reasonable
prepayment assumption may have to be taken into account in determining weighted
average maturity). Under the regulations, the portion of the interest on each
SBA Loan payable to the Class A Certificateholders will be treated as "qualified
S-47
<PAGE>
stated interest." As a result, the amount of OID on an SBA Loan will equal the
amount by which the price at which a Certificateholder is deemed to have
acquired an interest in an SBA Loan (the "Purchase Price") is less than the
portion of the remaining principal balance of the SBA Loan allocable to the
interest acquired. Although Federal Tax Counsel cannot opine on the matter, the
Trust Fund intends to take the positions (i) that the amount of OID on the SBA
Loans will be determined by aggregating all payments on the SBA Loans allocable
to the Class A Certificateholders (not including the Spread), and treating the
portion of all payments on the SBA Loans allocable to Class A Certificateholders
as a single obligation on an aggregate basis, rather than being determined
separately with respect to each SBA Loan, and (ii) that no separate allocation
of consideration must be made to accrued interest or to amounts held in the
Certificate Account.
Based on these positions, the Trust Fund anticipates that the Certificates
will not be issued initially with OID (or that any OID present will be DE
MINIMIS). The Internal Revenue Service ("IRS") could require, instead, that the
computation be performed on an SBA Loan-by-SBA Loan basis. In the preamble to
the regulations under Section 1286 of the Code, the IRS requests comment on
appropriate aggregation rules. Any such recalculation could adversely affect the
timing and character of a Class A Certificateholder's income. The IRS might also
require that a portion of the purchase price for a Certificate be allocated to
accrued interest on each SBA Loan and to amounts held in the Certificate Account
pending distribution to Certificateholders at the time of purchase as though
such accrued interest and collections on the SBA Loans were separate assets
purchased by the Certificateholder. Any such allocation would reduce the
Purchase Price and thus increase the discount (or decrease the premium) on the
SBA Loans.
If the amount of OID is DE MINIMIS under the rule set forth above, the Class
A Certificates would not be treated as having OID. Each Class A
Certificateholder would be required to report on its federal income tax return
its share of the gross income of the Trust Fund, including interest and certain
other charges accrued on the SBA Loans and any gain upon collection or
disposition of the SBA Loans (but not including any portion of the Spread). Such
gross income attributable to interest on the SBA Loans would exceed the Class A
Remittance Rate by an amount equal to the Class A Certificateholder's share of
the expenses of the Trust Fund for the period during which it owns a Class A
Certificate. The Class A Certificateholder would be entitled to deduct its share
of expenses of the Trust Fund to the extent described below. Any amounts
received by a Class A Certificateholder from the Spread Account or from the
subordination of the Class B Certificates will be treated for federal income tax
purposes as having the same character as the payments they replace. A Class A
Certificateholder would report its share of the income of the Trust Fund under
its usual method of accounting. Accordingly, interest would be includable in a
Certificateholder's gross income when it accrues on the SBA Loans, or, in the
case of Certificateholders who are cash basis taxpayers, when received by the
Servicer on behalf of Certificateholders. The actual amount of discount on an
SBA Loan would be includable in income as principal payments are received on the
SBA Loans.
If, contrary to the treatment anticipated by the Trust Fund, the OID on an
SBA Loan is not DE MINIMIS, a Class A Certificateholder will be required to
include in income, in addition to the amounts described above, any OID as it
accrues, regardless of when cash payments are received, using a method
reflecting a constant yield on the SBA Loans. It is possible that the IRS could
require use of a prepayment assumption in computing the yield of an SBA Loan. If
an SBA Loan is deemed to be acquired by a Certificateholder at a significant
discount, such treatment could accelerate the accrual of income by a
Certificateholder.
Although the Trustee intends to account for OID, if any, reportable by
holders of Class A Certificates by reference to the price paid for a Class A
Certificate by an initial purchaser, the amount of OID will differ for
subsequent purchasers. Such subsequent purchasers should consult their tax
advisers regarding the proper calculation of OID on the interest in SBA Loans
represented by a Class A Certificate.
S-48
<PAGE>
As to SBA Loans that are real estate mortgages, a Certificateholder may be
able (or may be required) to account for any discount on such SBA Loans as
market discount rather than OID if either (i) the amount of OID with respect to
the Certificate was treated as zero under the OID DE MINIMIS rule when the
Certificate was stripped or (ii) no more than 1% (i.e., 100 basis points),
including any amount of servicing in excess of reasonable servicing, is stripped
off from the SBA Loans. As noted above, the Trust Fund intends to account for
the SBA Loans on an aggregate basis and does not intend to report separately for
this purpose with respect to the SBA Loans that are real estate mortgages.
In the event that an SBA Loan is treated as purchased at a premium (i.e.,
its Purchase Price exceeds the portion of the remaining principal balance of
such SBA Loan allocable to the Certificateholder), such premium will be
amortizable by the Certificateholder as an offset to interest income (with a
corresponding reduction in the Certificateholder's basis) under a constant yield
method over the term of the SBA Loan if an election under Section 171 of the
Code is made with respect to the interests in the SBA Loans represented by the
Certificates or was previously in effect. Any such election will also apply to
all debt instruments held by the Certificateholder during the year in which the
election is made and all debt instruments acquired thereafter.
A Certificateholder will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust Fund as provided in Section 162 or 212 of the
Code. If a Certificateholder is an individual, estate or trust, the deduction
for such holder's share of such fees will be allowed only to the extent that all
of such holder's miscellaneous itemized deductions, including such holder's
share of such fees, exceed two percent of such holder's adjusted gross income.
CLASS M AND CLASS B CERTIFICATEHOLDERS
IN GENERAL. Except as described below, it is believed that the Class M and
Class B Certificateholders will be subject to tax in the same manner as Class A
Certificateholders. However, no federal income tax authorities address the
precise method of taxation of an instrument such as the Class M and Class B
Certificates and Federal Tax Counsel cannot opine on this issue. In the absence
of applicable authorities, the Trustee intends to report income to Class M and
Class B Certificateholders in the manner described below.
Each Class M and Class B Certificateholder will be treated as owning (i) the
Class M and Class B Percentage, respectively, of the principal portion of the
Unguaranteed Interest on each SBA Loan plus (ii) a disproportionate portion of
the interest on each SBA Loan (not including the Spread). Income will be
reported to a Class M and Class B Certificateholder based on the assumption that
all amounts payable to the Class M and Class B Certificateholders are taxable
under the coupon stripping provisions of the Code and treated as a single
obligation. In applying those provisions, the Trustee will take the position
that a Class M and Class B Certificateholder's entire share of the interest on
an SBA Loan will qualify as "qualified stated interest." Thus, except to the
extent modified by the effects of subordination of the Class M and Class B
Certificates, as described below, income will be reported to Class M and Class B
Certificateholders in the manner described above for holders of the Class A
Certificates.
EFFECT OF SUBORDINATION
If the Certificateholders of one Class of Certificates receive distributions
of less than their share of the Trust Fund's receipts of principal or interest
(the "Shortfall Amount") because of the subordination of the Certificates, it is
believed that such Certificateholders would probably be treated for federal
income tax purposes as if they had (l) received as distributions their full
share of such receipts, (2) paid over to the Certificateholders of the other
Class of Certificates an amount equal to such Shortfall Amount, and (3) retained
the right to reimbursement of such amounts to the extent of future
S-49
<PAGE>
collections otherwise available for deposit in the Spread Account. However,
Federal Tax Counsel cannot opine to such treatment.
Under this treatment, (1) Class B Certificateholders would be required to
accrue as current income any interest, OID income, or (to the extent paid on the
SBA Loans) accrued market discount of the Trust Fund that was a component of the
Shortfall Amount, even though such amount was in fact paid to the Class A
Certificateholders, (2) a loss would only be allowed to the Class B
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless (i.e., when it became clear that that amount would not
be available from any source to reimburse such loss), and (3) reimbursement of
such Shortfall Amount prior to such a claim of worthlessness would not be
taxable income to the subordinate Class of Certificateholders because such
amount was previously included in income. Similarly, a loss would only be
allowed to the Class A Certificateholders when their right to receive
reimbursement of such Shortfall Amount became worthless. Those results should
not significantly affect the inclusion of income for a subordinate Class of
Certificateholders on the accrual method of accounting, but could accelerate
inclusion of income to the subordinate Class of Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions is unclear and Federal Tax
Counsel cannot opine as to such character or timing.
STATUS OF THE CERTIFICATES AS REAL PROPERTY LOANS
The Certificates generally will be "qualifying real property loans" within
the meaning of Section 593(d) of the Code, "real estate assets" for purposes of
Section 856(c)(4)(A) of the Code, and interest income on the Certificates
generally will be "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, to the extent
that the SBA Loans are mortgages secured by real property. The Certificates
generally will be treated as "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code, to the
extent that the SBA Loans are secured by residential real estate mortgages.
SALES OF CERTIFICATES
A Holder that sells a Certificate will recognize gain or loss equal to the
difference between the amount realized on the sale and its adjusted basis in the
Certificate. In general, such adjusted basis will equal the Holder's cost for
the Certificate, increased by the amount of any income previously reported with
respect to the Certificate, and decreased by the amount of any losses previously
reported with respect to the Certificate and the amount of any distributions
received thereon. Any such gain or loss generally will be capital gain or loss
if the assets underlying the Certificate were held as capital assets, except
that, in the case of a Certificate that was acquired with more than a DE MINIMIS
amount of market discount, such gain will be treated as ordinary interest income
to the extent of the portion of such discount that accrued during the period in
which the seller held the Certificate and that was not previously included in
income.
FOREIGN INVESTORS
A Certificateholder who is not a "United States person" (as defined below)
and is not subject to federal income tax as a result of any direct or indirect
connection to the United States other than its ownership of a Certificate
generally will not be subject to United States income or withholding tax in
respect of payments of interest or original issue discount on a Certificate,
provided that the Holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such Holder is not
a United States person and providing the name and address of such Holder).
However, distributions of interest to a Holder who is not a United States person
will be subject to withholding tax at a rate of 30 percent, unless such
withholding tax rate is reduced by an applicable treaty, to the extent that such
S-50
<PAGE>
interest distributions are attributable to SBA Loans originated on or prior to
July 18, 1984. For these purposes, the term "United States person" means a
citizen or a resident of the United States, a corporation, partnership, or other
entity created or organized in, or under the laws of, the United States or any
political subdivision thereof, or an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds from the
sale of Certificates, to Certificateholders who are not "exempt recipients" may
be subject to the "backup withholding" tax under Section 3406 of the Code at a
rate of 31 percent, if such holders fail to furnish certain information,
including their taxpayer identification numbers, to the Trustee, its agent, or
the broker effecting a sale of the Certificate, or otherwise fail to establish
an exemption from such tax. Any amounts deducted and withheld from a
distribution to a Certificateholder would be allowed as a credit against such
Certificateholder's federal income tax. Furthermore, certain penalties may be
imposed by the IRS on a Certificateholder who is required to supply information
but who does not do so in the proper manner.
ERISA CONSIDERATIONS
Neither an Underwriter Exemption (as defined in the Prospectus) nor
Prohibited Transaction Class Exemption 83-1 is applicable to the purchase,
holding or transfer of the Certificates. Therefore, no Certificates may be
purchased for, or on behalf of, any employee benefit plan or other retirement
arrangement which is subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended, and/or Section 4975 of the Code, or any entity
whose underlying assets include plan assets by reason of such plan or account
investing in such entity (including insurance company separate or general
accounts and collective investment funds). Each Certificateholder will be deemed
to have represented and warranted that it is not subject to the foregoing
limitations. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase Certificates or to purchase
Certificates representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
for the sale of the Offered Certificates, dated March 26, 1999 (the
"Underwriting Agreement"), the Sellers have agreed to sell and the Underwriters
have agreed to purchase all the Offered Certificates set forth below its name.
<TABLE>
<CAPTION>
FIRST UNION PRUDENTIAL
CAPITAL MARKETS SECURITIES
CORP. INCORPORATED TOTAL
------------------ ------------------- -------------
<S> <C> <C> <C>
Class A.............................. $ 47,006,000 $ 47,006,000 $ 94,012,000
Class M.............................. $ 1,444,000 $ 1,444,000 $ 2,888,000
------------------ ------------------- -------------
Total................................ $ 48,450,000 $ 48,450,000 $ 96,900,000
</TABLE>
The Representative has been advised by the Underwriters that the
Underwriters propose initially to offer the Offered Certificates to the public
from time to time in negotiated transactions or otherwise, at varying prices to
be determined at the time of sale. This Prospectus Supplement and the Prospectus
may be used by First Union Capital Markets Corp. in connection with offers and
sales
S-51
<PAGE>
related to market-making transactions. First Union Capital Markets Corp. may act
as principal or agents in such transactions.
The Representative has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Each of the Underwriters may provide investment banking and other services
for the Representative for which it will receive additional compensation.
The Representative, the Sellers, Holdings and First Union National Bank are
affiliates of First Union Capital Markets Corp. The Underwriters, their agents
and their associates may be customers of (including borrowers from), engage in
transactions with, and/or perform services for the Representative, its
affiliates, and the Trustee in the ordinary course of business.
RATINGS
It is a condition to their issuance that the Class A Certificates be rated
"Aaa" and "AAA" by Moody's and Duff & Phelps, respectively, and that the Class M
Certificates be rated at least "A2" and "A" by Moody's and Duff & Phelps,
respectively. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time. No person
is obligated to maintain the rating on any Certificate.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Sellers by Bruce Hurwitz, Esq.,
Managing Attorney to the Sellers. Certain legal matters relating to the validity
of the issuance of the Certificates will be passed upon for the Underwriters by
Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan LLP
also will render opinions relating to the transfer of the Unguaranteed Interests
from the Sellers to the Trust Fund and as to the material federal income tax
consequences associated with the purchase, ownership and disposition of the
Certificates. See "Risk Factors--The Status of the SBA Loans in the Event of
Bankruptcy of the Sellers" in the Prospectus and "Federal Income Tax
Consequences" herein and "Federal Income Tax Consequences" in the Prospectus.
FINANCIAL INFORMATION
The Sellers have determined that their financial statements are not material
to the offering made hereby. Except for certain representations and warranties
relating to the SBA Loans, the obligations of the Sellers with respect to the
SBA Loans are primarily limited to contractual servicing obligations.
The Trust Fund has been formed to own the SBA Loans and to issue the
Certificates. The Trust Fund had no assets or obligations prior to the issuance
of the Certificates and will not engage in any activities other than those
described herein. Accordingly, no financial statements with respect to the Trust
Fund are included in this Prospectus Supplement.
S-52
<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Act............................................................................................. S-23
Account......................................................................................... S-57
Additional Fee.................................................................................. S-9, S-24
Additional Fee SBA Loans........................................................................ S-9, S-24
Adjusted SBA Loan Remittance Rate............................................................... S-39
Adjustment Date................................................................................. S-34
Aggregate Class A Certificate Principal Balance................................................. S-57
Aggregate Class B Certificate Principal Balance................................................. S-57
Aggregate Class M Certificate Principal Balance................................................. S-57
Agreement....................................................................................... S-11
Annual Expense Escrow Amount.................................................................... S-57
Applicable Percentage........................................................................... S-38
Assignee........................................................................................ S-31
Assignment of Mortgage.......................................................................... S-57
Available Funds................................................................................. S-57
Bank............................................................................................ S-38
BIF............................................................................................. S-57
Book-Entry Certificates......................................................................... S-40
Business Day.................................................................................... S-57
Call Report..................................................................................... S-38
Capitalized Interest Account.................................................................... S-57
Cedel........................................................................................... S-40
Cedel Participants.............................................................................. S-41
Certificate Account............................................................................. S-32
Certificateholder or Holder..................................................................... S-47, S-57
Certificate Owners.............................................................................. S-40
Certificate Register............................................................................ S-57
Certificate Registrar........................................................................... S-58
Certified Lender................................................................................ S-23
Class A Percentage.............................................................................. S-36
Class A Remittance Rate......................................................................... S-34
Class B Percentage.............................................................................. S-36
Class B Remittance Rate......................................................................... S-34
Class Carry Forward Amount...................................................................... S-58
Class Interest Distribution Amount.............................................................. S-34
Class M Percentage.............................................................................. S-36
Class M Remittance Rate......................................................................... S-34
Class Principal Distribution Amount............................................................. S-36
Closing Date.................................................................................... S-1, S-9
CLP............................................................................................. S-27
Collateral...................................................................................... S-58
Commercial Property............................................................................. S-58
Compensating Interest........................................................................... S-2, S-39
Cooperative..................................................................................... S-42
Corporation..................................................................................... S-38
CPR............................................................................................. S-25
Curtailment..................................................................................... S-58
</TABLE>
S-53
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Custodian....................................................................................... S-1
Cut-Off Date.................................................................................... S-1, S-9
Designated Depository Institution............................................................... S-58
Determination Date.............................................................................. S-58
Defaulted SBA Loan.............................................................................. S-45
DCR............................................................................................. S-5
Determination Date.............................................................................. S-39
DTC............................................................................................. S-40
DTC Services.................................................................................... S-42
Due Date........................................................................................ S-58
Due Period...................................................................................... S-58
Euroclear....................................................................................... S-40
Euroclear Operator.............................................................................. S-42
Euroclear Participants.......................................................................... S-42
European Depositories........................................................................... S-40
Event of Default................................................................................ S-58
Excess Payments................................................................................. S-58
Excess Proceeds................................................................................. S-58
Expense Account................................................................................. S-59
Excess Spread................................................................................... S-10
Extra Interest.................................................................................. S-35
Extra Interest Percentage....................................................................... S-34
FDIC............................................................................................ S-38, S-58
Federal Tax Counsel............................................................................. S-47
FHLMC........................................................................................... S-59
Final Scheduled Remittance Date................................................................. S-1
FIRREA.......................................................................................... S-38
FNMA............................................................................................ S-59
Foreclosed Property............................................................................. S-59
Foreclosed Property Disposition................................................................. S-59
FTA............................................................................................. S-9
FTA's Fee....................................................................................... S-9
Funding Period.................................................................................. S-11
Global Securities............................................................................... A-1
GPP............................................................................................. S-27
Grantor Trust................................................................................... S-5
Guaranteed Interest............................................................................. S-9
Holder.......................................................................................... S-47, S-57
Industry........................................................................................ S-41
Insurance Proceeds.............................................................................. S-59
Interest........................................................................................ S-1
IRS............................................................................................. S-48
Letter of Credit................................................................................ S-37
Liquidated SBA Loan............................................................................. S-59
Liquidation Proceeds............................................................................ S-59
Loan Guaranty Agreement......................................................................... S-59
LOC Available Amount............................................................................ S-37
Majority Certificateholders..................................................................... S-59
Monthly Advances................................................................................ S-39
Monthly Payment................................................................................. S-59
</TABLE>
S-54
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Moody's......................................................................................... S-5
Mortgage........................................................................................ S-59
Mortgaged Property.............................................................................. S-59
MSNY............................................................................................ S-9, S-27
Multi-Party Agreement........................................................................... S-39
Net Liquidation Proceeds........................................................................ S-59
Note Rates...................................................................................... S-13
Obligor......................................................................................... S-9
Offered Certificates............................................................................ ii, S-25
OID............................................................................................. S-47
Opinion of Counsel.............................................................................. S-59
Original Class A Certificate Principal Balance.................................................. S-59
Original Class B Certificate Principal Balance.................................................. S-59
Original Class M Certificate Principal Balance.................................................. S-59
Original Pool Principal Balance................................................................. S-25
Parent.......................................................................................... S-27
Paying Agent.................................................................................... S-60
Percentage Interest............................................................................. S-60
Permitted Instruments........................................................................... S-33
Person.......................................................................................... S-61
Physical Certificates........................................................................... S-43
PLP............................................................................................. S-27
Pool Principal Balance.......................................................................... S-60
Preferred Lender................................................................................ S-23
Pre-Funded Amount............................................................................... S-24
Pre-Funding Account............................................................................. S-2, S-60
Premium Protection Fee.......................................................................... S-10
Prime Rate...................................................................................... S-10
Principal....................................................................................... S-2
Principal and Interest Account.................................................................. S-1, S-29
Principal Balance............................................................................... S-61
Principal Prepayment............................................................................ S-61
Prior Lien...................................................................................... S-61
Purchase Price.................................................................................. S-48
Record Date..................................................................................... S-1, S-30
Registered Holder............................................................................... S-61
Reimbursable Amounts............................................................................ S-61
Released Mortgaged Property Proceeds............................................................ S-39
Relevant Depositary............................................................................. S-40
Remittance Date................................................................................. S-1, S-30
Representative.................................................................................. S-1, S-9
Residential Property............................................................................ S-61
Responsible Officer............................................................................. S-61
SAIF............................................................................................ S-61
SBA............................................................................................. S-9
SBA File........................................................................................ S-61
SBA Section 7(a) Loans.......................................................................... S-9
SBA Form 1086................................................................................... S-61
SBA Loan Interest Rate.......................................................................... S-61
SBA Loan Pool................................................................................... S-9
</TABLE>
S-55
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
SBA Loan-Backed Certificates.................................................................... A-1
SBA Loans....................................................................................... S-9
SBA Loan Schedule............................................................................... S-62
SBA Notes....................................................................................... S-9
SBA Rules and Regulations....................................................................... S-62
Section 7(a) Program............................................................................ S-23
Sellers......................................................................................... S-9
Servicer........................................................................................ S-1, S-9
Servicer's Certificate.......................................................................... S-62
Servicing Advance............................................................................... S-30, S-40
Servicing Fee................................................................................... S-40, S-62
Servicing Officer............................................................................... S-62
Shortfall Amount................................................................................ S-49
Special Remittance Date......................................................................... S-25
Specified Spread Account Requirement............................................................ S-37
Spread.......................................................................................... S-47
Spread Account.................................................................................. S-10
Spread Account Agreement........................................................................ S-37
Spread Account Custodian........................................................................ S-62
Spread Account Depositor........................................................................ S-1, S-4, S-10
Spread Balance.................................................................................. S-37
Subsequent Closing Date......................................................................... S-62
Subsequent Cut-Off Date......................................................................... S-61
Subsequent SBA Loans............................................................................ S-22
Subsequent Transfer Agreement................................................................... S-62
Subservicer..................................................................................... S-62
Subservicing Agreement.......................................................................... S-62
Successor Servicer.............................................................................. S-44
Systems......................................................................................... S-41
Tax Return...................................................................................... S-62
Termination Price............................................................................... S-24, S-45
Terms and Conditions............................................................................ S-42
TMSIC........................................................................................... S-9, S-27
Trust........................................................................................... S-1
Trust Fund...................................................................................... S-10
Trustee......................................................................................... S-1, S-9
UCC............................................................................................. S-32
Underwriting Agreement.......................................................................... S-51
Unguaranteed Interest........................................................................... S-10
Unguaranteed Percentage......................................................................... S-10
United States person............................................................................ S-51
U.S. ........................................................................................... A-4
weighted average life........................................................................... S-25
</TABLE>
S-56
<PAGE>
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the definitions contained in the
Agreement and used in this Prospectus Supplement. Reference is made to the
Agreement for the full definitions of all terms.
ACCOUNT: The Certificate Account, the Pre-Funding Account and the
Capitalized Interest Account, each established by the Trustee for the benefit of
the Certificateholders; the Expense Account established by the Trustee for the
benefit of the Trustee and the Spread Account held by the Spread Account
Custodian pursuant to the Spread Account Agreement. The Trustee's obligation to
establish and maintain the Certificate Account pursuant to the Agreement is not
delegable.
AGGREGATE CLASS A CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class A Certificate Principal Balance less the sum
of all amounts previously distributed to the Class A Certificateholders in
respect of principal.
AGGREGATE CLASS B CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class B Certificate Principal Balance less the sum
of all amounts previously distributed to the Class B Certificateholders in
respect of principal.
AGGREGATE CLASS M CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class M Certificate Principal Balance less the sum
of all amounts previously distributed to the Class M Certificateholders in
respect of principal.
ANNUAL EXPENSE ESCROW AMOUNT: The product of 0.06% per annum and the Pool
Principal Balance, which is computed and payable on a monthly basis and
represents the estimated annual Trustee's fees and Trust Fund expenses.
ASSIGNMENT OF MORTGAGE: With respect to those SBA Loans secured by a
Mortgaged Property, an assignment of the Mortgage, notice of transfer or
equivalent instrument sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to reflect of record the transfer of the
related SBA Loan to the Trustee subject to the Multi-Party Agreement.
AVAILABLE FUNDS: With respect to each Remittance Date, the sum of (i) all
amounts (including any Excess Spread) received from any source by the Servicer
or any Subservicer during the preceding calendar month with respect to principal
and interest on the SBA Loans (net of the amount payable to the holder of the
Guaranteed Interest, the FTA's Fee, the Premium Protection Fee, the Additional
Fee and the Servicing Fee, (ii) advances by the Servicer, (iii) amounts in the
Spread Account and (iv) amounts available under the Letter of Credit.
BIF: The Bank Insurance Fund, or any successor thereto.
BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii) a day on
which banking institutions in the States of California, New York, New Jersey or
North Carolina are authorized or obligated by law or executive order to be
closed.
CAPITALIZED INTEREST ACCOUNT: The capitalized interest account established
by the Representative and maintained by the Trustee pursuant to the Agreement.
CERTIFICATEHOLDER or HOLDER: Each Person in whose name a Class A, Class M or
Class B Certificate is registered in the Certificate Register, except that,
solely for the purposes of giving any consent, waiver, request or demand
pursuant to the Agreement, any Certificate registered in the name of the
Sellers, the Servicer, any Subservicer or any affiliate of any of them, shall be
deemed not to be outstanding and the undivided Percentage Interest evidenced
thereby shall not be taken into account in determining whether the requisite
percentage of Certificates necessary to effect any such consent, waiver, request
or demand has been obtained.
CERTIFICATE REGISTER: The Certificate Register established and maintained in
accordance with the Agreement.
S-57
<PAGE>
CERTIFICATE REGISTRAR: Initially, Marine Midland Bank and thereafter, any
successor appointed pursuant to the Agreement.
CLASS CARRY FORWARD AMOUNT: The amount, if any, by which (i) the Class
Principal Distribution Amount for each Class of Certificates with respect to any
preceding Remittance Date exceeded (ii) the amount of the actual principal
distribution to the Class of Certificates on such Remittance Date.
COLLATERAL: All items of property (including a Mortgaged Property), whether
real or personal, tangible or intangible, or otherwise, pledged by an Obligor or
others to a Seller to secure payment under an SBA Loan.
COMMERCIAL PROPERTY: Real property (other than agricultural property or
Residential Property) that is generally used by the Obligor in the conduct of
its business.
CURTAILMENT: With respect to an SBA Loan, any payment of principal received
during a Due Period as part of a payment that is in excess of five times the
amount of the Monthly Payment due for such Due Period and which is not intended
to satisfy the SBA Loan in full, nor is intended to cure a delinquency.
DESIGNATED DEPOSITORY INSTITUTION: With respect to the Principal and
Interest Account, an entity which is an institution whose deposits are insured
by either the BIF or SAIF administered by the FDIC, the unsecured and
uncollateralized long-term debt obligations of which shall be rated A2 or better
by Moody's and A or better by Duff & Phelps or P-1 by Moody's and A1 by Duff &
Phelps, and which is either (i) a federal savings association duly organized,
validly existing and in good standing under the federal banking laws, (ii) an
institution duly organized, validly existing and in good standing under the
applicable banking laws of any state, (iii) a national banking association duly
organized, validly existing and in good standing under the federal banking laws,
or (iv) a principal subsidiary of a bank holding company, in each case acting or
designated by the Servicer as the depository institution for the Principal and
Interest Account.
DETERMINATION DATE: That day of each month which is the third Business Day
prior to the 15th day of such month.
DUE DATE: The day of the month on which the Monthly Payment is due from the
Obligor on an SBA Loan.
DUE PERIOD: The immediately preceding calendar month with respect to any
Remittance Date.
EVENT OF DEFAULT: The Events of Default of the Servicer specified in the
Agreement.
EXCESS PAYMENTS: With respect to a Due Period, any amounts received on an
SBA Loan in excess of the Monthly Payment due on the Due Date relating to such
Due Period which does not constitute either a Curtailment or a Principal
Prepayment or payment with respect to an overdue amount. Excess Payments are
payments of principal for purposes of the Agreement.
EXCESS PROCEEDS: As of any Remittance Date, with respect to any Liquidated
SBA Loan, the excess, if any, of (a) the Unguaranteed Percentage of the total
Net Liquidation Proceeds, over (b) the Principal Balance of such SBA Loan as of
the date such SBA Loan became a Liquidated SBA Loan plus 30 days interest
thereon at the then-applicable Adjusted SBA Loan Remittance Rate; provided,
however, that such excess shall be reduced by the amount by which interest
accrued on the advance, if any, made by the Servicer at the related SBA Loan
Interest Rate(s) exceeds interest accrued on such advance at the then-applicable
weighted average Class A and Class B Remittance Rates.
EXPENSE ACCOUNT: The expense account established and maintained by the
Trustee in accordance with the Agreement.
FDIC: The Federal Deposit Insurance Corporation and any successor thereto.
S-58
<PAGE>
FHLMC: The Federal Home Loan Mortgage Corporation and any successor thereto.
FNMA: The Federal National Mortgage Association and any successor thereto.
FORECLOSED PROPERTY: Property, the title to which is acquired in foreclosure
or by deed in lieu of foreclosure.
FORECLOSED PROPERTY DISPOSITION: The final sale of a Foreclosed Property
acquired in foreclosure or by deed in lieu of foreclosure. The proceeds of any
Foreclosed Property Disposition constitute part of the definition of Liquidation
Proceeds.
INSURANCE PROCEEDS: Proceeds paid by any insurer pursuant to any insurance
policy covering an SBA Loan, Collateral or Foreclosed Property, including but
not limited to title, hazard, life, health and/or accident insurance policies.
LIQUIDATED SBA LOAN: Any defaulted SBA Loan or Foreclosed Property as to
which the Servicer has determined that all amounts which it reasonably and in
good faith expects to recover have been recovered from or on account of such SBA
Loan.
LIQUIDATION PROCEEDS: Cash, including Insurance Proceeds, proceeds of any
Foreclosed Property Disposition, revenues received with respect to the
conservation and disposition of a Foreclosed Property, and any other amounts
received in connection with the liquidation of defaulted SBA Loans, whether
through trustee's sale, foreclosure sale or otherwise.
LOAN GUARANTY AGREEMENT: The Loan Guaranty Agreement (Deferred
Participation) (SBA Form 750) dated August 13, 1980 between the SBA and The
Money Store Investment Corporation, as such agreement may be amended from time
to time.
MAJORITY CERTIFICATEHOLDERS: The Holder or Holders of Class A, Class M and
Class B Certificates evidencing an Aggregate Class A, Class M and Class B
Certificate Principal Balance, as the case may be, in excess of 50% of the
Aggregate Class A, Class M and Class B Certificate Principal Balance, as the
case may be.
MONTHLY PAYMENT: The monthly payment of principal and/or interest required
to be made by an Obligor on the related SBA Loan, as adjusted pursuant to the
terms of the related SBA Note.
MORTGAGE: The mortgage, deed of trust or other instrument creating a lien on
a Mortgaged Property.
MORTGAGED PROPERTY: The underlying real property, if any, securing an SBA
Loan, consisting of a Commercial Property or Residential Property and any
improvements thereon.
NET LIQUIDATION PROCEEDS: Liquidation Proceeds net of (i) any reimbursements
to the Servicer made therefrom pursuant to the Agreement and (ii) amounts
required to be released to the related Obligor pursuant to applicable law.
OPINION OF COUNSEL: A written opinion of counsel, who may, without
limitation, be counsel for the Sellers or Servicer, reasonably acceptable to the
Trustee and experienced in matters relating thereto.
ORIGINAL CLASS A CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class A Certificates issued on the Closing Date.
ORIGINAL CLASS B CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class B Certificates on the Closing Date.
ORIGINAL CLASS M CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class M Certificates on the Closing Date.
S-59
<PAGE>
PAYING AGENT: Initially, Marine Midland Bank, and thereafter, any other
Person that meets the eligibility standards for the Paying Agent specified in
the Agreement and is authorized by the Trustee to make payments on the
Certificates on behalf of the Trustee.
PERCENTAGE INTEREST: With respect to a Class A, Class M or Class B
Certificate, the portion of the Trust Fund evidenced by such Class A, Class M or
Class B Certificate, expressed as a percentage, the numerator of which is the
denomination represented by such Class A, Class M or Class B Certificate and the
denominator of which is the Original Class A, Class M or Class B Certificate
Principal Balance, as the case may be.
PERMITTED INSTRUMENTS: As used herein, Permitted Instruments shall include
the following:
(i) direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal and
interest by, the United States or any agency or instrumentality thereof,
provided such obligations are backed by the full faith and credit of the
United States, FHA debentures, Federal Home Loan Bank consolidated senior
debt obligations, and FNMA senior debt obligations, but excluding any of
such securities whose terms do not provide for payment of a fixed dollar
amount upon maturity or call for redemption;
(ii) federal funds, certificates of deposit, time deposits and banker's
acceptances (having original maturities of not more than 365 days) of any
bank or trust company incorporated under the laws of the United States or
any state thereof, provided that the short-term debt obligations of such
bank or trust company at the date of acquisition thereof have been rated
Prime-1 or better by Moody's and Duff 1+ or better by Duff & Phelps;
(iii) deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $3,000,000 which
deposits are held only up to the limits insured by the BIF or SAIF
administered by the FDIC, provided that the unsecured long-term debt
obligations of such bank or savings and loan association have been rated A3
or better by Moody's and A or better by Duff & Phelps;
(iv) commercial paper (having original maturities of not more than 365
days) rated Prime-1 or better by Moody's and Duff 1+ or better by Duff &
Phelps;
(v) debt obligations rated Aaa by Moody's and AAA by Duff & Phelps
(other than any such obligations that do not have a fixed par value and/or
whose terms do not promise a fixed dollar amount at maturity or call date);
(vi) investments in money market funds rated Aaa or better by Moody's
and Duff 1+ or better by Duff & Phelps (if so rated by Duff & Phelps) the
assets of which are invested solely in instruments described in clauses
(i)-(v) above;
(vii) certain guaranteed investment contracts and repurchase agreements
satisfying the criteria set forth in the Agreement; and
(viii) any other investment acceptable to the Rating Agencies, written
confirmation of which shall be furnished to the Trustee prior to any such
investment.
PERSON: Any individual, corporation, partnership, limited liability company,
joint venture, association, joint-stock company, trust, national banking
association, unincorporated organization or government or any agency or
political subdivision thereof.
POOL PRINCIPAL BALANCE: The aggregate Principal Balances as of any date of
determination.
PRE-FUNDING ACCOUNT: The pre-funding account maintained by the Trustee
pursuant to the Agreement.
S-60
<PAGE>
PRINCIPAL AND INTEREST ACCOUNT: The principal and interest account
established by the Servicer pursuant to the Agreement.
PRINCIPAL BALANCE: With respect to any SBA Loan or related Foreclosed
Property, at any date of determination, (i) the Unguaranteed Percentage of the
principal balance of the SBA Loan outstanding as of the Cut-Off Date (or, with
respect to any Subsequent SBA Loan, as of the date set forth in the Agreement),
after application of principal payments received on or before such date, minus
(ii) the sum of (a) the Unguaranteed Percentage of the principal portion of the
Monthly Payments received during each Due Period ending prior to the most recent
Remittance Date, which were distributed pursuant to the Agreement on any
previous Remittance Date, and (b) the Unguaranteed Percentage of all Principal
Prepayments, Curtailments, Excess Payments, Insurance Proceeds, Released
Mortgaged Property Proceeds, Net Liquidation Proceeds and net income from a
Foreclosed Property to the extent applied by the Servicer as recoveries of
principal in accordance with the provisions of the Agreement, which were
distributed pursuant to the Agreement on any previous Remittance Date. The
Principal Balance of any Liquidated SBA Loan or any SBA Loan that has been paid
off will equal $0.
PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on an SBA
Loan equal to the outstanding principal balance thereof, received in advance of
the final scheduled Due Date which is intended to satisfy an SBA Loan in full.
PRIOR LIEN: With respect to any SBA Loan secured by a lien which is not a
first priority lien, each loan relating to the corresponding Collateral having a
prior priority lien.
REGISTERED HOLDER: With respect to any SBA Loan, the Person identified as
such in the applicable SBA Form 1086, and any permitted assignees thereof.
REIMBURSABLE AMOUNTS: As of any date of determination, an amount payable to
the Servicer and/or a Seller with respect to (i) the Monthly Advances and
Servicing Advances reimbursable pursuant to the Agreement, (ii) any advances
reimbursable pursuant to the Agreement and not previously reimbursed, and (iii)
any other amounts reimbursable to the Servicer or a Seller pursuant to the
Agreement.
RESIDENTIAL PROPERTY: Any one or more of the following: (i) single family
dwelling unit not attached in any way to another unit, (ii) row house, (iii)
two-family house, (iv) low-rise condominium, (v) planned unit development, (vi)
three- or four-family house, (vii) high-rise condominium, (viii) mixed use
building or (ix) manufactured home (as defined in FNMA/FHLMC Seller-Servicers'
Guide) to the extent that it constitutes real property in the state in which it
is located.
RESPONSIBLE OFFICER: When used with respect to the Trustee, any officer
assigned to the Corporate Trust Division, including any Vice President or
Assistant Vice President, any Secretary or Assistant Secretary, any trust
officer or any other officer of the Trustee customarily performing functions
similar to those performed by any of the above designated officers and also,
with respect to a particular matter, any other officer to whom such matter is
referred because of such officer's knowledge of and familiarity with the
particular subject. When used with respect to a Seller, the President, any Vice
President, Assistant Vice President, or any Secretary or Assistant Secretary.
SAIF: The Savings Association Insurance Fund, or any successor thereto.
SBA FILE: The SBA File maintained with respect to each SBA Loan in
accordance with the Agreement.
SBA Form 1086: The Secondary Participation Guaranty and Certification
Agreement on SBA Form 1086, pursuant to which investors purchase the SBA
Guaranteed Portion.
SBA LOAN INTEREST RATE: With respect to any date of determination, the
then-applicable annual rate of interest borne by an SBA Loan, pursuant to its
terms, which, as of the Cut-Off Date, is shown on the SBA Loan Schedule.
S-61
<PAGE>
SBA LOAN SCHEDULE: The schedule of SBA Loans attached as an exhibit to the
Agreement, such schedule identifying each SBA Loan by address of the related
premises, and the name of the Obligor and setting forth as to each SBA Loan the
following information: (i) the Principal Balance as of the close of business on
the Cut-Off Date, (ii) the Account Number, (iii) the original principal amount
of the SBA Loan, (iv) the SBA Loan Date and original number of months to
maturity, in months, (v) the SBA Loan Interest Rate as of the Cut-Off Date and
guaranteed rate payable to the Registered Holder and the FTA, (vi) when the
first Monthly Payment was due, (vii) the Monthly Payment as of the Cut-Off Date,
(viii) the remaining number of months to maturity as of the Cut-Off Date, (ix)
the Unguaranteed Percentage, (x) the SBA loan number, (xi) the margin which is
added to the Prime Rate to determine the SBA Loan Interest Rate, and (xii) the
lifetime minimum and maximum SBA Loan Interest Rates, if applicable.
SBA RULES AND REGULATIONS: The Small Business Act, as amended, codified at
15 U.S.C. 631 ET. SEQ., all legislation binding on the SBA regarding financial
transactions, all rules and regulations promulgated from time to time thereunder
and the Loan Guaranty Agreement.
SERVICER'S CERTIFICATE: The monthly certificate of the Servicer, delivered
to the Trustee in accordance with the Agreement.
SERVICING FEE: A fee of 0.40% per annum of the unpaid principal balance of
each SBA Loan, calculated and paid monthly from the interest portion of Monthly
Payments, Liquidation Proceeds and certain other proceeds collected.
SERVICING OFFICER: Any officer of the Servicer involved in, or responsible
for, the administration and servicing of the SBA Loans whose name appears on a
list of servicing officers furnished to the Trustee by the Servicer, as such
list may from time to time be amended.
SPREAD ACCOUNT CUSTODIAN: Marine Midland Bank, in its capacity as Spread
Account Custodian under the Spread Account Agreement, or any successor thereto.
SUBSEQUENT CLOSING DATE: The date specified in a Subsequent Transfer
Agreement in which the Subsequent SBA Loans are transferred to the Trust Fund.
SUBSEQUENT CUT-OFF DATE: The date specified in a Subsequent Transfer
Agreement in which the Subsequent SBA Loans are transferred to the Trust Fund.
SUBSEQUENT TRANSFER AGREEMENT: Each Subsequent Transfer Agreement executed
by the Trustee and the applicable Seller(s) by which Subsequent SBA Loans are
sold and assigned to the Trust Fund.
SUBSERVICER: The Money Store of New York, Inc. or any other person with whom
the Servicer has entered into a Subservicing Agreement and who satisfies any
requirements set forth in the Agreement in respect of the qualification of a
Subservicer.
SUBSERVICING AGREEMENT: Any agreement between the Servicer and any
Subservicer relating to subservicing and/or administration of certain SBA Loans
as provided in the Agreement, a copy of which shall be delivered, along with any
modifications thereto, to the Trustee and the SBA.
TAX RETURN: The federal income tax return to be filed on behalf of the Trust
Fund together with any and all other information reports or returns that may be
required to be furnished to the Certificateholders or filed with the Internal
Revenue Service or any other governmental taxing authority under any applicable
provision of federal, state or local tax laws.
S-62
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally Offered Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of The
Depository Trust Company, 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 and prior issuances of securities generally having
the same characteristics as the Certificates and representing a pool of SBA
loans ("SBA Loan-Backed Certificates").
Secondary, cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior SBA Loan-Backed Certificates
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior SBA
Loan-Backed Certificates issues in same-day funds.
A-1
<PAGE>
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN 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 Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear,
as the case may be, will instruct the respective Depositary to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities based upon a year consisting of 12 months of 30 days each. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the 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 Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities based upon a year consisting
of 12 months of 30 days each. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedel
A-2
<PAGE>
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Cedel Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
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:
(a) 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;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate.
EXCEPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person 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 Certificate 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 Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner or
his agent.
A-3
<PAGE>
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security 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 it 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.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof or (iii) an estate or trust the
income of which is includable in gross income for United States tax purposes,
regardless of its source. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
A-4
<PAGE>
DATED MARCH 29, 1999.
PROSPECTUS
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
THE MONEY STORE ASSET BACKED NOTES
(ISSUABLE IN SERIES)
This Prospectus relates to The Money Store Asset Backed Certificates (the
"Certificates") and The Money Store Asset Backed Notes (the "Notes" and
collectively with the Certificates, the "Securities") described herein, issuable
in one or more Series (each a "Series"), which may be sold from time to time on
terms determined at the time of sale and described in the related Supplement to
this Prospectus (each a "Prospectus Supplement"), evidencing specified interests
in, or rights to receive payments from, one or more trust funds (each, a
"Trust"), the primary assets of which will consist of the right to receive
payments and other recoveries attributable to certain unguaranteed interests
(the "Unguaranteed Interests") in one or more pools (each, a "Pool") of certain
loans partially guaranteed by the U.S. Small Business Administration and certain
loans originated in connection with such loans (the "SBA Loans"), and certain
other commercial loans with similar characteristics (the "Non-SBA Loans," and
collectively with the SBA Loans, the "Loans"), and certain other related or
similar assets more particularly described herein (collectively, the "Trust
Assets"). The Trust Assets and other assets of any Trust will be described in
the Prospectus Supplement for the related Series of Certificates and/or Notes.
Certain of the Trust Assets may have been originated by wholly-owned
subsidiaries (the "Originators") of The Money Store Inc. ("The Money Store" or
the "Representative") or other affiliates of the Representative. Certain other
of the Trust Assets may have been acquired by The Money Store, an Originator or
an affiliate thereof from other lenders or government agencies. In addition, if
so specified in the related Prospectus Supplement, the Trust will include monies
on deposit in one or more trust accounts to be established with a Trustee (as
defined herein), which may include a Pre-Funding Account (as defined herein)
which would be used to purchase additional Trust Assets for the related Trust
from time to time during the Funding Period (as defined herein) specified in the
related Prospectus Supplement. If specified in the related Prospectus
Supplement, certain of the related Securities may evidence a fractional
undivided ownership interest in a Trust which will hold a beneficial ownership
interest in another trust fund which will contain the Trust Assets. Securities
may also be entitled to the benefits of insurance policies, cash accounts,
letters of credit, financial guaranty insurance policies, third party
guarantees, guaranties of The Money Store, supplemental interest payments or
other forms of credit enhancement, maturity protection or derivative
instruments, to the extent described in the related Prospectus Supplement. The
Prospectus Supplement for each Series of Securities will name the entities
(which will include The Money Store or one of its affiliates and may include
other entities) which will act, directly or through one or more sub-servicers,
as master servicers (each, in such capacity, the "Master Servicer") of such
Trust Assets.
SEE RISK FACTORS ON PAGE 21 HEREIN FOR A DISCUSSION OF CERTAIN RISK FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
The date of this Prospectus is March 29, 1999.
<PAGE>
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Each Class of Securities of any series will represent the right to
receive, or be secured by, a specified amount of payments of principal and/or
interest on the related Trust Assets in the manner described herein and in the
related Prospectus Supplement. The right of each Class of Securities to receive
payments may be senior or subordinate to the rights of one or more of the other
Classes of such Series. The right of the holders of any Class of Notes
("Noteholders") and the right of the holders of any Class of Certificates
("Certificateholders" and collectively with the Noteholders, "Securityholders"
or "Holders") to receive any distributions of principal and interest will be set
forth in the related Prospectus Supplement. A Series may include two or more
Classes of Certificates and/or Notes which differ as to the timing and priority
of payment, interest rate or amount of distributions in respect of principal or
interest or both. A Series may include one or more Classes of Certificates
and/or Notes entitled to distributions in respect of principal, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no distributions in respect of
principal. Distributions on Certificates of any Series will be subordinated to
prior payments due on the related Notes, if any, to the extent described herein
and in the related Prospectus Supplement. The Securities of each Series will
represent fractional undivided ownership interests in the related Trust.
Distributions to Holders of Securities will be made on certain dates
specified in the related Prospectus Supplement (each, a "Remittance Date"),
which may be monthly, quarterly, semi-annually or at such other intervals as are
specified therein. The rate at which any Class of Certificates (the
"Pass-Through Rate") or the rate at which any Class of Notes (the "Interest
Rate") bear interest or the method of calculating such Pass-Through Rate or
Interest Rate, which may be fixed or variable, will be set forth in the related
Prospectus Supplement. Distributions on the Certificates and/or Notes of a
Series will be made only from the assets of the related Trust and certain
related property. The Pass-Through Rate for a Class of Certificates or the
Interest Rate for a Class of Notes that bear interest based upon a floating rate
of interest, as specified in the related Prospectus Supplement, may base such
floating rate upon any of following: (i) the auction procedures described herein
(such Securities being referred to herein as "Auction Rate Securities"), (ii)
the London interbank offered rate for U.S. dollar deposits for a specified
period ("LIBOR") plus an amount set forth in the related Prospectus Supplement,
(iii) the average bond equivalent rates of weekly auctions of Treasury bills for
a specified period (the "T-Bill Rate") plus an amount set forth in the related
Prospectus Supplement, (iv) the prime lending rate of certain leading U.S.
commercial banks plus an applicable spread, as described in the related
Prospectus Supplement (the "Prime Rate"), or (v) any such other method or
procedures used to determine the floating rate of interest as may be described
in the applicable Prospectus Supplement.
The Securities will not represent an obligation of or interest in the
Representative, the Originators, or any affiliate thereof and, except to the
extent described herein or specified in the related Prospectus Supplement, will
not be insured or guaranteed by any governmental agency or instrumentality or
(except as specified in the Prospectus Supplement) by any other person. Unless
otherwise specified in the related Prospectus Supplement, the only obligations
of the Representative or the Originators with respect to a Series of Securities
will be pursuant to certain limited representations and warranties. Except for
certain representations and warranties relating to the Trust Assets and certain
other exceptions, the Master Servicer's obligations with respect to the related
Series of Certificates and/or Notes will be limited to its contractual servicing
obligations. If the amount available for distribution to Holders on any
Remittance Date is less than the amount due to them, the Master Servicer, to the
extent provided in the related Prospectus Supplement, may be obligated, under
certain terms and conditions, to advance cash to such Holders, to the extent
such deficiency is attributable to delinquent payments of principal and/or
interest during the immediately preceding Due Period (as defined herein). See
"Description of the Securities-- Monthly Advances and Compensating Interest."
The yield to Holders on each Class of Certificates and/or Notes of a Series
may be affected by the rate of payment of principal (including prepayments) of
the Trust Assets in the related Trust and the timing of receipt of such payments
as described herein and in the related Prospectus Supplement. A Trust may be
subject to early termination under the circumstances described herein and in the
related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat
each Trust as a "real estate mortgage investment conduit" ("REMIC") for federal
income tax purposes. See "Federal Income Tax Consequences."
2
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, including First Union Capital Markets,
a division of Wheat First Securities, Inc. ("First Union Capital Markets"), an
affiliate of the Representative, as more fully described under "Plan of
Distribution" herein and in the related Prospectus Supplement. The intention of
any underwriter to make a secondary market in the Securities will be set forth
in the related Prospectus Supplement. There can be no assurance that a secondary
market for the Securities will develop, or if it does develop, that it will
continue. This Prospectus may not be used to consummate sales of a Series of
Securities unless accompanied by a Prospectus Supplement.
First Union Capital Markets expects to enter into market making transactions
in the Class A Certificates and may act as principal or agent in any such
transactions. Any such purchases or sales will be made at prices related to
prevailing market prices at the time of sale. This Prospectus and the related
Prospectus Supplement may be used by First Union Capital markets in connection
with such transactions.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Certificates and/or Notes
to be offered hereunder, among other things, will set forth with respect to such
Series of Certificates and/or Notes: (i) the aggregate principal amount, the
Pass-Through Rate, Interest Rate or Rates or other applicable annual rate or
rates of interest (or the manner of determining such rate or rates) and
authorized denominations of each Class of such Certificates and/or Notes; (ii)
certain information concerning the Trust Assets and insurance policies, cash
accounts, letters of credit, financial guaranty insurance policies, third party
guarantees, supplemental interest payments or other forms of credit enhancement
or maturity protection or other derivative instruments, if any, relating to the
Pools or all or part of the related Certificates and/or Notes; (iii) the
specified interest of each Class of Certificates and/or Notes in, and manner and
priority of, the distributions on the Trust Assets; (iv) information as to the
nature and extent of subordination with respect to such Series of Certificates
and/or Notes, if any; (v) the Remittance Dates; (vi) information as to the
Master Servicer; (vii) the circumstances, if any, under which each Trust may be
subject to early termination; (viii) whether the Representative intends to elect
to cause the Trust to be treated as a REMIC; and (ix) additional information
with respect to the plan of sale of such Certificates and/or Notes.
AVAILABLE INFORMATION
The Representative and the Originators have filed a Registration Statement
under the Securities Act of 1933, as amended (the "1933 Act"), with the
Securities an Exchange Commission (the "Commission") with respect to the
Securities. The Registration Statement and amendments thereof and to the
exhibits thereto, as well as such reports and other information, are available
for inspection without charge at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C.
3
<PAGE>
20549; 7 World Trade Center, 13th Floor, 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.
The Commission also maintains a Website (http://www.sec.gov) that contains
reports, proxy and information statements and other information filed
electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning any Securities and the related Trust
will be provided to the Securityholders as described in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, a Series of
Certificates and/or Notes may be issuable in book-entry form. In such event, the
related Certificates and/or Notes will be registered in the name of Cede & Co.
("Cede"), the nominee of The Depository Trust Company ("DTC") or another
nominee. All reports will be provided to Cede or such other nominee, which in
turn will provide such reports to Participants and Indirect Participants (as
defined herein) of DTC or such other entities as described in the related
Prospectus Supplement. Such Participants and Indirect Participants will then
forward such reports to the beneficial owners of Securities. See "Description of
the Securities--Book-Entry Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering of the Securities issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and the related
Prospectus Supplement and to be a part hereof from the date of the filing of
such documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of this Prospectus. The Representative will provide without
charge to each person to whom a copy of the Prospectus is delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein by reference, except the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests for such copies should be directed to The Money Store
Inc., 707 Third Avenue, West Sacramento, California 95606, Attention: Investor
Relations, Telephone: (916) 617-2001.
4
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT. CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS PROSPECTUS SHALL HAVE
THE MEANINGS ASSIGNED TO SUCH TERMS ELSEWHERE IN THIS PROSPECTUS.
<TABLE>
<S> <C>
Securities Offered.............. The Money Store Asset Backed Certificates (the
"Certificates") and The Money Store Asset Backed Notes
(the "Notes"). Notes are issuable from time to time in
Series pursuant to an Indenture (an "Indenture"), and
Certificates are issuable from time to time in Series
pursuant to either a Pooling and Servicing Agreement (a
"Pooling and Servicing Agreement") or a Trust Agreement (a
"Trust Agreement"). As used herein, "Agreements" means,
collectively, with respect to a Series of Certificates,
the related Pooling and Servicing Agreement or the related
Trust Agreement, with respect to a Series of Notes, the
related Indenture and the related Sale and Servicing
Agreement, as the context requires, and with respect to a
Series of Securities, the relevant combination of
Agreements for such Series. Each Certificate of a Series
will evidence an interest in the Trust Fund or Trust Funds
for such Series, as specified in the related Prospectus
Supplement. Each Series of Securities will consist of one
or more Classes, each Class may differ in, among other
things, the amounts allocated to and the priority of
principal and interest payments. The Securities of each
Class will be issued in fully registered form in the
denominations specified in the related Prospectus
Supplement. If so specified in the related Prospectus
Supplement, the Securities or certain Classes of such
Securities offered thereby may be available in book- entry
form only.
Issuers......................... Certain trust funds (each, a "Trust") represented by The
Money Store or its affiliates, the primary assets of which
will be the right to receive payments and other recoveries
attributable to one or more Pools of Loans and certain
other Trust Assets.
Representative and Master
Servicer...................... The Money Store Inc. ("The Money Store"), a New Jersey
corporation or certain of its affiliates including First
Union National Bank or certain of its affiliates. The
Prospectus Supplement relating to any Series of
Certificates and/or Notes will name the entities (which
may include The Money Store or one of its affiliates and
may additionally include other unrelated entities) which
will act, directly or through one or more Sub-Servicers
(as defined herein), as master servicers (each, in such
capacity, the "Master Servicer"), on the terms and
conditions set forth in the related Pooling and Servicing
Agreement or Sale and Servicing Agreement (a "Sale and
Servicing Agreement"). The principal offices of The Money
Store are located in Sacramento, California and Union, New
Jersey. The Money Store is a wholly-owned subsidiary of
First Union National Bank, a national banking association
subsidiary of First Union Corporation. See "The
Representative and the Originators."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
The Trust Assets................ The Securities will evidence fractional undivided
ownership interests in or rights to receive payments from
certain Trusts further described herein. The primary
assets of each Trust may consist of one or more pools
(each, a "Pool") of assets (the "Trust Assets"), which may
include (i) the Unguaranteed Interest of loans originated
under the U.S. Small Business Administration (the "SBA")
general business loan program created under Section 7(a)
of the Small Business Act of 1953 ("SBA Section7(a)
Loans"), (ii) loans made to small businesses in connection
with the origination of an SBA Section7(a) Loan, which
related SBA Section7(a) Loan may or may not be part of a
Trust Fund (the "Section 7(a) Companion Loans"), (iii)
loans originated under the SBA's 504 program ("SBA 504
Loans," and collectively with the SBA Section7(a) Loans
and the Section 7(a) Companion Loans, the "SBA Loans") and
(iv) loans originated pursuant to the Conventional
Commercial Loan Program (as defined below) that have many
similar characteristics to SBA Section7(a) Loans or SBA
504 Loans but were not originated pursuant to an SBA
program (the "Non-SBA Loans"). The SBA Loans and the
Non-SBA Loans are referred to herein collectively as the
"Loans".
The "Unguaranteed Interest" will equal (i) as to any SBA
Section7(a) Loan, all payments and other recoveries on
such SBA Section7(a) Loan not constituting the Guaranteed
Interest therein and certain other amounts to be described
in a Prospectus Supplement that will not be transferred to
the related Trust and (ii) as to any Section 7(a)
Companion Loan or SBA 504 Loan or Non-SBA Loan, all
payments and other recoveries on such Section 7(a)
Companion Loan, SBA 504 Loan or Non-SBA Loan.
The payment terms of the Loans to be included in any Pool
will be described in the related Prospectus Supplement and
may include any of the following features, combinations
thereof or other features described in the related
Prospectus Supplement:
(a) Interest may be payable at a fixed rate (a "Fixed
Rate") or may be payable at a rate that is adjustable
from time to time in relation to an index, that may be
fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a
fixed rate (each, an "Adjustable Rate"). The specified
rate of interest on a Loan is its "Mortgage Interest
Rate." Changes to an Adjustable Rate may be subject to
periodic limitations, maximum rates, minimum rates or
a combination of such limitations. Accrued interest
may be deferred and added to the principal of a Loan
for such periods and under such circumstances as may
be specified in the related Prospectus Supplement.
Loans may permit the payment of interest at a rate
lower than the Mortgage Interest Rate for a period of
time or for the life of the Loan, and the amount of
any difference may be contributed from funds supplied
by the seller of the properties securing the related
Loan (the "Mortgaged Properties") or
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
another source or may be treated as accrued interest
and added to the principal of the Loan.
(b) Principal may be payable on a level basis to fully
amortize the Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is
significantly longer than the original term to
maturity or on an interest rate that is different from
the Mortgage Interest Rate, or may not be amortized
during all or a portion of the original term. Payment
of all or a substantial portion of the principal may
be due on maturity (a "balloon" payment). From time to
time, principal may include interest that has been
deferred and added to the principal balance of the
Loan.
(c) Monthly payments of principal and interest may be
fixed for the life of the Loan, may increase over a
specified period of time ("graduated payments"), or
may change from period to period. Loans may include
limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the
Loan or may adjust or decline over time, and may be
prohibited for the life of the Loan or for certain
periods ("Lockout Periods"). Certain Loans may permit
prepayments after expiration of the applicable Lockout
Period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment.
Other Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified
time periods. The Loans may include due-on-sale
clauses which permit the mortgagee to demand payment
of the entire Loan in connection with the sale or
certain other transfers of the related Mortgaged
Properties. Other Loans may be assumable by persons
meeting the then applicable underwriting standards of
the originator.
The Mortgaged Properties relating to Loans may be located
in any one of the fifty states, the District of Columbia,
the Commonwealth of Puerto Rico or any other commonwealth,
territory or possession of the United States. Unless
otherwise specified in the related Prospectus Supplement,
all of the Mortgaged Properties will be covered by
standard hazard insurance policies ("Standard Hazard
Insurance Policies") insuring against losses due to fire
and various other causes. As set forth in the related
Prospectus Supplement, certain of the Loans underlying a
given Series of Securities may have been originated by the
Representative, the Originators or affiliates thereof and
certain Loans may have been purchased by the
Representative, an Originator or an affiliate thereof in
the open market or in privately negotiated transactions,
including transactions with entities affiliated with the
Representative.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
The SBA Section7(a) Loans will have been originated under
Section 7(a) (the "Section 7(a) Program") of the Small
Business Act of 1953 (the "SBA Act"). The Section 7(a)
Program was intended to encourage lenders to provide loans
to qualifying small businesses. To assist qualified
borrowers in obtaining more financing when needed, the
Originators originate Section 7(a) Companion Loans in
conjunction with the origination of an SBA Section7(a)
Loan to the same borrower. Although the Section 7(a)
Companion Loan is not guaranteed by the SBA, it is secured
by a lien on collateral prior to the lien of the related
SBA Section7(a) Loan.
The SBA has also established a program (the "SBA 504 Loan
Program") to encourage lenders to provide fixed asset
financing to qualifying small businesses. In the SBA 504
Loan Program, the Originators provide approximately 50% of
project costs in a conventional loan agreement, with
borrowers providing a minimum 10% equity contribution. The
SBA provides the remainder of the financing. The loans
originated by the Originators under the SBA 504 Loan
Program are not guaranteed by the SBA. The funds used by
the SBA to originate its portion of an SBA 504 Loan are
generated by issuing SBA-guaranteed debentures on behalf
of a certified development company.
SBA Section7(a) Loans originated by the Originators
generally range in size from $100,000 to $1.5 million. The
maximum amount for a Section 7(a) Companion Loans is
currently $1,500,000, although this amount may be
increased where the Originators believe the collateral or
other factors warrant such increase. The maximum size of
an SBA 504 Loan originated by the Originators is currently
$3.0 million.
The Non-SBA Loans will have been originated or purchased
by the Originators under the programs described under "The
Trusts-- Non-SBA Loans."
The Prospectus Supplement for each Series of Securities
will specify with respect to all Loans expected to be
included in the related Pool as of the related closing
date, among other things, (i) the expected aggregate
outstanding principal balance and the expected average
outstanding principal balance of the Loans in such Pool as
of the date specified in the Prospectus Supplement, (ii)
the largest expected principal balance and the smallest
expected principal balance of any of the Loans, (iii) the
types of Mortgaged Properties and/or other assets securing
the Loans, (iv) the original terms to maturity of the
Loans, (v) the expected weighted average term to maturity
of the Loans as of the date specified in the Prospectus
Supplement and the expected range of the terms to
maturity, (vi) the earliest origination date and latest
maturity date of any of the Loans, (vii) the expected
weighted average Loan-to-Value Ratio of the Loans, (viii)
the expected weighted average Mortgage Rate and ranges of
Mortgage Rates borne by the Loans, (ix) in the case of
Loans having Adjustable Rates, the expected weighted
average of the Adjustable Rates as of the date set forth
in the Prospectus Supplement and maximum permitted
Adjustable
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Rates, if any, (x) the amount of any Guaranty Insurance
Policy, Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy or Bankruptcy Bond (each as defined
herein) to be maintained with respect to such Pool, (xi)
the amount, if any, and terms of any other credit
enhancement or other derivative instruments to be provided
with respect to all or any Loans or the Pool and (xii) the
expected geographic location of the Mortgaged Properties.
Pre-Funding Account............. If provided in the related Prospectus Supplement, the
original principal amount of a Series of Securities may
exceed the principal balance of the Trust Assets initially
being delivered to the Trustee. Cash in an amount up to
the amount of such difference (such amount, the
"Pre-Funded Amount") will be deposited into a separate
trust account (the "Pre-Funding Account") maintained with
the Trustee for the benefit of the Holders. During the
period set forth in the related Prospectus Supplement (the
"Funding Period"), the Pre-Funded Amount in the
Pre-Funding Account may be used to purchase additional
Trust Assets for the related Trust subject to the
satisfaction of certain conditions specified under the
Agreements.
For a Trust that elects to be characterized as either a
REMIC or a grantor trust under current federal income tax
laws, the maximum length of the related Funding Period
will not exceed three calendar months or 90 days,
respectively, from the date of issuance of the Securities
and otherwise the maximum length of the Funding Period
will not exceed the period set forth in the related
Prospectus Supplement. The amount of the initial
Pre-Funded Amount is intended not to exceed the aggregate
principal balance of additional Trust Assets that the
Representative anticipates will be acquired and conveyed
to the Trust during the applicable Funding Period.
Prior to the conveyance of any additional Trust Assets to
the Trust, the Representative will be required to give
notice of the additional Trust Assets to be conveyed to
the Trust to the Trustee(s) and any third-party credit
enhancement provider. Upon the satisfaction of the
conditions set forth in the Agreement, the Trustee will
release from the Pre-Funding Account the necessary funds
to purchase the additional Trust Assets to be conveyed to
the Trust on such date. If any Pre-Funded Amount remains
on deposit in the Pre-Funding Account at the end of the
Funding Period, such amount, in the amounts and in the
manner specified in the related Prospectus Supplement,
will be used to prepay some or all Classes of the related
Series of Certificates and/or Notes.
Multi-Party Agreement........... In connection with each issuance of Securities relating to
SBA Section7(a) Loans, the applicable Originators, the
Master Servicer and the Trustee will enter into an
agreement (the "Multi-Party Agreement"), which will set
forth the relationship of the parties with respect to the
SBA Section7(a) Loans and the proceeds thereof and the
consent of the SBA to the transactions contemplated by the
related Agreement.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Revolving Period and
Amortization Period; Retained
Interest...................... If the related Prospectus Supplement so provides, there
may be a period commencing on the date of issuance of a
Class or Classes of Notes and/or Certificates of a Series
and ending on the date set forth in the related Prospectus
Supplement (each, a "Revolving Period") during which
limited or no principal payments will be made to one or
more Classes of Notes and/or Certificates of the related
Series as are identified in such Prospectus Supplement.
Some or all collections of principal otherwise allocated
to such Classes of Notes or Certificates may be (i)
utilized during the Revolving Period to acquire additional
Trust Assets which satisfy the criteria described under
"The Trusts--General" and the criteria set forth in the
related Prospectus Supplement, (ii) held in an account and
invested in Permitted Investments (as defined herein), for
later distribution to Securityholders, (iii) applied to
those Notes or Certificates for such Series, if any,
specified in the related Prospectus Supplement as then are
in amortization, or (iv) otherwise applied as specified in
the related Prospectus Supplement.
An "Amortization Period" is the period during which an
amount of principal is payable to Holders of Securities
which, during the Revolving Period, were not otherwise
entitled to such payments. If so specified in the related
Prospectus Supplement, during an Amortization Period all
or a portion of principal collections on the Loans may be
applied as specified above for a Revolving Period and, to
the extent not so applied, will be distributed to the
Classes of Notes and/or Certificates for such Series
specified in the related Prospectus Supplement as then
being entitled to payments of principal. In addition, if
so specified in the related Prospectus Supplement, amounts
deposited in certain accounts for the benefit of one or
more Classes of Notes or Certificates for such Series may
be released from time to time or on a specified date and
applied as a payment of principal on such Classes of Notes
and/or Certificates. The related Prospectus Supplement
will set forth the circumstances which will result in the
commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to
the Representative or one of its affiliates a certificate
evidencing an undivided beneficial interest (a "Retained
Interest") in such Series not represented by the other
Securities issued by the related Trusts. As further
described in the related Prospectus Supplement, the value
of such Retained Interest will fluctuate as the amount of
Notes and Certificates of the related Series of Securities
outstanding is reduced.
Description of the
Certificates.................. Each Certificate will represent a fractional undivided
ownership interest in the Trust created pursuant to the
related Agreement. The primary assets of such Trust will
be a Pool of Loans and certain other Trust Assets. The
Certificates of any Series may be issued in one or more
Classes, as specified in the related Prospectus
Supplement. A Series of Certificates may include one or
more Classes of senior Certificates (collectively, "Senior
Certificates")
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
which receive certain preferential treatment specified in
the related Prospectus Supplement with respect to one or
more Classes of subordinate Certificates (collectively,
the "Subordinated Certificates"). In addition, a Series
may include one or more Series entitled to (i) principal
payments with disproportionate, nominal or no interest
payments or (ii) interest payments with disproportionate,
nominal or no principal payments (such Certificates,
"Strip Certificates"). Certain Series or Classes of
Certificates may be covered by a Guaranty Insurance
Policy, Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy, Bankruptcy Bond or other insurance
policies, cash accounts, letters of credit, financial
guaranty insurance policies, third party guarantees,
supplemental interest payments or other forms of credit
enhancement or maturity protection, or derivative
products, as described herein and in the related
Prospectus Supplement.
Each Class of Certificates within a Series will evidence
the interests specified in the related Prospectus
Supplement, which may (i) include the right to receive
distributions allocable only to principal, only to
interest or to any combination thereof; (ii) include the
right to receive distributions only of prepayments of
principal throughout the lives of the Certificates or
during specified periods; (iii) be subordinated in its
right to receive distributions of scheduled payments of
principal, prepayments of principal, interest or any
combination thereof to one or more other Classes of
Certificates of such Series throughout the lives of the
Certificates or during specified periods or may be
subordinated with respect to certain losses or
delinquencies; (iv) include the right to receive such
distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the
right to receive distributions in accordance with a
schedule or formula or on the basis of collections from
designated portions of the assets in the related Trust;
(vi) include, as to Certificates entitled to distributions
allocable to interest, the right to receive interest at a
fixed rate or a floating rate; and (vii) include, as to
Certificates entitled to distributions allocable to
interest, the right to distributions allocable to interest
only after the occurrence of events specified in the
related Prospectus Supplement, and in each case, may
accrue interest until such events occur, as specified in
such Prospectus Supplement. The timing and amounts of such
distributions may vary among Classes, over time, or
otherwise as specified in the related Prospectus
Supplement. The Pass-Through Rate for a Class of
Certificates that pay interest based upon a floating rate
of interest, as specified in the related Prospectus
Supplement, may base such floating rate upon any of
following: (i) the auction procedures for Auction Rate
Securities described herein, (ii) LIBOR plus an amount set
forth in the related Prospectus Supplement, (iii) the
T-Bill Rate plus an amount set forth in the related
Prospectus Supplement, (iv) the Prime Rate plus an
applicable spread, as set forth in the related Prospectus
Supplement, or (v) any such other method or procedures
used to
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
determine the floating rate of interest as may be
described in the applicable Prospectus Supplement.
The Certificates will be issuable in fully registered
form, in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof (or such other
amounts as may be set forth in a Prospectus Supplement),
except that one Certificate of each Class may be issued in
a different denomination. See "Description of Securities."
With respect to any Series of Securities including one or
more Classes of Notes, distributions in respect of the
Certificates may be subordinated in priority of payment to
payments on the Notes of such Series, to the extent
specified in the related Prospectus Supplement.
Description of the Notes........ Any Series of Securities may include one or more Classes
of Notes, as specified in the related Prospectus
Supplement, each of which will be issued pursuant to an
Indenture and will be treated as debt obligations of the
related Trust.
Unless otherwise specified in the related Prospectus
Supplement, Notes will be available for purchase in
denominations of $1,000 and integral multiples of $1,000
(or such other accounts as may be set forth in a
Prospectus Supplement), except that one Note of each Class
may be issued in a different denomination, in book-entry
form or in definitive form, as specified in the related
Prospectus Supplement. See "Description of the
Securities."
Each Class of Notes will have a stated principal amount
and will bear interest at the Interest Rate or Rates as
specified in the related Prospectus Supplement, which may
be different for each Class of Notes and may be fixed,
variable, adjustable, or any combination of the foregoing.
The related Prospectus Supplement will specify the
Interest Rate for each Class of Notes or the method for
determining the Interest Rate. The Interest Rate for a
Class of Notes that pay interest based upon a floating
rate of interest, as specified in the related Prospectus
Supplement, may base such floating rate upon any of
following: (i) the auction procedures for Auction Rate
Securities described herein, (ii) LIBOR plus an amount set
forth in the related Prospectus Supplement, (iii) the T-
Bill Rate plus an amount set forth in the related
Prospectus Supplement, (iv) the Prime Rate plus an
applicable spread, as set forth in the related Prospectus
Supplement, or (v) any such other method or procedures
used to determine the floating rate of interest as may be
described in the applicable Prospectus Supplement. Each
Note may also represent a fractional undivided interest
in, or be entitled to receive payments from, monies on
deposit, if any, in the Pre-Funding Account as specified
in the related Prospectus Supplement and any other account
established for the benefit of Noteholders, as specified
in the related Prospectus Supplement.
A Series may include two or more Classes of Notes which
differ as to the timing and priority of payment,
seniority, allocations of loss,
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Interest Rate or amount of payments of principal or
interest, or as to which payments of principal or interest
may or may not be made upon the occurrence of specified
events or on the basis collections from designated
portions of the Trust Assets for such Series. In addition,
a Series may include one or more Classes of Notes entitled
to (i) principal payments with disproportionate, nominal
or no interest payments or (ii) interest payments with
disproportionate, nominal or no principal payments (such
Notes, "Strip Notes"). A Series of Notes may include one
or more Classes of senior Notes (collectively, "Senior
Notes") which receive certain preferential treatment
specified in the related Prospectus Supplement with
respect to one or more Classes of subordinate Notes
(collectively, the "Subordinated Notes"). Certain Series
or Classes of Notes may be covered by a Guaranty Insurance
Policy, Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy, Bankruptcy Bond or other insurance
policies, cash accounts, letters of credit, financial
guaranty insurance policies, third party guarantees,
supplemental interest payments or other forms of credit
enhancement or maturity protection or derivative
instruments, as described herein and in the related
Prospectus Supplement.
Credit Enhancement.............. The Trust Assets in a Trust or the Securities of one or
more Classes in the related Series may have the benefit of
one or more types of credit enhancement, as described in
the related Prospectus Supplement. The protection against
losses afforded by any such credit support may be limited.
Such credit enhancement may include one or more of the
following types:
A. Subordination and Reserve
Accounts...................... The rights of all Certificateholders will be subordinated
to the rights of all Noteholders of a Series to receive
distributions to the extent described in the related
Prospectus Supplement, with respect to the Trust Assets
and other assets in the related Trust. The rights of the
holders of Subordinated Certificates and/or Subordinated
Notes, as the case may be (collectively, "Subordinated
Securities"), of a Series to receive distributions will be
subordinated to the rights of the holders of the Senior
Certificates and/or Senior Notes, as the case may be
(collectively, "Senior Securities"), of the same Series to
receive distributions to the extent described in the
related Prospectus Supplement. This subordination is
intended to enhance the likelihood of regular receipt by
holders of Senior Securities of the full amount of
payments which such holders would be entitled to receive
if there had been no losses or delinquencies. The
protection afforded to the holders of Senior Securities
through subordination may be accomplished by the
preferential right of such holders to receive, prior to
any distribution being made in respect of the related
Subordinated Securities the amounts of principal and
interest due to them on each Remittance Date out of the
funds available for distribution on such date in the
related Distribution Account (as defined herein) to the
extent described in the related Prospectus
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Supplement. The protection afforded to the holders of
Senior Securities through subordination also may be
accomplished by allocating certain types of losses or
delinquencies to the related Subordinated Securities to
the extent described in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the
same Class of Securities may constitute Senior
Certificates and/or Senior Notes, as the case may be, with
respect to certain types of payments or certain losses or
delinquencies and Subordinated Certificates and/or
Subordinated Notes, as the case may be, with respect to
other types of payments or losses or delinquencies. If so
specified in the related Prospectus Supplement,
subordination may apply only in the event of certain types
of losses not covered by other forms of credit support,
such as hazard losses not covered by Standard Hazard
Insurance Policies or losses due to the bankruptcy of a
Mortgagor not covered by a Bankruptcy Bond. If further
specified in the related Prospectus Supplement, one or
more reserve accounts (each, a "Reserve Account") may be
established and maintained, in whole or in part, by the
deposit therein of distributions allocable to the holders
of Subordinated Certificates and/or Subordinated Notes, as
the case may be, for a specified time or until a specified
level is reached. The related Prospectus Supplement will
set forth information concerning the amount of
subordination of a Class or Classes of Subordinated
Certificates and/or Subordinated Notes, as the case may
be, in a Series, the circumstances in which such
subordination will be applicable, the manner, if any, in
which the amount of subordination will decrease over time,
the manner of funding any Reserve Account, and the
conditions under which amounts in any such Reserve Account
will be used to make distributions to holders of Senior
Certificates and/ or Senior Notes, as the case may be, or
released to holders of Subordinated Certificates and/or
Subordinated Notes, as the case may be, from the related
Trust.
B. Guaranty Insurance Policy.... A certificate or note guaranty insurance policy (each a
"Guaranty Insurance Policy") may be obtained and
maintained for each Class or Series of Certificates and/or
Notes. Guaranty Insurance Policies generally
unconditionally and irrevocably guarantee that the full
amount of the distributions of principal and interest
("Insured Payments"), as well as any other amounts
specified in the related Prospectus Supplement, will be
received by an agent of the Trustee, for distribution by
the Trustee to the Holders of the covered Securities.
Guaranty Insurance Policies may have certain limitations
set forth in the related Prospectus Supplement, including
(but not limited to) limitations on the insurer's
obligation to guarantee the Master Servicer's obligation
to repurchase or substitute for any Loans, to guarantee
any specified rate of prepayments or to provide funds to
redeem Securities on any specified date.
C. Spread Amount................ If so specified in the related Prospectus Supplement,
certain Classes of Certificates and/or Notes may be
entitled to receive
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
limited acceleration of principal relative to the
amortization of the related Trust Assets. The accelerated
amortization will be achieved by applying certain excess
interest collected on the Trust Assets to the payment of
principal on such Classes of Securities. This acceleration
feature is intended to create an amount (the "Spread
Amount"), resulting from, and generally equal to, the
excess of the aggregate principal balances of the
applicable Trust Assets over the principal balances of the
applicable Classes of Securities. Once the required Spread
Amount is reached, and subject to the provisions described
in the next sentence and in the related Prospectus
Supplement, the acceleration feature will cease, unless
necessary to maintain the required level of the Spread
Amount. The applicable Agreement may provide that, subject
to certain floors, caps and triggers, the required level
of the Spread Amount may increase or decrease over time.
An increase would result in a temporary period of
accelerated amortization of the applicable Classes of
Securities to increase the actual level of the Spread
Amount to its required level; a decrease would result in a
temporary period of decelerated amortization to reduce the
actual level of the Spread Amount to its required level.
An Agreement also may provide that after one or more
Classes of Securities have been paid to the required level
of the Spread Amount, excess interest, together with
certain other excess amounts, may be applied to make-up
shortfalls in, or accelerate the amortization of, other
Classes of Securities.
D. Mortgage Pool Insurance
Policy........................ A mortgage pool insurance policy or policies ("Mortgage
Pool Insurance Policy") may be obtained and maintained for
each Series pertaining to Loans, limited in scope,
covering defaults on the related Loans in an initial
amount equal to a specified percentage of the aggregate
principal balance of all Loans included in the Pool as of
the Cut-Off Date or such other date as is specified in the
related Prospectus Supplement.
E. Special Hazard Insurance
Policy........................ In the case of Loans certain physical risks that are not
otherwise insured against by Standard Hazard Insurance
Policies may be covered by a special hazard insurance
policy or policies (a "Special Hazard Insurance Policy").
The level of coverage of each Special Hazard Insurance
Policy will be specified in the related Prospectus
Supplement.
F. Bankruptcy Bonds............. A mortgagor bankruptcy bond or bonds ("Bankruptcy Bond")
may be obtained to cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of
principal or interest on a Loan or a reduction by such
court of the principal amount of a Loan, and will cover
certain unpaid interest on the amount of such a principal
reduction. The level of coverage of each Bankruptcy Bond
will be specified in the related Prospectus Supplement.
G. Cross Support................ If so specified in the Prospectus Supplement, the
ownership interests of separate Trusts or separate groups
of assets may be evidenced by separate Classes of the
related Series of Certificates and/or Notes. In such case,
credit support may be provided by a cross-support feature
which requires that distributions be made
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
with respect to certain Certificates and/or Notes
evidencing interests in one or more Trusts or asset groups
prior to distributions to other Certificates and/or Notes
evidencing interests in other asset groups or Trusts. If
specified in the related Prospectus Supplement, the
coverage provided by one or more forms of credit support
may apply concurrently to two or more separate Trusts,
without priority among such Trusts, until the credit
support is exhausted. If applicable, the Prospectus
Supplement will identify the Trusts or asset groups to
which such credit support relates and the manner of
determining the amount of the coverage provided thereby
and of the application of such coverage to the identified
Trusts or asset groups.
H. Supplemental Interest
Payments...................... If so specified in the Prospectus Supplement, one or more
Classes of Certificates and/or Notes may be entitled to
receive supplemental interest payments under specified
circumstances. Supplemental interest payments will be
available to fund some or all of the difference, if any,
between the interest owed to a Class of Securities on a
Remittance Date and the interest that would be available
to pay such interest assuming no defaults or delinquencies
on the Trust Assets. Such differences may result if the
interest rates on the applicable Classes of Securities are
based upon an index that differs from the index used in
determining the interest rates on the Trust Assets. Except
as otherwise provided in a Prospectus Supplement,
supplemental interest payments will not be available to
fund shortfalls resulting from delinquencies or defaults
on the Trust Assets.
I. Maturity Protection.......... If so specified in the Prospectus Supplement, one or more
Classes of Certificates and/or Notes may be entitled to
third-party payments to help provide that the holders of
such Securities receive their unpaid principal on or prior
to a specified date.
J. Other Insurance, Guarantees,
Swaps, and Similar Instruments
or Agreements................. If specified in the related Prospectus Supplement, a Trust
may include in lieu of some or all of the foregoing or in
addition thereto letters of credit, financial guaranty
insurance policies, other third party guarantees, limited
guarantees or insurance from agencies or instrumentalities
of the United States, and other arrangements for
maintaining timely payments or providing additional
protection against losses on the assets included in such
Trust, paying administrative expenses, or accomplishing
such other purpose as may be described in the Prospectus
Supplement. The Trust may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds
held in one or more accounts will be invested at a
specified rate.
If any Class of Securities has a floating interest rate,
or if any of the Trust Assets has a floating interest
rate, the Trust may include an interest rate swap
contract, an interest rate cap agreement or similar hedge
contract providing limited protection against interest
rate risks. If provided in the related Prospectus
Supplement,
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
interest and/or principal on one or more Classes of the
Securities of a Series may be paid to Holders thereof in a
currency other than U.S. dollars. If so provided, the
Trust may, in connection therewith, enter into one or more
currency rate swaps to provide limited protection against
foreign currency rate fluctuation risks. One or more
Classes of Securities also may be issued in conjunction
with a put or call feature entitling (in the case of a
put) or obligating (in the case of a call) the applicable
Securityholders to sell some or all of its Securities to
the party named in the applicable Prospectus Supplement on
the date or dates set forth therein. Any such arrangements
must be acceptable to each nationally recognized rating
agency that provides a rating for the related Series of
Securities (the "Rating Agency").
Monthly Advances................ If so specified in the related Prospectus Supplement, the
Master Servicer will be required under each Agreement to
remit to the Trustee no later than the day of each month
which is at least three business days prior to the
Remittance Date and is in no case earlier than the seventh
business day of such month (the "Determination Date") the
amount (a "Monthly Advance"), if any, by which (a) the sum
of (x) 30 days' interest at the weighted average Adjusted
Loan Remittance Rate (as defined herein under "Description
of the Securities--Monthly Advances and Compensating
Interest") on the then outstanding principal balance of
the related Series of Certificates and/or Notes and (y)
the amount, if any, required to be deposited into the
related Reserve Account (as specified in the related
Prospectus Supplement) for the related Remittance Date
exceeds (b) the amount received by the Master Servicer in
respect of interest on the Loans as of the related Record
Date (less certain amounts not required to be deposited
into the related Trust). Such advances by the Master
Servicer are reimbursable in the first instance from late
collections of interest, including amounts received in
connection with the liquidation of defaulted Loans
("Liquidation Proceeds"), amounts paid by any insurer
pursuant to any insurance policy covering a Loan,
Mortgaged Property or REO Property ("Insurance Proceeds"),
and proceeds received by the Master Servicer in connection
with condemnation, eminent domain or a release of lien
("Released Mortgaged Property Proceeds") collected with
respect to the related Loans as to which the advances were
made, and certain other amount that would otherwise be
distributed on the Securities. The Master Servicer will
not be required to make any Monthly Advances which it
determines, in good faith, would be nonrecoverable from
amount received in respect of the Loans. See "Description
of the Securities--Monthly Advances and Compensating
Interest."
Compensating Interest........... If so specified in the related Prospectus Supplement, with
respect to each Loan as to which the Master Servicer
receives a principal payment in full in advance of the
final scheduled due date (a "Principal Prepayment") or
receives a principal payment that exceeds the scheduled
payment by a specified multiple, but which was not
intended by the Mortgagor to satisfy the Loan in full or
to
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
cure a delinquency (a "Curtailment"), the Master Servicer
will be required to remit to the Trustee, from amounts
otherwise payable to the Master Servicer as servicing
compensation, an amount ("Compensating Interest") equal to
any excess of (a) 30 days' interest on the principal
balance of each such Loan as of the beginning of the
related Due Period at the applicable weighted average
Adjusted Loan Remittance Rate over (b) the amount of
interest actually received on the related Loan during such
Due Period (less certain amounts not required to be
deposited into the related Trust).
Optional Termination............ The Master Servicer, certain insurers, the holders of
certain Classes of Certificates or Notes, or certain other
entities specified in the related Prospectus Supplement
may have the option to effect early retirement of a Series
of Securities through the purchase of the related Trust
Assets and other assets in the related Trust under the
circumstances and in the manner described in "The
Agreement-- Termination; Purchase of Loans."
Mandatory Termination........... The Trustee, the Master Servicer or certain other entities
specified in the related Prospectus Supplement may be
required to effect early retirement of a Series of
Securities under the circumstances and in the manner
specified in the related Prospectus Supplement and herein
under "The Agreement--Termination; Purchase of Loans."
Trustee......................... The trustee or trustees under any Agreement relating to a
Series of Securities (each, a "Trustee") will be specified
in the related Prospectus Supplement. Additionally, any
Co-Trustees, Custodians or Co-Custodians will be set forth
in the related Prospectus Supplement.
Federal Income Tax
Consequences.................. The federal income tax consequences of the purchase,
ownership and disposition of the Securities of each series
will depend on whether an election is made to treat the
corresponding Trust (or certain assets of the Trust) as a
"real estate mortgage investment conduit" ("REMIC") under
the Internal Revenue Code of 1986, as amended (the
"Code"), and, if such election is not made, whether the
Trust is structured and intended to be treated as a
grantor trust, a partnership or otherwise.
REMIC. If an election is to be made to treat the Trust (or
certain assets of the Trust) for a Series of Securities as
a REMIC for federal income tax purposes, the related
Prospectus Supplement will specify which Class or Classes
thereof will be designated as regular interests in the
REMIC ("REMIC Regular Certificates") and which class of
Certificates will be designated as the residual interest
in the REMIC ("REMIC Residual Certificates"). To the
extent provided herein and in the related Prospectus
Supplement, in the opinion of Stroock & Stroock & Lavan
LLP, special federal tax counsel ("Federal Tax Counsel"),
Certificates representing an interest in the REMIC
generally will be considered "real estate assets" for
purposes of Section 856(c)(4)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code.
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
In the opinion of Federal Tax Counsel, for federal income
tax purposes, REMIC Regular Certificates generally will be
treated as debt obligations of the Trust with payment
terms equivalent to the terms of such Certificates.
Holders of REMIC Regular Certificates will be required to
report income with respect to such Certificates under an
accrual method, regardless of their normal tax accounting
method. Original issue discount, if any, on REMIC Regular
Certificates will be includible in the income of the
Holders thereof as it accrues, in advance of receipt of
the cash attributable thereto, which rate of accrual will
be determined based on a reasonable assumed prepayment
rate. The REMIC Residual Certificates generally will not
be treated as evidences of indebtedness for federal income
tax purposes, but instead as representing rights to the
taxable income or net loss of the REMIC.
Each holder of a REMIC Residual Certificate will be
required to take into account separately its pro rata
portion of the REMIC's taxable income or loss. Certain
income of a REMIC (referred to as "excess inclusions")
generally may not be offset by such a holder's net
operating loss carryovers or other deductions, and in the
case of a tax-exempt holder of a REMIC Residual
Certificate will be treated as "unrelated business taxable
income." In certain situations, particularly in the early
years of a REMIC, holders of a REMIC Residual Certificate
may have taxable income, and possibly tax liabilities with
respect to such income, in excess of cash distributed to
them. "DISQUALIFIED ORGANIZATIONS," AS DEFINED IN "FEDERAL
INCOME TAX CONSEQUENCES--REMIC RESIDUAL CERTIFICATES--TAX
ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES; RESTRICTION
ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES," ARE
PROHIBITED FROM ACQUIRING OR HOLDING ANY BENEFICIAL
INTEREST IN THE REMIC RESIDUAL CERTIFICATES.
Grantor Trust. If no election is to be made to treat the
Trust for a series of Certificates ("Non-REMIC
Certificates") as a REMIC, the Trust may be classified as
a grantor trust for federal income tax purposes and not as
an association taxable as a corporation or a taxable
mortgage pool. In the opinion of Federal Tax Counsel,
holders of Non-REMIC Certificates will be treated for such
purposes, subject to the possible application of the
stripped bond rules, as owners of undivided interests in
the related Trust Assets generally will be required to
report as income their pro rata share of the entire gross
income (including amounts paid as reasonable servicing
compensation) from the Trust Assets and will be entitled,
subject to certain limitations, to deduct their pro rata
share of expenses of the Trust.
To the extent provided in the related Prospectus
Supplement, Non-REMIC Certificates may represent "real
estate assets" for purposes of Section 856(c)(4)(A) of the
Code and "Loans. . . principally secured by an interest in
real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code.
Partnership. If no election is to be made to treat the
Trust for a Series as a REMIC and it is so specified in
the related Prospectus
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
Supplement, the Trust will generally be treated as a
partnership for federal income tax purposes, and Federal
Tax Counsel will deliver its opinion generally to the
effect that the Trust will not be an association (or
publicly traded partnership) taxable as a corporation, or
a taxable mortgage pool, for federal income tax purposes.
Each Noteholder, by the acceptance of a Note of such
Series, will agree to treat such Note as indebtedness, and
each Certificateholder, by the acceptance of a Certificate
of such series, will agree to treat the related Trust as a
partnership in which such Certificateholder is a partner
for federal income and state tax purposes.
Investors are advised to consult their tax advisors and to
review "Federal Income Tax Consequences" herein and, if
applicable, in the related Prospectus Supplement.
ERISA Considerations............ Fiduciaries of employee benefit plans or other retirement
plans or arrangements, including individual retirement
accounts, certain Keogh plans, and collective investment
funds, separate accounts and insurance company general
accounts in which such plans, accounts or arrangements are
invested, that are subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code should carefully review with
their legal advisors whether an investment in Securities
will cause the assets of the related Trust to be
considered plan assets under the Department of Labor
("DOL") regulations set forth in 29 C.F.R. Section
2510.3-101 (the "Plan Asset Regulations"), thereby
subjecting the Trustee and the Master Servicer to the
fiduciary investment standards of ERISA, and whether the
purchase, holding or transfer of Securities gives rise to
a transaction that is prohibited under ERISA or subject to
the excise tax provisions of Section 4975 of the Code,
unless a DOL administrative exemption applies. See "ERISA
Considerations."
Legal Investment................ Each Prospectus Supplement will describe the extent, if
any, to which the Classes of Securities offered thereby
will constitute "mortgage-related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") and whether they will be legal investments for
certain types of institutional investors under SMMEA. See
"Legal Investment" herein.
Registration of Securities...... Securities may be represented by global certificates
and/or notes registered in the name of Cede, as nominee of
DTC, or another nominee. In such case, Securityholders
will not be entitled to receive definitive certificates
and/or notes representing such Holders' interests, except
in certain circumstances described in the related
Prospectus Supplement. See "Description of the
Securities--Book-Entry Registration" herein.
</TABLE>
20
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities will
develop or, if a secondary market does develop, that it will provide Holders of
the Securities with liquidity of investment or that it will continue for the
lives of the Securities. In addition, transfers of certain Classes of Securities
may be restricted as set forth in the related Prospectus Supplement.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates and/or Notes in book-entry form may reduce the
liquidity of such Securities in the secondary trading market since investors may
be unwilling to purchase Securities for which they cannot obtain physical
certificates or notes.
Since transactions in Certificates and Notes will, in most cases, be able to
be effected only through DTC, Direct or Indirect Participants and certain banks,
the ability of a Securityholder to pledge a Certificate or Note to persons or
entities that do not participate in the DTC system, or otherwise to take actions
in respect of such Securities may be limited due to lack of a physical
certificate representing such Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities since distributions may be
required to be forwarded by the Trustee to DTC and, in such a case, DTC will be
required to credit such distributions to the accounts of its Participants which
thereafter will be required to credit them to the accounts of the applicable
Class of Securityholders either directly or indirectly through Indirect
Participants or such other entities as described in the related Prospectus
Supplement. See "Description of the Securities--Book-Entry Registration."
NATURE OF SECURITY
Certain of the Loans will be loans secured by junior liens subordinate to
the rights of the mortgagee under each related senior mortgage. As a result, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a junior mortgage loan only to the
extent that the claims, if any, of each such senior mortgagee are satisfied in
full, including any related foreclosure costs. In addition, a mortgagee may not
foreclose on the mortgaged property unless it forecloses subject to any related
senior mortgage or mortgages, in which case it must either pay the entire amount
of each senior mortgage to the applicable mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on each senior
mortgage in the event of default thereunder. In servicing mortgage loans in
their portfolios, it has been the Originators' practice to satisfy each such
senior mortgage at or prior to the foreclosure sale only to the extent that they
determine any amounts so paid will be recoverable from future payments and
collections on the mortgage loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of the
Loans--Foreclosure/Repossession."
An overall decline in the market value of residential or commercial real
estate, the general condition of a Mortgaged Property, or other factors, could
adversely affect the values of the Mortgaged Properties such that the
outstanding balances of the Loans which are junior mortgage loans, together with
any senior liens on the Mortgaged Properties, equal or exceed the value of the
Mortgaged Properties. Such a decline could extinguish the interest of the
related Trust in the Mortgaged Property before having any effect on the interest
of the related senior mortgagee. The Representative will not be able to quantify
the impact of any property value declines on the Loans or predict whether, to
what extent or how long such declines may continue. In periods of such declines,
the actual rates of delinquencies, foreclosures and losses on the Loans could be
higher than those historically experienced in the mortgage lending industry in
general.
21
<PAGE>
Certain of the Loans may constitute "Balloon Loans." Balloon Loans are
originated with a stated maturity of less than the period of time of the
corresponding amortization schedule. As a result, upon the maturity of a Balloon
Loan, the Mortgagor will be required to make a "balloon" payment which will be
significantly larger than such Mortgagor's previous monthly payments. The
ability of such a Mortgagor to repay a Balloon Loan at maturity frequently will
depend on such borrower's ability to refinance the Loan. The ability of a
Mortgagor to refinance such a Loan will be affected by a number of factors,
including the level of available mortgage rates at the time, the value of the
related Mortgaged Property and other collateral securing the Loan, the
Mortgagor's equity in the related Mortgaged Property, the financial condition of
the Mortgagor and the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing of a
balloon payment, the receipt and reinvestment by Securityholders of the proceeds
in such an environment may produce a lower return than that previously received
in respect of the related Loan. Conversely, a high interest rate environment may
make it more difficult for the Mortgagor to accomplish a refinancing and may
result in delinquencies or defaults. None of the Representative, the
Originators, the Master Servicer or the Trustee will be obligated to provide
funds to refinance any Loan.
General economic conditions have an impact on the ability of borrowers to
repay loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
bankruptcy of a Mortgagor, it is possible that a Trust could experience a loss
with respect to such Mortgagor's Loan. In conjunction with a Mortgagor's
bankruptcy, a bankruptcy court may suspend or reduce the payments of principal
and interest to be paid with respect to such Loan or permanently reduce the
principal balance of such Loan, thus either delaying or permanently limiting the
amount received by the Trust with respect to such Loan. Moreover, in the event a
bankruptcy court prevents the transfer of the related Mortgaged Property to a
Trust, any remaining balance on such Loan may not be recoverable.
Even assuming that the Mortgaged Properties and other collateral securing a
Loan provide adequate security for the Loans, substantial delays could be
encountered in connection with the liquidation of defaulted Loans and
corresponding delays in the receipt of related proceeds by the Securityholders
could occur. An action to foreclose on a Mortgaged Property securing a Loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Mortgaged Property or to obtain Liquidation Proceeds
(net of expenses) sufficient to repay all amounts due on the related Loan. The
Master Servicer will be entitled to deduct from Liquidation Proceeds all
expenses reasonably incurred in attempting to recover amounts due on the related
liquidated Loan and not yet repaid, including payments to prior lienholders,
legal fees and costs of legal action, real estate taxes, and maintenance and
preservation expenses. In the event that any Mortgaged Properties and other
collateral securing a Loan fail to provide adequate security for the Loans and
insufficient funds are available from applicable Credit Enhancement,
Securityholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a larger principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller loan than would be the case with a
larger loan.
22
<PAGE>
ENVIRONMENTAL CONSIDERATIONS
Under environmental legislation and case law applicable in various states,
including California, a secured party that takes a deed in lieu of foreclosure,
acquires a mortgaged property at a foreclosure sale or which, prior to
foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Agreement, is not required to take an active role
in operating the Mortgaged Properties. See "Certain Legal Aspects of the
Loans--Environmental Considerations."
In each Agreement the Originators will represent and warrant that at the
time of origination of each Loan, the related commercial real property was below
regulatory agency action levels of contamination from toxic substances or
hazardous wastes and that as of the Cut-Off Date, the Originators have no
knowledge of any contamination from toxic substances or hazardous wastes on any
commercial real property, except for commercial real property subject to ongoing
environmental rehabilitation. The Servicer will agree that if it has reasonable
cause to believe a property may have contamination from toxic substances or
hazardous wastes (unless subject to ongoing environmental rehabilitation), it
will not foreclose upon the related Loan until after it obtains a Phase I
environmental report or other professional environmental data sufficient to
verify the environmental condition of the property. See "The
Agreements--Representations and Warranties" herein.
In accordance with SBA SOP 50-10 (effective 1-29-99), the SBA allows
lenders, subject to certain conditions, to take as collateral commercial real
property that is subject to ongoing environmental rehabilitation. These
conditions include the lender identifying a party that has accepted
responsibility for, and has commenced clean-up under, an environmental
rehabilitation program approved by the appropriate regulatory agency. The party
responsible for clean-up must execute an indemnity agreement approved by the
SBA, which agreement holds such party accountable for completing all required
remediation. The indemnity agreement inures to the benefit of subsequent holders
of the property. The lender must obtain adequate financial data on the
indemnitor indicating that the indemnitor will be able to complete the required
remediation.
PRE-FUNDING ACCOUNTS
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities.
The ability of a Trust Fund to obtain subsequent Loans during the related
Pre-Funding Period will be dependent on the ability of the Originators to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Originators to originate or acquire such Loans
will be affected by a variety of social and economic factors, including the
prevailing level of market interest rates, unemployment levels and consumer
perception of general economic conditions.
PREPAYMENT CONSIDERATIONS
The Loans may be prepaid in full or in part at any time. The rate of
prepayments of the Loans cannot be predicted and may be affected by a wide
variety of economic, social, and other factors, including prevailing interest
rates and the availability of alternative financing. Therefore, no assurance can
be given as to the level of prepayments that a Trust will experience.
23
<PAGE>
THE STATUS OF THE LOANS IN THE EVENT OF BANKRUPTCY OF AN ORIGINATOR
The Originators believe that upon the sale of a Series of Certificates
and/or Notes to an independent third party for fair value and without recourse,
such sale will constitute an absolute and unconditional sale of such
Certificates and/or Notes and the interests in the Loans evidenced thereby.
However, in the event of the bankruptcy of an Originator at a time when it or
any affiliate thereof holds any interest in the Loans, a trustee in bankruptcy
or other creditor could attempt to recharacterize the sale of the Loans as a
borrowing by such Originator or any such affiliate with the result that
Securities are deemed to be creditors of such Originator or such affiliate,
secured by a pledge of the Loans. If such an attempt were successful, a trustee
in bankruptcy could elect to accelerate payment of the Securities and liquidate
the Loans with the Securityholders entitled to the then outstanding principal
amount thereof together with accrued interest. Thus, the Holders of Securities
could lose the right to future payments of interest, might suffer reinvestment
loss in a lower interest rate environment and, if the Loans are sold for a price
less than the then outstanding principal balances of all classes of Securities,
certain Certificateholders and/or Noteholders might suffer a loss of principal.
In connection with the issuance of each Series of Securities, the Trustee
will receive an opinion of Stroock & Stroock & Lavan LLP, special counsel, to
the effect that if it were litigated, a court ultimately would uphold the
Originators' intention that the transfer of the Loans in each Loan to a Trust
constitutes a sale under applicable law. Therefore, the Loans would not be
property of the Originators in the event of the appointment of a receiver or
conservator for the Originators. Such opinion is limited to matters of New York
and federal law and the conclusions thereof are based upon a reasoned analysis
of the transaction and legal principles derived from existing case law believed
to be applicable by analogy. It should be recognized, however, that a court is
not bound by such legal opinion.
Prepayments may result from voluntary early payments by borrowers (including
payments in connection with refinancings of the related senior mortgage loan or
loans), sales of businesses financed by the Loans, sales of Mortgaged Properties
subject to "due-on-sale" provisions and liquidations due to default, as well as
the receipt of proceeds from insurance policies. In addition, repurchases or
purchases from a Trust of Loans required to be made by the Master Servicer under
the Agreement will have the same effect on the Securityholders as a prepayment
of the related Loans. See "Yield, Maturity and Prepayment Considerations"
herein. Also, if a Pre-Funding Account is established and during the Funding
Period the entire Pre-Funded Amount is not used to purchase subsequent Loans,
the Certificates and/or Notes will be prepaid in part from and to the extent of
such remaining amounts.
Collections on the Loans may vary due to the level and frequency of
delinquent payments and of prepayments. Collections on the Loans may also vary
due to seasonal business patterns and payment habits of borrowers.
The Loans may be "simple interest" or "date-of-payment loans". If a payment
is received on a Loan later than scheduled, a smaller portion of such payment
will be applied to principal and a greater portion will be applied to interest
than would have been the case had the payment been received on its scheduled due
date, resulting in such Loan having a longer average life than would have been
the case had the payment been made as scheduled. Conversely, if a payment on a
Loan is received earlier than scheduled, more of such payment will be applied to
principal and less to interest than would have been the case had the payment
been received on its scheduled due date, resulting in such Loan having a shorter
average life than would have been the case had the payment been made as
scheduled. However, this effect is mitigated because the monthly payment amount
is recalculated periodically to reflect changes in the interest rate, the
then-current principal balance and the then-remaining term to maturity.
SECURITY RATING
If as set forth in the related Prospectus Supplement, the rating of one or
more classes of Securities may depend, to a large extent, on the
creditworthiness of a third party provider of credit enhancement. In
24
<PAGE>
such event, any reduction in the rating assigned to the claims-paying ability of
such provider below the rating initially given to such Class of Securities would
likely result in a reduction in the rating of such Series of Securities. See
"Rating."
UNAUDITED STATEMENTS
On each Remittance Date, the Trustee will mail to each Securityholder a
statement setting forth, among other things, certain information as to the
distribution being made on such Remittance Date, the fees to be paid to the
Master Servicer and Trustee and the loss and delinquency status of the Loans.
Although the information contained in such statements will be prepared by the
Master Servicer, neither such information nor any other financial information
furnished to Securityholders will be examined and reported upon, and an opinion
will not be expressed by, an independent public accountant. See "Description of
the Agreement and the Securities--Payments on the Loans; Distribution on the
Securities" herein.
25
<PAGE>
THE TRUSTS
A Trust for any Series of Securities will include the Trust Assets
consisting of a Pool(*) comprised of (i) SBA Section7(a) Loans, (ii) Section
7(a) Companion Loans, (iii) SBA 504 Loans, and (iv) Non-SBA Loans, in each case,
as specified in the related Prospectus Supplement, together with payments in
respect of such Trust Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
The Notes of each Series will be secured by the pledge of the assets of the
related Trust, and the Certificates of each Series will represent interests in
the assets of the related Trust. The Securities will be entitled to payment from
the assets of the related Trust and, to the extent specified in a Prospectus
Supplement, payments in respect of the assets of other trusts established by the
Representative, the Originators or any of their affiliates. If specified in the
related Prospectus Supplement, certain Securities will evidence the entire
fractional undivided ownership interest in a Trust which will contain a
beneficial ownership interest in another Trust which will contain all or some of
the Trust Assets.
Certain of the Trust Assets may have been originated by the Originators.
Other Trust Assets may have been acquired by the Representative, an Originator
or an affiliate thereof in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Representative.
The following is a brief description of the Trust Assets expected to be
included in the Trusts. If specific information respecting the Trust Assets is
not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
Prospectus Supplement, and specific information will be set forth in a report on
Form 8-K to be filed with the Commission within fifteen days after the initial
issuance of such Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to the Form
8-K and will be available for inspection at the corporate trust office of the
Trustee specified in the related Prospectus Supplement. A schedule of the Trust
Assets relating to such Series (the "Trust Asset Schedule") will be attached to
the Agreement delivered to the Trustee upon delivery of the Securities.
GENERAL
The real property which secures repayment of the Loans (the "Mortgaged
Properties") may be located in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any other commonwealth, territory
or possession of the United States. The Loans in a Pool will provide for
payments to be made monthly ("monthly pay"), bi-weekly or at such other times as
may be set forth in a Prospectus Supplement. The payment terms of the Loans to
be included in a Trust will be described in the related Prospectus Supplement
and may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(I.E., a rate that is adjustable from time to time in relation to an index,
a rate that is fixed for a period of time or under certain circumstances and
is followed by an adjustable rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an adjustable rate to a fixed
rate). The specified rate of interest on a Loan is its "Mortgage Interest
Rate". Changes to an Adjustable Rate may be subject to periodic
- ------------------------
* Whenever the terms "Pool," "Certificates," "Notes" and "Securities" are used
in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool, the Certificates representing
certain undivided fractional interests, as described below, in a single
Trust consisting primarily of the Loans in such Pool, and the Notes shall
refer to debt obligations of such Trust secured by the related Pool of SBA
Loans. Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates of one specific Series, the term
"Interest Rate" will refer to the Interest Rate borne by the Notes of one
specific Series and the term "Trust" will refer to one specific Trust.
26
<PAGE>
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of
a Loan for such periods and under such circumstances as may be specified in
the related Prospectus Supplement. Loans may provide for the payment of
interest at a rate lower than the Mortgage Interest Rate for a period of
time or for the life of the Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the Mortgaged Property
securing the related Loan or another source or may be treated as accrued
interest added to the principal of the Loan.
(b) Principal may be payable on a level basis to fully amortize the Loan
over its term, may be calculated on the basis of an assumed amortization
schedule that is significantly longer than the original term to maturity or
on an interest rate that is different from the Mortgage Interest Rate, or
may not be amortized during all or a portion of the original term. Payment
of all or a substantial portion of the principal may be due on maturity
("balloon" payments). Principal may include interest that has been deferred
and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the life
of the Loan, may increase over a specified period of time ("graduated
payments") or may change from period to period. Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments. Loans may require
the monthly payments of principal and interest to increase for a specified
period, provide for deferred payment of some or all of the payments due
during a specified period, which may be recouped as deferred interest, or
otherwise.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Loan or may decline over time, and may be
prohibited for the life of the Loan or for certain periods ("lockout
periods"). Certain Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Loan in connection with
the sale or certain transfers of the related Mortgaged Property. Other Loans
may be assumable by persons meeting the then applicable underwriting
standards of the Originator.
The Prospectus Supplement for each Series of Securities will contain
information with respect to all the Loans expected to be included in the related
Pools as of the related closing date, including (i) the expected aggregate
outstanding principal balance and the expected average outstanding principal
balance of the Loans as of the date set forth in the Prospectus Supplement; (ii)
the largest expected principal balance and the smallest expected, principal
balance of any of the Loans; (iii) the types of Mortgaged Properties and/or
other assets securing the Loans (iv) the original terms to maturity of the
Loans; (v) the expected weighted average term to maturity of the Loans as of the
date set forth in the Prospectus Supplement and the expected range of the terms
to maturity; (vi) the earliest origination date and latest maturity date of any
of the Loans; (vii) the expected Mortgage Interest Rate and ranges of Mortgage
Interest Rates borne by the Loans; (viii) in the case of Loans having Adjustable
Rates, the expected weighted average of the Adjustable Rates, if any; (ix) the
amount of any Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy or Bankruptcy Bond to be maintained with respect to such
Pool; (x) the amount, if any, and terms of any other credit enhancement or other
derivative instruments to be provided with respect to all or any Loans or the
Pool; and (xi) the expected geographic location of the Mortgaged Properties. If
specific information respecting the Loans is not known to the Representative at
the time the related Securities are initially offered, more general information
of the nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
27
<PAGE>
Unless otherwise provided in the related Prospectus Supplement, the only
obligations of the Representative or the Originators with respect to a Series of
Securities will be to provide (or, where the Representative or an Originator
acquired a Loan from another originator, obtain from such originator) certain
representations and warranties concerning the Loans and to assign to the Trustee
for such Series of Securities the Representative's or Originator's rights with
respect to such representations and warranties. See "The Agreements--Sale of
Loans." The obligations of the Master Servicer with respect to the Loans will
consist principally of its contractual servicing obligations under the related
Agreement and its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Loans in the amounts
described herein under "Description of the Securities--Monthly Advances and
Compensating Interest." The obligations of a Master Servicer to make advances
may be subject to limitations, to the extent provided herein and in the related
Prospectus Supplement.
If provided in the related Prospectus Supplement, the original principal
amount of a Series of Securities may exceed the principal balance of the Trust
Assets initially being delivered to the Trustee. Cash in an amount equal to such
difference (the "Pre-Funded Amount") will be deposited into a separate trust
account (the "Pre-Funding Account") maintained with the Trustee. During the
period set forth in the related Prospectus Supplement (the "Funding Period"),
amounts on deposit in the Pre-Funding Account may be used to purchase additional
Trust Assets for the related Trust subject to the satisfaction of certain
conditions specified under the Agreements. Any amounts remaining in the
Pre-Funding Account at the end of such period will be distributed as a principal
prepayment to the holders of the related Series of Securities at the time and in
the manner set forth in the related Prospectus Supplement.
SBA Section7(A) LOANS
The SBA Section7(a) Loans will consist of the Unguaranteed Interests in
loans originated under Section 7(a) (the "Section 7(a) Program") of the Small
Business Act of 1953 (the "SBA Act"), which Act created the Small Business
Administration (the "SBA"). The Section 7(a) Program was intended to encourage
lenders to provide loans to qualifying small businesses. Loans made under the
Section 7(a) Program can be used to construct, purchase, expand or convert
facilities or to purchase building equipment, leaseholds or materials. Money
lent under the Section 7(a) Program also can be used for working capital, debt
refinancing and business acquisition needs.
The SBA Section7(a) Loans are partially guaranteed by the SBA pursuant to a
Small Business Administration Loan Guaranty Agreement (Deferred Participation)
(SBA Form 750), dated August 13, 1980 by and between The Money Store Investment
Corporation and the SBA (the "Loan Guaranty Agreement") and pertinent SBA
regulations found at 13 C.F.R. part 120. As to any SBA Section7(a) Loan, the
right to receive the guaranteed portion of the principal balance thereof
together with interest thereon at a per annum rate in effect from time to time
plus a fee paid to the SBA's fiscal and transfer agent is referred to herein as
the "Guaranteed Interest". The Guaranteed Interest varies from SBA Section7(a)
Loan to SBA Section7(a) Loan, will not be included in the related Trust Fund and
Securityholders will have no right or interest therein. As to any SBA
Section7(a) Loan, the "Unguaranteed Interest" will equal all payments and other
recoveries on such SBA Section7(a) Loan not constituting the Guaranteed Interest
therein and certain other amounts to be described in a Prospectus Supplement
that will not be transferred to the related Trust.
The SBA administers three levels of lender participation in the Section 7(a)
Program. Under the first level, known as the "Guaranteed Participant Program",
the lender gathers and processes data from applicants and forwards it, along
with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guaranty the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications.
Under the second level of lender participation, known as the "Certified
Lender Program," the lender (the "Certified Lender") gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the
28
<PAGE>
lender's credit analysis, which generally is completed within three working
days. The SBA requires that lenders originate loans meeting certain portfolio
and volume criteria before authorizing them to participate in the Certified
Lender Program.
Under the third level of lender participation, known as the "Preferred
Lender Program", the lender (the "Preferred Lender") has the authority to
approve a loan and obligate the SBA to guarantee the loan without submitting an
application to the SBA for credit review. The lender is required to notify the
SBA of the approved loan and submit certain documents. The standards established
for participants in the Preferred Lender Program are more stringent than those
for participants in the Certified Lender Program and involve meeting additional
requirements in terms of origination, servicing and liquidation capabilities as
well as loan volumes and portfolio quality.
THE SECTION 7(A) COMPANION LOANS
For applications submitted between January 1, 1995 and October 12, 1995, the
maximum loan size for most loans originated under the Section 7(a) Program was
reduced administratively to $500,000. To assist qualified borrowers in obtaining
more financing when needed, the Originators introduced a program (the "Section
7(a) Companion Program") pursuant to which an Originator originated a loan (the
"Section 7(a) Companion Loan") to the related borrower in situations in which
the total amount financed would otherwise have exceeded the $500,000 limit. The
Originators may originate Section 7(a) Companion Loans in the future where a
qualified borrower requests financing in an amount that otherwise would exceed
the limits of the Section 7(a) Program. Although Section 7(a) Companion Loans
are not guaranteed by the SBA, they are secured by a lien on the related primary
collateral, which lien is prior to the lien of the related SBA Section7(a) Loan.
Section 7(a) Companion Loans may be utilized by a borrower for all eligible
SBA Section7(a) Loan purposes. Section 7(a) Companion Loans are originated only
in conjunction with a Seller obtaining an SBA guarantee of the accompanying SBA
Section7(a) Loan under the Certified Lender Program (the SBA currently prohibits
Section 7(a) Companion Loans in connection with the Preferred Lender Program).
Section 7(a) Companion Loans bear interest and have terms to maturity as
described above under "--SBA 7(a) Loan Parameters."
SBA 504 LOANS
The SBA 504 Loans will consist of loans originated by the Originators under
the SBA 504 Loan Program (the "SBA 504 Loan Program"). The SBA 504 Loan Program
was established under the SBA Act to encourage lenders to provide fixed asset
financing to qualifying small businesses. SBA 504 Loans may be used for plant
acquisition, construction, renovation, expansion, land and site improvements,
acquisition and installation of machinery and equipment as well as certain
closing costs and professional fees and the interest on interim financing. The
Originators provide approximately 50% of project costs in a conventional loan
agreement, with borrowers providing a minimum 10% equity contribution. The SBA
provides the remainder of the financing. Each loan by the Originators must
receive prior approval by the SBA.
The funds used by the SBA to originate its portion of a project generated
pursuant to the SBA 504 Loan Program are generated by issuing SBA-guaranteed
debentures on behalf of a certified development company (a "CDC"). A CDC is an
organization sponsored by private interests or by state or local governments.
The debentures are pooled monthly and sold through a certificate mechanism to
the public market. The loans originated by the Originators under the SBA 504
Loan Program are not guaranteed by the SBA.
NON-SBA LOANS
Certain of the non-SBA loans will be loans made in connection with the
conventional commercial loan program of the Representative and the Originators.
Beginning in November of 1996, a conventional loan
29
<PAGE>
program was introduced as part of the hospitality lending program offered to HFS
Incorporated (now known as Cendant). The Originators participates in a preferred
vendor alliance program which is a contractual relationship between The Money
Store and HFS Incorporated. In September of 1997, the conventional commercial
loan program was expanded and offered through all sales channels as a viable
option for qualified non-hospitality, owner-occupied commercial real estate
transactions. This expanded conventional program, called TMSDirect, allows up to
100% financing for qualified borrowers in need of financing primarily for
commercial real estate acquisition and/or ground-up construction projects.
TMSDirect loan amounts range from $250,000 to $3,000,000.
ORIGINATION MECHANISMS. The Originators primarily generate Conventional
Commercial Loans through two mechanisms. The first, known as the Franchise
Finance Division, utilizes a national referral network of trade associations,
hotel/motel franchisors and independent or affiliated commercial loan brokers.
Franchise Account Managers perform essentially the same tasks as local sales
representatives and are compensated primarily through commissions.
The second origination arm, known as the HFS Group, generates business
primarily from its contractual relationship as a preferred vendor with HFS,
Incorporated ("HFS"). Commercial Loan Representatives of the HFS Group work with
the sales and transfer/renewal departments for each of the franchise concepts to
locate customers. All customer contact is handled by telephone through a
national sales center in Sacramento, California.
Both the Franchise Finance Division and the HFS Group also receive referrals
from the Originators' national network of sales offices serving local markets.
COLLATERAL FOR CONVENTIONAL COMMERCIAL LOANS. Conventional Commercial Loans
are first-lien mortgages for the purchase, development or refinance of franchise
hotel/motel properties. The national franchisors that represent the focus for
this program include the HFS franchise concepts itemized above and other major
hotel/motel franchisors, including Choice Hotels International and Best Western
International.
Each Conventional Commercial Loan originated by an Originator is secured by
a first lien on the related primary collateral. Additional liens on secondary
collateral may also be taken. The borrower is required to fund at least 25% of
the total allowable project costs; however, the Originator may require a higher
equity percentage for certain larger projects and projects with special credit
risks. The Loan-to-Value Ratio for Conventional Commercial Loans may not exceed
75% of the lower of cost or appraised value. The Originators also generally
require a minimum debt service coverage ratio of 1.25:1 for the most recent two
full years, interim and projected periods.
Conventional Commercial Loans that are originated for construction purposes
generally possess a maximum Loan-to-Value Ratio of 75% of the lower of the
appraised value or the total of the construction budget, interim interest,
contingency and loan point and fees.
COMPETITION. The Originators' main competitors vary by region and by
market. Its primary competitors are banks and finance companies such as PMC
Capital Inc., Allied Capital Commercial Corp. and Hotel Capital Corp. of
America. The Originators do not believe that any one competitor, or a small
group of competitors, is dominant in the industry.
UNDERWRITING CRITERIA FOR CONVENTIONAL COMMERCIAL LOANS. The Originators
seek to control the risk of default of the actual credit through their
underwriting standards. The underwriting for the Originators' Conventional
Commercial Loan Program emphasizes historical operating performance and debt
service coverage to help determine the repayment ability of the borrower. It is
also expected by the Originators that qualifying owners generally have direct
industry experience. Lack of experience must be offset by significant training
provided by the franchisor, by an extended transition period during which the
seller of the business will remain on site or by contracting with a
professional, qualified management firm.
30
<PAGE>
As with SBA Section7(a) Loans, SBA 504 Loans and SBA Section7(a) Companion
Loans, the Originators have established review procedures to help ensure that
all loans that they originate or acquire comply with the policy defined for the
Conventional Commercial Loan Program. Commercial loan officers evaluate each
applicant's financial statements, credit reports and other data to determine if
the credit and collateral satisfy the Originator's standards. These standards
include historic debt service coverage, reasonableness of projections and
strength of management. For each application, qualified personnel also perform a
site inspection to determine the appropriateness of the location for the
proposed use, observe the economic conditions of the local market and inspect
the property for obvious structural defects or environmental issues.
The Originators' loan officers assess the reasonableness of projections
based primarily upon (i) their experience with other similar loans in the same
industry and area, (ii) their general knowledge of the industry, (iii) their
general experience in assessing small business loans and (iv) the business
experience of the applicant. The qualification of an applicant to prepare such
projections is generally based upon the applicant's experience in the industry
and knowledge specific to the market in which the project is proposed. Following
credit review and approval but prior to loan funding, a feasibility study and an
appraisal for the proposed project are commissioned by the commercial loan
officer from an appraiser approved by Originator. For construction loans, the
feasibility study must be based on, at a minimum, preliminary plans and
specifications along with a cost breakdown prepared by a qualified third party.
The Originators consider this feasibility information to be critical in
assessing the viability of a proposed project in a specific market area.
Environmental due diligence appropriate to the environmental status of the site
is also required on each project to be financed.
The maximum loan amount for the Conventional Commercial Loan Program is
$3,000,000; the minimum loan is $250,000. A prepayment penalty is imposed on
loans that are prepaid within the first five years of the loan term. The
Originators require a first lien position on the fee interest in the subject
facility and all business assets financed with a Conventional Commercial Loan.
The personal guarantees of owners, principals and affiliate businesses will
generally be required. Non-recourse financing may be considered on a case-by
case basis as warranted by the overall creditworthiness of the applicant and the
viability of the proposed project.
All loan applications are submitted to a centralized loan underwriting and
processing center in Sacramento, California. The loan application package is
screened initially for completeness by a credit manager or senior loan officer,
who then assigns the package to a commercial loan officer. The commercial loan
officer is responsible for analyzing the creditworthiness of the applicant and
preparing a loan memorandum, which includes a credit analysis (including a
description of the collateral), states the purpose of the loan and the strengths
and weaknesses of the credit. In addition, for each proposed loan, the
commercial loan officer performs a collateral analysis, financial analysis
(including historical debt service coverage) and business and personal credit
checks.
If the commercial loan officer recommends the loan for approval, the loan
memorandum and supporting documents are submitted to the senior loan officer,
credit manager, or a senior credit officer for review based on the various
levels of credit authority. All Conventional Commercial Loans above $1,500,000
are reviewed and approved by a committee of not less than three members of an
Originator's senior client administration group, including at least one senior
credit officer.
In the production area, middle management consist of credit and processing
managers who report to regional production managers. Production managers report
to the senior vice president of production. Both senior vice presidents report
to the executive vice president of lending operations.
The Originators also may originate Non-SBA Loans with characteristics
substantially the same as SBA Section7(a) Loans or SBA 504 Loans.
31
<PAGE>
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Securities of each Series for general corporate
purposes, including repayment of debt, including, but not limited to, warehouse
facilities, and the origination and acquisition of Loans and other Trust Assets.
The Representative expects Securities to be sold in Series from time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The Loans will have been originated or acquired by the Originators. The
Money Store or one of its affiliates, including First Union National Bank or
certain of its affiliates, may act as a Master Servicer of the Loans and other
Trust Assets. Except for certain representations and warranties relating to the
Loans and other Trust Assets and certain other matters, the obligations of The
Money Store and the Originators with respect to the Loans and other Trust Assets
will be limited to its contractual servicing obligations.
The Money Store is a New Jersey corporation and is headquartered in
Sacramento, California and Union, New Jersey. The Money Store is a wholly-owned
subsidiary of First Union National Bank, a national banking subsidiary of First
Union Corporation.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries have consisted primarily of mortgage loans, Loans, student loans,
and automobile loans.
Since 1967, The Money Store and its subsidiaries have been active in the
development of the residential home equity lending industry in the United
States.
THE SBA LOAN LENDING PROGRAM
SBA 7(a) loans originated by The Money Store generally range in size from
$100,000 to $1,500,000. In certain cases, a sales representative may originate a
loan exceeding $1,500,000 when the borrower is particularly strong and when
credit administration confers. Average loan sizes for 1997 and 1998 increased to
$414,000 and $463,314.
The Originators primarily generate SBA loans through three sales channels:
Retail, Wholesale and Franchise. The Money Store is considered a "PLP" lender
under the SBA's preferred lender program in most SBA jurisdictions nationwide.
The following describes how each channel sources business:
RETAIL
Business Development Officers ("BDOs") in the Retail sales channel source
customers primarily through a referral network of commercial real estate
brokers, business brokers, accountants, attorneys and various other third-party
referral sources. All BDOs work with the customer to identify the correct loan
program based on his or her individual financing needs. All loan applications
are thoroughly screened by the BDO in the field to assess eligibility and credit
worthiness based upon the Originator's current credit guidelines. Once this
initial field screening is complete, and, assuming the prospective borrower
prequalifies for financing, a complete loan package is generated and submitted
to a centralized loan production center in Sacramento, California (known as the
National Loan Production Center) where it is first screened for quality and
completeness. The transaction is then assigned to the appropriate underwriting
team.
The Retail sales channel is divided into eight regional territories, each of
which is managed by a VP/ Regional Sales Manager (RSM). Each VP/RSM reports
directly to the National Sales Manager for this channel. Each retail sales
region is supported by a team of sales assistants and clerical staff.
32
<PAGE>
WHOLESALE
The Wholesale sales channel serves the entire nation via a remote call
center located in Sacramento. Sales activity for this stand-alone sales unit is
driven by a direct mail program featuring a toll-free 800 number which can be
used by respondents nationwide. Commercial Loan Representatives ("CLRs") work
directly with borrowers over the phone to complete all the necessary paperwork
in order to generate a complete loan package for submission to centralized
screening and underwriting. CLRs perform virtually the same prequalification
tasks as described in the retail section above.
The Wholesale sales channel is designed to maximize The Money Store's market
penetration and add incremental closed loan volume to the company in markets not
served by a local BDO presence. The majority of this unit's sales activity is
generated from captive audiences such as national affinity relationships and
professional associations with which The Money Store has formal lending
agreements.
The Wholesale sales channel is managed by a VP/Sales Manager and is
supported by a team of Sales Assistants and a clerical staff.
FRANCHISE
The Franchise sales channel is a highly specialized unit dedicated to
franchise financing. This sales unit sources business through targeted
successful franchise concepts with proven track records and demonstrated brand
awareness nationwide. The Franchise sales channel focuses its marketing efforts
primarily in the hotel/motel, fast food and automotive repair industries.
Examples include Howard Johnson Hotels, Burger King and Big O Tires. The sales
representatives, known as Franchise Account Managers ("FAMs"), manage multiple
franchise relationships as a way to ensure a consistent stream of referrals
direct from the franchiser. This relationship management approach also allows
for a coordinated service effort and an ongoing stream of communication to
franchisers and their franchisees.
The Franchise Finance Division is divided into nine regional territories and
is managed by a VP/Sales manager. The unit, as with other sales channels, is
supported by a team of Sales Assistants and clerical staff. FAMs are subject to
the same prequalification and screening method as the Retail and Wholesale sales
channels.
In all three sales channels, all sales representatives are compensated
primarily through a sales commission program. Each sales channel is managed by
its own national sales manager. The originations unit in its entirety reports
directly to the SVP of Originations.
COMPETITION
Competition is highly fragmented and key players vary by region and by
market.
Primary competitors are typically small, independent banks such as
SeirraWest Bank, and regional banks such as Bank of Commerce. National banks,
such as Bank of America, Wells Fargo and Bank One are also prevalent. Non-bank
financial institutions, such as AT&T Small Business Capital (now known as
Newcourt Credit Group, Inc.) and Heller First Capital Corporation are considered
formidable competitors, as well.
No one competitor nor group of competitors is dominant in the industry.
Although methods of competition vary according to region, the Originators
believe that as one of the few SBA lenders with a sophisticated nationwide
network of sales professionals, they are able to compete effectively in all
markets in which they operate. The Originator's experience and breadth of
operations give them a unique knowledge of the intricacies of SBA lending. This
knowledge, coupled with the fact that SBA and SBA-type lending constitutes their
sole line of business enables the Originators to respond to the needs of
customers quickly and efficiently.
33
<PAGE>
MARKETING SUPPORT
The national sales program, including all three sales channels, is supported
by an in-house marketing services department which provides advertising, media
buying, public relations, graphic design and sales promotions services. Each
sales representative is paired with a Marketing Specialist who acts as a single
point of contact for all field marketing needs.
LOAN PURPOSE AND COLLATERAL FOR SBA SECTION7(A) LOANS
Prior to 1986, the Originators estimate that over 50% of their SBA
Section7(a) Loans were made as working capital and equipment loans. Since 1986,
however, the Originators have refocused their lending on owner/ user commercial
real estate loans to established businesses with track records generally of at
least three to four years. The Originators have continued to develop lending for
larger owner/user commercial real estate loans to established businesses. These
loans are generally larger and better collateralized than working capital,
equipment or general-purpose small-business loans. The SBA requires that
owner/users occupy at least 67% of the mortgaged premises in the case of
newly-constructed facilities and 51% in the case of existing facilities.
A majority of the SBA Section7(a) Loan originations have been first-lien
mortgages for either the purchase or refinancing of commercial real estate, with
the balance being loans made by the Originators to franchisees of national
franchisors and general business loans for business acquisition, equipment
purchases, working capital or debt consolidation. As described below, where an
SBA Section7(a) Companion Loan is originated in connection with an SBA
Section7(a) Loan, the SBA Section7(a) Companion Loan will be secured by a
first-lien mortgage, with the SBA Section7(a) Loan being secured by a
second-lien mortgage in addition to other collateral. SBA Section7(a) Loans
generally are guaranteed personally by the borrower. In cases where a second or
third mortgage on a residential property is taken as additional collateral, the
Originators may not require the borrower to obtain a title insurance policy.
UNDERWRITING CRITERIA FOR SBA SECTION7(A) LOANS
The Originators seek to control two risks through their underwriting
standards: (i) default of the actual credit and (ii) SBA repudiation of its
guaranty due to ineligibility, non-compliance with SBA lending regulations or
poor documentation. The Originators' underwriting emphasizes historical
operating performance and debt-service coverage to help determine the repayment
ability of the borrower. The Originators have established review procedures to
help ensure that all loans that they originate or acquire comply with the
requirements of the SBA.
Commercial loan officers ("CLOs") evaluate each applicant's financial
statements, credit reports, business plans and other data to determine if the
credit and collateral satisfy the Originators' standards. These standards
include historic debt-service-coverage, reasonableness of projections, strength
of management and sufficiency of secondary repayment, as well as the SBA's
eligibility rules. For each application, qualified personnel also perform a site
inspection to determine the appropriateness of the location for the proposed
business use, observe the economic conditions of the local market and inspect
the property for obvious structural defects or environmental issues (as
discussed further below).
The Originators' loan officers assess the reasonableness of projections
based primarily upon (i) their experience with other similar loans in the same
industry and area, (ii) their knowledge of the industry of the applicant, (iii)
their general experience in assessing small business loans and (iv) the business
experience of the applicant. The qualification of an applicant to prepare such
projections is generally based upon the applicant's experience in the business
area and market for which the loan is requested. Some applicants prepare
projections with the assistance of accountants, business consultants and/or
franchisors, while some applicants obtain no such assistance. Typically, there
is no independent third party review of such projections.
34
<PAGE>
The Originators have a tiered system of generally acceptable maximum
Loan-to-Value Ratios or LTVs (as defined below) based on the type of property
securing a loan, the characteristics of the borrower and the industry of the
borrower. Maximum permissible Loan-to-Value Ratios also depend on the length of
time that the debt service coverage on the property has at least equaled a
specified ratio. Applicants having significantly higher earnings before interest
and taxes relative to their debt service than the Originators normally require
may be considered for higher Loan-to-Value Ratios. Conversely, applicants not
meeting the debt service requirement may be considered for a loan with a lower
Loan-to-Value Ratio than the permitted maximum based on the overall
creditworthiness of the applicant.
For commercial real estate transactions, the highest LTVs are typically
reserved for situations where general purpose property is being financed and the
subject business is in a non-cyclical industry. In such cases, if the debt
service coverage ratio (I.E., the ratio of the pro forma annual debt service
payments on the proposed debt of the subject business to the subject businesses'
annual net operating income plus certain non-cash extraordinary items) equals
and/or exceeds 1.2:1 for the most recent two full years and interim period, a
borrower may qualify for 100% LTV financing with corresponding SBA approval.
Where general purpose property is being financed and the business is either
cyclical, particularly interest rate sensitive and/or seasonal in nature, and
where debt service coverage meets or exceeds 1.2:1 for the most recent two full
years and interim period, the maximum permissible LTV is generally 90%. When
special purpose real estate is involved (e.g., restaurants), and debt service
coverage meets or exceeds 1.2:1 for the most recent two full years and interim
period, maximum LTVs of between 80%-90% are considered.
Applications significantly exceeding the previously mentioned debt service
requirements may receive special approval for loans with higher LTVs.
Conversely, applications which do not meet the stated debt service requirements,
but still indicate a reasonable level of repayment capacity, may still be
considered at lower LTVs. These exceptions to policy are entertained on a
case-by-case basis as warranted by the overall creditworthiness of the
applicant. Other characteristics evaluated in determining an appropriate LTV in
these situations include (but are not limited to): (i) experience, strength and
continuity of business management; (ii) overall financial strength of the
subject business as evidenced by balance sheet and profit/loss statements (e.g.,
current as well as pro forma liquidity and equity positions, historical sales
trends and profitability as well as projections); and (iii) availability of
additional sources of repayment (e.g., personal financial strength of the
applicant including liquidity, supplementary outside income(s) and/or additional
collateral).
All loan applications are submitted to a centralized loan underwriting and
processing center in Sacramento, California. The loan application package is
screened initially for completeness by a credit manager or senior loan officer,
who then assigns the package to a CLO. CLOs are responsible for analyzing the
creditworthiness of the applicant and preparing a loan memorandum, which
includes a credit analysis (including a description of the collateral), states
the purpose of the loan, strengths and weaknesses of the credit, and eligibility
for the applicable SBA program. In addition, for each proposed loan, the CLOs
perform a collateral analysis, financial analysis (including historical debt
service coverage), personal resource analysis, and business and personal credit
checks. Any real property to be taken as collateral is appraised by an
independent appraiser.
If the CLO recommends the loan for approval, the loan memorandum and
supporting documents are submitted to the credit manager, or a senior credit
officer for review based on the various levels of credit authority. Upon
concurrence of the CLOs recommendation by the credit manager or senior credit
officer, as the case may be, a commitment letter and SBA submission documents
are generated by the CLO and, in most cases, forwarded to the BDO. The BDO meets
with the customer to explain the commitment letter and SBA documentation,
obtains required customer signatures and deposits, and returns the signed
documents to the processing center in Sacramento. The loan package is forwarded
to a loan processing manager, who screens the loan package for completeness and
then assigns the package to a loan processor. The loan processor prepares the
Loan Authorization and Agreement, and all necessary documentation to
35
<PAGE>
submit to the SBA for a loan guarantee, and for closing the loan in strict
accordance to the credit memorandum, SBA regulations, and state and federal law.
Once loan approval has been granted and a signed commitment letter has been
returned by the Borrower, approved applications under the Preferred Lender
Program are submitted directly to the SBA's central PLP processing center for
assignment of a authorization number. Loans not made pursuant to the Preferred
Lender Program require prior approval by an SBA district office.
Once a loan is funded, the complete original file is forwarded to loan
servicing. When the loan package is received, the final physical file is
established in a uniform manner, and a computerized "tickler system" tracks
follow-up items, such as UCC filing renewals, insurance policy expirations and
deeds of trust recording. The loan file then undergoes a final post-closing
audit, to help verify that the loan was originated in accordance with the
Sellers' procedures and consistent with the SBA's loan authorization. Once the
file has been audited and is complete, it is microfilmed.
The Originators originate loans to a variety of industries. However, based
upon their loss experience and economic forecasts obtained from industry
associations, chambers of commerce, academic institutions, governmental entities
and others, the Originators may de-emphasize lending in certain regions or
industries from time to time. The Originators also periodically have refined
their underwriting guidelines to exclude certain high-risk ventures, such as car
washes.
Collateral for SBA Section7(a) Loans originated by the Originators generally
consists of one or more of the following: (i) first liens on commercial real
estate (or second liens when the SBA Section7(a) Loan is originated in
conjunction with a Section 7(a) Companion Loan), (ii) second liens on
residential properties, (iii) personal guarantees and (iv) business assets. The
Originators believe that the pledge of a borrower's personal wealth provides
appropriate incentives, thereby minimizing defaults and maximizing recoveries.
Generally, the Originators do not take inventory or accounts receivable as
collateral, thereby allowing borrowers to obtain short-term financing with these
assets from other sources. The Originators also originate machinery and
equipment loans; however, some of these also are secured by real estate. For
example, loans are provided for medical/dental equipment, machinery, print shop
equipment and franchise restaurant equipment.
The Originators define the loan-to-value ratio ("LTV" or "Loan-to-Value
Ratio") of a Loan as the gross amount of the loan divided by the total "net
collateral value" of all collateral (primary and secondary, but excluding the
value of any personal guarantees) securing such loan. In determining "net
collateral value", the Originators apply discounts of appraised value based on
the type of collateral and lien position. Generally, first liens on commercial
or residential property are allowed a maximum "collateral value" of 100% of the
lower of cost or appraised value and, therefore, are not discounted. Second and
third mortgages are allowed a maximum collateral value of 80%, unless the first
lien is of nominal value. The maximum collateral value allowed for used
machinery and equipment is 30% of cost and 50% for new machinery and equipment.
In determining the appropriate LTV required for a particular credit, the
Originators review the historical debt-service coverage ratio, stability of the
industry, level of equity from the borrower, purpose of the loan, economic
condition of the market and size of the loan. The Originators usually require a
1.2x debt-service coverage ratio for the most recent two complete years and
interim period.
SERVICING AND COLLECTIONS OF SBA SECTION7(A) LOANS
The Originators service substantially all the SBA Section7(a) Loans they
originate. Servicing includes collecting payments from borrowers, remitting
payments on Guaranteed Interests to the Agent of the SBA, accounting for
principal and interest, contacting delinquent borrowers and supervising loan
liquidations.
Monthly, borrowers are sent payment coupons and statements showing the
interest rate, the outstanding loan balance, the next payment date and the
monthly payment.
36
<PAGE>
The loan servicing department is responsible for all post-closing follow-up
until the loan is repaid. These duties include tracking receipt of payments,
performing field visits, analyzing post-closing financials, reviewing UCC
filings and coordinating post-closing borrower requests with the SBA (E.G.,
exchanges of collateral or assumptions). In addition, the loan servicing
department typically conducts field visits to the borrower's place of business
shortly after closing and within 24 months thereafter. Finally, all loan
documents require that borrowers submit updated financial statements. For
delinquent accounts, these statements are reviewed by the loan servicing
department to determine compliance with loan covenants.
Delinquency reports are generated every ten days and borrowers are contacted
frequently to determine the cause of any delinquency and to solicit payments. A
collections officer maintains contact with each delinquent borrower until the
loan becomes current or is transferred to the credit services unit within the
loan servicing department. If a loan is chronically delinquent, even if
currently performing, the loan will be serviced by customer service until such
loan is repurchased by the SBA, and then by a credit services officer for the
remainder of the loan.
WORKOUTS AND LIQUIDATIONS OF SBA SECTION7(A) LOANS
When an SBA Section7(a) Loan becomes approximately 75 days past due, the
appropriate Originator initiates procedures that result in the SBA's repurchase
of the Guaranteed Interest of the defaulted SBA Section7(a) Loan from the
secondary market investor. In most cases the repurchase process is completed
within 30 to 45 days. The SBA tries to minimize the repurchase time frame
because it pays accrued interest (up to 120 days) on the guaranteed portion of
the loan until the loan is repurchased. After it has repurchased a Guaranteed
Interest, the SBA owns a direct participation in the related loan.
A credit services officer is assigned the responsibility for the workout or
liquidation once an SBA Section7(a) Loan is repurchased. The loan workout
officer evaluates the borrower's corporate and personal ability to repay and
then formulates an appropriate workout plan. Generally, workout plans indicate
the expected recovery time period or the possibility of an assumption of the
debt by a third-party; plans also include liquidation options.
To some degree, the SBA is involved in every repurchased loan, depending on
the nature of the recovery and the particular SBA District. In most cases, the
SBA allows the Originators to perform workouts. In rare instances, the SBA takes
over the servicing of repurchased loans. In the majority of foreclosure
situations, title is assumed in the name of the appropriate originator. In the
remainder of the foreclosure situations, at the direction of the SBA, title is
assumed in the name of the SBA.
In formulating workout plans, the Originators assess the value of the
collateral through a variety of sources including brokers, appraisers and other
market sources. The Originators also take steps to help protect the value of the
collateral, such as performing site visits, appraising properties and ensuring
payment of taxes and, where appropriate, maintenance of insurance. Where
necessary, the Originators engage property managers or take other measures
designed to protect the collateral value from deterioration.
Loan workouts are focused on allowing the business to recover from temporary
setbacks, if possible. The Originators believe that recoveries are improved if
the borrower is cooperative and works with the lender to achieve a resolution.
The Originators stress the development of a strong relationship with borrowers
over the long term. This generally results in cooperation by the borrower in the
workout, and the Originators generally receive substantial cash flow from these
troubled loans.
Although the SBA generally is reluctant to allow foreclosure on a personal
residence until all other avenues have been pursued, the Originators believe
that the possibility of foreclosure is a powerful incentive to borrowers to make
the loan current.
The Originators view SBA Section7(a) Loans as small business loans as
opposed to commercial real estate mortgages. Accordingly, the workout is more
complex and the period to recovery or reinstatement takes
37
<PAGE>
longer than for typical commercial real estate loans. However, because the
Originators often receive substantial cash flow from troubled assets during the
workout period, loan workouts are generally more efficient than foreclosures on
the collateral. If a borrower is uncooperative or the business is not viable,
the Originators prepare a liquidation plan and determine the likely recovery
value and best method of liquidation. In order to have the SBA honor its
guarantee the SBA must approve all liquidation plans.
On average, the workout liquidation process requires approximately 18 to 24
months. The length of the workout is determined primarily by the complexity and
long-term viability of the business, as well as the bankruptcy status of the
borrower. In particular, a bankruptcy may lengthen the workout timeframe by
approximately 12 to 18 months.
In certain cases, the Originators may forbear payments of interest and
principal for a period of three to six months if the borrower is experiencing
temporary difficulties. Under SBA servicing policy, the lender has unilateral
authority to defer loans for up to 90 days. Past 90 days, the lender must obtain
approval from the investors in the guaranteed portions, which is usually
granted. For deferments in excess of 180 days, SBA approval must be obtained.
ENVIRONMENTAL POLICY
The Originators have developed an environmental credit policy to help
minimize potential environmental liabilities. This policy conforms to the
environmental requirements set by the SBA, and many of the Originators'
guidelines are stricter than those of the SBA. The standard
environmental-related requirements for Loans secured by commercial real property
include: (i) obtaining a commitment letter from the borrower acknowledging that
the closing is contingent upon compliance with environmental laws, (ii)
obtaining an environmental questionnaire from the borrower and, if possible
environmental information from, the previous owner of the property, (iii)
performing a site visit of the property, (iv) checking the property against a
published list of "Superfund" sites and, if the property is listed, performing
an environmental audit or, for any Loan approved after January 1, 1996,
searching a comprehensive state and federal environmental data base for each
commercial real property taken as collateral for which a Phase I environmental
report has not been ordered or obtained and (v) obtaining a certificate from the
borrower providing representations and warranties as to the absence of hazardous
substances and providing a broad indemnification. If, after performance of these
requirements, there is any evidence of a potential environmental problem which
might require remediation, the applicable Originator will require remediation to
be performed or require an appropriate level professional environmental report
on the property and the loan will be closed only after remediation to levels
below regulatory agency action levels, the property is subject to ongoing
rehabilitation approved by the SBA, with respect to SBA Loans, or if no
actionable contamination is revealed. A Phase I environmental report describes
the results of an audit of the related property performed by a licensed
environmental assessment firm, which audit includes (i) an inspection of the
related and adjacent properties; (ii) a historical review of site records; (iii)
a review of files of regulatory agencies concerning the site; and (iv)
interviews with individuals knowledgeable about the site use and operations.
In preparing a Phase I environmental report, the licensed environmental
assessment firm may contact the United States Environmental Protection Agency,
state and local water control authorities, state and local environmental
departments and local fire departments to ascertain whether a particular
property has an environmental problem and, if so, the nature thereof. The
Originators typically do not contact such authorities unless an environmental
problem has been revealed.
In the Agreement the Originators will represent and warrant that at the time
of origination of each Loan forming part of the Trust, even those originated
prior to January 1990, the related commercial real property was free of
actionable contamination from toxic substances or hazardous wastes and that, as
of the Cut-Off Date, the Originators have no knowledge of any such actionable
contamination from toxic substances or hazardous wastes on any commercial real
property. The Master Servicer will agree that if it
38
<PAGE>
has reasonable cause to believe a property may have contamination from toxic
substances or hazardous wastes, it will not foreclose upon the related Loan
until after it obtains satisfactory evidence that no actionable contamination
issues expose the Originators to liability.
ORIGINATION OF SECTION 7(A) COMPANION LOANS
For most applications submitted between January 1, 1995 and October 12,
1995, the maximum loan size for a loan originated under the Section 7(a) Program
was reduced administratively to $500,000. To assist qualified borrowers in
obtaining more financing when needed, the Originators introduced the Section
7(a) Companion Program pursuant to which the Originators originated a Section
7(a) Companion Loan to a borrower requesting an SBA Section7(a) Loan from an
Originator where the total amount financed would otherwise exceed $500,000. The
Originators may originate Section 7(a) Companion Loans in the future where a
qualified borrower requests financing in an amount that otherwise exceeds the
limits of the Section 7(a) Program.
The Originators will not fund a Section 7(a) Companion Loan unless and until
the SBA issues its guaranty of the related SBA Section7(a) Loan. The
underwriting criteria, servicing and collection procedures, workout and
liquidation policies and environmental policy for the Section 7(a) Companion
Loans are substantially the same as those described above for the SBA
Section7(a) Loans, except that The Money Store Commercial Mortgage Inc. (one of
the Originators) generally requires a debt-service coverage ratio of 1.1:1 and
the required LTV for Section 7(a) Companion Loans is generally 50%-60%. Also,
the SBA is not required to be involved in the workout or liquidation of a
Section 7(a) Companion Loan. However, if in connection with the workout or
liquidation of a Section 7(a) Companion Loan, the Originators wish to workout or
liquidate the related SBA Section7(a) Loan, the SBA will be involved in such
procedures.
ORIGINATION OF SBA 504 LOANS.
The SBA 504 Loans will consist of loans originated by an Originator under
the SBA 504 Loan Program (the "SBA 504 Loan Program"). The SBA 504 Loan Program
was established under the Act to encourage lenders to provide fixed asset
financing to existing qualifying small businesses. SBA 504 Loans may be used for
plant acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment and the
interest on interim financing.
Each SBA 504 Loan originated by an Originator is secured by a first lien on
the related primary collateral, with the related loan made by the SBA being
secured by a second lien, in addition to a lien on other collateral. The
borrower is required to fund at least 10% of the total allowable project costs,
however, an Originator may require a higher percentage for certain larger
projects and projects with special credit risks (i.e. special use real property
and/or defined business start-up). The LTV for SBA 504 Loans generally may not
exceed 55%-65%. The Originators also generally require a minimum debt service
coverage ratio of 1.1:1 for the most recent two full years and interim periods.
Applications with a lower debt service coverage ratio may be considered, but
generally only if the LTV is below approximately 55%. When special purpose real
estate is involved (e.g., restaurants), or in the case of cyclical or interest
rate sensitive industries, the Originators also generally require LTVs below
approximately 55%.
SBA 504 Loans that are originated for construction purposes generally
possess an LTV of 80% during the construction phase pending issuance of the
SBA-guaranteed debenture upon completion of the construction. Additionally,
secondary collateral required by the CDC for the related loan made by the SBA
also will serve as collateral for the interim construction loan.
Except as set forth above, the underwriting criteria, servicing and
collection procedures, workout and liquidation policies and environmental policy
for the SBA 504 Loans and the Non-SBA Loans are substantially the same as those
described above for the SBA Section7(a) Loans, except that the SBA is not
involved in the workout or liquidation procedures.
39
<PAGE>
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued, from time to time, pursuant to
either a Pooling and Servicing Agreement or a Trust Agreement, and each Series
of Notes will be issued, from time to time, pursuant to an Indenture, each to be
dated as of the date set forth in the related Prospectus Supplement (each such
date, a "Cut-Off Date"), among The Money Store, the applicable Originators,
and/or certain affiliates thereof, and the Trustee for the benefit of the
related Certificateholders or Noteholders, as the case may be, of such Series. A
Series may contain either Certificates or Notes or a combination thereof. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust. A form
of a Pooling and Servicing Agreement, Trust Agreement, Sale and Servicing
Agreement and an Indenture have each been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries describe certain material provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will describe
any provision of the Agreement relating to such Series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Series of
Securities and the applicable Prospectus Supplement. The Representative will
provide a copy of the Agreement (without exhibits) relating to any Series
without charge upon written request of a holder of a Security of such Series
addressed to The Money Store Inc., 707 Third Avenue, West Sacramento, California
95605 Attention: Corporate Counsel.
GENERAL
The Securities of each Series will represent debt obligations of, in the
case of Notes, or fractional undivided ownership interests in, in the case of
Certificates, a Trust created pursuant to the related Agreement and/or such
other assets as may be described in the related Prospectus Supplement. The
Securities will be issued in fully registered form, in minimum denominations of
$1,000 and integral multiples of $1,000 in excess thereof (or such other amounts
do may be set forth in a Prospectus Supplement), except that one Certificate or
Note of each Class may be issued in a different denomination.
Definitive Securities, if issued, will be transferable and exchangeable at
the corporate trust office of the Trustee or, at the election of the Trustee, at
the office of a Security Registrar appointed by the Trustee. No service charge
will be made for any registration of exchange or transfer, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge. If provided in the related Agreement, a security administrator may
perform certain duties in connection with the administration of the Securities.
The Securities will not represent obligations of the Representative (except
with respect to a Guaranty issued in connection with a Series), the Originators
or any affiliate thereof. The assets of each Trust will consist of one or more
of the following, as set forth in the related Prospectus Supplement, (a) the
Loans that from time to time are subject to the related Agreement and which are
held in the related Pool; (b) the assets for the Trust that from time to time
are required by the Agreement to be deposited in certain reserve accounts,
including the Distribution Account, the Principal and Interest Account, the
Expense Account, the Letter of Credit Fee Account and the Insurance Account
(each, as defined herein), or to be invested in Permitted Investments (as
defined herein); (c) property and any proceeds thereof acquired by foreclosure
of the Loans in such Pool, deed in lieu of foreclosure or a comparable
conversion; (d) any Primary Mortgage Insurance Policies; (e) any Mortgage Pool
Insurance Policies; (f) any Special Hazard Insurance Policies; (g) any
Bankruptcy Bonds; and (h) all rights under any other insurance policies,
guarantees, supplemental interest payments, surety bonds, letters of credit, or
other credit enhancement or maturity protection or other derivative instrument
covering any Securities, any Loan in the related Pool or any related Mortgaged
Property which is required to be maintained pursuant to the related Agreement.
40
<PAGE>
Each Series of Securities will be issued in one or more Classes. Each Class
of Securities of a Series will evidence beneficial ownership of the interest in
assets of the related Trust specified in the related Prospectus Supplement. A
Class of Securities may be divided into two or more Sub-Classes, as specified in
the related Prospectus Supplement.
A Series may include two or more Classes of Certificates, as specified in
the related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Pass-Through Rate or amount of payments
of principal or interest, or as to which payments of principal or interest may
or may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Trust Assets for such Series. A
Series of Certificates may include one or more Classes of Senior Certificates
that receive certain preferential treatment, specified in the related Prospectus
Supplement, with respect to one or more Classes of Subordinated Certificates of
such Series. Certain Series or Classes of Certificates within a Series may be
covered by a Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy, Bankruptcy Bond or other insurance policies, cash
accounts, letters of credit, financial guaranty insurance policies, third party
guarantees, supplemental interest payments or other forms of credit enhancement
or maturity protection, or derivative products, in each case as described herein
and in the related Prospectus Supplement. The Pass-Through Rate for a Class of
Certificates that pay interest based upon a floating rate of interest, as
specified in the related Prospectus Supplement, may base such floating rate upon
any of the following: (i) the auction procedures for Auction Rate Securities
described herein, (ii) LIBOR plus an amount set forth in the related Prospectus
Supplement, (iii) the T-Bill Rate plus an amount set forth in the related
Prospectus Supplement, (iv) the Prime Rate plus an applicable spread, as set
forth in the related Prospectus Supplement, or (v) any such other method or
procedures used to determine the floating rate of interest as may be described
in the applicable Prospectus Supplement. In addition, a Series may include one
or more Classes of Certificates entitled to (a) principal payments with
disproportionate, nominal or no interest payments or (b) interest payments with
disproportionate, nominal or no principal payments (Strip Certificates).
A Series may include two or more Classes of Notes, as specified in the
related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Interest Rate or amount of payments of
principal or interest, or as to which payments of principal or interest may or
may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Trust Assets for such Series. A
Series of Notes may include one or more Classes of Senior Notes which receive
certain preferential treatment specified in the related Prospectus Supplement
with respect to one or more Classes of Subordinated Notes of such Series.
Certain Series or Classes of Notes within a Series may be covered by a Guaranty
Insurance Policy, Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, Bankruptcy Bond or other insurance policies, cash accounts, letters of
credit, financial guaranty insurance policies, third party guarantees,
supplemental interest payments or other forms of credit enhancement or maturity
protection, or derivative products, in each case as described herein and in the
related Prospectus Supplement. The Interest Rate for a Class of Notes that pay
interest based upon a floating rate of interest, as specified in the related
Prospectus Supplement, may base such floating rate upon any of following: (i)
the auction procedures for Auction Rate Securities described herein, (ii) LIBOR
plus an amount set forth in the related Prospectus Supplement, (iii) the T-Bill
Rate plus an amount set forth in the related Prospectus Supplement, (iv) the
Prime Rate plus an applicable spread, as set forth in the related Prospectus
Supplement, or (v) any such other method or procedures used to determine the
floating rate of interest as may be described in the applicable Prospectus
Supplement. In addition, a Series may include one or more Classes of Notes
entitled to (a) principal payments with disproportionate, nominal or no interest
payments or (b) interest payments with disproportionate, nominal or no principal
payments (Strip Notes).
41
<PAGE>
With respect to any Series of Securities that includes one or more Classes
of Notes, distributions in respect of the Certificates may be subordinated in
priority of payment to payments on the Notes of such Series, to the extent
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities will be made by the Trustee on each
Remittance Date, in the amounts specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Securities are
registered at the close of business on the record dates specified in the
Prospectus Supplement unless Definitive Securities have been issued, the
registered holder of all Securities will be Cede or such other nominee specified
in the related Prospectus Supplement. Distributions will be made by check mailed
to the persons entitled thereto at the address appearing in the register
maintained for holders of Securities (the "Security Register") or, to the extent
described in the related Prospectus Supplement, by wire transfer or by such
other means as are described therein, except that the final distribution in
retirement of the Securities will be made only upon presentation and surrender
of the Securities at the office or agency of the Trustee or other person
specified in the final distribution notice to Securityholders.
DISTRIBUTIONS ON SECURITIES
Each Class of Securities within a Series will evidence the interests
specified in the related Prospectus Supplement, which may (i) include the right
to receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) include the right to receive distributions only of
prepayments of principal throughout the lives of the Securities or during
specified periods; (iii) be subordinated in its right to receive distributions
of scheduled payments of principal, prepayments of principal, interest or any
combination thereof to one or more other Classes of Securities of such Series
throughout the lives of the Securities or during specified periods or may be
subordinated with respect to certain losses or delinquencies; (iv) include the
right to receive such distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the right to receive
distributions in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related Trust; (vi)
include, as to Securities entitled to distributions allocable to interest, the
right to receive interest at a fixed rate or a floating rate; and (vii) include,
as to Securities entitled to distributions allocable to interest, the right to
distributions allocable to interest only after the occurrence of events
specified in the related Prospectus Supplement, and in each case, may accrue
interest until such events occur, as specified in such Prospectus Supplement.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds available in the
related Distribution Account and other accounts (each a "Distribution Account")
to the extent described in the related Prospectus Supplement. To the extent
described in the related Prospectus Supplement, on each Remittance Date, the
Master Servicer will withdraw from the applicable Distribution Account and such
other accounts as may be described in the related Prospectus Supplement and
distribute to the Securityholders of each Class (other than a Series having a
Class of Subordinated Certificates, as described below), either the specified
interest of such Class in the Pool times the aggregate of all amounts on deposit
in the Distribution Account as of the Determination Date, or, in the case of
Classes which have been assigned an aggregate principal balance and Pass-Through
Rate or Interest Rate, payments of interest and payments in reduction of such
aggregate principal balance from all amounts on deposit in the Distribution
Account on the Determination Date, in the priority and calculated in the manner
set forth in the related Prospectus Supplement.
The timing and amounts of distributions allocable to interest and principal
and, if applicable, Principal Prepayments and scheduled payments of principal,
to be made on any Remittance Date may vary among Classes, over time or otherwise
as specified in the Prospectus Supplement. Differing allocations of principal
and interest to different Classes of Securityholders will have the effect of
accelerating the amortization of Senior Notes or Senior Certificates, as the
case may be, while increasing the interests
42
<PAGE>
evidenced by the Subordinated Notes or Subordinated Certificates, as the case
may be, in the related Trust. Distributions to any Class of Securities will be
made pro rata to all Securityholders of that Class, or as otherwise described in
a Prospectus Supplement.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in determining
the interest rates on any Notes or Certificates that are Auction Rate
Securities. Appendix I hereto contains a more detailed description of these
procedures. Prospective investors in the Auction Rate Securities should read
carefully the following summary, along with the more detailed description in
Appendix I.
The interest rate on each Class of Auction Rate Securities will be
determined periodically (generally, for periods ranging from 7 days to one year)
by means of a "Dutch Auction." In this Dutch Auction, investors and potential
investors submit orders through an eligible broker/dealer as to the principal
amount of Auction Rate Securities such investors wish to buy, hold or sell at
various interest rates. The broker/dealers submit their clients' orders to the
auction agent, who processes all orders submitted by all eligible broker/dealers
and determines the interest rate for the upcoming interest period. The broker/
dealers are notified by the auction agent of the interest rate for the upcoming
interest period and are provided with settlement instructions relating to
purchases and sales of Auction Rate Securities.
In the auction procedures, the following types of orders may be submitted:
(i) Bid/Hold Orders--the minimum interest rate that a current investor
is willing to accept in order to continue to HOLD some or all of its
Auction Rate Securities for the upcoming interest period;
(ii) Sell Orders--an order by a current investor to SELL a specified
principal amount of Auction Rate Securities, regardless of the
upcoming interest rate; and
(iii) Potential Bid Orders--the minimum interest rate that a potential
investor (or a current investor wishing to purchase additional
Auction Rate Securities) is willing to accept in order to BUY a
specified principal amount of Auction Rate Securities.
If an existing investor does not submit orders with respect to all its
Auction Rate Securities of the applicable Class, the investor will be deemed to
have submitted a Hold Order at the new interest rate for that portion of the
Auction Rate Securities for which no order was received.
In connection with each auction, Auction Rate Securities will be purchased
and sold between investors and potential investors at a price equal to their
then outstanding principal balance (i.e., par) plus any accrued interest. The
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the Auction Rate Securities.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
43
<PAGE>
(b) Summary of All Orders Received For The Auction
<TABLE>
<CAPTION>
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
- ---------------------- ---------------- ----------------------
<S> <C> <C>
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 Units Sell 50 Units at 3.05%
100 Units at 3.10% 200 Units 50 Units at 3.10%
100 Units at 3.12% 50 Units at 3.11%
300 Units 50 Units at 3.14%
100 Units at 3.15%
350 Units
</TABLE>
Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 500 units).
(c) Auction Agent Organizes Orders In Ascending Order
<TABLE>
<CAPTION>
CUMULATIVE
ORDER NUMBER CUMULATIVE ORDER NUMBER TOTAL
NUMBER OF UNITS TOTAL (UNITS) % NUMBER OF UNITS (UNITS) %
- ----------- ----------- --------------- --------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
</TABLE>
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next period that interest will accrue (each an "Interest
Period"), when another auction will be held. Multiple orders at the winning rate
are allocated units on a pro rata basis. Notwithstanding the foregoing, in no
event will the interest rate exceed the lesser of the Net Loan Rate or the
Maximum Auction Rate (each as described in Appendix I).
The above example assumes that a successful auction has occurred (I.E., all
Sell Orders and all Bid/ Hold Orders below the new interest rate were
fulfilled). In certain circumstances, there may be insufficient Potential Bid
Orders to purchase all the Auction Rate Securities offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal the
lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all the
Auction Rate Securities are subject to Hold Orders (I.E., each holder of Auction
Rate Securities wishes to continue holding its Auction Rate Securities,
regardless of the interest rate) the interest rate for the upcoming Interest
Period will equal the lesser of the Net Loan Rate and the All Hold Rate (as
defined below).
As stated above, the foregoing is only a summary of the auction procedures.
A more detailed description of these procedures is contained in Appendix I.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Securityholders (rather than to guarantee or insure against losses) if so
provided in the related Prospectus Supplement, the Master Servicer will be
required to advance to the Trustee, on or before each Remittance Date (from its
own funds), the amount, if any, by which (a) the sum of (x) 30 days' interest at
the applicable weighted average Adjusted Loan Remittance Rate (as defined below)
on the then outstanding principal balance of the related Series of Securities
and (y) the amount, if any, required to be deposited into the related Reserve
Account (as specified in the Prospectus Supplement) for the related Remittance
Date exceeds (b) the
44
<PAGE>
amount received by the Master Servicer and any Sub-Servicers in respect of
interest on the Loans as of the related Record Date (less certain amounts not
required to be deposited into the related Trust) (such excess, the "Monthly
Advance"). For each Class of Securities, the "Adjusted Loan Remittance Rate"
will equal the sum of the related Pass-Through Rate or Interest Rate and the
rate used in determining certain expenses payable by the related Trust, as more
specifically set forth in the related Prospectus Supplement. The Master Servicer
will not be required to make any Monthly Advances which it determines, in good
faith, would be nonrecoverable from amounts in respect of the Loans.
If so specified in the related Prospectus Supplement, not later than the
close of business on each Determination Date, with respect to each Loan for
which a Principal Prepayment in full or Curtailment was received during the
related Due Period, the Master Servicer will be required to remit to the Trustee
for deposit in the Distribution Account from amounts otherwise payable to it as
servicing compensation, an amount equal to the excess of (a) 30 days' interest
on the principal balance of each such Loan as of the beginning of the related
Due Period at the applicable weighted average Adjusted Loan Remittance Rate,
over (b) the amount of interest actually received on the related Loan for such
Due Period (such difference, "Compensating Interest").
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving Period") during which limited or no
principal payments will be made to one or more Classes of Notes or Certificates
of the related Series as are identified in such Prospectus Supplement. Some or
all collections of principal otherwise allocated to such Classes of Notes or
Certificates may be (i) utilized during the Revolving Period to acquire
additional Trust Assets which satisfy the criteria specified above and the
criteria set forth in the related Prospectus Supplement, (ii) held in an account
and invested in Permitted Investments for later distribution to Securityholders,
(iii) applied to those Notes or Certificates for such Series, if any, specified
in the related Prospectus Supplement as then are in amortization, or (iv)
otherwise applied as specified in the related Prospectus Supplement.
An "Amortization Period" is the period during which an amount of principal
is payable to Holders of a Series which, during the Revolving Period, were not
otherwise entitled to such payments. If so specified in the related Prospectus
Supplement, during an Amortization Period all or a portion of principal
collections on the Loans may be applied as specified above for a Revolving
Period and, to the extent not so applied, will be distributed to the Classes of
Notes or Certificates for such Series specified in the related Prospectus
Supplement as then being entitled to payments of principal. In addition, if so
specified in the related Prospectus Supplement, amounts deposited in certain
accounts for the benefit of one or more Classes of Notes or Certificates for
such Series may be released from time to time or on a specified date and applied
as a payment of principal on such Classes of Notes or Certificates. The related
Prospectus Supplement will set forth the circumstances which will result in the
commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to the
Representative or one of its affiliates a certificate evidencing an undivided
beneficial interest (a "Retained Interest") in such Series not represented by
the other Securities issued by the Representative. As further described in the
related Prospectus Supplement, the value of such Retained Interest will
fluctuate as the amount of Notes and Certificates of the related Series of
Securities
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
and/or Notes of a Series initially will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company
45
<PAGE>
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 Uniform
Commercial Code ("UCC") and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in their
accounts, thereby eliminating the need for physical movement of certificates and
notes. Participants include securities brokers and dealers, 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 brokers,
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participant").
Under a book-entry format, Certificateholders and/or Noteholders, as
applicable, that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of Certificates and/or Notes of a
Series registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Securityholders will
receive all distributions of principal of and interest on the Securities and
reports relating to the Securities from the Trustee through DTC and its
Participants. Under a book-entry format, Securityholders will receive payments
and reports relating to the Securities after the related Remittance Date
because, while payments and such reports are required to be forwarded to Cede,
as nominee for DTC, on each such date, DTC will forward such payments and
reports to its Participants which thereafter will be required to forward them to
Indirect Participants or Securityholders. Unless and until Definitive Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Agreement. The beneficial
holders of such Certificates and/or Notes of a Series will only be permitted to
exercise the rights of Certificateholders and/or Noteholders, as applicable,
under the applicable Agreement indirectly through DTC and its Participants who
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 Securities and is required to
receive and transmit reports and payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to the Securities similarly are required to make
book-entry transfers and receive and transmit such reports and payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the rules provide a mechanism by
which Securityholders will receive distributions and reports and will be able to
transfer their interests.
Unless and until Definitive Securities are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a physical certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken by
a Securityholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Securities are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified
46
<PAGE>
percentages of the Securityholders only at the direction of and on behalf of
Participants whose holdings include current principal amounts of outstanding
Securities that satisfy such specified percentages. DTC may take conflicting
actions with respect to other current principal amounts of outstanding
Securities to the extent that such actions are taken on behalf of Participants
whose holdings include such current principal amounts of outstanding Securities.
Any Notes and/or Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Securityholders or their nominees ("Definitive Securities"), rather than to DTC
or its nominee only under the events specified in the related Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Agreement and Prospectus Supplement, DTC
will be required to notify all Participants of the availability through DTC of
Definitive Securities. Upon surrender by DTC of the certificates and/or notes
representing the Securities and instruction for re-registration, the Trustee
will issue the Notes and/or Certificates in the form of Definitive Securities,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders. Thereafter, payments of principal of and interest
on the Securities will be made by the Trustee directly to Securityholders in
accordance with the procedures set forth herein and in the related Agreement.
The final distribution of any Security (whether Definitive Securities or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Remittance Date at
such office or agency as is specified in the notice of final payment to
Securityholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Securities or with respect to the Trust Assets in the related Trust.
Credit enhancement may be in the form of (i) the subordination of one or more
Classes of the Notes and/or Certificates of such Series, (ii) the use of a
Guaranty Insurance Policy, Spread Amount, Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Reserve Accounts, Supplemental
Interest Payments, a letter of credit, a limited financial guaranty insurance
policy, third party guarantees or maturity protection, derivative instruments,
another method of credit enhancement described in the related Prospectus
Supplement, or the use of a cross-support feature, or (iii) any combination of
the foregoing. Credit enhancement will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal balance of the
Securities and interest thereon. If losses occur which exceed the amount covered
by credit enhancement or which are not covered by the credit enhancement,
holders of one or more Classes of Securities will bear their allocable share of
deficiencies. If a form of credit enhancement applies to several Classes of
Securities, and if principal payments equal to the aggregate principal balances
of certain Classes will be distributed prior to such distributions to other
Classes, the Classes which receive such distributions at a later time are more
likely to bear any losses which exceed the amount covered by credit enhancement.
Coverage under any credit enhancement may be canceled or reduced by the Master
Servicer or the Representative if such cancellation or reduction would not
adversely affect the rating or ratings of the related Securities. The Trustee of
the related Trust will have the right to sue providers of credit enhancement if
a default is made on a required payment.
SUBORDINATION
All Classes of Certificates are Subordinated in right of payment to any
Class of Notes in a given Series to the extent described in the related
Prospectus Supplement. To enhance the likelihood of regular receipt by holders
of Senior Certificates or Senior Notes, as the case may be, of the full amount
of payments which they would be entitled to receive in the absence of any losses
or delinquencies, if so specified in the related Prospectus Supplement,
distributions of scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been payable to one or more
Classes of Subordinated
47
<PAGE>
Certificates or Subordinated Notes, as the case may be, of a Series will instead
be payable to holders of one or more Classes of Senior Certificates or Senior
Notes, as the case may be, under the circumstances and to the extent specified
in the Prospectus Supplement. If specified in the related Prospectus Supplement,
the holders of Senior Certificates or Senior Notes, as the case may be, will
receive the amounts of principal and/or interest due to them on each Remittance
Date, out of the funds available for distribution on such date in the related
Distribution Account, prior to any such distribution being made to holders of
the related Subordinated Certificates or Subordinated Notes, a the case may be,
in each case under the circumstances and subject to the limitations specified in
the Prospectus Supplement. The protection afforded to the holders of Senior
Certificates or Senior Notes, as the case may be, through subordination also may
be accomplished by first allocating certain types of losses or delinquencies to
the related Subordinated Certificates or Subordinated Notes, as the case may be,
to the extent described in the related Prospectus Supplement. If aggregate
losses and delinquencies in respect of such Loans were to exceed the total
amounts payable and available for distribution to holders of Subordinated
Certificates or Subordinated Notes, as the case may be, or, if applicable, were
to exceed the specified maximum amount, holders of Senior Certificates or Senior
Notes, as the case may be, would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates or Subordinated Notes, as the case may be,
on any Remittance Date may instead be deposited into one or more Reserve
Accounts established and maintained with the Trustee. If so specified in the
Prospectus Supplement, such deposits may be made on each Remittance Date, on
each Remittance Date for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Certificates or Senior Notes, as the case may be,
or otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Account may be released to the holders of the Class of
Securities specified in the Prospectus Supplement at the times and under the
circumstances specified in the Prospectus Supplement. See "--Reserve Accounts"
below.
If so specified in the related Prospectus Supplement, the same Class of
Securities may be Senior Certificates or Senior Notes, as the case may be, with
respect to certain types of payments or certain types of losses or delinquencies
and Subordinated Certificates or Subordinated Notes, as the case may be, with
respect to other types of payment or types of losses or delinquencies. If
specified in the related Prospectus Supplement, various Classes of Senior
Certificates or Senior Notes, as the case may be, and Subordinated Certificates
or Subordinated Notes, as the case may be, may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates or Subordinated Notes, as the case may be,
respectively, through a cross support mechanism or otherwise. As between Classes
of Senior Certificates or Senior Notes, as the case may be, and as between
Classes of Subordinated Certificates or Subordinated Notes, as the case may be,
distributions may be allocated among such Classes (i) in the order of their
scheduled final Remittance Dates, (ii) in accordance with a schedule or formula,
(iii) in relation to the occurrence of events, or (iv) otherwise, in each case
as specified in the Prospectus Supplement. The related Prospectus Supplement
will set forth information concerning the amount of subordination of a Class or
Classes of Subordinated Certificates or Subordinated Notes, as the case may be,
in a Series, the circumstances in which such subordination will be applicable,
the manner, if any, in which the amount of subordination will decrease over
time, the manner of funding any Reserve Account, and the conditions under which
amounts in any such Reserve Account will be used to make distributions to Senior
Holders of Senior Certificates or Senior Notes, as the case may be, or released
to Holder of Subordinated Certificates or Subordinated Notes, as the case may
be, from the related Trust.
48
<PAGE>
GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy may be obtained and maintained for any Class or Series of Certificates
and/or Notes. The issuer of any Guaranty Insurance Policy (a "Security Guaranty
Insurer") will be described in the related Prospectus Supplement. A copy of any
such Guaranty Insurance Policy will be attached as an exhibit to the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy will unconditionally and irrevocably guarantee to Securityholders that an
amount equal to each full and complete Insured Payment will be received by an
agent of the Trustee (an "Insurance Paying Agent") on behalf of Securityholders,
for distribution by the Trustee to each Securityholder. The "Insured Payment"
will equal the full amount of the distributions of principal and interest to
which Securityholders are entitled under the related Agreement plus any other
amounts specified therein or in the related Prospectus Supplement.
The specific terms of any Guaranty Insurance Policy will be as set forth in
the related Prospectus Supplement. Guaranty Insurance Policies may have
limitations including (but not limited to) limitations on the insurer's
obligation to guarantee the Master Servicer's obligation to repurchase or
substitute for any Loans, to guarantee any specified rate of prepayments or to
provide funds to redeem Certificates and/or Notes on any specified date.
Subject to the terms of the related Agreement, the Guaranty Insurer may be
subrogated to the rights of each Securityholder to receive payments under the
Securities to the extent of any payments by such Security Guaranty Insurer under
the related Guaranty Insurance Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes of
Securities may be entitled to receive limited acceleration of principal relative
to the amortization of the related Trust Assets. The accelerated amortization
will be achieved by applying certain excess interest collected on the Trust
Assets to the payment of principal on such Classes of Securities. This
acceleration feature is intended to create an amount (the "Spread Amount"),
resulting from, and generally equal to, the excess of the aggregate principal
balances of the applicable Trust Assets over the principal balances of the
applicable Classes of Securities. Once the required Spread Amount is reached,
and subject to the provisions described in the next sentence and in the related
Prospectus Supplement, the acceleration feature will cease, unless necessary to
maintain the required level of the Spread Amount. The applicable Agreement will
provide that, subject to certain floors, caps and triggers, the required level
of the Spread Amount may increase or decrease over time. An increase would
result in a temporary period of accelerated amortization of the applicable
Classes of Securities to increase the actual level of the Spread Amount to its
required level; a decrease would result in a temporary period of decelerated
amortization to reduce the actual level of the Spread Amount to its required
level. An Agreement also may provide that after one or more Classes of
Securities have been paid to the required level of the Spread Amount, excess
interest, together with certain other excess amounts, may be applied to make-up
shortfalls in, or accelerate the amortization of, other Classes of Securities.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of Loans, a
Mortgage Pool Insurance Policy issued by the insurer (the "Pool Insurer") named
in such Prospectus Supplement will be obtained and maintained for each Series
pertaining to Loans. Each Mortgage Pool Insurance Policy will, subject to the
limitations described below, cover loss by reason of default in payment on the
related Loans in the Pool in an amount, unless otherwise specified in the
related Prospectus Supplement, initially equal to a specified percentage of the
aggregate principal balance of all Loans included in the Pool as of the Cut-Off
Date or such other date as is specified in such Prospectus Supplement. The
Mortgage Pool Insurance Policies,
49
<PAGE>
however, are not blanket policies against loss, since claims thereunder may only
be made respecting particular defaulted Loans and only upon satisfaction of
certain conditions precedent described below.
A Mortgage Pool Insurance Policy generally will not insure (and many Primary
Mortgage Insurance Policies do not insure) against loss sustained by reason of a
default arising from, among other things, (i) fraud or negligence in the
origination or servicing of a Loan, including misrepresentation by the
Mortgagor, the originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to the Mortgage Pool Insurance Policy, a bond or other credit
support may cover fraud in connection with the origination of Loans. If so
specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in a
breach of the Master Servicer's representations described above and, in such
event, might give rise to an obligation on the part of the Master Servicer to
purchase the defaulted Loan if the breach cannot be cured by the Master
Servicer. No Mortgage Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim in respect of a defaulted Loan
occurring when the servicer of such Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related Securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Loans to the date of payment of the claim. Accordingly,
if aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Securityholders.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special Hazard
Insurance Policy will be obtained for the Pool and will be issued by the insurer
(the "Special Hazard Insurer") named in such Prospectus Supplement. Each Special
Hazard Insurance Policy will, subject to limitations described below, protect
holders of the related Securities from (i) loss by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "The Agreement--Hazard Insurance." No Special
Hazard Insurance Policy will cover losses occasioned by war, civil insurrection,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear reaction, flood (if the Mortgaged
Property is located in a federally designated flood area), chemical
contamination and certain other risks. The amount of coverage under any Special
Hazard Insurance Policy will be specified in the related Prospectus Supplement.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
Loan has been kept in force and other protection and preservation expenses have
been paid.
Unless otherwise specified in the related Prospectus Supplement, since each
Special Hazard Insurance Policy will be designed to permit full recovery under
the Mortgage Pool Insurance Policy in circumstances in which such recoveries
would otherwise be unavailable because property has been damaged by a cause not
insured against by a standard hazard policy and thus would not be restored, each
Agreement will provide that, if the related Mortgage Pool Insurance Policy shall
have been terminated or been exhausted through payment of claims, the Master
Servicer will be under no further obligation to maintain such Special Hazard
Insurance Policy.
50
<PAGE>
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Loan or a reduction by such court of the principal
amount of a Loan and will cover certain unpaid interest on the amount of such a
principal reduction from the date of the filing of a bankruptcy petition. The
required amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. To the extent specified in an applicable
Prospectus Supplement, the Master Servicer may deposit cash, an irrevocable
letter of credit or any other instrument acceptable to each nationally
recognized rating agency rating the Securities of the related Series in the
Trust to provide protection in lieu of or in addition to that provided by a
Bankruptcy Bond. See "Certain Legal Aspects of the Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders."
RESERVE ACCOUNTS
If specified in a Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit or a combination
thereof in the aggregate amount specified in the Prospectus Supplement may be
deposited by the Master Servicer or Representative on the date specified in the
Prospectus Supplement in one or more Reserve Accounts established with the
Trustee. In addition to or in lieu of the foregoing, if so specified in such
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into such Reserve Accounts. Such deposits may be made on the date
specified in the Prospectus Supplement, which may include each Remittance Date,
each Remittance Date for specified periods or until the balance in the Reserve
Account has reached a specified amount. See "--Subordination" above.
The cash and other assets in the Reserve Accounts will be used to enhance
the likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement. Any
cash in a Reserve Account and the proceeds upon maturity or liquidation of any
other asset or instrument therein will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Any asset or instrument deposited in
the Reserve Account generally will name the Trustee, in its capacity as trustee
for the Securityholders, as beneficiary and will be issued by an entity
acceptable to the applicable Rating Agency. Additional information with respect
to such instruments deposited in the Reserve Accounts will be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on assets and instruments deposited in
a Reserve Account will be available for withdrawal from such Reserve Account for
distribution to Securityholders for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
SUPPLEMENTAL INTEREST PAYMENTS
If so specified in the Prospectus Supplement, one or more Classes of
Securities may be entitled to receive supplemental interest payments under
specified circumstances. Supplemental interest payments will be available to
fund some or all of the difference, if any, between the interest owed to a Class
of Securities on a Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Trust Assets.
Such differences may result if the interest rates on the applicable Classes of
Securities are based upon an index that differs from the index used in
determining
51
<PAGE>
the interest rates on the Trust Assets. Except as otherwise provided in a
Prospectus Supplement, supplemental interest payments will not be available to
fund shortfalls resulting from delinquencies or defaults on the Trust Assets.
MATURITY PROTECTION
If so specified in the Prospectus Supplement, one or more Classes of
Securities may be entitled to third-party payments to help provide that the
holders of such Securities receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES, SWAPS, AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include in
lieu of some or all of the foregoing or in addition thereto letters of credit,
financial guaranty insurance policies, third party guarantees, limited
guarantees or insurance from agencies or instrumentalities of the United States,
and other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust, paying
administrative expenses, or accomplishing such other purpose as may be described
in the Prospectus Supplement. The Trust may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate.
If any Class of Securities has a floating interest rate, or if any of the
Trust Assets has a floating interest rate, the Trust may include an interest
rate swap contract, an interest rate cap agreement or similar hedge contract
providing limited protection against interest rate risks. If provided in the
related Prospectus Supplement, interest and/or principal on one or more Classes
of the Securities of a Series may be paid to Holders thereof in a currency other
than U.S. dollars. If so provided, the Trust may, in connection therewith, enter
into one or more currency rate swaps to provide limited protection against
foreign currency rate fluctuation risks. One or more Classes of Securities also
may be issued in conjunction with a put or call feature entitling (in the case
of a put) or obligating (in the case of a call) the applicable Securityholders
to sell some or all of its Securities to the party named in the applicable
Prospectus Supplement on the date or dates set forth therein. Any such
arrangements must be acceptable to each nationally recognized rating agency that
provides a rating for the related Series of Securities (the "Rating Agency").
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust may be evidenced by separate
Classes of the related Series of Securities. In such case, credit support may be
provided by a cross-support feature which requires that distributions be made
with respect to Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
separate Trusts. If applicable, the Prospectus Supplement will identify the
Trusts to which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such coverage
to the identified Trusts.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Securities will be affected by the amount and
timing of principal payments on or in respect of the Trust Assets included in
the related Trusts, the allocation of available funds to various Classes of
Securities, the Pass-Through Rate or Interest Rate for various Classes of
Securities and the purchase price paid for the Securities.
52
<PAGE>
The original terms to maturity of the Loans in a given Pool will vary
depending upon the type of Loans included therein. Each Prospectus Supplement
will contain information with respect to the type and maturities of the Loans in
the related Pool. Loans generally may be prepaid without penalty in full or in
part at any time.
In general, prepayment of Loans is likely to increase when the level of
prevailing interest rates for similar loans declines significantly, although the
prepayment rate is influenced by a number of other factors, including general
economic conditions. Similarly, when the level of prevailing interest rates
rises, prepayment rates may decrease. No prediction can be made as to the
prepayment rate that the Loans will actually experience.
The prepayment experience of the Pools may be affected by a wide variety of
factors, including general and local economic conditions, mortgage market
interest rates and the availability of alternative financing. The Representative
is unaware of any reliable studies that would project the prepayment risks
associated with the Loans based upon current interest rates and economic
conditions or the historical prepayment experience of The Money Store's and its
affiliates' portfolios of Loans.
Greater than anticipated prepayments of principal will increase the yield on
Securities purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Securities
purchased at a price greater than par. The effect on an investor's yield of
principal prepayments on the Loans occurring at a rate that is faster (or
slower) than the rate anticipated by the investor in the period immediately
following the issuance of the applicable Class of Securities may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Securities will also be affected by the amount
and timing of delinquencies and defaults on the Loans and the recoveries, if
any, on defaulted Loans and foreclosed properties. Delinquencies and defaults
will generally slow the rate of payment of principal to the Securityholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Loans and foreclosed properties result in principal payments on the
Securities faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on a Loan, the Mortgagor will
be charged interest on the principal amount of the Loan so prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. If so specified in the related Prospectus
Supplement, in the event that less than 30 days' interest is collected on a Loan
during a Due Period, whether due to prepayment in full or a Curtailment, the
Master Servicer will be obligated to pay Compensating Interest with respect
thereto, but only to the extent of the aggregate Servicing Fee and Contingency
Fee for the related Remittance Date. To the extent such shortfalls exceed the
amount of Compensating Interest that the Master Servicer is obligated to pay,
and are not otherwise covered by Insured Payments, the yield on the Securities
could be adversely affected.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Trust
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Securities. See "The Agreement--Termination; Purchase of
Loans."
If so specified in the related Prospectus Supplement, the effective yield to
certain Securityholders may be slightly lower than the yield otherwise produced
by the applicable Remittance Rate and purchase price, because while interest
generally will accrue on such Securities from the first day of each month, the
distribution of such interest will not be made earlier than a specified date in
the month following the month of accrual.
In addition, if so specified in the related Prospectus Supplement,
prepayments may result from amounts on deposit, if any, in the Pre-Funding
Account at the end of the Funding Period being applied to the payment of
principal of the Securities.
The Prospectus Supplement relating to a Series of Securities will discuss in
greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Securities. Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities.
53
<PAGE>
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
SALE OF LOANS
Pursuant to each related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as the case may be, at the time of issuance of Securities
of a Series, the Originators and/or The Money Store will sell to the related
Trust, without recourse, all interest of the Originators and/or The Money Store
in each of the Trust Assets comprising the assets of such Trust and all interest
in all actual payments collected after the Cut-Off Date with respect to such
Trust Assets.
In addition, to the extent specified in the related Prospectus Supplement,
the net proceeds received from the sale of the Securities of a given Series will
be applied to the deposit of the Pre-Funded Amount into the Pre-Funding Account.
The aggregate principal balance of additional Trust Assets to be purchased for
the related Trust generally will be equal to the Pre-Funded Amount on the date
of the issuance of the related Series. On each applicable purchase date, the
Originators and/or The Money Store will sell to the related Trust, without
recourse, the entire interest of the Originators and/or The Money Store in the
additional Trust Assets identified in a schedule attached to a supplemental
conveyance relating to such additional Trust Assets executed on such date by the
Originators and/or The Money Store. In connection with each purchase of
additional Trust Assets, the related Trust will be required to pay to the
Originators and/or The Money Store a cash purchase price equal to the
outstanding principal balance of each additional Trust Asset as of its related
Cut-Off Date. The purchase price will be withdrawn from the Pre-Funding Account
and paid to the Originators and/or The Money Store so long as the
representations and warranties set forth in "--Representations and Warranties"
below apply to each additional Trust Asset to be conveyed, and the conditions
set forth in the paragraph below and in the related Agreement are satisfied. The
Originators and/or The Money Store will convey the additional Trust Assets to
the related Trust on the applicable purchase date pursuant to the Agreement.
Any conveyance of additional Trust Assets will be subject to the following
conditions, among others specified in the related Prospectus Supplement: (i)
each such additional Trust Asset must satisfy the eligibility criteria specified
in the related Agreement as of its applicable Cut-Off Date and such additional
criteria as may be specified in the related Prospectus Supplement; (ii) if and
to the extent specified in the related Prospectus Supplement, the third-party
credit enhancement provider, if any, shall have approved the transfer of such
additional Trust Assets to the related Trust; (iii) neither the Originator nor
The Money Store will have selected such additional Trust Assets in a manner that
either believes is adverse to the interests of Securityholders; and (iv) the
Originator and The Money Store will deliver certain opinions of counsel to the
Trustee(s) and the Rating Agencies with respect to the validity of the
conveyance of such additional Trust Assets.
In connection with such transfer and assignment, unless otherwise set forth
in a Prospectus Supplement the Representative and/or the Originators will
deliver to the Trustee or, with respect to the notes executed by borrowers
evidencing a loan (each a "Loan Note") relating to the SBA Section7(a) Loans
being delivered pursuant to (a) below, to the fiscal and transfer agent of the
SBA (the "FTA"), the following documents with respect to each Loan
(collectively, the "Trustee's Document File"):
(a) The original Loan Note, endorsed by means of an allonge as follows
(bracketed language is only for SBA Section7(a) Loans): "Pay to the order of
[Name of Trustee], and its successors and assigns, as trustee under that
certain Pooling and Servicing Agreement dated as of , 199 for
the benefit of [the United States Small Business Administration and] holders
of The Money Store Asset-Backed [Certificates] [Notes], Series 199 - ,
Class and Class [, as their respective interests may
54
<PAGE>
appear], without recourse" and signed, by facsimile or manual signature, in
the name of the applicable Originator by a Responsible Officer, with all
prior and intervening endorsements showing a complete chain of endorsement
from the originator to the applicable Originator, if such Originator was not
the originator;
(b) With respect to those Loans secured by Mortgaged Properties, either:
(i) the original mortgage or deed of trust (each a "Mortgage"), with
evidence of recording thereon, (ii) a copy of the Mortgage certified as a
true copy by a Responsible Officer of the applicable Originator where the
original has been transmitted for recording until such time as the original
is returned by the public recording office or duly licensed title or escrow
officer or (iii) a copy of the Mortgage certified by the public recording
office in those instances where the original recorded Mortgage has been
lost;
(c) With respect to those Loans secured by Mortgaged Properties, either:
(i) the original Assignment of Mortgage from the applicable Seller endorsed
as follows (bracketed language is only for SBA Section7(a) Loans): "[Name of
Trustee], ("Assignee") its successors and assigns, as trustee under the
Pooling and Servicing Agreement dated as of , 199 [, subject to
the Multi-Party Agreement dated as of , 199 ]" with evidence of
recording thereon (PROVIDED, HOWEVER, that where permitted under the laws of
the jurisdiction wherein the Mortgaged Property is located, the Assignment
of Mortgage may be effected by one or more blanket assignments for Loans
secured by Mortgaged Properties located in the same county), or (ii) a copy
of such Assignment of Mortgage certified as a true copy by a Responsible
Officer of the applicable Originator where the original has been transmitted
for recording (PROVIDED, HOWEVER, that where the original Assignment of
Mortgage is not being delivered to the Trustee, each such Responsible
Officer may complete one or more blanket certificates attaching copies of
one or more Assignments of Mortgage relating to the Mortgages originated or
acquired by the applicable Originator);
(d) With respect to those Loans secured by Mortgaged Properties, either:
(i) originals of all intervening assignments, if any, showing a complete
chain of title from the originator to the applicable Originator, including
warehousing assignments, with evidence of recording thereon if such
assignments were recorded, (ii) copies of any assignments certified as true
copies by a Responsible Officer of the applicable Originator where the
originals have been submitted for recording until such time as the originals
are returned by the public recording officer, or (iii) copies of any
assignments certified by the public recording office in any instances where
the original recorded assignments have been lost;
(e) With respect to those Loans secured by Mortgaged Properties, either:
(i) originals of any title insurance policies relating to the Mortgaged
Properties or (ii) copies of any title insurance policies or other evidence
of lien position, including but not limited to PIRT policies, limited
liability reports and lot book reports, to the extent the Originators obtain
such policies or other evidence of lien position, certified as true by the
applicable Originator;
(f) With respect to those Loans secured by other items of collateral,
the original or certified copy of all file UCC financing statements securing
such collateral naming the applicable Seller as "Secured Party;"
(g) For all Loans, blanket assignment of all collateral securing the
Loan, including without limitation, all rights under applicable guarantees
and insurance policies;
(h) For all Loans, irrevocable power of attorney of the applicable
Originator to the Trustee to execute, deliver, file or record and otherwise
deal with the collateral for the Loans in accordance with the Agreement. The
power of attorney will be delegable by the Trustee to the Master Servicer
and any successor servicer and will permit the Trustee or its delegate to
prepare, execute and file or record UCC financing statements and notices to
insurers; and
55
<PAGE>
(i) For all Loans, blanket UCC-1 financing statements identifying by
type all collateral for the Loans in each of the Pools and naming the
Trustee, and with respect to the SBA Section7(a) Loans, the SBA, as Secured
Parties and the applicable Originator as the Debtor.
Notwithstanding the foregoing, the Representative or the applicable
Originators will not be required to record the Assignment of Mortgage to the
Trustee if the Representative delivers opinions of counsel, satisfactory to the
Rating Agencies, to the effect that recordation of such assignments is not
required in the relevant jurisdictions to protect the interests of the Trustee
in the Loans.
REPRESENTATIONS AND WARRANTIES
Each Originator will represent to the Trustee and the Securityholders, among
other things, with respect to each Loan originated or acquired by it, as of the
related Cut-Off Date or such other date as may be set forth in an Agreement:
(1) The information with respect to each Loan set forth in the Loan Schedule
is true and correct;
(2) All of the original or certified documentation set forth in the
Agreement (including all material documents related thereto) has been or will be
delivered to the Trustee or, with respect to the SBA Section7(a) Loans, the FTA,
or as otherwise provided in the related Agreement;
(3) Each Loan has been originated or acquired by an Originator in accordance
with the applicable underwriting criteria set forth herein and is being serviced
by the Master Servicer or one or more Subservicers;
(4) With respect to those Loans secured by a Mortgaged Property, each
Mortgage is a valid and subsisting lien of record on the Mortgaged Property
subject only to any applicable prior liens on such Mortgaged Property and
subject in all cases to such exceptions that are generally acceptable to banking
institutions in connection with their regular commercial lending activities, and
such other exceptions to which similar properties are commonly subject and which
do not individually, or in the aggregate, materially and adversely affect the
benefits of the security intended to be provided by such Mortgage;
(5) Each Section 7(a) Companion Loan, if any, is secured by a Mortgaged
Property, which security interest is senior to the security interest in such
Mortgaged Property granted in connection with the related SBA Section7(a) Loan
and each SBA 504 Loan, if any, is secured by a Mortgaged Property, which
security interest is senior to the security interest in such Mortgaged Property
granted in connection with the related loan made by the SBA;
(6) Immediately prior to the transfer and assignment contemplated by the
Agreement, the applicable Originator held good and indefeasible title to, and
was the sole owner of each Section 7(a) Companion Loan, each SBA 504 Loan, each
Non-SBA Loan, and the Unguaranteed Interest of each SBA Section7(a) Loan,
conveyed by the Originator subject to no liens, charges, mortgages, encumbrances
or rights of others except as set forth in paragraphs(4) and (5) above or other
liens which will be released simultaneously with such transfer and assignment;
(7) As of the related Cut-Off Date, no Loan will be more than 59 days
delinquent in payment;
(8) To the best of the Originator's knowledge, there will be no delinquent
tax or assessment lien on any Mortgaged Property which is the primary collateral
for the related loan, and each such Mortgaged Property will be free of material
damage and will be in good repair;
(9) No Loan will be subject to any right of rescission, set-off,
counterclaim or defense, including the defense of usury, nor will the operation
of any of the terms of the Loan or any related Mortgage, or the exercise of any
right thereunder, render either the Loan or any related Mortgage unenforceable
in whole or in part, or subject to any right of rescission, set-off,
counterclaim or defense, including the defense of
56
<PAGE>
usury, and no such right of rescission, set-off, counterclaim or defense has
been asserted with respect thereto;
(10) Each Loan at the time it was made complied in all material respects
with applicable state and federal laws and regulations, including, without
limitation, usury, equal credit opportunity, disclosure and recording laws and,
with respect to the SBA Loans, the applicable SBA Rules and Regulations;
(11) The Originator requires that the improvements upon each Mortgaged
Property which is the primary collateral for the related loan are covered by a
valid and existing hazard insurance policy with a generally acceptable carrier
that provides for fire and extended coverage;
(12) The Originator requires that if a Mortgaged Property is in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards, a flood insurance policy is in effect with respect
to such Mortgaged Property with a generally acceptable carrier;
(13) Each Loan will conform, and all such Loans in the aggregate will
conform, to the descriptions thereof set forth in this Prospectus and the
related Prospectus Supplement;
(14) The terms of each Loan and the related Mortgage or other security
agreement pursuant to which collateral was pledged will not have been impaired,
altered or modified in any respect, except by a written instrument which has
been recorded, if necessary, to protect the interest of the SBA, with respect to
the SBA Section7(a) Loans, and the Securityholders and which will have been
delivered to the Trustee;
(15) Each Mortgaged Property which is the primary collateral for the related
Loan will be, at the time of origination of such Loan, and to the best of the
Originator's knowledge will be, as of the related Cut-Off Date, below regulatory
agency action levels of contamination from toxic substances or hazardous wastes
or is subject to ongoing environmental rehabilitation, which, with respect to
the SBA Loans, must be approved by the SBA;
(16) With respect to each Loan secured by a Mortgaged Property and that is
not a first mortgage loan, either (i) no consent for the Loan is required by the
holder of any related prior lien or (ii) such consent has been obtained;
(17) Any related Mortgage will contain customary and enforceable provisions
in accordance with the SBA Rules and Regulations which render the rights and
remedies of the holder thereof adequate for the realization against the
Mortgaged Property of the benefits of the security, including, (i) in the case
of a Mortgage designated as a deed of trust, by trustee's sale, and (ii)
otherwise by judicial foreclosure. There will be no homestead or other exemption
available to the Mortgagor which would materially interfere with the right to
sell the Mortgaged Property at a trustee's sale or the right to foreclose the
Mortgage;
(18) There will be no default, breach, violation or event of acceleration
existing under each Loan and no event which, with the passage of time or with
notice and the expiration of any grace or cure period, would constitute a
default, breach, violation or event of acceleration, and the Originators will
not have waived any default, breach, violation or event of acceleration; and
(19) With respect to those SBA Section7(a) Loans secured by collateral other
than a Mortgaged Property, the related SBA Note, security agreements, if any,
and UCC-1 filed with respect to such collateral creates a valid and subsisting
lien of record on such collateral subject only to any prior liens, if any, on
such collateral and subject in all cases to such exceptions that are generally
acceptable to lending institutions in connection with their regular commercial
lending activities, and such other exceptions to which similar collateral is
commonly subject and which do not individually, or in the aggregate, materially
and adversely affect the benefits of the security intended to be provided by
such SBA Note, security agreement and UCC-1.
Pursuant to the Agreement, upon the discovery by The Money Store, the
Originators, the Master Servicer, any Subservicer or the Trustee of a breach of
any of the representations and warranties contained
57
<PAGE>
in the Agreement relating to an Originator or the Loans which materially and
adversely affects the value of the Loans or the interest of the Securityholders
in the related Loan in the case of a representation or warranty relating to a
particular Loan (notwithstanding that such representation and warranty was made
to the applicable Originator's best knowledge), the party discovering such
breach is required to give prompt written notice to the other parties. Within 60
days of the earlier to occur of its discovery or its receipt of notice of any
such breach, the appropriate Originator will, (x) if such Loan is an SBA
Section7(a) Loan, (i) promptly cure such breach in all material respects, (ii)
purchase the Unguaranteed Interest of such SBA Section7(a) Loan from its own
funds at a price equal to the then current principal balance of the Unguaranteed
Interest of such SBA Section7(a) Loan as of the date of purchase, plus 30 days'
interest thereon at the related Adjusted Loan Remittance Rate as of the next
succeeding Determination Date, plus any accrued unpaid Servicing Fees, Monthly
Advances and Servicing Advances reimbursable to the Master Servicer, which
purchase price shall be deposited in the Principal and Interest Account on the
next succeeding Determination Date or (iii) remove such SBA Section7(a) Loan
from the related Trust and substitute one or more qualified SBA Section7(a)
Loans; or (y) if such Loan is a Section 7(a) Companion Loan, an SBA 504 Loan or
a Non-SBA Loan, (i) promptly cure such breach in all material respects, (ii)
purchase such Loan from its own funds at a price equal to the then current
principal balance of such Loan as of the date of purchase, plus 30 days'
interest thereon at the related Adjusted Loan Remittance Rate as of the next
succeeding Determination Date, plus any accrued unpaid Servicing Fees, Monthly
Advances and Servicing Advances reimbursable to the Master Servicer, which
purchase price shall be deposited in the Principal and Interest Account on the
next succeeding Determination Date or (iii) remove such Loan from the related
Trust and substitute one or more qualified Loans of similar type. In addition,
the Originators will agree to indemnify the related Trust, the Trustee, the
Securityholders, and, with respect to SBA Loans, the SBA, against any loss
arising from a material breach of any such representation and warranty. The
obligation of the Originators to so purchase or substitute and to indemnify the
Securityholders and the Trustee will constitute the sole remedy respecting a
material breach of any such representation or warranty to the Securityholders or
the Trustee.
PAYMENTS ON THE LOANS
The Agreement will require the Master Servicer to establish and maintain one
or more principal and interest accounts (each a "Principal and Interest
Account") at one or more institutions designated as a "Designated Depository
Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be held
(i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Master Servicer is required to deposit in the Principal and Interest
Account (within two Business Days of receipt): (i) all payments received after
the Cut-Off Date on account of interest on the Loans (net of the portion
thereof, if any, required to be paid to the holders of the Guaranteed Interest,
the FTA's Fee, the Additional Fee and the Servicing Fee, other servicing
compensation payable to the Master Servicer as permitted by the Agreement) and
such other amounts as may be described in a Prospectus Supplement, (ii) all
payments received after the Cut-Off Date on account of principal on the Loans
(or with respect to SBA Section7(a) Loans, the Unguaranteed Interest of all such
sums received), including all Excess Payments, Principal Prepayments,
Curtailments, Net Liquidation Proceeds, Insurance Proceeds (other than amounts
to be applied to the restoration or repair of the related Mortgaged Property, or
to be released to the Obligor) and Released Mortgaged Property Proceeds (or with
respect to SBA Section7(a) Loans, the Unguaranteed Interest of all such sums
received), (iii) any amounts paid in connection with the repurchase of a Loan,
or with respect to SBA Section7(a) Loans, the Unguaranteed Interest of such
Loan, and the amount of any adjustment for substituted Loans, (iv) the amount of
any losses incurred in connection with investments in Permitted Instruments and
(v) certain amounts relating to insufficient insurance policies and foreclosed
property.
58
<PAGE>
GENERAL SERVICING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will agree to master service the Loans in accordance with the related
Agreement and, with respect to the SBA Section7(a) Loans, the Multi-Party
Agreement and the SBA Rules and Regulations. As used herein, "SBA Rules and
Regulations" means the SBA Act, all rules and regulations promulgated from time
to time thereunder and the Loan Guaranty Agreement. Pursuant to each Agreement
and in accordance with applicable SBA Rules and Regulations, the Master Servicer
will be required to make reasonable efforts to collect all payments called for
under the terms of the related Loan. Nonetheless, the Master Servicer, in
determining the type of action that is reasonable to pursue may consider, among
other things, the unpaid principal balance of a Loan against the estimated cost
of collection or foreclosure action, the unpaid balance of the related prior
mortgage, if any, the condition and estimated market value ("as is" and "if
repaired"), the estimated marketability of the related Mortgaged Property and
the borrower's ability to repay.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee (the "Servicing
Fee") and, to the extent set forth in the related Prospectus Supplement, a
contingency fee (the "Contingency Fee") equal to the percentages per annum
specified in the related Prospectus Supplement of the principal balance of each
Loan. The Contingency Fee is meant to provide additional servicing compensation
to a successor servicer if The Money Store or one of its affiliates is replaced
as Master Servicer under the related Agreement. However, as long as The Money
Store or one of its affiliates acts as Master Servicer, it will be entitled to
receive any applicable Contingency Fee, although such amount is not deemed
servicing compensation. Unless otherwise specified in the related Prospectus
Supplement, the Servicing Fee and Contingency Fee, if any, will each be
calculated and payable monthly from the interest portion of scheduled monthly
payments, liquidation proceeds and certain other collected proceeds. In
addition, the Master Servicer will be entitled under the Agreement to retain
additional servicing compensation in the form of assumption and other
administrative fees, any applicable prepayment penalties, premiums and late
payment charges, interest paid on funds in the Principal and Interest Account,
interest paid on earnings realized on Permitted Instruments, and certain other
excess amounts.
The Master Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its
obligations under the Agreements, including, but not limited to, the cost of (i)
the preservation, restoration and protection of a Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property and other collateral acquired
in satisfaction of the related Loan. Such expenditures may include costs of
collection efforts, reappraisals, forced placement of hazard insurance if a
borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing payments on the related senior mortgage, if any,
advances of delinquent property taxes, upkeep and maintenance of the property if
it is acquired through foreclosure and similar types of expenses. Each such
expenditure constitutes a "Servicing Advance." The Master Servicer will be
obligated to make the Servicing Advances incurred in the performance of its
servicing obligations. The Master Servicer will be entitled to recover Servicing
Advances to the extent permitted by the Loans or, if not theretofore recovered
from the Mortgagor on whose behalf such Servicing Advance was made, from
Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds
and such other amounts as may be collected by the Master Servicer from the
Mortgagor or otherwise relating to the Loan. Servicing Advances will be
reimbursable to the Master Servicer from the sources described above out of the
funds on deposit in the Principal and Interest Account.
HAZARD INSURANCE
The Master Servicer will be required under each Agreement to maintain fire
and hazard insurance with extended coverage customary in the area where a
Mortgaged Property is located. Such requirements
59
<PAGE>
vary from region to region. If at origination of a Loan, to the best of the
Master Servicer's knowledge after reasonable investigation, the related
Mortgaged Property is in an area identified in the Federal Register by the Flood
Emergency Management Agency as having special flood hazards (and such flood
insurance has been made available) consistent with the SBA Rules and
Regulations, if applicable, the Master Servicer will require the related obligor
to purchase a flood insurance policy with a generally acceptable insurance
carrier, in an amount representing coverage not less than the lesser of (a) the
full insurable value of the Mortgaged Property, or (b) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, as amended.
The Master Servicer will also be required to maintain, to the extent such
insurance is available and in accordance with the SBA Rules and Regulations, if
applicable, and the Master Servicer's policies, on Foreclosed Property
constituting real property, fire and hazard insurance in the amounts described
above and liability insurance. Any amounts collected by the Master Servicer
under any such policies (other than amounts to be applied to the restoration or
repair of the Mortgaged Property, or to be released to the Obligor in accordance
with the SBA Rules and Regulations, if applicable), are required to be deposited
by the Master Servicer in the Principal and Interest Account.
REALIZATION UPON DEFAULTED LOANS WITH RELATED MORTGAGES
In accordance with SBA Rules and Regulations and with the prior written
consent of the SBA, the Master Servicer will be required to foreclose upon or
otherwise comparably effect the ownership in the name of the SBA of Mortgaged
Properties relating to defaulted SBA Section7(a) Loans as to which no
satisfactory arrangements can be made for collection of delinquent payments.
Although the consent of the SBA will not be required for the Master Servicer to
foreclose on a Mortgaged Property relating to a Section 7(a) Companion Loan, the
Master Servicer will have to obtain such consent in connection with the related
SBA Section7(a) Loan. No consent of the SBA will be required for the Master
Servicer to foreclose on a Mortgaged Property relating to an SBA 504 Loan or a
Non-SBA Loan. In connection with such foreclosure or other conversion, the
Master Servicer will be required to exercise collection and foreclosure
procedures with the same degree of care and skill in its exercise or use, as it
would exercise or use under the circumstances in the conduct of its own affairs.
The Master Servicer will take into account the existence of any hazardous
substances, hazardous wastes or solid wastes on Mortgaged Properties in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property, and will not foreclose on a Mortgaged
Property where it has cause to believe actionable contamination from such
substances exists unless it has received a Phase I environmental report or other
professional environmental documentation and such report or documentation
reveals no actionable environmental contamination, or such Mortgaged Property is
subject to an environmental rehabilitation for which the Originators are not
responsible.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Agreement will require the Master Servicer to make reasonable efforts to
collect all payments called for under the terms and provisions of the Loans.
Consistent with the foregoing and the SBA Rules and Regulations, if applicable,
the Master Servicer may in its discretion waive any assumption fee or any other
fee or charge which the Master Servicer would be entitled to retain as servicing
compensation and may waive, vary or modify any term of any Loan or consent to
the postponement of strict compliance with any such term or in any matter grant
indulgence to any Mortgagor, subject to the limitations set forth in the
Agreement. In the event the Master Servicer consents to the deferment of the due
dates for payments due on a Loan, the Master Servicer will nonetheless make
payment of any required Monthly Advance with respect to the payments so extended
to the same extent as if such installment were due, owing and delinquent and had
not been deferred.
60
<PAGE>
SUB-SERVICERS
The Master Servicer will be permitted under the related Agreement to enter
into sub-servicing arrangements with sub-servicers meeting the requirements of
the related Agreement (each, a "Sub-Servicer"). Such sub-servicing arrangements
will not relieve the Master Servicer of any liability it might otherwise have,
had the sub-servicing arrangement not been entered into.
The Master Servicer is required to deliver to the Trustee and the SBA on or
before March 31 of each year, an Officers' Certificate stating, as to each
signer thereof, that (i) the Master Servicer has fully complied with certain
provisions of the Agreement relating to servicing of the Loans and payments on
the Securities, (ii) a review of the activities of the Master Servicer during
such preceding year and of performance under the Agreement has been made under
such officers' supervision, and (iii) to the best of such officers' knowledge,
based on such review, the Master Servicer has fulfilled all its obligations
under the Agreement for such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officers and the nature and status thereof including the steps being taken by
the Master Servicer to remedy such default.
On or before March 31 of each year, the Master Servicer is required to cause
to be delivered to the Trustee a letter or letters of a firm of nationally
recognized independent certified public accountants reasonably acceptable to the
Trustee stating that such firm has, with respect to the Master Servicer's
overall servicing operations, examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF MASTER SERVICER
The Security Guaranty Insurer, if any, or the Holders of not less than 50
percent of each Class of Securities, other than the holders of residual
interests, if any (the "Majority Securityholders"), by notice in writing to the
Master Servicer and with the prior written consent of the Security Guaranty
Insurer, if any, which consent may not be unreasonably withheld, may, pursuant
to the related Agreement, remove the Master Servicer upon the occurrence of any
of the following events:
(i) (a) an Event of Nonpayment (as defined below) if the Series has the
benefit of a Guaranty Insurance Policy; (B) the failure by the Master
Servicer to make any required Servicing Advance to the extent such failure
materially or adversely affects the interests of the Security Guaranty
Insurer, if any, or the Securityholders; (C) the failure by the Master
Servicer to make any required Monthly Advance; (D) the failure by the Master
Servicer to remit any Compensating Interest; or (E) any failure by the
Master Servicer to remit to the Trustee any payment required to be made
under the terms of the related Agreement, which in each case continues
unremedied (in the case of the events described in clauses (i) (a), (i) (B),
(i) (D) and (i) (E) for 30 days) after the date upon which written notice of
such failure, requiring the same to be remedied, shall have been given to
the Master Servicer by the Trustee or to the Master Servicer and the Trustee
by any Securityholder or the Security Guaranty Insurer, if any; or
(ii) failure by the Master Servicer or The Money Store (so long as The
Money Store is the Master Servicer) duly to observe or perform, in any
material respect, any other covenants, obligations or agreements of the
Master Servicer or the Representative, as set forth in the related
Agreement, which failure continues unremedied for a period of 60 days after
the date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Master Servicer or The Money Store,
as the case may be, by the Trustee or to the Master Servicer or The Money
Store, as the case may be, and the Trustee by any Securityholder or the
Security Guaranty Insurer, if any; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or liquidation of
its
61
<PAGE>
affairs, shall have been entered against the Master Servicer and such decree
or order shall have remained in force, undischarged or unstayed for a period
of 60 days; or
(iv) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings of or
relating to the Master Servicer or of or relating to all or substantially
all of the Master Servicer's property; or
(v) the Master Servicer shall admit in writing its inability to pay its
debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations.
Unless otherwise specified in the related Prospectus Supplement, an "Event
of Nonpayment" will generally be defined in the Agreements as a shortfall on any
Remittance Date in moneys (excluding any amounts representing Insured Payments)
available to fund the full amount of the Distribution Amounts due on such
Remittance Date.
The Master Servicer may not assign its obligations under the Agreement nor
resign from the obligations and duties thereby imposed on it except by mutual
consent of the Master Servicer, the Security Guaranty Insurer, if any, the SBA,
the Trustee and the Majority Securityholders, or upon the determination that the
Master Servicer's duties thereunder are no longer permissible under applicable
law and such incapacity cannot be cured by the Master Servicer. No such
resignation shall become effective until a successor has assumed the Master
Servicer's responsibilities and obligations in accordance with the Agreement.
Upon removal or resignation of the Master Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"), except that the Trustee as
Successor Servicer will not be required to make Monthly Advances and certain
other advances to the extent that the Trustee determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the SBA or the Security
Guaranty Insurer, if any, so request, the Trustee may appoint, or petition a
court of competent jurisdiction to appoint, any established mortgage loan
servicing institution acceptable to the SBA, the Security Guaranty Insurer, if
any, or such other entities as may be specified in a Prospectus Supplement,
having a net worth of not less than $15,000,000 and which is an approved SBA
guaranteed lender in good standing as the Successor Servicer in the assumption
of all or any part of the responsibilities, duties or liabilities of the Master
Servicer.
The Successor Servicer will be entitled to receive the Servicing Fee, the
Contingency Fee, if any, and such other compensation as is described under
"--Servicing and Other Compensation and Payment of Expenses" above.
TERMINATION; PURCHASE OF LOANS
The Trust established under a Pooling and Servicing Agreement or a Trust
Agreement will terminate upon notice to the Trustee following the earlier to
occur of (i) the final payment or other liquidation of such last Loan remaining
in the related Trust or the disposition of all REO Property, (ii) the optional
purchase of the assets of the Trust by the Master Servicer or the Security
Guaranty Insurer, if any, as described below, (iii) mutual consent of the Master
Servicer, the Security Guaranty Insurer, if any, and all Securityholders in
writing; or (iv) if a REMIC election has been made for the related Trust, the
occurrence of a "qualified liquidation" of the Trust, as permitted by the REMIC
provisions of the Code as described below; provided, however, that in no event
will any Trust terminate later than twenty-one years after the death of the last
survivor of the person named in the related Agreement.
Subject to provisions in an Agreement concerning adopting a plan of complete
liquidation, on any date on which the aggregate principal balances of the Loans
are less than 10% of the Original Pool Principal Balance (or such other
percentage as may be specified in the related Prospectus Supplement),
62
<PAGE>
the Master Servicer may, at its option, and in the absence of the exercise
thereof by the Master Servicer, the Security Guaranty Insurer, if any, may, at
its option, purchase, on the next succeeding Remittance Date, all of the Loans
and any related REO Properties at a price equal to the Termination Price. If so
provided in the related Prospectus Supplement, the Master Servicer or another
entity may purchase some or all of the Loans under the circumstances described
in such Prospectus Supplement.
On any Remittance Date on or after the Cross-Over Date on which Loans with
an aggregate principal balance as of the Cut-Off Date that equals or exceeds 25%
of the Original Pool Principal Balance (or such other percentage as may be
specified in the related Prospectus Supplement) have become liquidated Loans,
the Security Guaranty Insurer, if any, may determine to purchase and may cause
the purchase from the Trust of all Loans and REO Properties in the Pool at a
price equal to the sum of the Termination Price and the outstanding and unpaid
fees and expenses of the Trustee and the Master Servicer.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture may
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the final scheduled
Remittance Date for such Notes and any installment of interest on such Notes in
accordance with the terms of the Indenture and the Notes of such Series. In the
event of any such defeasance and discharge of Notes of such Series, holders of
Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
REMIC CONSIDERATIONS. If a REMIC election is made for a Series of
Securities, following a final determination by the Internal Revenue Service (the
"IRS") or by a court of competent jurisdiction, in either case from which no
appeal is taken within the permitted time for such appeal, or if any appeal is
taken, following a final determination of such appeal from which no further
appeal can be taken, to the effect that the REMIC does not and will no longer
qualify as a REMIC pursuant to Section 860D of the Code (the "Final
Determination"), at any time on or after the date which is 30 calendar days
following such Final Determination (i) the Majority Securityholders may direct
the Trustee on behalf of such Trust to adopt a "plan of complete liquidation"
(within the meaning of Section 860F(a) (4)(B)(i) of the Code) with respect to
such REMIC and (ii) the Security Guaranty Insurer, if any, may notify the
Trustee of the Security Guaranty Insurer's determination to purchase from the
Trust all Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Loan, then remaining in such
REMIC at a price (the "Termination Price") equal to the sum of (x) 100% of the
aggregate principal balances of such Loans as of the day of purchase minus
amounts remitted from the Principal and Interest Account to the Distribution
Account representing collections of principal on such Loans during the current
Due Period, (y) 30 days' interest on such amount computed at the applicable
weighted average of the Adjusted Loan Remittance Rates, and (z) the interest
portion of any unreimbursed Insured Payment made by the Security Guaranty
Insurer, if any. Upon receipt of such direction by the Majority Securityholders
or of such notice from the Security Guaranty Insurer, the Trustee will notify
the holders of the residual interest in the Trust (the "Class R Certificates")
of such election to liquidate or such determination to purchase, as the case may
be (the "Termination Notice"). The Holders of a majority of the percentage
interest of the Class R Certificates then outstanding may, within 60 days
63
<PAGE>
from the date of receipt of the Termination Notice (the "Purchase Option
Period"), at their option, purchase from the related Trust all Loans and all
property theretofore acquired by foreclosure, deed in lieu of foreclosure, or
otherwise in respect of any Loan then remaining in the REMIC at a purchase price
equal to the Termination Price.
If, during a Purchase Option Period, the holders of the Class R Certificates
have not exercised the option described in the immediately preceding paragraph,
then upon the expiration of the Purchase Option Period (i) in the event that the
Majority Securityholders have given the Trustee the direction described in
clause (i) above, the Trustee is required to sell the Loans and such other
property in the REMIC and distribute the proceeds of the liquidation of the
REMIC, each in accordance with the plan of complete liquidation, such that, if
so directed, the liquidation of the REMIC and the distribution of the proceeds
of the liquidation occur no later than the close of the 60th day, or such later
day as the Majority Securityholders shall permit or direct in writing, after the
expiration of the Purchase Option Period and (ii) in the event that the Security
Guaranty Insurer has given the Trustee notice of the Security Guaranty Insurer's
determination to purchase the assets described in clause (ii) preceding, the
Security Guaranty Insurer shall so purchase such assets within 60 days after the
expiration of the Purchase Option Period.
Following a Final Determination, the holders of a majority of the percentage
interest of the Class R Certificates then outstanding may, at their option and
upon delivery to the Trustee and the Security Guaranty Insurer, if any, of an
opinion of nationally recognized tax counsel selected by the Holders of such
Class R Certificates, which opinion shall be reasonably satisfactory in form and
substance to the Majority Securityholders and the Security Guaranty Insurer, if
any, that the effect of the Final Determination is to increase substantially the
probability that the gross income of the REMIC will be subject to federal
taxation, purchase from the Trust all Loans and all property theretofore
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of
any Loan then remaining in the applicable REMIC at a purchase price equal to the
Termination Price. The foregoing opinion shall be deemed satisfactory unless the
Majority Securityholders give the holders of a majority of percentage interests
in the Class R Certificates notice that such opinion is not satisfactory within
thirty days after receipt of such opinion.
CONTROL BY HOLDERS
Each Agreement will provide that the Majority Securityholders may exercise
any trust or power conferred on the Trustee with respect to the Securities or
the Trusts, upon satisfaction of certain conditions set forth in the Agreements;
provided, however, that with respect to any action or event affecting only one
or more Classes of Securities, only Holders of such Class or Classes may
exercise such trust or power.
EVENTS OF DEFAULT UNDER THE INDENTURE; RIGHTS OF NOTEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under the Indenture for each Series of Notes include: (i) a default for
thirty (30) days or more in the payment of any principal of or interest on any
Note of such Series; (ii) failure to perform any other covenant of the
Representative or the Trust Fund in the Indenture which continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Representative or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the
Representative or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the
64
<PAGE>
Notes of such Series may declare the principal amount of all the Notes of such
Series to be due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the Holders of a majority in
aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Note of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Each Agreement may be amended from time to time by the Master Servicer and
the Trustee by written agreement, upon the prior written consent of the SBA, the
letter of credit provider, if any and the
65
<PAGE>
Security Guaranty Insurer, if any, without the notice to, or consent of, the
Securityholders, to cure any ambiguity, to correct or supplement any provisions
therein, to comply with any changes in the Code, or to make any other provisions
with respect to matters or questions arising under the Agreement which are not
inconsistent with the provisions of such Agreement, or any agreement for the
retention of each Trustee's Document File; provided, however, that such action
shall not, as evidenced by an Opinion of Counsel delivered to the Trustee,
adversely affect the interest of any Securityholder or any other party and
further provided that no such amendment shall reduce in any manner the amount
of, or delay the timing of, any amounts which are required to be distributed on
any Securities without the consent of the Holder of such Security or change the
rights or obligations of any other party thereto without the consent of such
party.
Each Agreement may be amended from time to time by The Money Store, the
Master Servicer, the Trustee and the Holders of the majority of the percentage
interest in each Class of Securities affected thereby, upon the prior written
consent of the SBA, the letter of credit provider, if any and the Security
Guaranty Insurer, if any, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement or
of modifying in any manner any provisions thereof; provided, however, that if a
REMIC election is made for the applicable Trust, no such amendment shall be made
unless the Trustee receives an Opinion of Counsel, at the expense of the party
requesting the change, that such change will not adversely affect the status of
the Trust as a REMIC or cause a tax to be imposed on the REMIC, and provided
further, that no such amendment shall reduce in any manner the amount of, or
delay the timing of, any amounts which are required to be distributed on any
Securities without the consent of the Holders of 100% of each Class of
Securities affected thereby.
Each Agreement may be amended from time to time by the Master Servicer, The
Money Store and the Trustee by written agreement, upon the prior written consent
of the SBA and Security Guaranty Insurer, if any, without the notice to or
consent of the Securityholders, in connection with the substitution of cash, a
letter of credit or any other collateral deposited in a Reserve Account.
It will not be necessary for the consent of holders to approve the
particular form of any proposed amendment, but it will be sufficient if such
consent shall approve the substance thereof.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Agreement. The Agreement will provide that the Trustee may resign at any time,
in which event the Representative will be obligated to appoint a successor
Trustee. The Representative may also remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Agreement, if the Trustee becomes
insolvent or if the Trustee enters into certain business combinations. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
CERTAIN LEGAL ASPECTS OF THE LOANS
GENERAL
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the Loans. Laws and practices relating to the
legal effects and enforcement of mortgages and deeds of trust vary somewhat from
state to state. In general, however, the most significant applicable legal
principles are similar in all states. The following discussion addresses the
more significant legal principles applicable to mortgages and deeds of trust in
all states. It should be noted that some of the Loans may relate to Mortgaged
Properties located in California, which has enacted various laws, not common to
most other states, which impose special limitations on the remedies available to
the holders of mortgages and deeds of trust. These laws, called "anti-deficiency
laws," are discussed below.
66
<PAGE>
NATURE OF THE TRUST ASSETS
The Loans generally will be secured by mortgages, deeds of trust, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust or a security deed is generally accomplished
by a non-judicial trustee's sale under a specific provision in the deed of trust
or security deed which authorizes the trustee to sell the property at public
auction upon any default by the borrower under the terms of the note, deed of
trust or security deed. In some states, the trustee must record a notice of
default and send a copy to the borrower-trustor, to any person who has recorded
a request for a copy of any notice of default and notice of sale, to any
successor in interest to the borrower-trustor, to the beneficiary of any junior
deed of trust and to certain other persons. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligations. Before such non-judicial
sales takes place, typically a notice of sale must be posted in a public place
and published during a specific period of time in one or more newspapers, posted
on the property, and sent to parties having an interest of record in the
property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the mortgage is not reinstated, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the
67
<PAGE>
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
FORECLOSURE IN CALIFORNIA
It is expected that a significant portion of the Loans (by principal
balance) will be originated to businesses located in California. Foreclosure of
a deed of trust in California may be effected by a judicial or nonjudicial
foreclosure proceeding, with the choice of remedy depending on the
circumstances. Where the likelihood of a large recoverable deficiency is
present, a judicial foreclosure action may be preferred. The discussion above
under the heading "Foreclosure/Repossession" and "Rights of Redemption" are
generally accurate with respect to foreclosure of a deed of trust in California.
Generally, upon the completion of a non-judicial foreclosure sale in
California, the foreclosing lender is prohibited from obtaining a deficiency
judgment against the borrower. A deficiency judgment is available following a
judicial foreclosure, subject to the limitation of the excess of the outstanding
debt over the fair market value of the property at the time of sale, and in no
event may the deficiency exceed the difference between the outstanding debt and
the purchase price at the foreclosure sale. California law also requires the
deed of trust beneficiary to exhaust all real property security in a single
action (i.e. in a judicial foreclosure) before a deficiency judgment may be
sought against the borrower.
68
<PAGE>
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory prohibitions
which limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower equal in most cases to the
difference between the amount due to the lender and the net amount realized upon
any sale of the real property sold at the foreclosure sale. Other statutes
require the beneficiary or mortgagee to exhaust the security afforded under a
deed of trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following a
judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the foreclosure sale. As a result of these prohibitions, it is anticipated that
in many instances the Master Servicer will not seek deficiency judgments against
defaulting mortgagors.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his Chapter 11 or
Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court provided no sale of the residence
had yet occurred prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the property, thus leaving the lender a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
loan.
Federal and local real estate and tax laws provide priority to certain tax
liens over the lien of the mortgage. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include the federal Truth-in-Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, and related statutes. These federal laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the applicable laws. In some
cases, this liability may affect assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Some courts have imposed general equitable principles to limit the remedies
available in connection with foreclosure. These equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. For example, some courts have required that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lenders' judgment and have required that lenders reinstate loans or recast
payment
69
<PAGE>
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of the
lenders to foreclose if the default under the mortgage instrument or deed of
trust is not monetary, such as the borrower's failure to maintain adequately the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. Finally, some courts have been willing to relieve a
borrower from the consequences of the default if the borrower has not received
adequate notice of the default.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Trust Assets and give
rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Trust
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of a Trust and reduce the amounts otherwise
distributable to the Securityholders if a Mortgaged Property securing a Loan
became the property of such Trust in certain circumstances and if such Cleanup
Costs were incurred. Moreover, certain states by statute impose a lien for any
Cleanup Costs incurred by such state on the property that is the subject of such
Cleanup Costs (a "Superlien"). All subsequent liens on such property are
subordinated to such Superlien and, in some states, even prior recorded liens
are subordinated to such Superliens. In the latter states, the security interest
of the Trustee in a property that is subject to such a Superlien could be
adversely affected.
70
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, special federal tax counsel
("Federal Tax Counsel"), the following are the material federal income tax
consequences of the purchase, ownership and disposition of the Certificates or
Notes offered hereby. The discussion, and the opinions referred to below, are
based on laws, regulations, rulings and decisions now in effect (or, in the case
of certain regulations, proposed), all of which are subject to change or
possibly differing interpretations. Because tax consequences may vary based upon
the status or tax attributes of the owner of a Certificate, prospective
investors should consult their own tax advisors in determining the federal,
state, local and other tax consequences to them of the purchase, ownership and
disposition of Certificates or Notes. For purposes of this tax discussion
(except with respect to information reporting, or where the context indicates
otherwise), the terms "Certificateholder" and "holder" mean the beneficial owner
of a Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made with respect to each Trust related to a series of
Certificates to treat such Trust or certain assets of such Trust as a "real
estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election will be made
with respect to the related Trust. In addition, if the related Prospectus
Supplement so provides, the transaction documents for a Trust may provide that
an election will be made to qualify such Trust as a Financial Asset
Securitization Investment Trust ("FASIT") pursuant to recently issued provisions
of the Code. To the extent provided in the Prospectus Supplement for a series,
Certificateholders may also have the benefit of a Reserve Fund and of certain
agreements (each, a "Yield Supplement Agreement") under which payment will be
made from the Reserve Fund in the event that interest accrued on the Loans at
their Mortgage Interest Rates is insufficient to pay interest on the
Certificates of such Series (a "Basis Risk Shortfall"). If a REMIC election is
to be made, the Prospectus Supplement will designate the Certificates of such
series as "regular interests" ("REMIC Regular Certificates") in the REMIC
(within the meaning of Section 860G(a)(1) of the Code) or as the "residual
interest" ("REMIC Residual Certificates") in the REMIC (within the meaning of
Section 860G(a)(2) of the Code). The terms "REMIC Certificates" and "Non-REMIC
Certificates" denote, respectively, Certificates of a series with respect to
which a REMIC election will, or will not, be made.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree in
the Agreement to elect to treat the related Trust or certain assets of such
Trust as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each series of REMIC Certificates,
Federal Tax Counsel will deliver its opinion generally to the effect that, with
respect to each series of REMIC Certificates for which a REMIC election is to be
made, under then existing law and assuming a proper and timely REMIC election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
related Trust or certain assets of such Trust will be a REMIC and the REMIC
Certificates will be considered to evidence ownership of "regular interests" or
"residual interests" within the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, REMIC
Regular Certificateholders who are entitled to payments from the Reserve Fund in
the event of a Basis Risk Shortfall will be required to allocate their purchase
price between their beneficial ownership interests in the related REMIC regular
interests and Yield Supplement Agreements, and will be required to report their
income realized with respect to each, calculated taking into account such
allocation. In general, such allocation would be based on the respective fair
market values of the REMIC regular interests and the related Yield Supplement
Agreements on the date of purchase of the related Certificate. No representation
is or will be made as to
71
<PAGE>
the fair market value of the Yield Supplement Agreements or the relative values
of the REMIC regular interests and the Yield Supplement Agreements, upon initial
issuance of the related REMIC Regular Certificates or at any time thereafter.
REMIC Regular Certificateholders are advised to consult their own tax advisors
concerning the determination of such fair market values. Under the Agreement,
holders of applicable classes of REMIC Regular Certificates will agree that, for
federal income tax purposes, they will be treated as owners of the respective
class of regular interests and of the corresponding Yield Supplement Agreement.
STATUS OF REMIC CERTIFICATES. The REMIC Certificates will be "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets, but not to the extent that the
REMIC's assets consist of Yield Supplement Agreements. However, if at least 95
percent of the REMIC's assets are qualifying assets, then 100 percent of the
REMIC Certificates will be qualifying assets (other than yield supplement
agreements). Similarly, income on the REMIC Certificates will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, subject to the limitations of the
preceding two sentences. In addition to Trust Assets, the REMIC's assets will
include payments on Trust Assets held pending distribution to holders of REMIC
Certificates, amounts in reserve accounts (if any), other credit enhancements
(if any) and possibly buydown funds ("Buydown Funds"). The Trust Assets may be
qualifying assets under the foregoing sections of the Code. However, Trust
Assets that are not secured by residential real property or real property used
primarily for church purposes may not constitute qualifying assets under Section
7701(a)(19)(C)(v) of the Code. In addition, to the extent that the principal
amount of a Trust Asset exceeds the value of the property securing the Trust
Asset, it is unclear and Federal Tax Counsel is unable to opine whether the
loans will be qualifying assets. The regulations under Sections 860A through
860G of the Code (the "REMIC Regulations") treat credit enhancements as part of
the mortgage or pool of mortgages to which they relate, and therefore credit
enhancements generally should be qualifying assets. Regulations issued in
conjunction with the REMIC Regulations provide that amounts paid on Trust Assets
and held pending distribution to holders of Certificates ("cash flow
investments") will be treated as qualifying assets. It is unclear whether
reserve funds or Buydown Funds would also constitute qualifying assets. The
Prospectus Supplement for each series will indicate (if applicable) that it has
Buydown Funds.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Federal Tax Counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement and applicable provisions of the Code and applicable
Treasury regulations and rulings, the Tiered REMICs will each qualify under then
existing law as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of "regular interests" or
"residual interests" in the related REMIC within the meaning of the REMIC
provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Certificates is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
CURRENT INCOME ON REMIC REGULAR CERTIFICATES--GENERAL. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of
72
<PAGE>
the REMIC Regular Certificates and not as ownership interests in the REMIC or
the REMIC's assets. Holders of REMIC Regular Certificates who would otherwise
report income under a cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount--Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate also may have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust will report original issue discount, if any, to the holders of
REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
73
<PAGE>
The OID Regulations provide that, in the case of a debt instrument such as a
REMIC Regular Certificate, (i) the amount and rate of accrual of original issue
discount will be calculated based on a reasonable assumed prepayment rate (the
"Prepayment Assumption"), and (ii) adjustments will be made in the amount and
rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued with
original issue discount if its stated redemption price at maturity exceeds its
issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations" and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any DE MINIMIS original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Remittance Date (or in the case of the first such period, begins on
the Closing Date) and ends on the next succeeding Remittance Date. The original
issue discount accruing during each accrual period is then allocated ratably to
each day during such period to determine the daily portion of original issue
discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on
74
<PAGE>
their issue price and assuming that the REMIC Regular Certificates will be
prepaid in accordance with the Prepayment Assumption. The adjusted issue price
of a REMIC Regular Certificate at the beginning of any accrual period will equal
the issue price of such REMIC Regular Certificate, increased by the portion of
the original issue discount that has accrued during prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods that were included in such REMIC Regular
Certificate's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although Federal Tax Counsel is unable to opine with respect to this
matter, such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued with
original issue discount at a cost less than its remaining stated redemption
price at maturity will also generally be required to include in gross income,
for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
QUALIFIED STATED INTEREST. Interest payable on a REMIC Regular Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includible in the stated redemption price at maturity of
the REMIC Regular Certificate. Accordingly, if the interest on a REMIC Regular
Certificate does not constitute "qualified stated interest," the REMIC Regular
Certificate will have original issue discount. Interest payments will not
qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. Any terms or conditions that do
not reflect arm's length dealing or that the holder does not intend to enforce
are not considered. It is unclear whether the terms and conditions of the Trust
Assets underlying the REMIC Regular Certificates or the terms and conditions of
the REMIC Regular Certificates are considered when determining whether the
likelihood of late payment or nonpayment of interest is a remote contingency.
Accordingly, Federal Tax Counsel is unable to opine whether interest payments on
REMIC Regular Certificates that otherwise would not be treated as having
original issue discount would be considered to have original issue discount
because there are not reasonable remedies to compel timely payment of interest
or terms or conditions that would make the likelihood of late payment or
nonpayment of interest a remote contingency.
PREMIUM. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
75
<PAGE>
PAYMENT LAG REMIC REGULAR CERTIFICATES; INITIAL PERIOD
CONSIDERATIONS. Certain REMIC Regular Certificates will provide for
distributions of interest based on a period that is the same length as the
interval between Remittance Dates but ends prior to each Remittance Date. Any
interest that accrues prior to the Closing Date may be treated under the OID
Regulations either (i) as part of the issue price and the stated redemption
price at maturity of the REMIC Regular Certificates or (ii) as not included in
the issue price or the stated redemption price. The OID Regulations provide a
special application of the DE MINIMIS rule for debt instruments with long first
accrual periods where the interest payable for the first period is at a rate
which is effectively less than that which applies in all other periods. In such
cases, for the sole purpose of determining whether original issue discount is DE
MINIMIS, the OID Regulations provide that the stated redemption price is equal
to the instrument's issue price plus the greater of the amount of foregone
interest or the excess (if any) of the instrument's stated principal amount over
its issue price.
VARIABLE RATE REMIC REGULAR CERTIFICATES. Under the OID Regulations, REMIC
Regular Certificates paying interest at a variable rate (a "Variable Rate REMIC
Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified DE MINIMIS
amount, (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate, and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i) above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction will not significantly affect
the yield of the Variable Rate REMIC Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. Despite the foregoing, a variable
rate of interest on a Variable Rate REMIC Regular Certificate will not
constitute an objective rate if it is reasonably expected that the average value
of such rate during the first half of the Variable Rate REMIC Regular
Certificate's term will be either significantly less than or significantly
greater than the average value of the rate during the final half of the Variable
Rate REMIC Regular Certificate's term. Further, an objective rate does not
include a
76
<PAGE>
rate that is based on information that is within the control of or unique to the
circumstances of the issuer or a party related to the issuer. An objective rate
will qualify as a "qualified inverse floating rate" if such rate is equal to a
fixed rate minus a qualified floating rate and variations in the rate can
reasonably be expected to inversely reflect contemporaneous variations in the
qualified floating rate. The OID Regulations also provide that if a Variable
Rate REMIC Regular Certificate provides for stated interest at a fixed rate for
an initial period of less than one year followed by a variable rate that is
either a qualified floating rate or an objective rate and if the variable rate
on the Variable Rate REMIC Regular Certificate's issue date is intended to
approximate the fixed rate, then the fixed rate and the variable rate together
will constitute either a single qualified floating rate or objective rate, as
the case may be (a "Presumed Single Variable Rate"). If the value of the
variable rate and the initial fixed rate are within 25 basis points of each
other as determined on the Variable Rate REMIC Regular Certificate's issue date,
the variable rate will be conclusively presumed to approximate the fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a "Single Variable Rate REMIC Regular Certificate"), original issue
discount is computed as described in "REMIC Regular Certificates-Current Income
on REMIC Regular Certificates--Original Issue Discount" based on the following:
(i) stated interest on the Single Variable Rate REMIC Regular Certificate which
is unconditionally payable in cash or property (other than debt instruments of
the issuer) at least annually will constitute qualified stated interest; (ii) by
assuming that the variable rate on the Single Variable Rate REMIC Certificate is
a fixed rate equal to: (a) in the case of a Single Variable Rate REMIC Regular
Certificate with a qualified floating rate or a qualified inverse floating rate,
the value of, as of the issue date, of the qualified floating rate or the
qualified inverse floating rate or (b) in the case of a Single Variable Rate
REMIC Regular Certificate with an objective rate (other than a qualified inverse
floating rate), a fixed rate which reflects the reasonably expected yield for
such Single Variable Rate REMIC Regular Certificate; and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii)
above.
In general, any Variable Rate REMIC Regular Certificate other than a Single
Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC Regular
Certificate") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Certificate as of the Multiple Variable Rate REMIC Regular Certificate's
issue date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
77
<PAGE>
inverse floating rate, the Multiple Variable Rate REMIC Regular Certificate is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted into
an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount." A Holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified stated interest as if the Holder held the "equivalent"
fixed rate debt instrument. Each accrual period appropriate adjustments will be
made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a "variable
rate debt instrument" under the OID Regulations, then the Variable Rate REMIC
Regular Certificate would be treated as a contingent payment debt obligation.
Federal Tax Counsel is unable to opine under current law how a Variable Rate
REMIC Regular Certificate would be taxed if such REMIC Regular Certificate were
treated as a contingent payment debt obligation since the OID Regulations
relating to contingent payment debt obligations do not apply to REMIC regular
interests.
INTEREST-ONLY REMIC REGULAR CERTIFICATES. The Trust intends to report
income from interest-only classes of REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
MARKET DISCOUNT. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includible in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued state otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to payments of interest at the Pass-Through Rate or Interest
Rate).
In addition, a holder may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry a REMIC Regular Certificate purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Certificate that accrues during the taxable year
in which such interest would otherwise be deductible and, in general, would be
deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current
78
<PAGE>
Income on REMIC Regular Certificates--Original Issue Discount"), taking into
account distributions (including prepayments) prior to the date of acquisition
of such REMIC Regular Certificate by the subsequent purchaser. If market
discount on a REMIC Regular Certificate is treated as zero under this rule, the
actual amount of such discount must be allocated to the remaining principal
distributions on the REMIC Regular Certificate, and when each such distribution
is made, gain equal to the discount, if any, allocated to the distribution will
be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that all Holders may elect to include in gross income all
interest that accrues on a debt instrument issued after April 4, 1994 by using
the constant yield method. For purposes of this election, interest includes
stated interest, original issue discount, and market discount, as adjusted to
account for any premium. Holders should consult their own tax advisors regarding
the availability or advisability of such an election.
SALES OF REMIC REGULAR CERTIFICATES. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includible in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includible in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from a
sale of a REMIC Regular Certificate by a bank or other financial institution to
which such section applies would be ordinary income or loss.
TERMINATION. The REMIC will terminate shortly following the REMIC's receipt
of the final payment in respect of the Trust Assets. The last distribution on a
REMIC Regular Certificate should be treated as a payment in full retirement of a
debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar
79
<PAGE>
quarter a ratable portion of the taxable income or net loss of the REMIC for
that quarter and allocating such daily amounts among the holders on such day in
proportion to their holdings. All income or loss of the REMIC taken into account
by a REMIC Residual Certificateholder must be treated as ordinary income or loss
as the case may be. Income from residual interests is "portfolio income" which
cannot be offset by "passive activity losses" in the hands of individuals or
other persons subject to the passive loss rules. The Code also provides that all
residual interests must be issued on the REMIC's startup day and designated as
such. For this purpose, "startup day" means the day on which the REMIC issues
all of its regular and residual interests, and under the REMIC Regulations may,
in the case of a REMIC to which property is contributed over a period of up to
ten consecutive days, be any day designated by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC must
be the calendar year. The basis of property contributed to the REMIC in exchange
for regular or residual interests is its fair market value immediately after the
transfer. The REMIC Regulations determine the fair market value of the
contributed property by deeming it equal to the aggregate issue prices of all
regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Trust Assets held by the REMIC must be included in
the income of the REMIC as it accrues, rather than being included in income only
upon sale of the Trust Assets or as principal on the Trust Assets is paid. The
REMIC is not entitled to any personal exemptions or to deductions for taxes paid
to foreign countries and U.S. possessions, charitable contributions or net
operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the REMIC taxable income related to a REMIC
Residual Certificate is also uncertain. Although Federal Tax Counsel is unable
to opine as to this matter, the related REMIC taxable income may be recognized
when the adjusted issue price of such REMIC Regular Certificate would exceed the
maximum amount of future payments with respect to such REMIC Regular
Certificate. It is unclear whether the Prepayment Assumption is taken into
account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC Residual
Certificate in its holder's hands will be its cost (i.e., the purchase price of
the REMIC Residual Certificate), and will be reduced (but not below zero) by the
holder's share of cash distributions and losses and increased by its share of
taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess losses may be carried forward indefinitely to
future quarters subject to the same limitation.
80
<PAGE>
There is no REMIC counterpart to the partnership election under Code Section
754 to increase or decrease the partnership's basis in its assets by reference
to the adjusted basis to subsequent partners of their partnership interest. The
REMIC Regulations do not provide for a similar election or other adjustment.
Consequently, a subsequent purchaser of a REMIC Residual Certificate at a
premium will not be able to use the premium to reduce his share of the REMIC's
taxable income.
MISMATCHING OF INCOME AND DEDUCTIONS; EXCESS INCLUSIONS. The taxable income
recognized by the holder of a REMIC Residual Certificate in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest and discount income (or deductions for amortization of
premium) with respect to Trust Assets, on the one hand, and the timing of
deductions for interest (including original issue discount) on the REMIC Regular
Certificates, on the other. In the case of multiple classes of REMIC Regular
Certificates issued at different yields, and having different weighted average
lives, taxable income recognized by the holders of REMIC Residual Certificates
may be greater than cash flow in earlier years of the REMIC (with a
corresponding taxable loss or less taxable income than cash flow in later
years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Trust Assets may not increase over time as a percentage of the
outstanding principal amount of the Trust Assets.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Trust Assets (the "Lower Tier
REMIC") will be treated as a single debt instrument for purposes of the original
issue discount provisions. Therefore, the Trust will calculate the taxable
income of Tiered REMICs by treating the Lower Tier REMIC regular interests as a
single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will be
subject to certain special rules. The excess inclusions with respect to a REMIC
Residual Certificate are equal to the excess, if any, of its share of REMIC
taxable income for the quarterly period over the sum of the daily accruals for
such quarterly period. The daily accrual for any day on which the REMIC Residual
Certificate is held is determined by allocating to each day in a quarter its
allocable share of the product of (A) 120% of the long-term applicable Federal
rate (for quarterly compounding) that would have applied to the REMIC Residual
Certificates (if they were debt instruments) on the closing date under Code
Section 1274(d)(1) and (B) the adjusted issue price of such REMIC Residual
Certificates at the beginning of a quarterly period. For this purpose, the
adjusted issue price of such REMIC Residual Certificate at the beginning of a
quarterly period is the issue price of such Certificates plus the amount of the
daily accruals of REMIC taxable income for all prior quarters, decreased by any
distributions made with respect to such Certificates prior to the beginning of
such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to have them apply only with respect to tax years beginning after
August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the
81
<PAGE>
extent excess inclusions of the REIT exceed its real estate investment trust
taxable income (excluding net capital gains), the excess inclusions would be
allocated among the shareholders of the REIT in proportion to the dividends
received by the shareholders from the REIT. Excess inclusions derived by
regulated investment companies ("RICs"), common trust funds, and subchapter T
cooperatives must be allocated to the shareholders of such entities using rules
similar to those applicable to REITs. The Internal Revenue Service has not yet
adopted or proposed such regulations as to REITs, RICs, or similar entities. A
life insurance company cannot adjust its reserve with respect to variable
contracts to the extent of any excess inclusion, except as provided in
regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a mortgage asset other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a Loan or certain other permitted investments,
or gain from the disposition of an asset representing a temporary investment of
payments on the Trust Assets pending distribution on the REMIC Certificates. In
addition, a tax is imposed on the REMIC equal to 100 percent of the value of
certain property contributed to the REMIC after its "startup day." No REMIC in
which interests are offered hereunder will accept contributions that would cause
it to be subject to such tax. This provision will not affect the REMIC's ability
to accept substitute Loans or to sell defective Loans in accordance with the
Agreement.
A REMIC is subject to a tax (deductible from its income) on any "net income
from foreclosure property" (determined in accordance with Section 857(b)(4)(B)
of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on the
Trust initially would be borne by the REMIC Residual Certificates in the related
REMIC rather than by the REMIC Regular Certificates, unless otherwise specified
in the Prospectus Supplement.
DEALERS' ABILITY TO MARK-TO-MARKET REMIC RESIDUAL CERTIFICATES. Treasury
regulations provide that all REMIC Residual Certificates acquired on or after
January 4, 1995, and similar interests or arrangements acquired on or after
January 4, 1995 that are determined by the Commissioner to have substantially
the same economic effect as a REMIC Residual Certificate, are not securities and
cannot be marked to market pursuant to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
TAX ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although Federal Tax Counsel is unable to opine with respect to the tax
treatment of a REMIC Residual Certificate that has unrecovered basis after all
funds of the Trust have been distributed, the holder may be entitled to claim a
loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual
82
<PAGE>
Certificates, residual interests in another REMIC, or any similar interests in a
"taxable mortgage pool" (as defined in Section 7701(i) of the Code) during the
period beginning six months before, and ending six months after, the date of
such sale, such sale will be subject to the "wash sale" rules of Section 1091 of
the Code. In that event, any loss realized by the seller on the sale generally
will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where the
transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions with respect to the interest transferred for periods after
such transfer multiplied by the highest corporate rate of tax. The transferor
(or agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
TREATMENT OF PAYMENTS TO A TRANSFEREE IN CONSIDERATION OF TRANSFER OF A
REMIC RESIDUAL CERTIFICATE. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear and Federal Tax Counsel is unable to opine with
respect to this issue. The preamble to the REMIC Regulations indicates that the
Internal Revenue Service is considering the tax treatment of these types of
residual interests. A transferee of such an interest should consult its own tax
advisors.
RESTRICTIONS ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES. An entity
cannot qualify as a REMIC absent reasonable arrangements designed to ensure that
(1) residual interests in such entity are not held by disqualified organizations
and (2) information necessary to calculate the tax due on transfers to
disqualified organizations (i.e., a computation of the present value of the
excess inclusions) is made available by the REMIC. The governing instruments of
a Trust will contain provisions designed to ensure the foregoing, and any
transferee of a REMIC Residual Certificate must execute and deliver an affidavit
stating that neither the transferee nor any person for whose account such
transferee is acquiring the REMIC Residual Certificate is a disqualified
organization. In addition, as to the requirement that reasonable arrangements be
made to ensure that disqualified organizations do not hold a residual interest
in the REMIC, the REMIC Regulations require that notice of the prohibition be
provided either through a legend on the certificate that evidences ownership, or
through a conspicuous statement in the prospectus or other offering document
used to offer the residual interest for sale. As to the requirement that
sufficient information be made available to calculate the tax on transfers to
disqualified organizations (or the tax, discussed below on pass-thru entities,
interests in which are held by disqualified organizations), the REMIC
Regulations further require that such information also be provided to the
Internal Revenue Service.
A tax is imposed on "pass-thru entities" holding residual interests where a
disqualified organization is a record holder of an interest in the pass-thru
entity. "Pass-thru entity" is defined for this purpose to include RICs, REITs,
common trust funds, partnerships, trusts, estates, and subchapter T
cooperatives. Except as provided in regulations, nominees holding interests in a
"pass-thru entity" for another person will also be treated as "pass-thru
entities" for this purpose. The tax is equal to the amount of excess inclusions
allocable to the disqualified organization for the taxable year multiplied by
the highest corporate
83
<PAGE>
rate of tax, and is deductible by the "pass-through entity" against the gross
amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or record
interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
For taxable years beginning after December 31, 1997, all partners of certain
electing partnerships having 100 or more partners ("electing large
partnerships") will be treated as disqualified organizations for purposes of the
tax imposed on pass-through entities if such electing large partnerships hold
residual interests in a REMIC. However, the electing large partnership would be
entitled to exclude the excess inclusion income from gross income for purposes
of determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate and (2)
the transferor reasonably expects that for each anticipated excess inclusion,
the transferee will receive distributions from the REMIC, at or after the time
at which taxes on such excess inclusion accrue, sufficient to pay the taxes
thereon. A significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor will be presumed not to have improper knowledge if (i) the transferor
conducts, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
came due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee represents to the transferor that (A) the transferee understands that
it might incur tax liabilities in excess of any cash received with respect to
the residual interest and (B) the transferee intends to pay the taxes associated
with owning the residual interest as they come due. A different formulation of
this rule applies to transfers of REMIC Residual Certificates by or to foreign
transferees. See "Foreign Investors" below.
DEDUCTIBILITY OF TRUST EXPENSES
A holder that is an individual, estate or trust will be subject to the
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed two
percent of the holder's adjusted gross income, and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the servicer of the Loans.
These deductions will be allocated entirely to the holders of the REMIC Residual
Certificates in the case of REMIC Trusts with multiple classes of REMIC Regular
Certificates that do not pay their principal amounts ratably. As a result, the
REMIC will report additional taxable income to holders of REMIC Residual
Certificates in an amount equal to their allocable share of such deductions, and
individuals, estates, or trusts holding an interest in such REMIC Residual
Certificates may have taxable income in excess of the cash received. In the case
of a "single-class REMIC," the expenses will be allocated, under Treasury
regulations, among the holders of the REMIC Regular Certificates and the REMIC
Residual Certificates on a daily basis in proportion to the relative amounts of
84
<PAGE>
income accruing to each Certificateholder on that day. In the case of a holder
of a REMIC Regular Certificate who is an individual or a "pass-through interest
holder" (including certain pass-through entities, but not including real estate
investment trusts), the deductibility of such expenses will be subject to the
limitations described above. The reduction or disallowance of these deductions
may have a significant impact on the yield of REMIC Regular Certificates to such
a holder. In general terms, a single-class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the
single-class REMIC rules. For taxable years beginning after December 31, 1997,
in the case of a partnership that has 100 or more partners and elects to be
treated as an "electing large partnership," 70 percent of such partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to individual
partners.
FOREIGN INVESTORS
REMIC REGULAR CERTIFICATES. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includible in gross income for United States federal income
taxation regardless of its source, and (iv) a trust other than a "foreign trust"
as defined in Section 7701(a)(31) of the Code. Recently issued Treasury
regulations (the "Final Withholding Regulations"), which are generally effective
with respect to payments made after December 31, 1999, consolidate and modify
the current certification requirements and means by which a holder may claim
exemption from United States federal income tax withholding and provide certain
presumptions regarding the status of holders when payments to the holders cannot
be reliably associated with appropriate documentation provided to the payor. All
holders should consult their tax advisers regarding the application of the Final
Withholding Regulations.
REMIC RESIDUAL CERTIFICATES. The Conference Report to the Tax Reform Act of
1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Loans held by a Trust
will not qualify as portfolio interest, although interest on the Private
Mortgage-Backed Securities, other pass-through certificates, or REMIC regular
interests held by a Trust may qualify. In any case, a holder of a REMIC
85
<PAGE>
Residual Certificate will not be entitled to the portfolio interest exception
from the 30% withholding tax (or to any treaty exemption or rate reduction) for
that portion of a payment that constitutes excess inclusions. Generally, the
withholding tax will be imposed when REMIC gross income is paid or distributed
to the holder of a residual interest or there is a disposition of the residual
interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Trust Assets from 50 percent of the Prepayment Assumption to 200 percent
of the Prepayment Assumption. A transfer by a foreign transferor to a domestic
transferee will likewise be disregarded under the REMIC Regulations if the
transfer would have the effect of allowing the foreign transferor to avoid the
tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust (Form 1066 and Schedules Q
thereto) must be filed as if the Trust were a partnership for federal income tax
purposes. Information on Schedule Q must be provided to holders of REMIC
Residual Certificates with respect to every calendar quarter. Each holder of a
REMIC Residual Certificate will be required to treat items on its federal income
tax returns consistently with their treatment on the Trust's information returns
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from an incorrect schedule received
from the Trust. The Trust also will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination of any adjustments to, among other things, items of REMIC taxable
income by the Internal Revenue Service. (Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.) Holders of REMIC Residual Certificates will have certain
rights and obligations with respect to any administrative or judicial
proceedings involving the Internal Revenue Service. Under the Code and
Regulations, a REMIC generally is required to designate a tax matters person.
Generally, subject to various limitations, the tax matters person has authority
to act on behalf of the REMIC and the holders of the REMIC Residual Certificates
in connection with administrative determinations and judicial review respecting
returns of taxable income of the REMIC.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the Representative or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the
Representative or its designee will act as the holder's fiduciary in the
performance of any duties required of the holder in the event that the holder is
the tax matters person.
86
<PAGE>
NON-REMIC CERTIFICATES ISSUED BY A GRANTOR TRUST
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made and for which the Trust is
classified as a grantor trust for federal income tax purposes.
TAX STATUS OF THE TRUST. Upon the issuance of each series of Non-REMIC
Certificates, Federal Tax Counsel will deliver its opinion to the effect that,
under then current law, assuming compliance with the Agreement, the related
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation or a taxable mortgage pool.
Accordingly, each holder of a Non-REMIC Certificate will be treated for federal
income tax purposes as the owner of an undivided interest in the Trust Assets
included in the Trust. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Trust Assets that is allocable to such Non-REMIC
Certificate and may deduct the portion of the expenses incurred by the Trust
that is allocable to such Non-REMIC Certificate, at the same time and to the
same extent as such items would be reported by such holder if it had purchased
and held directly such interest in the Trust Assets and received directly its
share of the payments on the Trust Assets and incurred directly its share of
expenses incurred by the Trust when those amounts are received or incurred by
the Trust.
A holder of a Non-REMIC Certificate that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the holder's other miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, the amount of
certain itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. A holder of a Non-REMIC Certificate that is not
a corporation cannot deduct such expenses for purposes of the alternative
minimum tax (if applicable). Such deductions will include servicing, guarantee
and administrative fees paid to the servicer of the Loans. As a result, the
Trust will report additional taxable income to holders of Non-REMIC Certificates
in an amount equal to their allocable share of such deductions, and individuals,
estates, or trusts holding Non-REMIC Certificates may have taxable income in
excess of the cash received.
STATUS OF THE NON-REMIC CERTIFICATES. The Non-REMIC Certificates will be
"real estate assets" for purposes of Section 856(c)(4)(A) of the Code and "loans
. . . secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the Trust's assets are qualifying assets. The Non-REMIC Certificates may
not be qualifying assets under either of the foregoing sections of the Code to
the extent that the Trust's assets include Buydown Funds, reserve funds, or
payments on mortgages held pending distribution to Certificateholders. Further,
the Non-REMIC Certificates may not be "real estate assets" to the extent loans
held by the trust are not secured by real property, and may not be "loans . . .
secured by an interest in real property" to the extent loans held by the trust
are not secured by residential real property or real property used primarily for
church purposes. In addition, to the extent that the principal amount of a loan
exceeds the value of the property securing the loan, it is unclear and Federal
Tax Counsel is unable to opine whether the loan will be a qualifying asset.
TAXATION OF NON-REMIC CERTIFICATES UNDER STRIPPED BOND RULES. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Master Servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the Master
Servicer or
87
<PAGE>
its affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm's length consideration for servicing the Loans and should be
characterized for federal income tax purposes as an ownership interest in the
Loans. The Internal Revenue Service has taken the position in Revenue Ruling
91-46 that retained interest in excess of reasonable compensation for servicing
is treated as a "stripped coupon" under the rules of Code Section 1286.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the Non-REMIC Certificates will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-REMIC Certificate will account for any discount on the
Non-REMIC Certificate as market discount rather than original issue discount if
either (i) the amount of original issue discount with respect to the Non-REMIC
Certificate was treated as zero under the original issue discount DE MINIMIS
rule when the Non-REMIC Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped off from the Loans. If neither of the above exceptions applies, the
original issue discount rules will apply to the Non-REMIC Certificates.
Section 1272(a)(6) of the Code provides for use of a prepayment assumption
in determining original issue discount for any pool of debt instruments the
yield on which may be affected by reason of prepayments. Therefore, if there is
original issue discount, the holder of a Non-REMIC Certificate (whether a cash
or accrual method taxpayer) will be required to report interest income from the
Non-REMIC Certificate in each taxable year equal to the income that accrues on
the Non-REMIC Certificate in that year calculated under a constant yield method
based on the yield of the Non-REMIC Certificate (or, possibly, the yield of each
Mortgage Asset underlying such Non-REMIC Certificate) to such holder. Such yield
would be computed at the rate that, if used in discounting the holder's share of
the payments on the Mortgage Assets, would cause the present value of those
payments to equal the price at which the holder purchased the Non-REMIC
Certificate. If required to report interest income on the Non-REMIC Certificates
to the Internal Revenue Service under the stripped bond rules, it is anticipated
that the Trustee will calculate the yield of the Non-REMIC Certificates based on
a representative initial offering price of the Non-REMIC Certificates and a
reasonable assumed rate of prepayment of the Trust Assets (although such yield
may differ from the yield to any particular holder that would be used in
calculating the interest income of such holder). The Prospectus Supplement for
each series of Non-REMIC Certificates will describe the prepayment assumption
that will be used for this purpose, but no representation is made that the Trust
Assets will prepay at that rate or at any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Trust Assets allocable to the Non-REMIC Certificate, the
use of a reasonable prepayment assumption would not have any significant effect
on the yield used in calculating accruals of interest income. In the case,
however, of a Non-REMIC Certificate acquired at a discount or premium (that is,
at a price less than or greater than such principal amount, respectively), the
use of a reasonable prepayment assumption would increase or decrease such yield,
and thus accelerate or decelerate the reporting of interest income,
respectively.
If a Loan is prepaid in full, the holder of a Non-REMIC Certificate acquired
at a discount or premium generally will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
Loan that is allocable to the Non-REMIC Certificate and the portion of the
adjusted basis of the Non-REMIC Certificate (see "Sales of Non-REMIC
Certificates" below) that is allocable to the Loan. The method of allocating
such basis among the Loans may differ depending on whether a reasonable
prepayment assumption is used in calculating the yield of the Non-REMIC
Certificates for purposes of accruing original issue discount. It is not clear
whether any other adjustments would be required to reflect differences between
the prepayment rate that was assumed in calculating yield and the actual rate of
prepayments.
In the case of a Non-REMIC Certificate which represents interests in Loans
that are subject to the original issue discount rules, the daily portions of
original issue discount generally will be calculated under
88
<PAGE>
the principles discussed in "REMIC Regular Certificates--Current Income on REMIC
Regular Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
TAXATION OF NON-REMIC CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY. If
the stripped bond rules do not apply to a Non-REMIC Certificate, then the holder
will be required to include in income its share of the interest payments on the
Trust Assets in accordance with its tax accounting method. In addition, if the
holder purchased the Non-REMIC Certificate at a discount or premium, the holder
will be required to account for such discount or premium in the manner described
below. The treatment of any discount will depend on whether the discount is
original issue discount as defined in the Code and, in the case of discount
other than original issue discount, whether such other discount exceeds a DE
MINIMIS amount. In the case of original issue discount, the holder (whether a
cash or accrual method taxpayer) will be required to report as additional
interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Trust Assets. However, original issue discount could arise with respect to a
Loan ("ARM") that provides for interest at a rate equal to the sum of an index
of market interest rates and a fixed number. The original issue discount for
ARMs generally will be determined under the principles discussed in "REMIC
Regular Certificates--Current Income on REMIC Regular Certificates--Original
Issue Discount--Variable Rate REMIC Regular Certificates."
If discount other than original issue discount exceeds a DE MINIMIS amount
(described below), the holder will also generally be required to include in
income in each month the amount of such discount accrued through such month and
not previously included in income, but limited, with respect to the portion of
such discount allocable to any Trust Asset, to the amount of principal on such
Trust Asset received by the Trust in that month. Because the Trust Assets may
provide for monthly principal payments, such discount may be required to be
included in income at a rate that is not significantly slower than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-REMIC Certificate to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the DE MINIMIS rule,
market discount with respect to a Non-REMIC Certificate will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Trust Assets allocable to the Non-REMIC Certificate and (ii) the weighted
average life (in complete years) of the Trust Assets remaining at the time of
purchase of the Non-REMIC Certificate.
If a holder purchases a Non-REMIC Certificate at a premium, such holder may
elect under Section 171 of the Code to amortize the portion of such premium that
is allocable to a Loan under a constant yield method based on the yield of the
Loan to such holder, provided that such Loan was originated after September 27,
1985. Premium allocable to a Loan originated on or before that date should be
allocated among the principal payments on the Loan and allowed as an ordinary
deduction as principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Loans or taking account of
a reasonable prepayment assumption, and Federal Tax Counsel is unable to opine
on this issue.
If a Loan is prepaid in full, the holder of a Non-REMIC Certificate acquired
at a discount or premium will recognize ordinary income or loss equal to the
difference between the portion of the prepaid principal amount of the Loan that
is allocable to the Non-REMIC Certificate and the portion of the adjusted basis
of the Non-REMIC Certificate (see "Sales of Non-REMIC Certificates" below) that
is allocable to the Loan. The method of allocating such basis among the Loans
may differ depending on whether a reasonable prepayment assumption is used in
calculating the yield of the Non-REMIC Certificates for purposes of accruing
original issue discount. Other adjustments might be required to reflect
differences
89
<PAGE>
between the prepayment rate that was assumed in accounting for discount or
premium and the actual rate of prepayments.
SALES OF NON-REMIC CERTIFICATES. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a DE
MINIMIS amount of discount other than original issue discount (see "Taxation of
Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
FOREIGN INVESTORS. A holder of a Non-REMIC Certificate who is not a "United
States person" (as defined below) and is not subject to federal income tax as a
result of any direct or indirect connection to the United States other than its
ownership of a Non-REMIC Certificate generally will not be subject to United
States income or withholding tax in respect of payments of interest or original
issue discount on a Non-REMIC Certificate to the extent attributable to Loans
that were originated after July 18, 1984, provided that the holder complies to
the extent necessary with certain identification requirements (including
delivery of a statement, signed by the holder of the Non-REMIC Certificate under
penalties of perjury, certifying that such holder is not a United States person
and providing the name and address of such holder). Treasury Regulations (the
"Final Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisors regarding the application of the Final
Withholding Regulations. Interest or original issue discount on a Non-REMIC
Certificate attributable to Loans that were originated prior to July 19, 1984
will be subject to a 30% withholding tax (unless such tax is reduced or
eliminated by an applicable tax treaty). For these purposes, the term "United
States person" means a citizen or a resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof, an estate the
income of which is subject to United States federal income taxation regardless
of its source, or a trust other than a "foreign trust," as defined in Section
7701(a)(31) of the Code.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable mortgage
pools" are subject to corporate level tax on their net income. A "taxable
mortgage pool" is generally defined as an entity that meets the following
requirements: (i) the entity is not a REMIC (or, after September 1, 1997, a
FASIT), (ii) substantially all of the assets of the entity are debt obligations,
and more than 50 percent of such debt obligations consist of real estate
mortgages (or interests therein), (iii) the entity is the obligor under debt
obligations with two or more maturities, and (iv) payments on the debt
obligations on which the entity is the obligor bear a relationship to the
payments on the debt obligations which the entity holds as assets. With respect
to requirement (iii), the Code authorizes the Internal Revenue Service to
provide by regulations that equity interests may be treated as debt for purposes
of determining whether there are two or more maturities. If a Series of
Non-REMIC Certificates were treated as obligations of a taxable mortgage pool,
the Trust would be ineligible to file consolidated returns with any other
corporation and could be liable for corporate tax. Treasury regulations do not
provide for the recharacterization of equity as
90
<PAGE>
debt for purposes of determining whether an entity has issued debt with two
maturities, except in the case of transactions structured to avoid the taxable
mortgage pool rules.
NON-REMIC CERTIFICATES AND NOTES OF A TRUST INTENDED TO BE CHARACTERIZED AS A
PARTNERSHIP OR DIVISION
The discussion under this heading applies only to a series of Certificates
and Notes with respect to which a REMIC election is not made and for which the
Trust is intended to be classified as a partnership or a division for federal
income tax purpose.
Federal Tax Counsel will deliver its opinion for a Trust which is intended
to be a partnership for federal income tax purposes, as specified in the related
Prospectus Supplement, generally to the effect that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Agreements and related documents will be complied with, such
that an election has not been and will not be made to treat the Trust as an
association taxable as a corporation, and on counsel's conclusion that the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or such rule is
otherwise inapplicable to the Trust, so that the Trust will not be characterized
as a publicly traded partnership taxable as a corporation, assuming that no
action will be taken that is inconsistent with the treatment of the Trust as a
partnership (such as an election to treat the Trust as a corporation for federal
income tax purposes ("Corporation Election")). If, however, the Trust has a
single owner for federal income tax purposes, it will be treated as a division
of its owner and as such will be disregarded as an entity separate from its
owner for federal income tax purposes, assuming that no Corporate Election is
made.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements: (i) the entity is
not a REMIC (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets. With respect to requirement (iii), the Code authorizes the
Internal Revenue Service to provide by regulations that equity interests may be
treated as debt for purposes of determining whether there are two or more
maturities. If the Trust were treated as a taxable mortgage pool, it would be
ineligible to file consolidated returns with any other corporation and could be
liable for corporate tax. Treasury regulations do not provide for the
recharacterization of equity as debt for purposes of determining whether an
entity has issued debt with two maturities, except in the case of transactions
structured to avoid the taxable mortgage pool rules. Federal Tax Counsel will
deliver its opinion for a Trust which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Trust will not be a taxable mortgage pool. This
opinion will be based on the assumption that the terms of the Agreements and
related documents will be complied with, and on counsel's conclusion that either
the number of classes of debt obligations issued be the Trust, or the nature of
the assets held by the Trust, will exempt the Trust from treatment as a taxable
mortgage pool.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income, possibly reduced by its
interest expense on the Notes. Any such corporate income tax could materially
reduce cash available to make payments on the Notes and distributions on the
Certificates, and Certificateholders could be liable for any such tax that is
unpaid by the Trust. In additions, all distributions to the Certificateholders
would be taxable as dividends.
91
<PAGE>
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Representative that
in its opinion the Notes will be classified as debt for federal income tax
purposes.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of counsel, the Internal Revenue Service successfully asserted that one or more
of the Notes did not represent debt for federal income tax purposes, the Notes
might be treated as equity interests in the Trust. If so treated, the Trust
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, the Trust might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to foreign holders generally would be subject to
United States federal income tax and United States federal income tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of the Trust's
expenses.
INTEREST INCOME ON THE NOTES. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with original issue discount within
the meaning of Section 1273 of the Code. A subsequent holder who purchases a
Note at a discount that exceeds a statutorily defined DE MINIMIS amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any original issue discount (if any), market
discount and gain previously included by such Noteholder in income with respect
to the Note and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by such
Noteholder with respect to such Note. Subject to the rules of the Code
concerning market discount on the Notes, any such gain or loss generally will be
capital gain or loss if the Note was held as a capital asset. Capital losses
generally may be deducted only to the extent the Noteholder has capital gains
for the taxable year, although under certain circumstances non-corporate
Noteholders can deduct losses in excess of available capital gains.
FOREIGN HOLDERS. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or the
Representative (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Representative is a "related person" within the meaning of the Code and (ii)
provides the person otherwise required to withhold United States tax with an
appropriate statement, signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If the information provided in the statement changes,
the foreign person must so inform the person otherwise required to withhold
United States tax within 30 days of such change. The statement generally must be
provided in the year a payment occurs (prior to such payment) or in either of
the two preceding years. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a
92
<PAGE>
signed statement to the withholding agent. However, in that case, the signed
statement must be accompanies by a Form W-8 or substitute form provided by the
foreign person that owns the Note. If such interest in not portfolio interest,
then it will be subject to United States federal income and withholding tax at a
rate of 30%, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-United States holder may
claim exemption from United States federal income tax withholding. All
Non-United States holders should consult their tax advisers regarding the
application of the Final Withholding Regulations, which are generally effective
with respect to payments made after December 31, 1999.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Trust will be required to
report annually to the Internal Revenue Service, and to each Noteholder of
record, the amount of interest paid on the Notes (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, individual
retirement accounts, or nonresident aliens who provide certification as to their
status as nonresidents). Accordingly, each holder (other than exempt holders who
are not subject to the reporting requirements) will be required to provide,
under penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the Internal Revenue Service, as a credit against the holder's federal income
tax liability.
TAX CONSEQUENCES TO HOLDERS OF CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE ISSUER AS A PARTNERSHIP. In the case of a Trust intended
to qualify as a partnership for federal income tax purposes, the Trust and the
Representative will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
United States federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust, the
Certificates, the Notes, and the Master Servicer is not clear because there is
no authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Generally, provided the
Certificates are issued at or close to face value, any such characterization
should not result in
93
<PAGE>
materially adverse tax consequences to Certificateholders as compared to the
consequences from treatment of the Certificates as equity in a partnership,
described below. The following discussion assumes that the Certificates
represent equity interests in a partnership.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, original issue discount and bond
premium) and any gain upon collection or disposition of Loans. The Trust's
deductions will consist primarily of interest and original issue discount
accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Loans that corresponds to any excess of
the principal amount of the Certificates over their initial issue price; (iii)
prepayment premium payable to the Certificateholders for such month; and (iv)
any other amounts of income payable to the Certificateholders for such month.
Such allocation will be reduced by any amortization by the Trust of premium on
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Trust will be
allocated to the Representative. Based on the economic arrangement of the
parties, this approach for allocating Trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the
Internal Revenue Service would not require a greater amount of income to be
allocated to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders, but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the Internal Revenue
Service were to require that such calculations be made separately for each Loan,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loans were not issued with
original issue discount and, therefore, the Trust should not have original issue
discount income. However, the purchase price paid by the Trust for the Loans may
be greater or less than the remaining principal balance of the Loans at the
94
<PAGE>
time of purchase. If so, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust will make this
calculation on an aggregate basis, but might be required to recompute it on a
Loan by Loan basis.)
If the Trust acquires the Loans at a market discount or premium, the Trust
will elect to include any such discount in income currently as it accrues over
the life of the Loans or to offset any such premium against interest income on
the Loans. As indicated above, a portion of such market discount income or
premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the partnership will be
considered to transfer its assets and liabilities to a new partnership in
exchange for interests in that new partnership, which it would then be treated
as transferring to its partners. The Trust will not comply with certain
technical requirements that might apply when such a constructive termination
occurs. As a result, the Trust may be subject to certain tax penalties and may
incur additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The Trust does not expect to have any other assets that would give
rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN REPRESENTATIVE AND TRANSFEREES. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Trust might be
reallocated among the Certificateholders. The Trust's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
95
<PAGE>
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust currently does not intend to make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (Internal Revenue Service Form 1065) with the Internal
Revenue Service for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the Internal Revenue Service on Schedule K-1. The Trust will provide
the Schedule K-1 information to nominees that fail to provide the Trust with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
holder notifies the Internal Revenue Service of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Representative will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the Internal Revenue Service. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear and federal
tax counsel is unable to opine whether the Trust would be considered to be
engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-United States persons because there is no
clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Trust would be
engaged in a trade or business in the United States for such purposes, the Trust
will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income
96
<PAGE>
that is allocable to foreign Certificateholders pursuant to Section 1446 of the
Code, as if such income were effectively connected to a United States trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures.
If the trust is engaged in a United States trade or business, each foreign
holder might be required to file a United States individual or corporate income
tax return (including, in the case of a corporation, the branch profits tax) on
its share of the Trust's income. A foreign holder generally would be entitled to
file with the Internal Revenue Service a claim for refund with respect to taxes
withheld by the Trust taking the position that no taxes were due because the
Trust was not engaged in a United States trade or business. However, interest
payments made (or accrued) to a Certificateholder who is a foreign person
generally will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the Trust, and for that reason or
because of the nature of the assets of the Trust probably will not be considered
"portfolio interest." As a result, even if the Trust was not considered to be
engaged in a United States trade or business, Certificateholders will be subject
to United States federal income tax which must be withheld at a rate of 30%,
unless reduced or eliminated pursuant to an applicable treaty. A foreign holder
would be entitled to claim a refund for such withheld tax, taking the position
that the interest was portfolio interest and therefore not subject to United
States tax. However, the Internal Revenue Service may disagree and no assurance
can be given as to the appropriate amount of tax liability. As a result, each
potential foreign Certificateholder should consult its tax advisor as to whether
an interest in a Certificate is an unsuitable investment.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and collective
investment funds, separate accounts and insurance company general accounts in
which such plans or arrangements are invested to which it applies and on those
persons who are fiduciaries with respect to such benefit plans. Certain employee
benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA)
and certain church plans (as defined in Section 3(33) of ERISA), are not subject
to ERISA. In accordance with ERISA's general fiduciary standards, before
investing in a Security a benefit plan fiduciary should determine whether such
an investment is permitted under the governing benefit plan instruments and is
appropriate for the benefit plan in view of its overall investment policy and
the composition and diversification of its portfolio and is prudent.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code (each a "Plan") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" under Sections 406 and 407
of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Representative, the Originators, the Security Guaranty Insurer, the
Underwriter and the Trustee and certain of their affiliates might be considered
"parties in interest" or "disqualified persons" with respect to a Plan. If so,
the acquisition or holding or transfer of Securities by or on behalf of such
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. In addition, the
U.S. Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulations"), which provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a
97
<PAGE>
Plan makes an "equity" investment will be deemed for purposes of ERISA to be
assets of the investing Plan unless certain exceptions apply. If an investing
Plan's assets were deemed to include an interest in the Loans and any other
assets of the Trust and not merely an interest in the Securities, the assets of
the Trust would become subject to the fiduciary investment standards of ERISA,
and transactions occurring between the Representative, the Trustee, the Master
Servicer, the Security Guaranty Insurer or any of their affiliates might
constitute prohibited transactions, unless an administrative exemption applies.
Certain such exemptions which may be applicable to the acquisition and holding
of the Securities or to the servicing of the Loans are noted below.
Regardless of whether the Securities are treated as debt or equity for
purposes of ERISA, the acquisition or holding of Securities which are Notes by
or behalf of a Plan could still be considered to give rise to a prohibited
transaction if the Trust is or becomes a party in interest or disqualified
person with respect to such Plan or in the event that a subsequent transfer of a
Note is made between a Plan and such party in interest or disqualified person.
However, one or more Investor Based Exemptions referred to below may be
applicable to exempt such prohibited transaction.
The DOL has issued an administrative exemption, Prohibited Transaction Class
Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts from the
application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of "mortgage pool pass-through certificates." A "mortgage pool" is
defined as an investment pool, consisting solely of interest bearing obligations
secured by first or second mortgages or deeds of trust on single-family
residential property, property acquired in foreclosure and undistributed cash. A
"mortgage pool pass-through certificate" is defined as a certificate which
represents a beneficial undivided interest in a mortgage pool which entitles the
holder to pass-through payments of principal and interest from the mortgage
loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Representative
and the Trustee maintain a system of insurance or other protection for the Loans
and the property securing such Loans, and for indemnifying holders of Securities
against reductions in pass-through payments due to defaults in loan payments or
property damage in an amount at least equal to the greater of 1% of the
aggregate principal balance of the Loans, or 1% of the principal balance of the
largest covered pooled Loan; (ii) the Trustee may not be an affiliate of the
Representative; and (iii) the payments made to and retained by the
Representative in connection with the Trust, together with all funds inuring to
its benefit for administering the Trust, represent no more than "adequate
consideration" for selling the Loans, plus reasonable compensation for services
provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Securities to a Plan with
respect to which the Representative, the Security Guaranty Insurer, the Master
Servicer, or the Trustee is a party in interest if the Plan does not pay more
than fair market value for such Securities and the rights and interests
evidenced by such Securities are not subordinated to the rights and interests
evidenced by other Securities of the same pool. PTCE 83-1 also exempts from the
prohibited transaction rules and transactions in connection with the servicing
and operation of the Pool, provided that any payments made to the Master
Servicer in connection with the servicing of the Trust are made in accordance
with a binding agreement, copies of which must be made available to prospective
investors.
In the case of any Plan with respect to which the Representative, the Master
Servicer, the Security Guaranty Insurer, or the Trustee is a fiduciary, PTCE
83-1 will only apply if, in addition to the other requirements: (i) the initial
sale, exchange or transfer of Securities is expressly approved by an independent
fiduciary who has authority to manage and control those plan assets being
invested in Securities; (ii) the Plan pays no more for the Securities than would
be paid in an arm's length transaction; (iii) no investment management, advisory
or underwriting fee, sale commission, or similar compensation is paid to the
Representative with regard to the sale, exchange or transfer of Securities to
the Plan; (iv) the total
98
<PAGE>
value of the Securities purchased by such Plan does not exceed 25% of the amount
issued; and (v) at least 50% of the aggregate amount of Securities is acquired
by persons independent of the Representative, the Trustee, the Master Servicer,
and the Security Guaranty Insurer.
Before purchasing Securities a fiduciary of a Plan should confirm that the
Trust is a "mortgage pool," that the Securities constitute "mortgage pool
pass-through certificates," and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Securities on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions (each an "Underwriter
Exemption") which may be applicable to avoid certain of the prohibited
transaction rules of ERISA with respect to the initial purchase, the holding and
the subsequent resale in the secondary market by Plans of pass-through
Securities representing a beneficial undivided ownership interest in the assets
of a trust that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Underwriter Exemption which may be
applicable to the Securities. The conditions of Underwriter Exemption, if
applied, will be set forth in "ERISA Considerations" in the Prospectus
Supplement.
One or more other prohibited transaction exemptions issued by the DOL may be
available to a Plan investing in Securities depending in part upon the type of
Plan fiduciary making the decision to acquire a Security and the circumstances
under which such decision is made, including but not limited to: PTCE 90-1,
regarding investments by insurance company pooled separate accounts, PTCE 91-38,
regarding investments by bank collective investment funds, PTCE 84-14, regarding
investments effectuated by "qualified plan asset managers", PTCE 96-23,
regarding investments effectuated by "in-house asset managers" and PTCE 95-60,
regarding investments by insurance company general accounts ("Investor Based
Exemptions"). However, even if the conditions specified in an Underwriter
Exemption or one or more of these other exemptions are met, the scope of the
relief provided might or might not cover all acts which might be construed as
prohibited transactions.
Any Plan fiduciary considering the purchase of a Security should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
Each Prospectus Supplement will describe the extent, if any, to which the
Classes of Securities offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. No representation is made herein as to
whether the Securities will constitute legal investments for any entity under
any applicable statute, law, rule, regulation or order. Prospective purchasers
are urged to consult with their counsel concerning the status of the Securities
as legal investments for such purchasers prior to investing in any Class of
Securities.
99
<PAGE>
PLAN OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time of
sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by First Union Capital Markets Corp. ("First Union Capital Markets"), an
affiliate of the Representative, acting as underwriter with other underwriters,
if any, named therein. In such event, the Prospectus Supplement may also specify
that the underwriters will not be obligated to pay for any Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Representative. In connection with the sale of the Securities, underwriters may
receive compensation from the Representative or from purchasers of the
Securities in the form of discounts, concessions or commissions. The Prospectus
Supplement will describe any such compensation paid by the Representative.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by First Union Capital Markets acting as agent or in some
cases as principal with respect to the Securities that it has previously
purchased or agreed to purchase. If First Union Capital Markets acts as agent in
the sale of Securities, First Union Capital Markets will receive a selling
commission with respect to each Series of Securities, depending on market
conditions, expressed as a percentage of the aggregate principal balance of the
Securities sold hereunder as of the Cut-off Date. The exact percentage for each
Series of Securities will be disclosed in the related Prospectus Supplement. To
the extent that First Union Capital Markets elects to purchase Securities as
principal, First Union Capital Markets may realize losses or profits based upon
the difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Representative and purchasers of
Securities of each Series.
This Prospectus and the related Prospectus Supplement may be used by First
Union Capital Markets, an affiliate of the Representative, in connection with
offers and sales related to market-making transactions in the Securities. First
Union Capital Markets may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.
The Representative shall indemnify First Union Capital Markets and any other
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments First Union Capital
Markets and any other underwriters may be required to make in respect thereof.
In the ordinary course of business, First Union Capital Markets and the
Representative may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the
Representative's Mortgage Loans pending the sale of such Mortgage Loans or
interests therein, including the Securities.
The Representative anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisers in this regard prior to any such reoffer or
sale.
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transactions with and/or perform services for, the
Representative, its affiliates and the Trustee in the ordinary course of
business.
100
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Securities of each Series will be passed upon for the Representative by Bruce
Hurwitz, Esq., Managing Attorney of the Representative and certain legal matters
relating to the validity of the issuance of the Securities of each Series will
be passed upon for the Underwriter of the Securities of each Series by Stroock &
Stroock & Lavan LLP, New York, New York.
FINANCIAL INFORMATION
A new Trust will be formed to own the Trust Assets and to issue each Series
of Securities. Each such Trust will have no assets or obligations prior to the
issuance of the Securities and will not engage in any activities other than
those described herein. Accordingly, no financial statements with respect to
such Trusts are included in this Prospectus.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies specified in the related Prospectus Supplement.
Ratings on mortgage pass-through securities address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying mortgage loans and
the credit quality of the guarantor, if any. Ratings on mortgage pass-through
securities do not represent any assessment of the likelihood of principal
prepayments by mortgagors or of the degree by which such prepayments might
differ from those originally anticipated. As a result, securityholders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
pass-through securities in extreme cases might fail to recoup their underlying
investments.
A rating of a security is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
101
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
<TABLE>
<S> <C>
accrual period........................................................................ 74
Adjustable Rate....................................................................... 6
Adjusted Loan Remittance Rate......................................................... 45
Agreements............................................................................ 5
Amortization Period................................................................... 10
ARM................................................................................... 89
Auction Rate Securities............................................................... 2
"balloon" payment..................................................................... 7
Balloon Loans......................................................................... 22
Bankruptcy Bond....................................................................... 15
Basis Risk Shortfall.................................................................. 71
BDO................................................................................... 32
Buydown Funds......................................................................... 72
CDC................................................................................... 29
Cede.................................................................................. 4
Certificateholder..................................................................... 2
Certificates.......................................................................... 1
Certified Lender...................................................................... 28
Certified Lender Program.............................................................. 28
Class................................................................................. 2
Class R Certificates.................................................................. 63
Cleanup Costs......................................................................... 70
CLO................................................................................... 34
Code.................................................................................. 18
Commission............................................................................ 3
Compensating Interest................................................................. 18
Contingency Fee....................................................................... 59
Conventional Commercial Loan.......................................................... 30
Conventional Commercial Loan Program.................................................. 30
Corporation Election.................................................................. 91
Curtailment........................................................................... 18
Cut-Off Date.......................................................................... 40
Definitive Securities................................................................. 47
Designated Depository Institution..................................................... 58
Detailed Description.................................................................. 26
Determination Date.................................................................... 17
Distribution Account.................................................................. 42
DOL................................................................................... 20
DTC................................................................................... 4
Dutch Auction......................................................................... 43
ERISA................................................................................. 20
Event of Nonpayment................................................................... 62
excess inclusions..................................................................... 19
Exchange Act.......................................................................... 4
FASIT................................................................................. 71
Federal Tax Counsel................................................................... 18
</TABLE>
102
<PAGE>
<TABLE>
<S> <C>
Final Determination................................................................... 63
Final Withholding Regulations......................................................... 90
First Unica Capital Markets........................................................... 3
Fixed Rate............................................................................ 6
FTA................................................................................... 54
Funding Period........................................................................ 9
graduated payments.................................................................... 7
Guaranteed Interest................................................................... 28
Guaranteed Participant Program........................................................ 28
Guaranty.............................................................................. 4
Guaranty Insurance Policy............................................................. 14
HFS................................................................................... 30
Holders............................................................................... 2
Indenture............................................................................. 5
Indirect Participant.................................................................. 46
Insurance Paying Agent................................................................ 49
Insurance Proceeds.................................................................... 17
Insured Payment....................................................................... 14
Interest Period....................................................................... 44
Interest Rate......................................................................... 2
Investor Based Exemptions............................................................. 99
IRS................................................................................... 63
LIBOR................................................................................. 2
Liquidation Proceeds.................................................................. 17
Loan Guaranty Agreement............................................................... 28
Loan Note............................................................................. 54
Loans................................................................................. 1
Lockout Periods....................................................................... 7
Lower Tier REMIC...................................................................... 81
LTV................................................................................... 35
Majority Securityholders.............................................................. 61
Master Servicer....................................................................... 1
Money Store........................................................................... 1
Monthly Advance....................................................................... 17
monthly pay........................................................................... 26
Mortgage.............................................................................. 55
Mortgage Interest Rate................................................................ 6
Mortgage Pool......................................................................... 98
Mortgage Pool Insurance Policy........................................................ 15
Mortgaged Properties.................................................................. 6
Multi-Party Agreement................................................................. 9
Multiple Variable Rate REMIC Regular Certificate...................................... 77
1933 Act.............................................................................. 3
Non-REMIC Certificates................................................................ 19
Non-SBA Loans......................................................................... 1, 6
Noteholders........................................................................... 2
Notes................................................................................. 1
objective rate........................................................................ 76
OID Regulations....................................................................... 73
Originators........................................................................... 1
Participants.......................................................................... 46
</TABLE>
103
<PAGE>
<TABLE>
<S> <C>
Pass-Through Rate..................................................................... 2
pass-thru entity...................................................................... 83
Permitted Instruments................................................................. 58
Permitted Investments................................................................. 51
Plan.................................................................................. 97
Plan Asset Regulations................................................................ 20
Pool.................................................................................. 1
Pooling and Servicing Agreement....................................................... 5
Pool Insurer.......................................................................... 49
Preferred Lender...................................................................... 29
Preferred Lender Program.............................................................. 29
Pre-Funded Amount..................................................................... 9
Pre-Funding Account................................................................... 9
Prepayment Assumption................................................................. 74
Presumed Single Qualified Floating Rate............................................... 76
Presumed Single Variable Rate......................................................... 77
Prime Rate............................................................................ 2
Principal and Interest Account........................................................ 58
Principal Prepayment.................................................................. 17
Prospectus Supplement................................................................. 1
PTCE 83-1............................................................................. 98
Purchase Option Period................................................................ 63
qualified floating rate............................................................... 76
qualifying assets..................................................................... 87
Rating Agency......................................................................... 17
REIT.................................................................................. 81
Released Mortgage Property Proceeds................................................... 17
REMIC................................................................................. 2
REMIC Certificates.................................................................... 71
REMIC Regular Certificates............................................................ 18
REMIC Residual Certificates........................................................... 18
REMIC Regulations..................................................................... 72
Remittance Date....................................................................... 2
Representative........................................................................ 1
Retained Interest..................................................................... 10
Reserve Account....................................................................... 14
Revolving Period...................................................................... 10
RICs.................................................................................. 82
Sale and Servicing Agreement.......................................................... 5
SBA................................................................................... 6
SBA Act............................................................................... 8
SBA Loans............................................................................. 1
SBA Rules and Regulations............................................................. 59
SBA 504 Loans......................................................................... 6
SBA 504 Loan Program.................................................................. 8
SBA Section7(a) Loans................................................................. 6
Section 7(a) Program.................................................................. 8
Section 7(a) Companion Loans.......................................................... 6
Section 7(a) Companion Program........................................................ 29
Securities............................................................................ 1
Security Guaranty Insurer............................................................. 49
</TABLE>
104
<PAGE>
<TABLE>
<S> <C>
Securityholder........................................................................ 2
Security Register..................................................................... 42
Senior Certificates................................................................... 10
Senior Notes.......................................................................... 13
Senior Securities..................................................................... 13
Series................................................................................ 1
Servicing Advance..................................................................... 59
Servicing Fee......................................................................... 59
Single Variable Rate REMIC Regular Certificate........................................ 77
SMMEA................................................................................. 20
Special Hazard Insurance Policy....................................................... 15
Special Hazard Insurer................................................................ 50
Spread Amount......................................................................... 15
Standard Hazard Insurance Policies.................................................... 7
Strip Notes........................................................................... 13
Strip Certificates.................................................................... 11
stripped bond rules................................................................... 87
Subordinated Certificates............................................................. 11
Subordinated Notes.................................................................... 13
Subordinated Securities............................................................... 13
Sub-Servicer.......................................................................... 61
Successor Servicer.................................................................... 62
Superlien............................................................................. 70
Supplemental Interest Payments........................................................ 47
T-Bill Rate........................................................................... 2
taxable mortgage pool................................................................. 90
Termination Notice.................................................................... 63
Termination Price..................................................................... 63
Tiered REMICs......................................................................... 72
Trust................................................................................. 1
Trust Agreement....................................................................... 5
Trust Assets.......................................................................... 1
Trust Asset Schedule.................................................................. 26
Trustee............................................................................... 18
Trustee's Document File............................................................... 54
UCC................................................................................... 46
Underwriter Exemption................................................................. 99
Underwriters.......................................................................... 100
Unguaranteed Interests................................................................ 1
United States person.................................................................. 90
Variable Rate REMIC Regular Certificate............................................... 76
Yield Supplement Agreement............................................................ 71
</TABLE>
105
<PAGE>
APPENDIX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each Class of
Auction Rate Securities (and may be different if otherwise set forth in a
related Prospectus Supplement). The term "Security," as used in this Appendix,
refers to each Class of Auction Rate Securities that are either Notes or
Certificates and the term "Securityholder" refers to Holders of Auction Rate
Securities.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus and Prospectus Supplement. Additionally,
the following terms have the meanings ascribed to them:
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR or such other
rate as may be set forth in the related Prospectus Supplement.
"Auction" means the implementation of the Auction Procedures on an Auction
Date.
"Auction Agent" means the initial auction agent under the initial Auction
Agent Agreement unless and until a substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the substitute auction agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement unless
and until a substitute Auction Agent Agreement is entered into, after which
"Auction Agent Agreement" shall mean such substitute Auction Agent Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent
Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Auction Date" means, with respect to the Initial Period for each Class of
Securities, the date set forth in the related Prospectus Supplement and
thereafter, the Business Day immediately preceding the first day of each Auction
Period for each Security, other than:
(a) each Auction Period commencing after the ownership of the Securities is
no longer maintained in Book-Entry Form by DTC;
(B) each Auction Period commencing after and during the continuance of an
Event of Default; or
(C) each Auction Period commencing less than two Business Days after the
cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the related Agreement and the related Terms
Supplement, as described herein.
"Auction Period" means, with respect to each Security, the Interest Period
applicable to such Security during which time the applicable Security Interest
Rate is determined pursuant to the related Agreement and the related Terms
Supplement, which Auction Period (after the Initial Period for such Security)
initially shall consist of between 7 days and one year (as set forth in the
related Prospectus Supplement), as the same may be adjusted pursuant to such
related Agreement and the related Terms Supplement.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the related Terms Supplement, as described herein.
"Auction Procedures" means the procedures set forth in the related Terms
Supplement and described herein by which the Auction Rate applicable to a
Security is determined.
I-1
<PAGE>
"Auction Rate" means, with respect to any Security, the rate of interest per
annum that results from the implementation of the Auction Procedures and is
determined as described in the related Agreement and the related Terms
Supplement and this Appendix I.
"Authorized Denominations" means, the dollar amount set forth in the related
Prospectus Supplement.
"Broker-Dealer" means the initial broker-dealer under the initial
Broker-Dealer Agreement or any other broker or dealer (each as defined in the
Securities Exchange Act of 1934, as amended), commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer set forth
in the Auction Procedures that (a) is a Participant (or an affiliate of a
Participant), (b) has been appointed as such by the Representative and the
Trustee pursuant to the related Agreement and (c) has entered into a
Broker-Dealer Agreement that is in effect on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction Agent and
a Broker-Dealer, and approved by Representative and the Trust, pursuant to which
the Broker-Dealer agrees to participate in Auctions as set forth in the Auction
Procedures, as from time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent
Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Effective Interest Rate" means, for any Loan and any collection period, the
per annum rate at which such Loan accrues interest during such collection
period.
"Existing Securityholder" means (i) with respect to and for the purpose of
dealing with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Securityholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Security.
"Existing Securityholder Registry" means the registry of Persons who are
owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"Federal Funds Rate" means, for any date of determination, the federal funds
(effective) rate as published on page 118 of the Dow Jones Telerate Service (or
such other page as may replace that page on that service for the purpose of
displaying comparable rates or prices) on the immediately preceding Business
Day. If no such rate is published on such page on such date, "Federal Funds
Rate" shall mean for any date of determination, the Federal funds (effective)
rate as published by the Federal Reserve Board in the most recent edition of
Federal Reserve Statistical Release No. H.15 (519) that is available on the
Business Day immediately preceding such date.
"Initial Period" means, as to any Security, the period commencing on the
Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
"Interest Period" means, with respect to a Security, the Initial Period for
such Security and each period commencing on the Rate Adjustment Date for such
Security and ending on the day before (i) the next Rate Adjustment Date for such
Security or (ii) the final maturity date of such Security, as applicable.
"Market Agent" means the entity named as market agent under the related
Agreement, or any successor to it in such capacity thereunder.
"Maximum Auction Rate" generally means (i) for Auction Periods of 34 days or
less, either (a) the greater of (1) One-Month LIBOR plus 0.60% or (2) the
Federal Funds Rate plus 0.60% (if both ratings assigned by the Rating Agencies
to the applicable Security are "Aa3" or "AA-" or better) or
I-2
<PAGE>
(B)One-Month LIBOR plus 1.50% (if any one of the ratings assigned by the Rating
Agencies to the Security is less than "Aa3" or "AA-") or (ii) for Auction
Periods of greater than or equal to 35 days, either (a) the greater of One-Month
LIBOR or Three-Month LIBOR, plus in either case, 0.60% (if both of the ratings
assigned by the Rating Agencies to the applicable Security are "Aa3" or "AA-" or
better) or (B) the greater of One-Month LIBOR or Three-Month LIBOR, plus in
either case, 1.50% (if any one of the ratings assigned by the Rating Agencies to
the applicable Security is less than "Aa3" or "AA-") or such other rate as may
be set forth in the related Prospectus Supplement. For purposes of the Auction
Agent and the Auction Procedures, the ratings referred to in this definition
shall be the last ratings of which the Auction Agent has been given notice
pursuant to the Auction Agent Agreement.
"Net Loan Rate" for any Interest Period will equal the weighted average
Effective Interest Rate for the Collection Period immediately preceding such
Interest Period less the amount set forth in the related Prospectus Supplement.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%, as the same may be
adjusted pursuant to a Terms Supplement or such other rate as may be set forth
in the related Prospectus Supplement.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Potential Securityholder" means any Person (including an Existing
Securityholder that is (i) a Broker-Dealer when dealing with the Auction Agent
and (ii) a potential beneficial owner when dealing with a Broker-Dealer) who may
be interested in acquiring Securities (or, in the case of an Existing
Securityholder thereof, an additional principal amount of Securities).
"Rate Adjustment Date" means, with respect to each Security, the date on
which the applicable Security Interest Rate is effective and means, with respect
to each such Security, the date of commencement of each Auction Period.
"Rate Determination Date" means, with respect to any Security, the Auction
Date, or if no Auction Date is applicable to such Series, the Business Day
immediately preceding the date of commencement of an Auction Period.
"Security Initial Rate" means, with respect to any Class of Notes or
Certificates, the rate identified as such in the related Prospectus Supplement.
"Security Initial Rate Adjustment Date" means, with respect to any Class of
Notes, the date identified as such in the related Prospectus Supplement and,
with respect to any Class of Certificates, the date set forth in the related
Agreement or the related Terms Supplement.
"Three-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months commencing on the related LIBOR
Determination Date (the "Three-Month Index Maturity") 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, having
the Three Month Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Three Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if
I-3
<PAGE>
the banks selected as aforesaid are not quoting as mentioned in this sentence,
Three-Month LIBOR in effect for the applicable Interest Period will be
Three-Month LIBOR in effect for the previous Interest Period.
EXISTING SECURITYHOLDERS AND POTENTIAL SECURITYHOLDERS
Participants in each Auction will include: (1) "Existing Securityholders,"
which shall mean any Securityholder according to the records of the Auction
Agent at the close of business on the Business Day preceding each Auction Date;
and (ii) "Potential Securityholders," which shall mean any person, including any
Existing Securityholder or a Broker/Dealer, who may be interested in acquiring
Securities (or, in the case of an Existing Securityholder, an additional
principal amount of the Security such Securityholder then holds). See
"--Broker-Dealer."
By purchasing a Security, whether in an Auction or otherwise, each
prospective purchaser of Securities or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Securities is maintained
in Book-Entry Form to sell, transfer or otherwise dispose of the Securities only
pursuant to a Bid (as defined below) or a Sell Order (as defined below) in an
Auction, or to or through a Broker-Dealer, provided that in the case of all
transfers other than those pursuant to an Auction, the Existing Securityholder
of the Securities so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of
Securities maintained at all times in Book-Entry Form for the account of its
Participant, which in turn will maintain records of such beneficial ownership,
and to authorize such Participant to disclose to the Auction Agent such
information with respect to such beneficial ownership as the Auction Agent may
request; (iv) that a Sell Order placed by an Existing Securityholder will
constitute an irrevocable offer to sell the principal amount of the Security
specified in such Sell Order; (v) that a Bid placed by an Existing
Securityholder will constitute an irrevocable offer to sell the principal amount
of the Security specified in such Bid if the rate specified in such Bid is
greater than, or in some cases equal to, the Security Interest Rate of such
Security, determined as described herein; and (vi) that a Bid placed by a
Potential Securityholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Security specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Security Interest Rate of the specified Security, determined as described
herein.
The principal amount of the Securities purchased or sold may be subject to
probation procedures on the Auction Date. Each purchase or sale of Securities on
the Auction Date will be made for settlement on the first day of the Interest
Period immediately following such Auction Date at a price equal to 100% of the
principal amount thereof, plus accrued but unpaid interest thereon. The Auction
Agent is entitled to rely upon the terms of any Order submitted to it by a
Broker-Dealer.
AUCTION AGENT
The entity named in the related Prospectus Supplement, will be appointed as
Auction Agent to serve as agent for a Trust in connection with Auctions. The
Trustee and the Representative will enter into the Auction Agreement with the
Auction Agent. Any Auction Agent or Substitute Auction Agent will be (i) a bank,
national banking association or trust company duly organized under the laws of
the United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such other
location as approved by the Trustee and the Market Agent in writing and having a
combined capital stock or surplus of at least $50,000,000, or (ii) a member of
the National Association of Securities Dealers, Inc. having a capitalization of
at least $50,000,000, and, in either case, authorized by law to perform all the
duties imposed upon it under the related Agreement and under the Auction Agent
Agreement. The Auction Agent may at any time resign and be discharged of the
duties and obligations created by the related Agreement by giving at least 90
days notice to the Trustee, the Trust, the Representative and the Market Agent.
The Auction Agent may be removed at any time by the Trustee
I-4
<PAGE>
upon the written direction of the Security Guaranty Insurer, if applicable, or,
with the consent of the Security Guaranty Insurer, if applicable, the
Securityholders of 66 2/3% of the aggregate principal amount of the Securities
then outstanding, by an instrument signed by the Security Guaranty Insurer, if
applicable, or such Securityholders or their attorneys and filed with the
Auction Agent, the Representative, the Trustee and the Market Agent upon at
least 90 days' notice. Neither resignation nor removal of the Auction Agent
pursuant to the preceding two sentences will be effective until and unless a
Substitute Auction Agent has been appointed and has accepted such appointment.
If required by the Trust or the Representative or by the Market Agent, with the
Trust's and the Representative's consent, a Substitute Auction Agent Agreement
shall be entered into with a Substitute Auction Agent. Notwithstanding the
foregoing, the Auction Agent may terminate the Auction Agent Agreement if,
within 25 days after notifying the Trustee, the Trust, the Representative, the
Security Guaranty Insurer, if applicable, and the Market Agent in writing that
it has not received payment of any Auction Agent Fee due it in accordance with
the terms of the Auction Agent Agreement, the Auction Agent does not receive
such payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of the
Representative (after receipt of a certificate from the Market Agent confirming
that any proposed Substitute Auction Agent meets the requirements described in
the immediately preceding paragraph above), shall use its best efforts to
appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on the Note
Remittance Date or Certificate Remittance Date set forth in the related
Prospectus Supplement, and will reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of the Auction Agent Agreement or
the Broker-Dealer Agreements (including the reasonable compensation and the
expenses and disbursements of its agents and counsel). The Trust will indemnify
and hold harmless the Auction Agent for and against any loss, liability or
expense incurred without negligence or bad faith on the Auction Agent's part,
arising out of or in connection with the acceptance or administration of its
agency under the Auction Agent Agreement and the Broker-Dealer Agreements
including the reasonable costs and expenses (including the reasonable fees and
expenses of its counsel) of defending itself against any such claim or liability
in connection with its exercise or performance of any of its respective duties
thereunder and of enforcing this indemnification provision; provided that the
Trust will not indemnify the Auction Agent as described in this paragraph for
any fees and expenses incurred by the Auction Agent in the normal course of
performing its duties under the Auction Agent Agreement and under the
Broker-Dealer Agreements, such fees and expenses being payable as described
above.
BROKER-DEALER
Existing Securityholders and Potential Securityholders may participate in
Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including the Broker-Dealer, as the sole Broker-Dealer or any
other broker or dealer (each as defined in the Securities Exchange Act of 1934,
as amended), commercial bank or other entity permitted by law to perform the
functions required of a Broker-Dealer set forth below which (i) is a Participant
or an affiliate of a Participant, (ii) has been selected by the Trust and (iii)
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
I-5
<PAGE>
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is payable by
the Auction Agent from monies received from the Trustee, on the Note Remittance
Date or Certificate Remittance Date set forth in the related Prospectus
Supplement.
MARKET AGENT
In connection with each Series of Notes and the Certificates, the "Market
Agent," will act solely as agent of the Trust and will not assume any obligation
or relationship of agency or trust for or with any of the Securityholders.
AUCTION PROCEDURES
GENERAL
Pursuant to the related Agreement and the related Terms Supplement, Auctions
to establish the Auction Rate for each Security issued by the Trust will be held
on each applicable Auction Date, except as described below, by application of
the Auction Procedures described herein. Such procedures are to be applicable
separately to each Class of Notes and each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold Rate
and One-Month LIBOR or Three-Month LIBOR, as the case may be, on each Auction
Date. The Administrator will calculate and, no later than the Business Day
preceding each Auction Date, will report to the Auction Agent in writing, the
Net Loan Rate. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Trustee will calculate the Maximum Auction Rate, and
Administrator will report to the Trustee in writing the Net Loan Rate, on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of such Security. If an Event of Default has occurred,
under the Indenture or the Pooling and Servicing Agreement, as applicable, the
Trustee will calculate the Non-Payment Rate on the Rate Determination Date for
(i) each Interest Period commencing after the occurrence and during the
continuance of such Payment Default and (ii) any Interest Period commencing less
than two Business Days after the cure of any Event of Default. The Auction Agent
will determine One-Month LIBOR or the Three-Month LIBOR, as applicable, for each
Interest Period other than the Initial Period for a Security; provided, that if
the ownership of the Securities is no longer maintained in Book-Entry Form, or
if an Event of Default has occurred, then the Trustee will determine the
One-Month LIBOR or the Three-Month LIBOR, as applicable, for each such Interest
Period. The determination by the Trustee or the Auction Agent, as the case may
be, of the One-Month LIBOR or the Three-Month LIBOR, as applicable, will (in the
absence of manifest error) be final and binding upon the Securityholders and all
other parties. If calculated or determined by the Auction Agent, the Auction
Agent will promptly advise the Trustee of the One-Month LIBOR or the Three-Month
LIBOR, as applicable.
SUBMISSION OF ORDERS
So long as the ownership of the Securities is maintained in Book-Entry Form,
an Existing Securityholder may sell, transfer or otherwise dispose of Securities
only pursuant to a Bid or Sell Order (as hereinafter defined) placed in an
Auction or through a Broker-Dealer, provided that, in the case of all transfers
other than pursuant to Auctions, such Existing Securityholder, its Broker-Dealer
or its Participant advises the Auction Agent of such transfer. Auctions for each
Class of Notes and each Class of Certificates will be conducted on each
applicable Auction Date, if there is an Auction Agent on such Auction Date, in
the following manner (such procedures to be applicable separately to each Class
of Notes and each Class of Certificates).
I-6
<PAGE>
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time) on each Auction Date relating to a Security:
(a) each Existing Securityholder of the applicable Security may submit
to a Broker-Dealer by telephone or otherwise information as to: (i) the
principal amount and Class of outstanding Securities, if any, held by such
Existing Securityholder which such Existing Securityholder desires to
continue to hold without regard to the Security Interest Rate for such
Securities for the next succeeding Auction Period (a "Hold Order"); (ii) the
principal amount and Class of outstanding Securities, if any, which such
Existing Securityholder offers to sell if the Security Interest Rate for
such Securities for the next succeeding Auction Period will be less than the
rate per annum specified by such Existing Securityholder (a "Bid"); and/or
(iii) the principal amount and Class of outstanding Securities, if any, held
by such Existing Securityholder which such Existing Securityholder offers to
sell without regard to the Security Interest Rate for such Securities for
the next succeeding Auction Period (a "Sell Order"); and
(b) one or more Broker-Dealers may contact Potential Securityholders to
determine the principal amount and Class of Securities which each such
Potential Securityholder offers to purchase, if the Security Interest Rate
for such Securities for the next succeeding Auction Period will not be less
than the rate per annum specified by such Potential Securityholder (also a
"Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Securityholder and each Potential Securityholder placing an Order is referred to
as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid
by an Existing Securityholder will constitute an irrevocable offer to sell: (i)
the principal amount and Class of the outstanding Securities specified in such
Bid if the Security Interest Rate for such Securities will be less than the rate
specified in such Bid, (ii) such principal amount or a lesser principal amount
and Class of the outstanding Securities to be determined as described below in
"Acceptance and Rejection of Orders," if the Security Interest Rate for such
Securities will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding Securities
to be determined as described below under "Acceptance and Rejection of Orders,"
if the rate specified therein will be higher than the Security Interest Rate for
such Securities and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a Sell
Order by an Existing Securityholder will constitute an irrevocable offer to
sell: (i) the principal amount of the Security specified in such Sell Order or
(ii) such principal amount or a lesser principal amount of outstanding
Securities of the specified Security as described below under "Acceptance and
Rejection of Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid
by a Potential Securityholder will constitute an irrevocable offer to purchase:
(i)the principal amount of the Security specified in such Bid if the Security
Interest Rate for such Securities will be higher than the rate specified in such
Bid or (ii) such principal amount or a lesser principal amount of such
Securities as described below in "Acceptance and Rejection of Orders," if the
Security Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and Class of
Security that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Securityholder: (a) the principal amount and Class of
Securities, if any, subject to any Hold Order placed by such Existing
Securityholder; (b) the principal amount, and Class of Securities, if any,
subject to any Bid placed by such Existing Securityholder and the rate specified
in such Bid; and (c) the principal amount, and Class
I-7
<PAGE>
of Securities, if any, subject to any Sell Order placed by such Existing
Securityholder, and (iv) to the extent such Bidder is a Potential
Securityholder, the rate specified in such Potential Securityholder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Securities of the applicable Class held
by any Existing Securityholder are not submitted to the Auction Agent prior to
the Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of such Existing Securityholder covering the principal
amount of Securities held by such Existing Securityholder and not subject to an
Order submitted to the Auction Agent.
Neither the Trust, the Representative, the Trustee nor the Auction Agent
will be responsible for any failure of a Broker-Dealer to submit an Order to the
Auction Agent on behalf of any Existing Securityholder or Potential
Securityholder.
An Existing Securityholder may submit multiple Orders, of different types
and specifying different rates, in an Auction with respect to Securities then
held by such Existing Securityholder. An Existing Securityholder that offers to
purchase additional Securities is, for purposes of such offer, treated as a
Potential Securityholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Securityholder and (ii) not
be accepted if submitted by a Potential Securityholder.
VALIDITY OF ORDERS
If any Existing Securityholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the Class of Securities held by such Existing
Securityholder, such Orders will be considered valid as follows and in the order
of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the Class of Securities held by such Existing
Securityholder, and if the aggregate principal amount of the Class of Securities
subject to such Hold Orders exceeds the aggregate principal amount of the Class
of Securities held by such Existing Securityholder, the aggregate principal
amount of the Class of Securities subject to each such Hold Order will be
reduced pro rata so that the aggregate principal amount of the Class of
Securities subject to all such Hold Orders equals the aggregate principal amount
of the Class of Securities held by such Existing Securityholder.
Bids. Any Bid will be considered valid up to an amount equal to the excess
of the principal amount of the Class of Securities held by such Existing
Securityholder over the aggregate principal amount of such Security, subject to
any Hold Orders referred to above. Subject to the preceding sentence, if
multiple Bids with the same rate are submitted on behalf of such Existing
Securityholder and the aggregate principal amount of Securities subject to such
Bids is greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Securityholder, such Bids will be considered valid first in the ascending order
of their respective rates until the highest rate is reached at which such excess
exists and then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Securities, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Securityholder at the rate therein specified.
Sell Orders. All Sell Orders will be considered valid up to an amount equal
to the excess of the principal amount of Securities of the Class held by such
Existing Securityholder over the aggregate principal amount of Securities
subject to valid Hold Orders and valid Bids as referred to above.
I-8
<PAGE>
If more than one Bid for a Class of Security is submitted on behalf of any
Potential Securityholder, each Bid submitted will be a separate Bid with the
rate and principal amount therein specified. Any Bid or Sell Order submitted by
an Existing Securityholder covering an aggregate principal amount of Securities
not equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Securityholder covering an aggregate principal amount of Securities not equal to
an Authorized Denomination or an integral multiple thereof will be rejected. Any
Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid pursuant
to the procedures described above is referred to as a "Submitted Hold Order," a
"Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
DETERMINATION OF SUFFICIENT BID AND BID AUCTION RATE
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Security, the excess of the total principal
amount of such Securities over the sum of the aggregate principal amount of
such Securities subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "Available Securities"); and
(b) from such Submitted Orders whether the aggregate principal amount of
Securities of such Class subject to Submitted Bids by Potential
Securityholders specifying one or more rates equal to or lower than the
Maximum Auction Rate exceeds or is equal to the sum of (i) the aggregate
principal amount of Securities of such Class subject to Submitted Bids by
Existing Securityholders specifying one or more rates higher than the
Maximum Auction Rate and (ii) the aggregate principal amount of Securities
of such Class subject to Submitted Sell Orders (in the event such excess or
such equality exists other than because all of the Securities are subject to
Submitted Hold Orders, such Submitted Bids by Potential Securityholders
above will be hereinafter referred to collectively as "Sufficient Bids");
and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be the
lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Securityholders of such
Security specifying such lowest rate and all other Submitted Bids from
Existing Securityholders of such Security specifying lower rates were
rejected (thus entitling such Existing Securityholders to continue to
hold the principal amount of Securities subject to such Submitted Bids);
and
(ii) each such Submitted Bid from Potential Securityholders of such
Security specifying such lowest rate and all other Submitted Bids from
Potential Securityholders specifying lower rates, were accepted, the
result would be that such Existing Securityholders described in
subparagraph (c)(i) above would continue to hold an aggregate principal
amount of Securities which, when added to the aggregate principal amount
of Securities to be purchased by such Potential Securityholders described
in this subparagraph (ii) would equal not less than the Available
Securities.
DETERMINATION OF AUCTION RATE AND SECURITY INTEREST RATE, NOTICE
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Net Loan Rate, the
Maximum Auction Rate, the All Hold Rate and the
I-9
<PAGE>
components thereof on the Auction Date, and based on such determinations, the
Auction Rate for the next succeeding Interest Period for the applicable Security
as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so
determined;
(b) if Sufficient Bids do not exist (other than because all of the
Securities of the applicable Security are subject to Submitted Hold Orders),
that the Auction Rate for the next succeeding Interest Period will be equal
to the Maximum Auction Rate; or
(c) if all Securities of the applicable Security are subject to
Submitted Hold Orders, that the Auction Rate for the next succeeding
Interest Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Security Interest
Rate for each applicable Security, which rate will be the lesser of (a) the
Auction Rate for each such Security and (b) the Net Loan Rate. In no event shall
a Security Interest Rate exceed the rate (the "Security Interest Rate
Limitation") set forth in the related Prospectus Supplement.
ACCEPTANCE AND REJECTION OF ORDERS
Existing Securityholders of the applicable Security will continue to hold
the principal amount of Securities of such Class that are subject to Submitted
Hold Orders. If, with respect to a Security, the Net Loan Rate is equal to or
greater than the Bid Auction Rate and if Sufficient Bids, as described above
under "Determination of Sufficient Bids and Bid Auction Rate," have been
received by the Auction Agent, the Bid Auction Rate will be the Security
Interest Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take such other action as provided in the
related Agreement and described below under "Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Security Interest
Rate will be the Net Loan Rate. If the Auction Rate and the Net Loan Rate are
both greater than the Security Interest Rate Limitation, the Security Interest
Rate for each series shall be equal to the Security Interest Rate Limitation. If
the Auction Agent has not received Sufficient Bids as described above under
"Determination of Sufficient Bids and Bid Auction Rate" (other than because all
of the Securities are subject to Submitted Holds Orders), the Security Interest
Rate will be the lesser of the Maximum Auction Rate or the Net Loan Rate. In any
of the cases described above in this paragraph, Submitted Orders will be
accepted or rejected and the Auction Agent will take such other action as
described below under "Insufficient Bids."
Sufficient Bids. If Sufficient Bids have been made with a respect to a
Security and the Net Loan Rate is equal to or greater than the Bid Auction Rate
(in which case the Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders will be accepted and, subject to the denomination requirements
described below, Submitted Bids will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that is
higher than the Security Interest Rate will be accepted, thus requiring each
such Existing Securityholder to sell the aggregate principal amount of
Securities subject to such Submitted Bids;
(b) Existing Securityholders' Submitted Bids specifying any rate that is
lower than the Security Interest Rate will be rejected, thus entitling each
such Existing Securityholder to continue to hold the aggregate principal
amount of Securities subject to such Submitted Bids;
(c) Potential Securityholders' Submitted Bids specifying any rate that
is lower than the Security Interest Rate will be accepted;
I-10
<PAGE>
(d) Each Existing Securityholder's Submitted Bid specifying a rate that
is equal to the Security Interest Rate will be rejected, thus entitling such
Existing Securityholder to continue to hold the aggregate principal amount
of Securities subject to such Submitted Bid, unless the aggregate principal
amount of Securities subject to such Submitted Bids will be greater than the
principal amount of Securities (the "remaining principal amount") equal to
the excess of the Available Securities over the aggregate principal amount
of Securities subject to Submitted Bids described in subparagraphs (b) and
(c) above, in which event such Submitted Bid of such Existing Securityholder
will be rejected in part and such Existing Securityholder will be entitled
to continue to hold the principal amount of Securities subject to such
Submitted Bid, but only in an amount equal to the aggregate principal amount
of Securities obtained by multiplying the remaining principal amount by a
fraction, the numerator of which will be the principal amount of Securities
held by such Existing Securityholder subject to such Submitted Bid and the
denominator of which will be the sum of the principal amount of Securities
subject to such Submitted Bids made by all such Existing Securityholders
that specified a rate equal to the Security Interest Rate; and
(e) Each Potential Securityholder's Submitted Bid specifying a rate that
is equal to the Security Interest Rate will be accepted, but only in an
amount equal to the principal amount of Securities obtained by multiplying
the excess of the aggregate principal amount of Available Securities over
the aggregate principal amount of Securities subject to Submitted Bids
described in subparagraphs (b), (c) and (d) above by a fraction, the
numerator of which will be the aggregate principal amount of Securities
subject to such Submitted Bid and the denominator of which will be the sum
of the principal amount of Securities subject to Submitted Bids made by all
such Potential Securityholders that specified a rate equal to the Security
Interest Rate.
Insufficient Bids. If Sufficient Bids have not been made with respect to a
Security (other than because all of the Securities of such Class are subject to
Submitted Hold Orders) or if the Net Loan Rate is less than the Bid Auction Rate
(in which case the Security Interest Rate shall be the Net Loan Rate) or if the
Security Interest Rate Limitation applies, subject to the denomination
requirements described below, Submitted Orders will be accepted or rejected as
follows in the following order of priority and all other Submitted Bids will be
rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that is
equal to or lower than the Security Interest Rate will be rejected, thus
entitling such Existing Securityholders to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
(b) Potential Securityholders' Submitted Bids specifying any rate that
is equal to or lower than the Security Interest Rate will be accepted, and
specifying any rate that is higher than the Security Interest Rate will be
rejected; and
(c) each Existing Securityholder's Submitted Bid specifying any rate
that is higher than the Security Interest Rate and the Submitted Sell Order
of each Existing Securityholder will be accepted, thus entitling each
Existing Securityholder that submitted any such Submitted Bid or Submitted
Sell Order to sell the Securities subject to such Submitted Bid or Submitted
Sell Order, but in both cases only in an amount equal to the aggregate
principal amount of Securities obtained by multiplying the aggregate
principal amount of Securities subject to Submitted Bids described in
subparagraph (b)above by a fraction, the numerator of which will be the
aggregate principal amount of Securities held by such Existing
Securityholder subject to such Submitted Bid or Submitted Sell Order and the
denominator of which will be the aggregate principal amount of Securities
subject to all such Submitted Bids and Submitted Sell Orders.
All Hold Orders. If all Securities of a Class are subject to Submitted Hold
Orders, all Submitted Bids will be rejected.
I-11
<PAGE>
Authorized Denominations Requirement. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Securityholder would be entitled or required to sell, or any Potential
Securityholder would be entitled or required to purchase, a principal amount of
Securities that is not equal to an Authorized Denomination or an integral
multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, round up or down the principal amount of
Securities to be purchased or sold by any Existing Securityholder or Potential
Securityholder so that the principal amount of Securities purchased or sold by
each Existing Securityholder or Potential Securityholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as a
result of the procedures described above regarding Insufficient Bids, any
Potential Securityholder would be entitled or required to purchase less than a
principal amount of Securities equal to an Authorized Denomination or any
integral multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, allocate Securities for purchase among Potential
Securityholders so that only Securities in an Authorized Denomination or any
integral multiples in excess thereof are purchased by any Potential
Securityholder, even if such allocation results in one or more of such Potential
Securityholders not purchasing any Securities.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Securities of each Class to be purchased and the
aggregate principal amount of Securities of each Class to be sold by Potential
Securityholders and Existing Securityholders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the
extent that such aggregate principal amount of Securities to be sold differs
from such aggregate principal amount of Securities to be purchased, determine to
which other Broker-Dealer or Broker-Dealers acting for one or more purchasers
such Broker-Dealer will deliver, or from which Broker-Dealers acting for one or
more sellers such Broker-Dealer will receive, as the case may be, Securities.
Any calculation by the Auction Agent (or the Trustee, if applicable) of the
Security Interest Rate, One-Month LIBOR, Three-Month LIBOR, the Maximum Auction
Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate will, in the
absence of manifest error, be binding on all other parties.
Notwithstanding anything in any related Agreement or, a related Terms
Supplement to the contrary, no Auction is to be held on any Auction Date on
which there are insufficient moneys held by the Trustee under the related
Agreement and available to pay the principal of and interest due on the
applicable Security on the Note Remittance Date or Certificate Remittance Date
immediately following such Auction Date.
SETTLEMENT PROCEDURES
The Auction Agent is required to advise each Broker-Dealer that submitted an
Order in an Auction of the Security Interest Rate for a Security for the next
Interest Period and, if such Order was a Bid or Sell Order, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, by telephone not later
than 3:00 p.m., eastern time, on the Auction Date if the Interest Rate is the
Auction Rate and not later than 4:00 p.m. eastern time on the Auction Date if
the Interest Rate is the Net Loan Rate. Each Broker-Dealer that submitted an
Order on behalf of a Bidder is required to then advise such Bidder of the
applicable Security Interest Rate for the next Interest Period and, if such
Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, confirm purchases and sales with each Bidder
purchasing or selling Securities as a result of the Auction and advise each
Bidder purchasing or selling Securities as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Securities or to deliver such Securities against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Securities on the Existing Securityholders Registry to
be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the depository, and the
I-12
<PAGE>
accounts of the respective Participants at DTC will be debited and credited and
Securities delivered as necessary to effect the purchases and sales of
Securities as determined in the Auction. Purchasers are required to make payment
through their Participants in same-day funds to DTC against delivery through
their Participants. DTC will make payment in accordance with its normal
procedures, which now provide for payment against delivery by its Participants
in immediately available funds.
If any Existing Securityholder selling Securities in an Auction fails to
deliver such Securities, the Broker-Dealer of any person that was to have
purchased Securities in such Auction may deliver to such person a principal
amount of Securities that is less than the principal amount of Securities that
otherwise was to be purchased by such person but in any event equal to an
Authorized Denomination or any integral multiple thereof. In such event, the
principal amount of Securities to be delivered will be determined by such
Broker-Dealer. Delivery of such lesser principal amount of Securities will
constitute good delivery. Neither the Trustee nor the Auction Agent will have
any responsibility or liability with respect to the failure of a Potential
Securityholder, Existing Securityholder or their respective Broker-Dealer or
Participant to deliver the principal amount of Securities or to pay for the
Securities purchased or sold pursuant to an Auction or otherwise. For a further
description of the settlement procedures, see "SETTLEMENT PROCEDURES."
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or failure
to act by the Auction Agent, Market Agent or any Broker-Dealer under the related
Agreement, the related Terms Supplement or under the Auction Agent Agreement,
the Market Agent Agreement or any Broker-Dealer Agreement. The Trustee may
conclusively rely upon any information required to be furnished by the Auction
Agent, the Market Agent or any Broker-Dealer without undertaking any independent
review or investigation of the truth or accuracy of such information.
CHANGES IN AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS
While any of the Securities are outstanding, the Administrator, may, from
time to time, change the length of the one or more Auction Periods in order to
conform with then current market practice with respect to similar securities or
to accommodate economic and financial factors that may affect or be relevant to
the length of the Auction Period and the interest rate borne by the Securities
(an "Auction Period Adjustment"). The Administrator will not initiate such
change in the length of the Auction Period unless it shall have received the
written consent from the Market Agent, which consent will not be unreasonably
withheld, not less than three days nor more than 20 days prior to the effective
date of an Auction Period Adjustment. The Administrator will initiate an Auction
Period Adjustment by giving written notice to the Trustee, the Auction Agent,
the Market Agent, the Security Guaranty Insurer and DTC in substantially the
form of, or containing substantially the information contained in, the related
Agreement at least 10 days prior to the Auction Date for such Auction Period.
Any such Auction Period Adjustment shall not result in an Auction Period of
less than 7 days nor more than 91 days. If any such Auction Period Adjustment
will result in an Auction Period of less than the number of days in the then
current Auction Period, the notice described above will be effective only if it
is accompanied by a written statement of the Trustee, the Auction Agent and DTC
to the effect that they are capable of performing their duties, if any, under
the related Agreement, the Auction Agent Agreement and any Broker-Dealer
Agreement with respect to such changed Auction Period.
An Auction Period Adjustment will take effect only if (a) the Trustee and
the Auction Agent receive, by 11:00 a.m., eastern time, on the Business Day
before the Auction Date for the first such Auction Period, a certificate from
the Representative authorizing an Auction Period Adjustment specified in such
certificate, the certificate of the Market Agent described above and the written
statement of the Trustee, the
I-13
<PAGE>
Auction Agent DTC described above and (B) Sufficient Bids exist at the Auction
on the Auction Date for such first Auction Period. If the condition referred to
in (a) is not met, the Security Interest Rate applicable for the next Auction
Period will be determined pursuant to the Auction Procedures and the Auction
Period will be the Auction Period determined without reference to the proposed
change. If the condition referred to in (a) is met, but the condition referred
to in (B) above is not met, the Security Interest Rate applicable for the next
Auction Period will be the lesser of the Maximum Auction Rate and the Net Loan
Rate and the Auction Period will be the Auction Period determined without
reference to the proposed change.
CHANGES IN THE AUCTION DATE
The Market Agent, at the written direction of the Representative, may
specify an earlier Auction Date (but in no event more than five Business Days
earlier) than the Auction Date that would otherwise be determined in accordance
with the definition of "Auction Date" with respect to one or more specified
Auction Periods in order to conform with then current market practice with
respect to similar securities or to accommodate economic and financial factors
that may affect or be relevant to the day of the week constituting an Auction
Date and the interest rate borne on the Securities. The Representative will not
consent to such change in the Auction Date unless the Representative will have
received from the Market Agent not less than three days nor more than 20 days
prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Trust, the Representative, and DTC.
The changes in Auction terms described above may be made with respect to any
Class of the Securities. In connection with any change in Auction Terms
described above, the Auction Agent is to provide such further notice to such
parties as is specified in the Auction Agent Agreement.
I-14
<PAGE>
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each Class of Securities and
may be different if specified in the related Prospectus Supplement.
(a) Not later than (i) 3:00 p.m. if the Security Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Security Interest Rate is the Net Loan
Rate, the Auction Agent is to notify by telephone each Broker-Dealer that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of an Existing Securityholder or Potential Securityholder of:
(i) the Security Interest Rate fixed for the next Interest Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted Bids
or Sell Orders on behalf of an Existing Securityholder, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, and the principal
amount of Securities, if any, to be sold by such Existing Securityholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Securityholder, whether such Bid was accepted or
rejected, in whole or in part, and the principal amount of Securities, if
any, to be purchased by such Potential Securityholder;
(v) if the aggregate amount of Securities to be sold by all Existing
Securityholders on whose behalf such Seller's Broker-Dealer submitted Bids
or Sell Orders exceeds the aggregate principal amount of Securities to be
purchased by all Potential Securityholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid, the name or names of one or more Buyer's
Broker-Dealers and the name of the Participant, if any, of each such Buyer's
Broker-Dealer (a "Participant") acting for one or more purchasers of such
excess principal amount of Securities and the principal amount of Securities
to be purchased from one or more Existing Securityholders on whose behalf
such Seller's Broker-Dealer acted by one or more Potential Securityholders
on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the principal amount of Securities to be purchased by all
Potential Securityholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid exceeds the amount of Securities to be sold by all Existing
Securityholders on whose behalf such Seller's Broker-Dealer submitted a Bid
or a Sell Order, the name or names of one or more Seller's Broker-Dealers
(and the name of the Participant, if any, of each such Seller's
Broker-Dealer) acting for one or more sellers of such excess principal
amount of Securities and the principal amount of Securities to be sold to
one or more Potential Securityholders on whose behalf such Buyer's
Broker-Dealer acted by one or more Existing Securityholder on whose behalf
each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Securityholder or Potential Securityholder is to:
(i) advise each Existing Securityholder and Potential Securityholder on
whose behalf such Broker-Dealer submitted a Bid or Sell Order in the Auction
on such Auction Date whether such Bid or Sell Order was accepted or
rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
advise each Potential Securityholder on whose behalf such Buyer's
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Securityholder's Participant to pay to such Buyer's
Broker-Dealer (or its Participant) through DTC the amount necessary to
purchase the principal amount of
II-1
<PAGE>
the Securities to be purchased pursuant to such Bid against receipt of such
Securities together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Securityholder on whose behalf such Seller's
Broker-Dealer submitted a Sell Order that was accepted, in whole or in part,
or a Bid that was accepted, in whole or in part, to instruct such Existing
Securityholder's Participant to deliver to such Seller's Broker-Dealer (or
its Participant) through DTC the principal amount of the Securities to be
sold pursuant to such Order against payment therefor;
(iv) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Securityholder on whose
behalf such Broker-Dealer submitted a Bid of the Security Interest Rate for
the next Interest Period;
(v) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Securityholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the
next Auction Date.
(c) On the basis of the information provided to it pursuant to paragraph (a)
above, each Broker-Dealer that submitted a Bid or Sell Order in an Auction is
required to allocate any funds received by it in connection with such Auction
pursuant to paragraph (b)(ii) above, and any Securities received by it in
connection with such Auction pursuant to paragraph (b)(iii) above, among the
Potential Securityholders, if any, on whose behalf such Broker-Dealer submitted
Bids, the Existing Securityholder, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell Orders in such Auction, and any Broker-Dealers identified
to it by the Auction Agent following such Auction pursuant to paragraph (a) (v)
or (a) (vi) above.
(d) On each Auction Date:
(i) each Potential Securityholder and Existing Securityholder with an
Order in the Auction on such Auction Date will instruct its Participant as
provided in (b)(ii) or (b)(iii) above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant in DTC's
system will instruct its Participant to deliver such Securities through DTC
to a Buyer's Broker-Dealer (or its Participant) identified to such Seller's
Broker-Dealer pursuant to (a) (v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in DTC's
system will instruct its Participant to pay through DTC to Seller's
Broker-Dealer (or its Participant) identified following such Auction
pursuant to (a) (vi) above the amount necessary to purchase the Securities
to be purchased pursuant to (b)(ii) above against receipt of such
Securities.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction Date
referred to in (d)(i) above will instruct DTC to execute the transactions
described under (b)(ii) or (b)(iii) above for such Auction, and DTC will
execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct DTC to
execute the transactions described in (d)(ii) above for such Auction, and
DTC will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct DTC to
execute the transactions described in (d)(iii) above for such Auction, and
DTC will execute such transactions.
(f) If an Existing Securityholder selling Securities in an Auction fails to
deliver such Securities (by authorized book-entry), a Broker-Dealer may deliver
to the Potential Securityholder on behalf of which it submitted a Bid that was
accepted a principal amount of Securities that is less than the principal amount
of
II-2
<PAGE>
Securities that otherwise was to be purchased by such Potential Securityholder.
In such event, the principal amount of Securities to be so delivered will be
determined solely by such Broker-Dealer (but only in Authorized Denominations).
Delivery of such lesser principal amount of Securities will constitute good
delivery. Notwithstanding the foregoing terms of this paragraph (f), any
delivery or nondelivery of Securities which will represent any departure from
the results of an Auction, as determined by the Auction Agent, will be of no
effect unless and until the Auction Agent will have been notified of such
delivery or nondelivery in accordance with the provisions of the Auction Agent
Agreement and the Broker-Dealer Agreements. Neither the Trustee nor the Auction
Agent will have any responsibility or liability with respect to the failure of a
Potential Securityholder, Existing Securityholder or their Respective
Broker-Dealer or Participant to take delivery of or deliver, as the case may be,
the principal amount of the Securities purchased or sold pursuant to an Auction
or otherwise.
II-3
<PAGE>
$96,900,000
[LOGO]
THE MONEY STORE SBA LOAN-BACKED ADJUSTABLE
RATE CERTIFICATES, SERIES 1999-1
----------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------
FIRST UNION CAPITAL MARKETS
PRUDENTIAL SECURITIES
UNDERWRITERS
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the offered certificates in any state where the offer is
not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the offered certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the offered
certificates will be required to deliver a prospectus supplement and prospectus
until June 27, 1999.
MARCH 29, 1999
