<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 5, 1996)
$144,673,000
FIRST MERCHANTS AUTO TRUST 1996-C
$101,000,000 FLOATING RATE ASSET BACKED NOTES, CLASS A-1
$ 37,886,000 6.15% ASSET BACKED NOTES, CLASS A-2
$ 5,787,000 6.35% ASSET BACKED CERTIFICATES
FIRST MERCHANTS AUTO RECEIVABLES CORPORATION II
SELLER
FIRST MERCHANTS ACCEPTANCE CORPORATION
SERVICER
[LOGO]
First Merchants Auto Trust 1996-C (the "Trust") will be formed pursuant to an
Amended and Restated Trust Agreement to be dated as of December 1, 1996 (the
"Trust Agreement"), between First Merchants Auto Receivables Corporation II (the
"Seller") and Chase Manhattan Bank Delaware, as owner trustee (the "Owner
Trustee"). The Trust will issue $101,000,000 aggregate principal amount of
Floating Rate Asset Backed Notes, Class A-1 (the "Class A-1 Notes") and
$37,886,000 aggregate principal amount of 6.15% Asset Backed Notes, Class A-2
(the "Class A-2 Notes" and, together with the Class A-1 Notes, the "Notes")
pursuant to an Indenture dated as of December 1, 1996 (the "Indenture"), between
the Trust and Harris Trust and Savings Bank, as indenture trustee (the
"Indenture Trustee"). The Trust also will issue $5,787,000 aggregate principal
amount of 6.35% Asset Backed Certificates (the "Certificates" and, together with
the Notes, the "Securities") pursuant to the Trust Agreement. Payments of
principal of and interest on the Certificates will be subordinated to payments
of principal of and interest on the Notes to the extent described herein.
The assets of the Trust will include a pool of motor vehicle retail installment
sale contracts (the "Initial Receivables") and any additional motor vehicle
retail installment sale contracts conveyed to the Trust during the Funding
Period, as described herein (the "Subsequent Receivables" and, together with the
Initial Receivables, the "Receivables"), in each case secured by security
interests in the motor vehicles financed thereby, including the right to receive
payments collected thereon on or after the applicable cutoff date; proceeds from
certain insurance policies relating to the Receivables; certain rights with
respect to funds on deposit in a collateral spread account; funds on deposit in
an account of the Trust (the "Pre-Funding Account") to be used to purchase the
Subsequent Receivables; funds on deposit in an account of the Trust (the
"Capitalized Interest Account") established in connection with the Pre-Funding
Account, as described herein; and certain other property, as more fully
described herein. Holders of the Notes and the Certificates also will have the
benefit of financial guaranty insurance policies to be issued by Financial
Security Assurance Inc.
Principal of and interest on the Securities generally will be distributable on
the fifteenth day of each month (or if such fifteenth day is not a business day,
the next succeeding business day), commencing January 15, 1997; however, no
principal payments will be made to holders of the Class A-2 Notes or the
Certificates until the Class A-1 Notes have been paid in full, and no principal
payments will be made to holders of the Certificates until the Class A-2 Notes
have been paid in full. The Class A-1 Final Scheduled Distribution Date will be
June 15, 2000, the Class A-2 Final Scheduled Distribution Date will be July 16,
2001 and the Certificate Final Scheduled Distribution Date will be January 15,
2003; however, payment in full of the Class A-1 Notes, Class A-2 Notes or
Certificates could occur earlier than the applicable Final Scheduled
Distribution Date, as described herein. The Securities are subject to partial
mandatory redemption or prepayment to the extent of funds remaining in the
Pre-Funding Account at the end of the Funding Period (as defined herein).
The full and timely payment of interest on and principal of the Notes and the
Certificates is unconditionally and irrevocably guaranteed pursuant to financial
guaranty insurance policies to be issued by
[LOGO]
PROSPECTIVE INVESTORS SHOULD CONSIDER THE POTENTIAL RISK FACTORS SET FORTH UNDER
"RISK FACTORS" ON PAGE S-19 HEREOF AND ON PAGE 14 OF THE PROSPECTUS.
THE NOTES WILL REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES WILL REPRESENT
BENEFICIAL INTERESTS IN, THE TRUST ONLY AND DO NOT REPRESENT OBLIGATIONS OF OR
INTERESTS IN FIRST MERCHANTS AUTO RECEIVABLES CORPORATION II, FIRST MERCHANTS
ACCEPTANCE CORPORATION OR ANY OF THEIR RESPECTIVE AFFILIATES. NONE OF THE NOTES,
THE CERTIFICATES OR THE RECEIVABLES ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Underwriters have severally agreed to purchase the Notes and Certificates,
respectively, from the Seller as provided herein, and the Notes and Certificates
will be offered by the Underwriters from time to time as provided herein in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The aggregate proceeds to the Seller from the sale of the
Securities are expected to be $144,075,168.73 before deducting expenses payable
by the Seller of approximately $400,000.
The Notes and Certificates are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any offer
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Securities will be made in book-entry form
through the facilities of The Depository Trust Company ("DTC"), and solely in
the case of the Notes, Cedel Bank, societe anonyme ("CEDEL") and the Euroclear
System ("Euroclear") on or about December 18, 1996.
Underwriters of the Notes
SALOMON BROTHERS INC BEAR, STEARNS & CO. INC.
Underwriter of the Certificates
SALOMON BROTHERS INC
The date of this Prospectus Supplement is December 10, 1996.
<PAGE>
THE SECURITIES ARE BEING OFFERED BY THE SELLER FROM TIME TO TIME PURSUANT TO
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS ACCOMPANYING THIS PROSPECTUS
SUPPLEMENT. THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION
ABOUT THE OFFERING OF THE SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS, AND PURCHASERS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS IN FULL. SALES OF THE SECURITIES MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
TO THE EXTENT THAT ANY STATEMENTS IN THIS PROSPECTUS SUPPLEMENT MODIFY
STATEMENTS CONTAINED IN THE PROSPECTUS, THE STATEMENTS IN THIS PROSPECTUS
SUPPLEMENT SHALL CONTROL.
There currently is no secondary market for the Securities and there is no
assurance that one will develop. Each of the Note Underwriters expects, but is
not obligated, to make a market in the Notes, and the Certificate Underwriter
expects, but is not obligated, to make a market in the Certificates. There is no
assurance that any such market will develop, or if one does develop, that it
will continue or provide sufficient liquidity.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL. SUCH TRANSACTIONS, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from an Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Seller or such
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
UNTIL 90 DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS EFFECTING
TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
REPORTS TO SECURITYHOLDERS
Unless and until the Notes or the Certificates are issued in definitive
certificated form, monthly and annual unaudited reports containing information
concerning the Receivables will be prepared by the Servicer and sent on behalf
of the Trust only to Cede & Co., as nominee of DTC and registered holder of the
Notes and the Certificates. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Reports to Securityholders" in the
accompanying Prospectus. Such reports will not constitute financial statements
prepared in accordance with generally accepted accounting principles. First
Merchants will file with the Securities and Exchange Commission (the
"Commission") such periodic reports with respect to the Trust as are required
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations of the Commission thereunder.
S-2
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE HEREIN AND IN THE PROSPECTUS. CERTAIN
CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT ON THE PAGES INDICATED IN THE "INDEX OF DEFINED TERMS" OR, TO THE
EXTENT NOT DEFINED HEREIN, HAVE THE MEANINGS ASSIGNED TO SUCH TERMS IN THE
PROSPECTUS.
<TABLE>
<S> <C>
Issuer.......................... First Merchants Auto Trust 1996-C (the "Trust"), a
Delaware business trust to be formed pursuant to an
Amended and Restated Trust Agreement to be dated as of
December 1, 1996, between the Seller and the Owner Trustee
(as amended and supplemented from time to time, the "Trust
Agreement").
Seller.......................... First Merchants Auto Receivables Corporation II (the
"Seller"), a bankruptcy-remote, special-purpose Delaware
corporation and a wholly owned subsidiary of First
Merchants Acceptance Corporation created to purchase motor
vehicle installment sales contracts, such as the
Receivables, from time to time from First Merchants. See
"The Seller and First Merchants."
Servicer........................ First Merchants Acceptance Corporation ("First Merchants"
or, in its capacity as servicer, the "Servicer"). See "The
Seller and First Merchants."
Indenture Trustee............... Harris Trust and Savings Bank, an Illinois banking
corporation, as trustee under the Indenture (the
"Indenture Trustee").
Owner Trustee................... Chase Manhattan Bank Delaware, a Delaware banking
corporation, as trustee under the Trust Agreement (the
"Owner Trustee").
Backup Servicer and Collateral
Agent......................... In addition to acting as Indenture Trustee under the
Indenture, Harris Trust and Savings Bank will agree in the
Sale and Servicing Agreement to act as backup servicer (in
such capacity, the "Backup Servicer") and to service the
Receivables in the event First Merchants resigns or is
removed as Servicer. Harris Trust and Savings Bank will
also agree in the Spread Account Agreement to act as
collateral agent (in such capacity, the "Collateral
Agent") on behalf of the Trust and the Security Insurer
with respect to the Spread Account and the amounts
deposited thereto.
Security Insurer................ Financial Security Assurance Inc., a New York financial
guaranty insurance company (the "Security Insurer"). See
"Financial Security Assurance Inc."
Securities Issued by the
Trust......................... The Trust will issue its Floating Rate Asset Backed Notes,
Class A-1 (the "Class A-1 Notes") in an aggregate initial
principal amount of $101,000,000 (the "Initial Class A-1
Note Balance") and its 6.15% Asset Backed Notes, Class A-2
(the "Class A-2 Notes" and, together with the Class A-1
Notes, the "Notes") in an aggregate initial principal
amount of $37,886,000 (the "Initial Class A-2 Note
Balance") pursuant to an Indenture dated as of
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
December 1, 1996 (the "Indenture"), between the Trust and
the Indenture Trustee. Payments of interest on and
principal of the Notes will be secured by the assets of
the Trust pursuant to the Indenture. The "Note Balance" as
of any date of determination will equal the sum of (i) the
Initial Class A-1 Note Balance and (ii) the Initial Class
A-2 Note Balance, less all amounts distributed to
Noteholders on or prior to such date and allocable to
principal.
The Trust will issue the 6.35% Asset Backed Certificates
(the "Certificates" and together with the Notes, the
"Securities") in an aggregate initial principal amount of
$5,787,000 pursuant to the Trust Agreement. The
Certificates will be subordinate to the Notes to the
extent described herein.
The Notes will be issued in fully registered form in
minimum denominations of $1,000 and integral multiples of
$1,000 in excess thereof. The Certificates will be issued
in fully registered form in minimum denominations of
$20,000 and integral multiples of $1,000 in excess
thereof.
Assets of the Trust............. The assets of the Trust will include (i) a pool of motor
vehicle retail installment sale contracts having an
aggregate principal balance as of November 14, 1996 (the
"Cutoff Date") of $108,504,998.27 (the "Initial
Receivables") and any additional motor vehicle retail
installment sale contracts (the "Subsequent Receivables"
and, together with the Initial Receivables, the
"Receivables") purchased by the Trust from the Seller
during the Funding Period (as defined herein) from funds
on deposit in an account (the "Pre-Funding Account")
established for that purpose, (ii) all rights, benefits,
obligations and proceeds arising from or in connection
with the Receivables, including, in the case of each
Initial Receivable, the right to receive payments
collected thereon on or after the Cutoff Date, and, in the
case of each Subsequent Receivable, the right to receive
payments collected thereon on or after the date as of
which such Subsequent Receivable is conveyed to the Trust
(each, a "Subsequent Cutoff Date"), (iii) security
interests in the new and used automobiles, light duty
trucks, vans and minivans (the "Financed Vehicles")
securing each Receivable, (iv) the related Receivable
files, (v) all rights to insurance proceeds and
liquidation proceeds with respect to the Receivables, (vi)
certain rights under the Receivables Purchase Agreement
dated as of December 1, 1996 (the "Receivables Purchase
Agreement"), between the Seller and First Merchants, (vii)
certain rights with respect to funds on deposit from time
to time in the Spread Account, as described herein; (viii)
funds on deposit in the Pre-Funding Account; and (ix)
funds on deposit in the Capitalized Interest Account.
Holders of the Notes and the Certificates also will have
the benefit of financial guaranty insurance policies to be
issued by the Security Insurer (the "Notes Policy" and the
"Certificates Policy", respectively, and, together, the
"Policies").
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
The Notes....................... The principal terms of the Notes will be as follows:
DISTRIBUTION DATES. Payments of interest on and principal
of the Notes will be made on the 15th day of each month
or, if such 15th day is not a Business Day, the next
succeeding Business Day, commencing January 15, 1997 (each
such date, a "Distribution Date"). Payments on the Notes
will be made on each Distribution Date to holders of
record of the Notes (the "Noteholders") as of the close of
business on the day immediately preceding such
Distribution Date (the "Record Date").
For purposes of this document, "Business Day" means any
day other than a Saturday, a Sunday, a legal holiday or
any other day on which commercial banking institutions in
New York, New York, Chicago, Illinois or any other city in
which the corporate trust office of the Indenture Trustee
is located are authorized or required by law, executive
order or governmental decree to be closed.
INTEREST RATES. The Class A-1 Notes will bear interest at
a per annum rate (the "Class A-1 Rate") equal to LIBOR for
the applicable Floating Rate Interest Accrual Period plus
0.11%, subject to a maximum per annum rate of 11.0%. The
Class A-2 Notes will bear interest at the rate of 6.15%
per annum (the "Class A-2 Rate").
"LIBOR" with respect to any Distribution Date will be
established by the Calculation Agent, which shall be the
Indenture Trustee, and will equal the offered rate for
United States dollar deposits for one month that appears
on Telerate Page 3750 as of 11:00 a.m., London time, on
the second LIBOR Business Day prior to the immediately
preceding Distribution Date or, in the case of the initial
Distribution Date, the second LIBOR Business Day prior to
the Closing Date (the "LIBOR Determination Date").
"Telerate Page 3750" means the display page so designated
on the Dow Jones Telerate Service (or such other page as
may replace that page on that service or such other
service as may be nominated by the information vendor for
the purpose of displaying London interbank offered rates
of major banks). If such rate appears on Telerate Page
3750 on a LIBOR Determination Date, LIBOR for the related
Floating Rate Interest Accrual Period will be such rate.
If on any LIBOR Determination Date such offered rate does
not appear on Telerate Page 3750, the Calculation Agent
will request each of the reference banks (which will be
major banks that are engaged in transactions in the London
interbank market selected by the Calculation Agent) to
provide the Calculation Agent with its offered quotation
for United States dollar deposits for one month to prime
banks in the London interbank market as of 11:00 a.m.,
London time, on such date. If at least two reference banks
provide the Calculation Agent with such offered
quotations, LIBOR with respect to such date will be the
arithmetic mean (rounded upwards, if necessary, to the
nearest one-sixteenth of one percent) of all such
quotations. If on such date fewer than two of
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
the reference banks provide the Calculation Agent with
such offered quotations, LIBOR with respect to such date
will be the arithmetic mean (rounded upwards, if
necessary, to the nearest one-sixteenth of one percent) of
the offered per annum rates that one or more leading banks
in New York City selected by the Calculation Agent are
quoting as of 11:00 a.m., New York City time, on such date
to leading European banks for United States dollar
deposits for one month; provided, however, that if such
banks are not quoting as described above, LIBOR with
respect to such date will be LIBOR applicable to the
immediately preceding Distribution Date. "LIBOR Business
Day" as used herein means a day that is both a Business
Day and a day on which banking institutions in the City of
London, England are not required or authorized by law to
be closed.
PAYMENTS OF INTEREST. Interest with respect to each
Distribution Date will accrue on the outstanding principal
amount of the Class A-1 Notes (the "Class A-1 Monthly
Interest Distributable Amount") at the Class A-1 Rate from
and including the most recent Distribution Date on which
interest was paid on the Notes (or, in the case of the
first Distribution Date, from and including the Closing
Date) to, but excluding, such Distribution Date (each, a
"Floating Rate Interest Accrual Period"). Interest on the
Class A-1 Notes will be calculated on the basis of the
actual number of days in each Floating Rate Interest
Accrual Period divided by 360. Interest with respect to
each Distribution Date will accrue on the outstanding
principal amount of the Class A-2 Notes (the "Class A-2
Monthly Interest Distributable Amount") at the Class A-2
Rate from and including the 15th day of the preceding
calendar month (or, in the case of the first Distribution
Date, from and including the Closing Date) to and
including the 14th day of the calendar month in which such
Distribution Date occurs. Interest on the Class A-2 Notes
will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. Interest that is due
but not paid on any Distribution Date on the Class A-1
Notes or the Class A-2 Notes will be payable on the
following Distribution Date, with interest on such overdue
amount (to the extent lawful) at the Class A-1 Rate or the
Class A-2 Rate, as applicable (the "Class A-1 Interest
Carryover Shortfall" and "Class A-2 Interest Carryover
Shortfall", respectively). The Class A-1 Monthly Interest
Distributable Amount and the Class A-1 Interest Carryover
Shortfall are sometimes referred to herein collectively as
the "Class A-1 Interest Distributable Amount"; and the
Class A-2 Monthly Interest Distributable Amount and the
Class A-2 Interest Carryover Shortfall are sometimes
referred to herein collectively as the "Class A-2 Interest
Distributable Amount." The Class A-1 Interest
Distributable Amount and the Class A-2 Interest
Distributable Amount are sometimes referred to herein
collectively as the "Noteholders' Interest Distributable
Amount."
Interest payments to holders of the Class A-1 Notes and
the Class A-2 Notes will have the same priority. If the
amount available for
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
distribution to Noteholders on any Distribution Date is
less than the amount of interest payable on the Notes,
Noteholders will receive their ratable share of such
amount, based on the aggregate amount of interest due on
such date on each class of the Notes.
See "Description of the Notes--Payments of Interest."
PAYMENTS OF PRINCIPAL. Principal of the Class A-1 Notes
will be payable on each Distribution Date in an amount
equal to the Class A-1 Principal Distributable Amount for
the related Collection Period, to the extent of funds
available therefor. The "Collection Period" with respect
to any Distribution Date other than the first Distribution
Date will be the calendar month preceding such
Distribution Date. The Collection Period with respect to
the first Distribution Date will be the period from and
including the Cutoff Date to and including December 31,
1996. The "Class A-1 Principal Distributable Amount" will
equal the sum of (i) the Class A-1 Monthly Principal
Distributable Amount and (ii) any portion of the Class A-1
Principal Distributable Amount that was due but unpaid on
the immediately preceding Distribution Date (the "Class
A-1 Principal Carryover Shortfall"). The "Class A-1
Monthly Principal Distributable Amount" for any
Distribution Date until the Class A-1 Notes are paid in
full will equal 100% of the Regular Principal Distribution
Amount.
The "Regular Principal Distribution Amount" on any
Distribution Date will be the sum of the following
amounts, without duplication, with respect to the related
Collection Period: (i) that portion of all collections on
the Receivables allocable to principal; (ii) the aggregate
outstanding principal balance of all Receivables that
became Liquidated Receivables during such Collection
Period; (iii) that portion allocable to principal of the
aggregate amount of any losses caused by the issuance
during the related Collection Period of an order by any
court of appropriate jurisdiction in any insolvency
proceeding that reduces the amount owed under a Receivable
(each such reduction, a "Cram Down Loss"); and (iv) that
portion allocable to principal of the Purchase Amount of
all Receivables that became Purchased Receivables during
or in respect of such Collection Period.
No principal payments will be made on the Class A-2 Notes
until the Class A-1 Notes have been paid in full. On each
Distribution Date, commencing on the Distribution Date on
which the Class A-1 Notes are paid in full, principal of
the Class A-2 Notes will be payable in an amount equal to
the Class A-2 Principal Distributable Amount for the
related Collection Period, to the extent of funds
available therefor. The "Class A-2 Principal Distributable
Amount" will equal the sum of (i) the Class A-2 Monthly
Principal Distributable Amount and (ii) any portion of the
Class A-2 Principal Distributable Amount that was due but
unpaid on the immediately preceding Distribution Date (the
"Class A-2 Principal Carryover Shortfall"). The Class A-1
Principal
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
Distributable Amount and the Class A-2 Principal
Distributable Amount are sometimes referred to herein
collectively as the "Noteholders' Principal Distributable
Amount."
The "Class A-2 Monthly Principal Distributable Amount" for
any Distribution Date on or after the Distribution Date on
which the Class A-1 Notes are paid in full will equal 100%
of the Regular Principal Distribution Amount (or, on the
Distribution Date on which the Class A-1 Notes are paid in
full, 100% of the Regular Principal Distribution Amount
remaining after the Class A-1 Notes are paid in full). In
addition, on any Distribution Date on or after the
Distribution Date on which the Class A-1 Notes are paid in
full, the Class A-2 Notes will receive as a payment of
principal of such Notes, to the extent of funds available
therefor, an amount (the "Class A-2 Additional Principal
Distribution Amount") equal to 50% of the portion, if any,
of the Total Distribution Amount for the related
Collection Period that remains after the payment of (a)
the Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Distribution
Dates), (b) any accrued and unpaid fees owed to the Owner
Trustee and the Indenture Trustee, to the extent such fees
are not paid by the Servicer, (c) the Noteholders'
Interest Distributable Amount, (d) the Noteholders'
Principal Distributable Amount, (e) the
Certificateholders' Interest Distributable Amount, (f) any
amounts owed to the Security Insurer under the Insurance
Agreement (as defined herein) and (g) any deficiency in
the Spread Account Required Amount.
The outstanding principal amount, if any, of the Class A-1
Notes will be payable in full on the June 15, 2000
Distribution Date (the "Class A-1 Final Scheduled
Distribution Date") and the outstanding principal amount,
if any, of the Class A-2 Notes will be payable in full on
the July 16, 2001 Distribution Date (the "Class A-2 Final
Scheduled Distribution Date").
MANDATORY REDEMPTION. The Notes are subject to partial
mandatory redemption on the Mandatory Redemption Date if
any amount remains on deposit in the Pre-Funding Account
after giving effect to the purchase of all Subsequent
Receivables, including those purchases, if any, made on
the last day of the Funding Period. If the amount on
deposit in the Pre-Funding Account is $150,000 or less,
then such amount will be applied in reduction of the
principal balance of the Class A-1 Notes. If the amount on
deposit in the Pre-Funding Account exceeds $150,000, then
such amount will be applied in reduction of the principal
balance of each Class of Notes and the Certificates pro
rata, based on the respective principal balances thereof
as of the preceding Distribution Date. The "Mandatory
Redemption Date" is the Distribution Date immediately
following the last day of the Funding Period.
The Certificates................ PASS-THROUGH RATE. 6.35% per annum (the "Pass-Through
Rate").
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
DISTRIBUTIONS OF INTEREST. Interest with respect to each
Distribution Date (the "Certificateholders' Monthly
Interest Distributable Amount") will accrue on the
outstanding principal balance of the Certificates (the
"Certificate Balance") at the Pass-Through Rate from and
including the 15th day of the preceding calendar month
(or, in the case of the first Distribution Date, from and
including the Closing Date) to and including the 14th day
of the calendar month in which such Distribution Date
occurs. Interest on the Certificates will be calculated on
the basis of a 360-day year consisting of twelve 30-day
months. Interest that is due but not paid on any
Distribution Date on the Certificates will be payable on
the following Distribution Date, with interest on such
overdue amount (to the extent lawful) at the Pass-Through
Rate (the "Certificateholders' Interest Carryover
Shortfall"). The Certificateholders' Monthly Interest
Distributable Amount and the Certificateholders' Interest
Carryover Shortfall are sometimes referred to herein
collectively as the "Certificateholders' Interest
Distributable Amount".
On each Distribution Date interest will be distributed PRO
RATA to holders of record of the Certificates as of the
related Record Date (the "Certificateholders" and,
together with the Noteholders, the "Securityholders"),
generally to the extent of the Total Distribution Amount
for the related Collection Period that remains after the
payment of the amounts described in clauses (a) through
(d) of the fourth paragraph under "The Notes--Payments of
Principal" above. The "Total Distribution Amount" with
respect to each Distribution Date will equal the sum of
the Regular Principal Distribution Amount (other than the
portion thereof attributable to Realized Losses or Cram
Down Losses) and an amount (the "Interest Distribution
Amount") equal to the sum of the following amounts with
respect to the related Collection Period: (i) that portion
of all collections on the Receivables allocable to
interest; (ii) that portion of all net liquidation
proceeds allocable to interest; (iii) that portion
allocable to interest of the Purchase Amount of each
Receivable that became a Purchased Receivable during or in
respect of the related Collection Period; (iv) any
investment income (net of related expenses) from the
investment of amounts on deposit in the Collection
Account, the Pre-Funding Account and the Capitalized
Interest Account; and (v) amounts released from the
Capitalized Interest Account. "Realized Losses" as to any
Distribution Date will equal the amount, if any, by which
the outstanding aggregate principal balance of all
Receivables that became Liquidated Receivables during the
related Collection Period exceeds that portion allocable
to principal of all net liquidation proceeds received with
respect to such Liquidated Receivables.
DISTRIBUTIONS OF PRINCIPAL. No distributions of principal
on the Certificates will be made until the Class A-2 Notes
have been paid in full. On each Distribution Date,
commencing on the Distribution Date on which the Class A-2
Notes are paid in full, principal of the
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
Certificates will be payable in an amount equal to the
Certificateholders' Principal Distributable Amount for the
related Collection Period, to the extent of funds
available therefor following payment of the amounts set
forth in clauses (i) through (v) under "Description of the
Transfer and Servicing Agreements--Distributions--Deposits
to the Distribution Accounts."
The "Certificateholders' Principal Distributable Amount"
will equal, on any Distribution Date on or after the
Distribution Date on which the Class A-2 Notes are paid in
full, the sum of (i) the Certificateholders' Monthly
Principal Distributable Amount and (ii) any portion of the
Certificateholders' Principal Distributable Amount that
was due and unpaid on the immediately preceding
Distribution Date (the "Certificateholders' Principal
Carryover Shortfall"). The "Certificateholders' Monthly
Principal Distributable Amount" for any Distribution Date
on or after the Distribution Date on which the Class A-2
Notes are paid in full, until the Certificates are paid in
full, will equal 100% of the Regular Principal
Distribution Amount (less, on the Distribution Date on
which the Class A-2 Notes are paid in full, the portion
thereof payable on the Class A-2 Notes). The outstanding
principal amount, if any, of the Certificates will be
payable in full on the January 15, 2003 Distribution Date
(the "Certificate Final Scheduled Distribution Date").
MANDATORY PREPAYMENT. The Certificates are subject to
partial mandatory prepayment on the Mandatory Redemption
Date if more than $150,000 remains on deposit in the
Pre-Funding Account after giving effect to the purchase of
all Subsequent Receivables, including those purchases, if
any, made on the last day of the Funding Period. Such
amount will be applied in reduction of the principal
balance of each Class of Notes and the Certificates PRO
RATA, based on the respective principal balances thereof
as of the preceding Distribution Date.
Optional Redemption; Optional
Prepayment.................... The Class A-2 Notes and the Certificates may be retired,
in whole but not in part, on any Distribution Date on
which the Servicer exercises its option to purchase the
Receivables. Under the terms of the Sale and Servicing
Agreement, the Servicer may purchase the Receivables when
the Pool Balance has been reduced to 10% or less of the
Initial Pool Balance. The "Pool Balance" on any
Distribution Date will equal the aggregate principal
balance of the Receivables at the end of the related
Collection Period, after giving effect to all payments
received from Obligors and Purchase Amounts to be remitted
by the Servicer or First Merchants, as the case may be,
for such Collection Period, and after adjustment for Cram
Down Losses and reduction to zero of the aggregate
outstanding principal balance of all Receivables that
became Liquidated Receivables during such Collection
Period. The "Initial Pool Balance" will equal the sum of
(i) the aggregate principal
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
balance of the Initial Receivables as of the Cutoff Date
and (ii) the aggregate principal balances of all
Subsequent Receivables as of their respective Subsequent
Cutoff Dates. Any such purchase of the Receivables by the
Servicer will result in the early retirement of the Class
A-2 Notes and the Certificates at a purchase price equal
to the outstanding principal amounts thereof plus accrued
and unpaid interest thereon.
The Receivables................. The Receivables will consist of non-prime motor vehicle
retail installment sale contracts (the "Contracts")
secured by new or used automobiles, light duty trucks,
vans and minivans, including the right to receive certain
payments made with respect thereto, security interests in
the related Financed Vehicles and the proceeds thereof.
The Contracts were or will be originated by retail motor
vehicle dealers who participate in First Merchants' auto
financing program and were or will be acquired by First
Merchants from such dealers. The obligors on the Contracts
are primarily consumers with limited access to traditional
sources of credit ("non-prime" borrowers), who are
generally relatively higher credit risks due to various
factors, including their past credit experience and the
absence or limited extent of their credit history. See
"Risk Factors--Nature of Obligors and Financed Vehicles;
Servicing" and "First Merchants' Automobile Financing
Program."
The Trust will purchase the Initial Receivables from the
Seller on December 18, 1996 (the "Closing Date") pursuant
to a Sale and Servicing Agreement dated as of December 1,
1996 (the "Sale and Servicing Agreement"), among the
Trust, the Seller, the Servicer and the Backup Servicer.
The Seller will have purchased the Initial Receivables,
and subject to the availability thereof, will be obligated
to purchase the Subsequent Receivables, from First
Merchants pursuant to the Receivables Purchase Agreement.
In the Receivables Purchase Agreement, First Merchants
will make certain representations and warranties with
respect to the Receivables and will agree to repurchase
any Receivable with respect to which there is a breach of
any such representation and warranty if such breach has a
material and adverse effect on the interests of the Seller
or the Trust in such Receivable. Under the Sale and
Servicing Agreement, the Seller will assign all of its
rights under the Receivables Purchase Agreement, including
its right to enforce First Merchants' repurchase
obligation, to the Trust.
The Initial Receivables have been selected from First
Merchants' portfolio of Contracts based on the criteria
specified in the Receivables Purchase Agreement and the
Sale and Servicing Agreement and are described herein
under "The Receivables Pool." As of the Cutoff Date, the
weighted average annual percentage rate ("APR") of the
Initial Receivables was approximately 20.36%, the weighted
average remaining term to maturity of the Initial
Receivables was approximately 53 months,
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
and the weighted average original term to maturity of the
Initial Receivables was approximately 55 months. No
Initial Receivable has a scheduled maturity later than
January 15, 2003 (the "Final Scheduled Maturity Date").
After the Closing Date, the Trust will be obligated to
purchase from the Seller from time to time before the end
of the Funding Period, from funds on deposit in the
Pre-Funding Account and subject to the availability
thereof, Subsequent Receivables satisfying the criteria
set forth in the Sale and Servicing Agreement. The
aggregate principal balance of the Subsequent Receivables
is anticipated by First Merchants to be approximately
$36,168,001.73. Pursuant to the Receivables Purchase
Agreement and the Sale and Servicing Agreement, the Seller
may purchase Subsequent Receivables only from First
Merchants and is obligated to sell the Subsequent
Receivables to the Trust, and the Trust may purchase
Subsequent Receivables only from the Seller. During the
Funding Period, the Seller will purchase the Subsequent
Receivables from First Merchants pursuant to one or more
subsequent purchase agreements (each, a "Subsequent
Purchase Agreement") and will convey the Subsequent
Receivables on designated dates (each, a "Subsequent
Transfer Date") to the Trust pursuant to subsequent
transfer agreements (each, a "Subsequent Transfer
Agreement").
Subsequent Receivables conveyed to the Trust on different
Subsequent Transfer Dates during the Funding Period may be
originated by First Merchants using different credit
criteria, may be of different credit quality and
seasoning, and may otherwise vary significantly from
Receivables previously originated by First Merchants. See
"Risk Factors" and "The Receivables Pool" herein.
The Receivables may be prepaid at any time without penalty
to the purchaser or co-purchasers of the Financed Vehicle
or any other person or persons who are obligated to make
payments thereunder (each, an "Obligor").
Pre-Funding Account............. On the Closing Date, a cash amount (the "Pre-Funded
Amount") equal to approximately $36,168,001.73 will be
deposited into an account (the "Pre-Funding Account")
which will be established in the name of the Indenture
Trustee. The Pre-Funding Account will be an asset of the
Trust and will be pledged to the Indenture Trustee
pursuant to the Indenture. Such amount will be funded from
the sale of the Securities and is expected to be used to
acquire Subsequent Receivables. The "Funding Period" is
the period from and including the Closing Date until the
earliest of (i) the Determination Date on which the amount
on deposit in the Pre-Funding Account is $150,000 or less,
(ii) the occurrence of an Event of Default under either
the Indenture or the Sale and Servicing Agreement and
(iii) the Determination Date in March 1997. The Pre-Funded
Amount will be reduced during the Funding Period by the
amount thereof used to purchase
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
Subsequent Receivables in accordance with the Sale and
Servicing Agreement. The Seller expects that the
Pre-Funded Amount will be reduced to less than $150,000 on
or before the Determination Date in March 1997. Any
Pre-Funded Amount remaining at the end of the Funding
Period will be payable as a principal distribution to the
Securityholders as a partial mandatory redemption or
prepayment on the immediately following Distribution Date.
Capitalized Interest Account.... On the Closing Date, a cash amount will be deposited in an
account (the "Capitalized Interest Account") which will be
established in the name of the Indenture Trustee. The
Capitalized Interest Account will be an asset of the
Trust, and will be pledged to the Indenture Trustee
pursuant to the Indenture. The amount so deposited in the
Capitalized Interest Account, including reinvestment
income thereon, will be applied (together with
reinvestment income on the Pre-Funding Account) on each
Distribution Date up to and including the Mandatory
Redemption Date to the amount of interest accrued at the
weighted average of the Class A-1 Rate, Class A-2 Rate and
the Pass-Through Rate on the amount by which the sum of
the Certificate Balance and the Note Balance exceeds the
Pool Balance. Any amounts remaining in the Capitalized
Interest Account not needed for such purpose will be paid
to the Seller on the Distribution Date immediately
following the end of the Funding Period.
Credit Enhancement
A. The Policies............... Concurrently with the issuance of the Securities, the
Security Insurer will issue the Notes Policy to the
Indenture Trustee and the Certificates Policy to the Owner
Trustee pursuant to an Insurance and Indemnity Agreement
dated as of December 1, 1996 (the "Insurance Agreement"),
among the Security Insurer, the Trust, First Merchants and
the Seller. Under the Policies, the Security Insurer will
unconditionally and irrevocably guarantee (i) the full,
complete and timely payment of the Noteholders' Interest
Distributable Amount, the Noteholders' Principal
Distributable Amount, the Certificateholders' Interest
Distributable Amount and the Certificateholders' Principal
Distributable Amount (collectively, the "Guaranteed
Payments") and (ii) the full and complete payment of any
portion of the interest or principal that is distributed
to Securityholders and subsequently recovered from any
such holder pursuant to a final, nonappealable order of a
court of competent jurisdiction under applicable
bankruptcy or insolvency laws.
B. Spread Account............. On the Closing Date, the Seller will establish a separate
collateral account (the "Spread Account") and will make an
initial deposit thereto of an amount to be agreed upon by
the Seller and the Security Insurer. In addition, on each
Subsequent Transfer Date an additional amount to be agreed
upon by the Seller and the Security Insurer will be
deposited into the Spread Account from the amount
withdrawn from the Pre-Funding Account in
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
connection with the sale of Subsequent Receivables to the
Trust and otherwise distributable to the Seller. The
amount initially deposited in the Spread Account, together
with the amount of any additional deposit referred to
above in connection with a Subsequent Transfer Date, is
referred to as the "Spread Account Initial Deposit." The
Spread Account will not be a part of the Trust, but will
be held by the Collateral Agent, and pledged to the
Indenture Trustee and the Owner Trustee for the benefit of
the Securityholders and the Security Insurer pursuant to a
Master Spread Account Agreement dated as of March 1, 1996
(the "Master Spread Account Agreement"), by and among the
Seller, the Collateral Agent, the Indenture Trustee and
the Security Insurer, and a Series 1996-C Supplement to
the Master Spread Account Agreement, dated as of December
1, 1996 (together with the Master Spread Account
Agreement, the "Spread Account Agreement"), by and among
the Seller, the Collateral Agent, the Indenture Trustee,
the Owner Trustee and the Security Insurer. On each
Distribution Date on which the amount on deposit in the
Spread Account is less than the Spread Account Required
Amount, the Total Distribution Amount remaining after the
distribution on such Distribution Date of the Noteholders'
Interest Distributable Amount, the Noteholders' Principal
Distributable Amount, the Certificateholders' Interest
Distributable Amount, the Certificateholders' Principal
Distributable Amount and the payment of all amounts due to
the Security Insurer, up to an amount equal to such
shortfall, will be distributed to the Collateral Agent for
deposit to the Spread Account.
The "Spread Account Required Amount" with respect to any
Distribution Date will be determined in accordance with
the Insurance Agreement and the Spread Account Agreement.
The Spread Account Required Amount may be increased or
decreased over time as a result of certain floors, caps or
triggers as set forth in the Insurance Agreement and the
Spread Account Agreement.
All amounts on deposit in the Spread Account on any
Distribution Date will be available to make up shortfalls
in the Noteholders' Interest Distributable Amount, the
Noteholders' Principal Distributable Amount, the
Certificateholders' Interest Distributable Amount, the
Certificateholders' Principal Distributable Amount and for
certain other purposes. On each Distribution Date, amounts
on deposit in the Spread Account in excess of the Spread
Account Required Amount may be released to the Seller or
other entities, subject to certain conditions set forth in
the Sale and Servicing Agreement and the Spread Account
Agreement. The Securityholders will have no further
interest in or rights with respect to any amounts so
released from the Spread Account.
Any amounts held on deposit in the Spread Account and any
investment earnings thereon will be owned by, and will be
taxable to, the Seller for federal income tax purposes.
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
C. Subordination of the
Certificates................ No distribution of interest will be made to
Certificateholders on any Distribution Date until the
holders of the Notes have been paid the Noteholders'
Interest Distributable Amount and the Noteholders'
Principal Distributable Amount for such Distribution Date,
and no distribution of principal will be made to
Certificateholders on any Distribution Date unless and
until the Class A-1 and Class A-2 Notes have been paid in
full. This subordination is intended to enhance the
likelihood of timely receipt by the Noteholders of the
full amount of interest and principal distributable to
them on each Distribution Date and to afford the
Noteholders limited protection against losses in respect
of the Receivables.
Allocation of Collections....... On each Distribution Date, the Total Distribution Amount
(and, if applicable, amounts on deposit in the Spread
Account and amounts payable by the Security Insurer
pursuant to the Policies) will be applied in the following
order of priority: (i) the Servicing Fee (together with
any portion of the Servicing Fee that remains unpaid from
prior Distribution Dates); (ii) any accrued and unpaid
fees owed to the Owner Trustee and the Indenture Trustee,
to the extent such fees are not paid by the Servicer;
(iii) the Class A-1 Interest Distributable Amount and
Class A-2 Interest Distributable Amount, paid ratably,
based on the aggregate amount of interest due on such date
on each class of Notes; (iv) the Noteholders' Principal
Distributable Amount; (v) the Certificateholders' Interest
Distributable Amount, (vi) after the Class A-2 Notes have
been paid in full, the Certificateholders' Principal
Distributable Amount; (vii) any amounts owed to the
Security Insurer pursuant to the Insurance Agreement;
(viii) any deficiency in the Spread Account Required
Amount; (ix) after the Class A-1 Notes have been paid in
full, any Class A-2 Additional Principal Distribution
Amount; and (x) any remaining amount to the Collateral
Agent to be applied pursuant to, and subject to the
conditions set forth in, the Spread Account Agreement.
If the Total Distribution Amount remaining on any
Distribution Date after payment of the amounts due
pursuant to clauses (i) and (ii) above is insufficient to
pay the Class A-1 Interest Distributable Amount, the Class
A-2 Interest Distributable Amount, the Noteholders'
Principal Distributable Amount, the Certificateholders'
Interest Distributable Amount, and the Certificateholders'
Principal Distributable Amount, such shortfall will be
paid, first, from amounts available, if any, in the Spread
Account and then from amounts payable under the applicable
Policy.
Transfer and Servicing
Agreements.................... First Merchants will sell the Receivables to the Seller
and will make certain representations and warranties with
respect to the Receivables pursuant to the Receivables
Purchase Agreement and Subsequent Purchase Agreements.
Pursuant to the Sale and
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
Servicing Agreement and Subsequent Transfer Agreements,
the Seller will sell the Receivables and will assign its
rights under the Receivables Purchase Agreement, including
its right to cause First Merchants to repurchase
Receivables with respect to which it is in breach of a
representation and warranty if such breach has a material
and adverse effect on the interests of the Seller or the
Trust. The rights and benefits of the Trust under the Sale
and Servicing Agreement will be assigned to the Indenture
Trustee as collateral for the Notes pursuant to the
Indenture. The Servicer will agree with the Trust to be
responsible for servicing, managing and making collections
on the Receivables. First Merchants will undertake certain
administrative duties pursuant to an Administration
Agreement dated as of December 1, 1996, among the Trust,
the Indenture Trustee and First Merchants, as
Administrator.
Consistent with its normal procedures, the Servicer may,
in its discretion and subject to the consent of the
Security Insurer, arrange with an Obligor to extend the
payment due date under the related Receivable. No such
arrangement will extend the final payment date on any
Receivable beyond the last day of the Collection Period
relating to the Final Scheduled Maturity Date. If the
Servicer grants an extension with respect to a Receivable
other than in accordance with the aforementioned
limitations, the Servicer will be required to purchase the
Receivable for the Purchase Amount.
The Servicer will be entitled to receive a fee for
servicing the Receivables on each Distribution Date (the
"Servicing Fee") equal to 2.50% per annum of the Pool
Balance as of the first day of the related Collection
Period (the "Servicing Fee Rate"), plus certain late fees,
prepayment charges and other administrative fees or
similar charges.
Collection Account; Local
Collection Accounts........... On or prior to the Closing Date, the Indenture Trustee
will establish one or more accounts (the "Collection
Account") in the name of the Indenture Trustee for the
benefit of the Securityholders.
On or prior to the Closing Date, First Merchants will
modify the payment statements sent to Obligors so that
payments made with respect to the Receivables on and after
the Cutoff Date will be addressed to one of several post
office boxes established by First Merchants for such
purpose (the "Post Office Boxes"). Payments mailed to the
Post Office Boxes will be collected on a daily basis by
the Servicer and deposited by the Servicer into one of
several accounts (each, a "Local Collection Account")
established in the name of the Indenture Trustee in
banking institutions approved by the Security Insurer. All
amounts in any Local Collection Account with respect to
the Receivables will be swept within two Business Days to
the Collection Account. Any payment by an Obligor on a
Receivable that is inadvertently delivered to First
Merchants rather
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
than being mailed to the applicable Post Office Box will
be deposited by First Merchants directly into the
applicable Local Collection Account, from which it will be
swept to the Collection Account.
Backup Servicer................. If a Servicer Termination Event occurs under the Sale and
Servicing Agreement, the rights and obligations of the
Servicer may be terminated (x) if no Security Insurer
Default shall have occurred and be continuing, by the
Security Insurer in its sole and absolute discretion or
(y) if a Security Insurer Default shall have occurred and
be continuing, by the Indenture Trustee or the holders of
Notes evidencing 25% or more of the aggregate outstanding
principal amount of the Notes. If the rights and
obligations of the Servicer are so terminated while First
Merchants is the Servicer, or if First Merchants resigns
as Servicer, the Backup Servicer shall act as successor
Servicer. The Backup Servicer will receive a portion of
the Servicing Fee for each Collection Period as
compensation for agreeing to stand by as successor
Servicer and for performing certain other functions.
Certain Legal Aspects of the
Receivables; Repurchase
Obligations................... In connection with the sale of the Receivables, security
interests in the Financed Vehicles securing the
Receivables will be assigned by First Merchants to the
Seller pursuant to the Receivables Purchase Agreement and
Subsequent Purchase Agreements and by the Seller to the
Trust pursuant to the Sale and Servicing Agreement and
Subsequent Transfer Agreements and will be pledged by the
Trust to the Indenture Trustee pursuant to the Indenture
as security for the Notes. Due to the administrative
burden and expense, however, the certificates of title to
the Financed Vehicles will not be amended or reissued to
reflect the assignment of such security interests to
either the Seller or the Trust or the pledge pursuant to
the Indenture. In the absence of such amendments, either
the Trust, the Indenture Trustee or both may not have a
perfected security interest in the Financed Vehicles
securing the Receivables in some states. First Merchants
will be obligated to repurchase any Receivables sold to
the Seller (and subsequently sold by the Seller to the
Trust) as to which there did not exist on the Closing Date
or Subsequent Transfer Date, as applicable, a first
perfected priority security interest in the name of First
Merchants in the related Financed Vehicle if such failure
materially and adversely affects the interest of any of
the Trust, the Indenture Trustee or the Security Insurer
in such Receivable and if such failure is not cured in a
timely manner.
To the extent their respective security interests in a
Financed Vehicle are perfected, the Trust and the
Indenture Trustee will have a prior claim over subsequent
purchasers of such Financed Vehicle and holders of
subsequently perfected security interests therein.
However, as against liens for repairs or storage of a
Financed Vehicle or for taxes unpaid by the related
Obligor, or
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
through fraud or negligence, the Trust and the Indenture
Trustee could lose their respective security interests or
the priority of such security interests in a Financed
Vehicle. First Merchants will not have any obligation to
repurchase a Receivable with respect to which the Trust or
the Indenture Trustee loses its security interest or the
priority of its security interest in the related Financed
Vehicle after the Closing Date or Subsequent Transfer
Date, as applicable, due to any such lien for repairs,
storage or taxes or due to the negligence or fraud of a
third party.
Tax Status...................... In the opinion of Brown & Wood LLP, special federal tax
counsel to the Trust, for federal income tax purposes, the
Notes will be characterized as debt, and the Trust will
not be characterized as an association (or a publicly
traded partnership) that is taxable as a corporation. In
the opinion of Sonnenschein Nath & Rosenthal, special
Illinois tax counsel to the Trust, the same
characterization will apply for Illinois income tax
purposes. Each Noteholder, by the acceptance of a Note,
will agree to treat the Notes as indebtedness, and each
Certificateholder, by acceptance of a Certificate, will
agree to treat the Trust as a partnership for federal
income tax and Illinois income tax purposes.
ERISA Considerations............ Subject to the considerations discussed under "ERISA
Considerations" herein and in the Prospectus, the Notes
are eligible for purchase by employee benefit plans.
The Certificates may not be acquired by any employee
benefit plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section
4975 of the Internal Revenue Code of 1986, as amended (the
"Code"), or by an individual retirement account. See
"ERISA Considerations" herein and in the Prospectus.
Rating of the Securities........ It is a condition to the issuance of the Securities that
the Notes and the Certificates be rated at least "Aaa" by
Moody's Investors Service, Inc. ("Moody's") and "AAA" by
Standard & Poor's Ratings Services ("Standard & Poor's"
and, together with Moody's, the "Rating Agencies"). The
ratings of the Securities will be based primarily on the
issuance of the Policies by the Security Insurer.
</TABLE>
S-18
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus
Supplement, and the accompanying Prospectus, prospective investors in the
Securities should consider the following risk factors and the risk factors in
the Prospectus before investing in the Securities. See "Risk Factors" in the
Prospectus.
LIMITED LIQUIDITY
There is currently no secondary market for the Securities offered hereby.
Each of the Note Underwriters currently intends to make a market in the Notes,
but it is under no obligation to do so. The Certificate Underwriter currently
intends to make a market in the Certificates, but it is under no obligation to
do so. There can be no assurance that a secondary market will develop or, if a
secondary market does develop, that it will provide the Securityholders with
liquidity of investment or that it will continue for the life of the Securities.
NATURE OF OBLIGORS AND FINANCED VEHICLES; SERVICING
The Obligors on the Receivables are primarily "non-prime" borrowers who have
limited access to traditional sources of consumer credit. The inability of a
borrower to finance an automobile purchase by means of traditional credit
sources is generally due to various factors, including such individual's
impaired credit history and the absence or limited extent of his or her credit
history. Typical "non-prime" borrowers include young borrowers (18 to 25 years
old) who are trying to establish an initial credit rating, previously bankrupt
borrowers who are reestablishing their credit rating, slow payers of credit
cards and department store accounts and borrowers who desire payment terms
slightly longer than the maximum term permitted by traditional sources of
automobile financing. The average interest rate charged by First Merchants to
such "non-prime" borrowers is generally higher than that charged by commercial
banks, savings and loans, credit unions and finance companies affiliated with
major automobile manufacturers which typically impose more stringent credit
requirements. As a result, the Obligors generally are considered to have a
higher risk of default on a finance contract than most automobile purchasers.
Such risk of default may increase in times of economic downturn in the areas in
which such obligors reside. As a result of the credit profile of the Obligors
and the APRs of the Receivables, the historical credit loss and delinquency
rates on the Receivables may be higher than those experienced by banks and the
captive finance companies of the automobile manufacturers. In the event of a
default under a Receivable, the only source of repayment may be liquidation
proceeds from the related Financed Vehicle; the Financed Vehicles securing the
Receivables will consist primarily of used vehicles which may not have a
liquidation value sufficient to pay in full the amount financed by the related
Contract. See "First Merchants' Automobile Financing Program--Credit Loss
Experience" and "--Delinquency Experience."
The servicing of receivables of customers with such credit profiles requires
special skill and diligence. The Servicer believes that its credit loss and
delinquency experience reflect in part its trained staff and collection
procedures. If a Servicer Termination Event occurs and First Merchants is
removed as Servicer, or if First Merchants resigns or is terminated as Servicer
by the Security Insurer, the Backup Servicer has agreed to assume the
obligations of successor Servicer under the Sale and Servicing Agreement. There
can be no assurance, however, that collections with respect to the Receivables
would not be adversely affected by a change in Servicer. See "Description of the
Transfer and Servicing Agreements--Rights Upon Servicer Termination Event" and
"--Backup Servicer."
The Sale and Servicing Agreement provides that the rights and obligations of
the Servicer are subject to renewal by the Security Insurer after three months,
for successive three-month periods. The Security Insurer has agreed to grant
automatic, continuous renewals of the Servicer's rights and obligations under
the Sale and Servicing Agreement so long as no Servicer Termination Event shall
have occurred.
S-19
<PAGE>
INDENTURE EVENT OF DEFAULT
If an Event of Default occurs and is continuing under the Indenture (an
"Indenture Event of Default") at a time when no Security Insurer Default has
occurred, neither the Indenture Trustee nor the Noteholders may declare the
Notes to be immediately due and payable. Upon the occurrence of any such
Indenture Event of Default, so long as a Security Insurer Default shall not have
occurred, the Security Insurer will have the right, but not the obligation, to
cause the liquidation, in whole or in part, of the Receivables, which may result
in the redemption, in whole or in part, of the Notes (and the Certificates).
Following the occurrence of such an Indenture Event of Default, the Security
Insurer will be obligated, upon receipt of a claim under the applicable Policy,
to make payments on the Noteholders' Interest Distributable Amount, the
Noteholders' Principal Distributable Amount, the Certificateholders' Interest
Distributable Amount and the Certificateholders' Principal Distributable Amount
on each Distribution Date; however, the Security Insurer also may determine in
its sole discretion to pay, from time to time after any such Indenture Event of
Default, all or any portion of the outstanding amount of the Securities plus
accrued interest thereon. See "Description of the Notes--Certain Provisions of
the Indenture-- Events of Default; Rights upon Event of Default."
PREPAYMENT FROM THE PRE-FUNDING ACCOUNT; ABILITY TO ORIGINATE SUBSEQUENT
RECEIVABLES
The conveyance of Subsequent Receivables to the Trust during the Funding
Period is subject to the conditions described herein under "The Receivables
Pool." Each Subsequent Receivable must satisfy the eligibility criteria
specified herein and in the Sale and Servicing Agreement. The ability of the
Seller to convey Subsequent Receivables to the Trust is completely dependent
upon the ability of First Merchants to originate through Dealers a sufficient
number of motor vehicle retail installment sales contracts that meet the
requirements set forth herein and in the Sale and Servicing Agreement for
transfer on a Subsequent Transfer Date. The ability of First Merchants to
originate sufficient Subsequent Receivables may be affected by a variety of
social and economic factors. Economic factors include interest rates,
unemployment levels, the rate of inflation and consumer perception of economic
conditions generally. Neither First Merchants nor the Seller has any basis to
predict the extent to which economic or social factors will affect the
availability of Subsequent Receivables. Although no assurances can be given,
First Merchants presently expects that it will originate sufficient Receivables
satisfying the criteria set forth herein and in the Sale and Servicing Agreement
to deplete the Pre-Funded Amount by the end of the Funding Period. See "The
Receivables Pool" herein.
The Securities are subject to partial mandatory redemption or prepayment on
the Mandatory Redemption Date if any amount remains on deposit in the
Pre-Funding Account after giving effect to the purchase of all Subsequent
Receivables, including those purchases, if any, made on the last day of the
Funding Period. If the amount on deposit in the Pre-Funding Account is $150,000
or less, then such amount will be applied in reduction of the principal balance
of the Class A-1 Notes. If the amount on deposit in the Pre-Funding Account
exceeds $150,000, then such amount will be applied in reduction of the principal
balance of each Class of Notes and the Certificates pro rata, based on the
respective principal balances thereof as of the preceding Distribution Date. The
"Mandatory Redemption Date" is the Distribution Date immediately following the
last day of the Funding Period. Any reinvestment risk from the redemption or
prepayment of the Securities from the Pre-Funded Amount at the end of the
Funding Period will be borne by the Noteholders and the Certificateholders. See
"Yield and Prepayment Considerations" in the Prospectus.
MATURITY AND PREPAYMENT ASSUMPTIONS
All of the Receivables may be prepaid at any time without penalty. The rate
of prepayments on the Receivables may be influenced by a variety of economic,
social and other factors, including the fact that an Obligor generally may not
sell or transfer the Financed Vehicle securing a Receivable without the consent
of First Merchants. For purposes of this Prospectus Supplement, the term
prepayment includes
S-20
<PAGE>
partial and full prepayments, liquidations due to defaults, losses caused by the
issuance of an order by a court in any insolvency proceeding reducing the amount
owed under a Receivable, as well as receipts of proceeds from physical damage,
loss upon repossession, credit life and credit accident and health insurance
policies and the Purchase Amounts of Purchased Receivables. The rate of
prepayment on the Receivables may also be influenced by the structure of the
related loan, the nature of the Obligors and the Financed Vehicles and servicing
decisions as discussed above.
Under certain circumstances, First Merchants or the Servicer may be
obligated to purchase Receivables with respect to which it is in breach of
certain representations, warranties or covenants under the Receivables Purchase
Agreement or the Sale and Servicing Agreement, as applicable. Subject to certain
conditions, the Servicer also has the right to purchase the Receivables when the
Pool Balance has been reduced to 10% or less of the Initial Pool Balance. See
"Description of the Notes--Optional Redemption" and "Description of the
Certificates--Optional Prepayment." See also "Description of the Transfer and
Servicing Agreements--Insolvency Event" regarding the sale of the Receivables if
an Insolvency Event occurs with respect to the Seller. Any reinvestment risks
resulting from a faster or slower incidence of prepayment of the Receivables
will be borne entirely by the Securityholders.
First Merchants is unable to make a prediction as to the actual prepayment
rates that will be experienced on the Receivables. However, First Merchants
believes that the actual rate of prepayments will result in a substantially
shorter weighted average life than the scheduled weighted average life of the
Receivables.
LIMITED OBLIGATION OF FIRST MERCHANTS; LIMITED ASSETS OF THE TRUST;
SUBORDINATION
First Merchants generally is not obligated to make any payments in respect
of the Securities or the Receivables. In connection with its sale of the
Receivables to the Seller, First Merchants will make certain representations and
warranties regarding the characteristics of the Receivables and, in certain
circumstances, First Merchants may be required to repurchase Receivables with
respect to which such representations or warranties are not true as of the date
made. See "Description of the Transfer and Servicing Agreements--Sale and
Assignment of Receivables." There is no assurance, however, that First Merchants
will have the financial ability to effect any repurchase of Receivables. First
Merchants is not otherwise obligated with respect to the Securities.
The Trust will not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the Receivables and, to the
extent available, amounts on deposit in the Pre-Funding Account, the Capitalized
Interest Account and the Spread Account. Although funds in the Spread Account
generally will be available on each Distribution Date to cover shortfalls in the
Noteholders' Interest Distributable Amount, the Noteholders' Principal
Distributable Amount, the Certificateholders' Interest Distributable Amount and
the Certificateholders' Principal Distributable Amount, such amounts are limited
and may be applied for other purposes to the extent described herein and in the
Spread Account Agreement. The Pre-Funding Account and the Capitalized Interest
Account will be maintained only until the Distribution Date on or immediately
following the last day of the Funding Period. The Pre-Funded Amount will be used
only to purchase Subsequent Receivables and to make certain deposits into the
Spread Account and is not available to cover losses on the Receivables. The
Capitalized Interest Account is designed to cover obligations of the Trust
relating to that portion of its assets not invested in Receivables and is not
designed to provide protection against losses or any other shortfalls on the
Receivables. Holders of the Notes and the Certificates will also have the
benefit of financial guaranty insurance policies to be issued by Financial
Security Assurance Inc. Although the Security Insurer will be obligated under
the Policies to cover shortfalls in distributions of the Noteholders' Interest
Distributable Amount, the Noteholders' Principal Distributable Amount, the
Certificateholders' Interest Distributable Amount and the Certificateholders'
Principal Distributable Amount on each Distribution Date, if the Security
Insurer defaults in its obligations under the Policies, the Trust will depend
solely on current
S-21
<PAGE>
distributions on the Receivables and, to the limited extent described herein,
amounts in the Spread Account to make payments on the Securities.
No distribution of interest will be made to Certificateholders on any
Distribution Date until the holders of the Notes have been paid the Noteholders'
Interest Distributable Amount and the Noteholders' Principal Distributable
Amount for such Distribution Date, and no distribution of principal will be made
to Certificateholders on any Distribution Date unless and until the Class A-1
and Class A-2 Notes have been paid in full. This subordination is intended to
enhance the likelihood of timely receipt by the Noteholders of the full amount
of interest and principal distributable to them on each Distribution Date and to
afford the Noteholders limited protection against losses in respect of the
Receivables.
RATINGS OF THE SECURITIES
It is a condition to the issuance of the Securities that the Notes and the
Certificates be rated "Aaa" by Moody's and "AAA" by Standard & Poor's. A rating
is not a recommendation to purchase, hold or sell Securities, inasmuch as such
rating does not comment as to market price or suitability for a particular
investor. The Rating Agencies do not evaluate, and the ratings do not address,
the possibility that Securityholders may receive a lower than anticipated yield.
There is no assurance that a rating will remain for any given period of time or
that a rating will not be lowered or withdrawn entirely by a Rating Agency if,
in its judgment, circumstances in the future so warrant.
The ratings of the Securities will be based primarily on the issuance of the
Policies and the rating of the Security Insurer. If a Security Insurer Default
should occur, the ratings on the Securities might be lowered or withdrawn
entirely. If any rating initially assigned to any Security is subsequently
lowered or withdrawn for any reason, including by reason of a downgrading of the
Security Insurer's claims-paying ability, no person or entity will be obligated
to provide any additional credit enhancement with respect to such Security. Any
reduction or withdrawal of a rating might have an adverse effect on the
liquidity and market price of such Security.
GEOGRAPHIC CONCENTRATION OF RECEIVABLES
As of the Cutoff Date approximately 14.19%, 11.17%, 8.55% and 8.03% of the
Initial Receivables (based on principal balance and location of the originating
dealer) were located in Texas, Georgia, Florida and California, respectively.
Accordingly, adverse economic conditions or other factors particularly affecting
any of these states could adversely affect the delinquency or loan loss
experience with respect to the Initial Receivables. No other state represented
more than 6.00% of the Initial Receivables. See "The Receivables Pool" herein.
S-22
<PAGE>
FIRST MERCHANTS' AUTOMOBILE FINANCING PROGRAM
GENERAL
First Merchants is a specialty finance company primarily engaged in
financing the purchase of used automobiles by acquiring dealer-originated
finance contracts. Since First Merchants' incorporation in March 1991, it has
targeted its marketing efforts to dealers which sell automobiles to consumers
who have limited access to traditional sources of credit ("non-prime"
borrowers). First Merchants serves two customers, the dealer and, indirectly,
the dealer's customer, the "non-prime" borrower. As of September 30, 1996, First
Merchants serviced approximately 3,000 dealers through dealer service centers
("Dealer Service Centers") in 37 states. First Merchants' total finance contract
portfolio (net finance receivables, including receivables sold or held for sale,
before deducting the allowance for credit losses and reserves attributable to
Contracts sold or held for sale) increased from approximately $94 million at
December 31, 1994 and approximately $284 million at December 31, 1995 to
approximately $565 million at September 30, 1996, while maintaining net
charge-offs as a percentage of average net finance receivables of under 6.0% for
such periods.
The automobile dealer business is highly fragmented and includes businesses
selling principally new automobiles, but also operating a used automobile
business, that are franchised by an automobile manufacturer ("franchised
dealers") and businesses selling exclusively used automobiles that are not
affiliated with an automobile manufacturer ("independent dealers"). During the
nine months ended September 30, 1996, approximately 80% (by aggregate principal
balance) of the finance contracts purchased by First Merchants were originated
by franchised dealers and the remainder were originated by independent dealers.
THE INDUSTRY
At December 31, 1995, there were approximately 22,750 franchised dealers and
approximately 63,750 independent dealers in the United States. First Merchants
believes that demographic and economic trends favor increased growth in the
non-prime segment of the automobile finance industry. The average American
family must spend a significantly higher percentage of its income to purchase an
automobile than it did several years ago. According to industry data, the
average price of a new automobile in 1994 represented approximately 59.3% of the
U.S. median family income for that year, an increase from approximately 51.5% in
1986. This increase, combined with increases in the average useful life of
automobiles and the number of late-model used automobiles available for sale
(including rental car and cars that were formerly leased), have led industry
analysts to believe that the market for retail sales of used automobiles will
continue to grow.
BUSINESS STRATEGY
First Merchants' primary business strategy is to focus its resources on
purchasing finance contracts from dealers that sell automobiles to "non-prime"
borrowers. The key elements of First Merchants' business strategy are as
follows:
EFFICIENT OPERATIONAL STRUCTURE. First Merchants' operational structure is
designed to maximize dealer service and finance contract originations, while
maintaining consistent portfolio performance and controlling operating expenses.
First Merchants' sales, credit and collection functions are organized as
follows: (i) a national sales force which is dedicated to developing new dealer
relationships and expanding the geographic scope of Dealer Service Centers; (ii)
regional Dealer Service Centers, which coordinate with the sales force to build
and nurture dealer relationships, underwrite and process credit applications and
disburse funds to dealers; (iii) "Account Service Centers", which perform all
account servicing functions such as finance contract verification, payment
processing, delinquency follow-ups and cost-effective recovery of charged-off
account balances; and (iv) the Asset Disposition Group ("ADG"), which arranges
the disposition of repossessed collateral.
S-23
<PAGE>
EXPERIENCED MANAGEMENT PERSONNEL. First Merchants has recruited experienced
management personnel at the executive, supervisory and managerial levels. First
Merchants believes that the retention of such experienced management personnel
is important in maintaining credit quality, supervising its operations and
maintaining flexible strategies for growth in a changing business environment.
First Merchants' executive officers, senior managerial personnel and its Dealer
Service Center and Account Service Center managers have an average of over 15
years of experience in the consumer or automobile finance industries. In
addition to recruiting experienced management personnel, First Merchants places
an emphasis on retaining such personnel through competitive compensation, equity
incentives and professional development programs, such as sales training and
counseling and credit underwriting certification programs.
PROCEDURES FOR CREDIT EVALUATION. To mitigate the higher risks often
associated with "non-prime" borrowers, First Merchants has developed procedures
for evaluating credit applications based in part upon First Merchants' ongoing
analysis and review of existing portfolio characteristics. First Merchants
utilizes a credit scoring system developed by a leading credit evaluation
company that is used as an objective guideline for evaluating a "non-prime"
borrower's creditworthiness. First Merchants employs a tiered pricing system
that provides guidance for the determination of the APR, discount and other
terms of a finance contract commensurate with the credit characteristics of such
contract. First Merchants has also established uniform guidelines and procedures
for evaluating credit applications relating to such matters as the borrower's
stability of residence, employment history, credit history, capacity to pay,
income, discretionary income and credit bureau score, as well as the value of
the collateral. See
"--Contract Acquisition Process--Credit Evaluation Procedures."
PROACTIVE COLLECTION MANAGEMENT. First Merchants pursues a policy of
proactive collection management through its Account Service Centers with respect
to both current and delinquent accounts, including activities related to monthly
billing and collections, borrower inquiries and repossessions. Shortly after
First Merchants purchases a finance contract, personnel at an Account Service
Center typically contact the borrower by telephone to verify the terms of the
sale. First Merchants also sends the borrower a letter which describes the
procedures and schedules for repaying the finance contract and explains First
Merchants' delinquency and repossession policies. Any finance contract for which
a payment is one day overdue is treated as a past due account for collection
purposes, and First Merchants generally contacts a borrower within two days
after such borrower's account becomes past due. First Merchants utilizes
predictive dialing technology to complement its calling efforts and enhance the
productivity of its collection personnel. First Merchants typically commences
repossession procedures before an account is more than two payments past due.
Management believes that proactive collection management is critical in
maintaining a low level of delinquencies and charge-offs.
MONITORING AND SUPERVISING THE OPERATIONAL STRUCTURE. First Merchants
maintains the following three departments reporting directly to senior
management that perform independent control functions to monitor and review the
operations of First Merchants: (i) Risk Management, which performs daily
analyses of new finance contracts purchased by First Merchants to ensure that
such finance contracts meet First Merchants' credit guidelines and were
purchased in compliance with First Merchants' operational procedures, analyzes
trends in the finance contract portfolio and performs back-end reviews of the
finance contract portfolio's performance; (ii) Internal Audit, which performs
on-site audits of each Dealer Service Center and Account Service Center at least
annually to ensure compliance with First Merchants' guidelines and procedures
and maintenance of First Merchants' credit quality standards; and (iii) Managing
Directors of Dealer Services, who typically visit and review the operations of
each Dealer Service Center throughout the year in order to evaluate compliance
with First Merchants' policies and procedures, measure the effectiveness of
business development efforts, and review general portfolio credit and
performance quality and office profitability. Each control function actively
utilizes First Merchants' management information system, which provides real
time, on-line reports on a daily basis and which contains operational
information from each of First Merchants' Dealer Service Centers,
S-24
<PAGE>
Account Service Centers and the ADG. In addition, management conducts daily
reviews of the volume of finance contracts purchased, aging of accounts,
repossession activities, and other operating data. See "First Merchants'
Automobile Financing Program--Management Information Systems."
SERVICE TO DEALERS. By providing prompt, flexible service and a reliable
source of financing for "non-prime" borrowers, First Merchants helps to expand
the dealers' customer base, thereby increasing the efficiency and effectiveness
of their used car sales operations. First Merchants believes that its guidelines
and procedures allow it to respond quickly to the dealers. First Merchants
typically responds to credit applications on the date received, in many cases
within 2 to 3 hours, and generally pays the dealer for finance contracts
purchased within 24 hours after First Merchants has received required
documentation from the dealer. Management believes that because of its prompt
and reliable response to dealers, many dealers conduct business with First
Merchants. As of September 30, 1996, First Merchants serviced approximately
3,000 dealers, with no single dealer accounting for more than 2% of First
Merchants' finance contract portfolio. Using a hub and spoke strategy, First
Merchants solicits business from automobile dealers through the business
development efforts of its sales force and Dealer Service Centers. First
Merchants evaluates each dealer with which it establishes a financing
relationship to endeavor to ensure that First Merchants purchases finance
contracts from only reputable automobile dealers carrying an inventory of
quality used automobiles. First Merchants assesses the length of service and
reputation of prospective dealers through the local Better Business Bureau and
state regulatory authorities. Each dealer with which First Merchants establishes
a financing relationship enters into a non-exclusive written dealer agreement (a
"Dealer Agreement") with First Merchants governing First Merchants' finance
contract purchases from the dealer. First Merchants periodically reviews each
dealer's financial information and inspects such dealer's physical premises and
automobile inventory to determine whether such dealer appears to be operating
its business satisfactorily and maintaining consistently high quality inventory.
First Merchants' management information systems track the monthly performance of
borrowers' accounts by dealer, allowing First Merchants to review and evaluate
the quality of finance contracts purchased from each dealer.
CREDIT LOSS EXPERIENCE
The following table summarizes data relating to First Merchants' charge-off
experience and includes Receivables sold or held for sale. The charge-off
experience includes estimated losses to be incurred upon the sale of repossessed
collateral. An account is charged-off at the earliest of the time the account's
collateral is repossessed, the account is 91 days or more past due or the
account is otherwise deemed to be uncollectible.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average net finance receivables
serviced............................... $ 431,907 $ 146,937 $ 171,737 $ 62,898 $ 22,005
Net charge-offs serviced................. 18,895 5,506 8,969 2,820 1,016
Net charge-offs as a percentage of
average net finance receivables
serviced (annualized).................. 5.8% 5.0% 5.2% 4.5% 4.6%
</TABLE>
DELINQUENCY EXPERIENCE
A payment is considered past due if the borrower fails to make any full
payment on or before the due date as specified by the terms of the finance
contract. First Merchants typically contacts borrowers
S-25
<PAGE>
whose payments are not received by the due date within two days after such due
date. For a discussion of First Merchants' delinquency control and collection
strategy, see "First Merchants' Automobile Financing Program--Delinquency
Control and Collection."
The following table summarizes First Merchants' delinquency experience for
accounts with payments 31 days or more past due on both a number and dollar
basis for its finance contract portfolio and includes Receivables sold or held
for sale as of September 30, 1996 and December 31, 1995, 1994 and 1993. The
delinquency experience data excludes contracts where the collateral has been
repossessed.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993
------------------------ ------------------------ ------------------------ ---------
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
DOLLARS CONTRACTS DOLLARS CONTRACTS DOLLARS CONTRACTS DOLLARS
--------- ------------- --------- ------------- --------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net finance receivables
serviced (1)................ $ 565,240 56,736 $ 284,173 31,082 $ 94,090 12,670 $ 33,563
Past due accounts:
31-60 days (2).............. 9,249 848 5,163 595 446 85 178
61 days or more (3)......... 10,041 1,056 2,021 251 177 29 24
--------- ------------- --------- ------------- --------- ------------- ---------
Total................... $ 19,290 1,904 $ 7,184 846 $ 623 114 $ 202
--------- ------------- --------- ------------- --------- ------------- ---------
--------- ------------- --------- ------------- --------- ------------- ---------
Accounts with payments 31 days
or more past due as a
percentage of net finance
receivables and number of
contracts serviced (4)...... 3.4% 3.4% 2.5% 2.7% 0.7% 0.9% 0.6%
<CAPTION>
<S> <C>
NUMBER OF
CONTRACTS
-------------
<S> <C>
Net finance receivables
serviced (1)................ 6,194
Past due accounts:
31-60 days (2).............. 42
61 days or more (3)......... 7
------
Total................... 49
------
------
Accounts with payments 31 days
or more past due as a
percentage of net finance
receivables and number of
contracts serviced (4)...... 0.8%
</TABLE>
- ------------------------
(1) Includes net finance receivables owned, sold or held-for-sale.
(2) Customers in this category have missed two consecutive monthly payments.
(3) Customers in this category have missed three or more consecutive monthly
payments.
(4) Customers in this category have missed two or more consecutive monthly
payments.
REPOSSESSED COLLATERAL
First Merchants commences repossession procedures against the underlying
collateral when it determines that collection efforts are likely to be
unsuccessful. Repossession generally occurs before a borrower has missed more
than two consecutive monthly payments. In such cases, the net amount due under
the finance contract is reduced to the estimated fair value of the collateral,
less the cost of disposition. Repossessed collateral included 815, 505, 150 and
69 automobiles at September 30, 1996, December 31, 1995, December 31, 1994 and
December 31, 1993, respectively.
CONTRACT ACQUISITION PROCESS
The following is a summary of the process that First Merchants typically
follows in connection with its acquisition of an automobile finance contract.
DEALER RELATIONS. Each dealer with which First Merchants establishes a
financing relationship enters into a non-exclusive written Dealer Agreement with
First Merchants, which governs First Merchants' finance contract purchases from
the dealer. A Dealer Agreement generally provides that the dealer shall
indemnify First Merchants against any damages or liabilities, including
reasonable attorneys' fees, arising out of (i) any breach of a representation or
warranty of the dealer set forth in the Dealer
S-26
<PAGE>
Agreement or (ii) any claim or defense that a borrower may have against a dealer
relating to a finance contract. Representations and warranties in a Dealer
Agreement generally relate to such matters as whether (i) the financed
automobile is free of all liens, claims and encumbrances except First Merchants'
lien, (ii) the down payment specified in the finance contract has been paid in
full in cash and/or trade in and no part of the down payment was loaned to the
borrower by the dealer and (iii) the dealer has complied with applicable law. If
the dealer violates the terms of the Dealer Agreement with respect to any
finance contract, the dealer must repurchase such contract on demand for the
unpaid balance and all other indebtedness due to First Merchants from the
borrower.
CREDIT EVALUATION PROCEDURES. If a "non-prime" borrower elects to finance
the purchase of an automobile through a dealer, the dealer will submit the
borrower's credit application to First Merchants for review of the borrower's
creditworthiness and the proposed transaction terms. Dealer Service Center
personnel conduct such review in accordance with First Merchants' guidelines and
procedures, which generally take into account, among other things, the
individual's stability of residence, employment history, credit history, ability
to pay, income, discretionary income, and credit bureau score, as well as the
value of the collateral. In addition, Dealer Service Center personnel evaluate a
credit bureau report in order to determine if (i) the individual's credit
quality is deteriorating, (ii) the individual's credit history suggests a high
probability of default or (iii) the individual's credit experience is too
limited for First Merchants to assess the probability of performance. First
Merchants also utilizes a credit scoring system developed by a leading credit
evaluation company that is used as an additional objective guideline for
evaluating a "non-prime" borrower's creditworthiness and employs a tiered
pricing system that provides guidance for the determination of the APR, discount
and other terms of a finance contract commensurate with the credit
characteristics of such contract. Dealer Service Center personnel may also
require verification of certain applicant or dealer provided information prior
to making the credit decision. Such verification typically requires submission
of supporting documentation, such as a paycheck stub or other substantiation of
income, and is performed solely by First Merchants' personnel. First Merchants
has assigned each Dealer Service Center manager a maximum credit authority per
finance contract based on various factors, including such manager's experience
level. Within the guidelines and procedures established by First Merchants, each
Dealer Service Center manager is authorized to approve or reject credit
applications within such manager's maximum credit authority and to supplement
objective credit criteria with subjective judgment in making credit decisions.
If the proposed financing exceeds the Dealer Service Center manager's maximum
credit authority or does not meet First Merchants' guidelines, the Dealer
Service Center manager must obtain the approval of the Assistant Vice
President-- Operations Risk Management.
After reviewing the credit application and the terms of the sale, the Dealer
Service Center notifies the dealer whether or not First Merchants would be
willing to purchase the finance contract upon sale of the automobile to the
applicant. First Merchants typically responds to submitted dealer applications
on the date received, in many cases within 2 to 3 hours. First Merchants is
selective in its approval process. First Merchants historically has approved
approximately 25% of all submitted credit applications, and approximately 52% of
those approved finance contracts have been purchased by First Merchants. The
difference between the number of applications approved and the number of finance
contracts entered into is due primarily to industry practice whereby the dealer
typically submits the credit application to more than one finance company and
then selects the finance company that is willing to provide the most favorable
terms. In cases where First Merchants is unwilling to purchase a finance
contract from a dealer under the proposed terms but believes the applicant has
the capacity to meet other repayment obligations, the Dealer Service Center
personnel will work with the dealer to restructure the terms of the financing or
suggest the sale of an alternative automobile with a price more suited to the
applicant's financial means.
S-27
<PAGE>
APPROVAL PROCESS. When First Merchants approves the purchase of a finance
contract, the Dealer Service Center notifies the dealer by facsimile or
telephone. Such notice specifies all pertinent information relating to the terms
of the approval, including the interest rate, the term, information about the
automobile to be sold, the amount of discount that First Merchants will take
from the principal amount of the finance contract and other consideration, if
any, paid by First Merchants to the dealer. Generally, a borrower is required to
make a down payment of at least 10% of the purchase price. First Merchants'
guidelines and procedures require that the advance to the dealers on the
underlying collateral cannot exceed 110% of the wholesale value of such
collateral, excluding the cost of ancillary products sold by the dealer to the
borrower, such as warranties or insurance, which may be financed by First
Merchants. Generally, advances to dealers have not exceeded 100% of the
collateral's wholesale value, excluding the cost of the ancillary products
referred to above.
CONTRACT PURCHASE. Upon final confirmation of the terms by the borrower,
the dealer completes the sale of the automobile to the borrower. After the
dealer delivers all required documentation to First Merchants, First Merchants
remits funds to the dealer, generally within 24 hours. Upon purchase of the
finance contract, First Merchants acquires a perfected security interest in the
financed automobile. Each finance contract requires that the automobile be
properly insured and that First Merchants be named as a loss payee, and
compliance with these requirements is verified prior to the remittance of funds
to the dealer. Additionally, First Merchants maintains a blanket insurance
policy covering physical property damages in the event that the borrower does
not maintain insurance.
CONTRACT SERVICING AND ADMINISTRATION
First Merchants' contract servicing and administration activities have been
specifically tailored to the unique challenges of servicing loans made to the
"non-prime" borrower. Each Account Service Center (i) collects payments, (ii)
accounts for and posts all payments received, (iii) responds to borrower
inquiries, (iv) takes all necessary action to maintain the security interest
granted in the financed automobile, (v) investigates delinquencies and
communicates with the borrower to obtain timely payments and (vi) monitors the
finance contract and its related collateral. When necessary, the ADG contracts
with third parties to repossess and dispose of financed automobiles.
First Merchants' activities incorporate proactive procedures and systems.
For example, First Merchants has established a process through which it attempts
to educate borrowers, both in writing and by telephone, upon First Merchants'
purchase of their finance contracts. This process is designed to ensure that
borrowers clearly understand their obligations and includes a review of the
terms of the finance contract with particular emphasis on the amount and due
date of each payment obligation, First Merchants' expectations as to the timely
receipt of payments and maintenance of insurance coverage and First Merchants'
delinquency and repossession policies.
First Merchants utilizes a monthly billing statement system (rather than
payment coupon books) to remind borrowers of their monthly payment obligations.
This system also serves as an early warning mechanism in the event that a
borrower has failed to notify First Merchants of an address change. First
Merchants typically contacts borrowers whose payments are not received by the
due date earlier than it believes is customary in the industry, commencing
within two days after a borrower's due date and continuing until payment has
been received. First Merchants believes that early and frequent contact with the
borrower reinforces the borrower's recognition of his or her obligation and
First Merchants' expectation of timely payment.
DELINQUENCY CONTROL AND COLLECTION
Personnel at each Account Service Center review accounts that are past due
to assess collection efforts to date and to define the collection strategy, if
appropriate. Each Account Service Center designs a collection strategy that
includes a specific deadline before which each delinquent obligation should be
S-28
<PAGE>
collected. Each Account Service Center employs predictive dialing technology
that automates the collection process with respect to accounts that are from one
to 30 days past due. Accounts that are over 30 days past due are turned over to
personnel at the Account Servicer Center for more intensive collection efforts.
Accounts that have not been collected prior to the deadline established by the
Account Service Center are again reviewed and, unless there are specific
circumstances which warrant further collection efforts, such accounts are
assigned to an outside agency for repossession. Repossessed automobiles are
generally resold through wholesale auctions. The elapsed time between
repossession and resale is generally 30 to 45 days, including passage of the
period during which the law of the applicable jurisdiction permits the borrower
to redeem the automobile. Since its inception, First Merchants has, on average,
recovered approximately 52% of the principal amount of the finance contracts
relating to its repossessed automobiles. Typically, after repossession, recovery
specialists based in the Account Service Centers seek to recover any deficiency
from the borrower, subject to applicable legal limitations.
THE TRUST
GENERAL
First Merchants Auto Trust 1996-C will be a business trust formed under the
laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Receivables and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Securities, (iii) making payments on the Securities
and (iv) engaging in other activities that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or connected therewith.
The Trust initially will be capitalized with equity equal to the Certificate
Balance of $5,787,000, excluding amounts deposited in the Spread Account.
Certificates with an original principal balance of $58,000 will be sold to the
Seller and the remaining equity interest will be sold to third party investors
that are expected to be unaffiliated with the Seller or its affiliates or the
Trust. The proceeds from the initial sale of the Securities will be used by the
Trust to purchase the Initial Receivables from the Seller pursuant to the Sale
and Servicing Agreement and to fund the Pre-Funding Account and the Capitalized
Interest Account. The Servicer will service the Receivables pursuant to the Sale
and Servicing Agreement and will be compensated for acting as Servicer. See
"Description of the Transfer and Servicing Agreements--Servicing Compensation"
herein. The Servicer will be appointed custodian of the Receivables by the Owner
Trustee, and will stamp the Receivables to reflect their sale and assignment to
the Seller and the Trust and the pledge to the Indenture Trustee, but will not
cause the certificates of title of the related Financed Vehicles to be amended
or reissued. In the absence of amendments to the certificates of title, the
Trust may not have perfected security interests in the Financed Vehicles
securing the Receivables originated in some states. See "Certain Legal Aspects
of the Receivables" in the Prospectus.
If the protection provided to the Securityholders by the Spread Account and
the Policies is insufficient, the Trust will look only to the Obligors on the
Receivables and the proceeds from the repossession and sale of Financed Vehicles
that secure defaulted Receivables to fund distributions of principal and
interest on the Securities. In such event, certain factors, such as the Trust's
not having a first priority perfected security interest in some of the Financed
Vehicles, may affect the Trust's ability to realize on the collateral securing
the Receivables and thus may reduce the proceeds to be distributed to
Securityholders. See "Description of the Notes--Credit Enhancement",
"Description of the Transfer and Servicing Agreements--Distributions" herein and
"Certain Legal Aspects of the Receivables" in the Prospectus.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Chase Manhattan Bank Delaware, as Owner Trustee, at the address listed below
under "--The Owner Trustee."
S-29
<PAGE>
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Closing Date, as if the issuance and sale of the Securities had taken place on
such date:
<TABLE>
<S> <C>
Class A-1 Notes.............................................. $ 101,000,000
Class A-2 Notes.............................................. $ 37,886,000
Certificates................................................. $ 5,787,000
-------------
Total.................................................... $ 144,673,000
-------------
-------------
</TABLE>
THE OWNER TRUSTEE
Chase Manhattan Bank Delaware is the Owner Trustee under the Trust
Agreement. Chase Manhattan Bank Delaware is a Delaware banking corporation and
its principal offices are located at 1201 Market Street, Wilmington, Delaware
19801. The Owner Trustee's liability in connection with the issuance and sale of
the Securities is limited solely to the express obligations of the Owner Trustee
set forth in the Trust Agreement and the Sale and Servicing Agreement. First
Merchants and the Seller and their respective affiliates may maintain normal
commercial banking relations with the Owner Trustee and its affiliates.
THE RECEIVABLES POOL
ELIGIBILITY CRITERIA
The Receivables were or will be selected from First Merchants' portfolio of
motor vehicle retail installment sale contracts based on several criteria,
including the requirement that each Receivable: (i) have an original term of not
more than 66 months, (ii) provide for level monthly payments that fully amortize
the amount financed over the original term of the related Contract (except for
the last payment, which may be different from the level payments), (iii) be not
more than 30 days past due as of the Cutoff Date or the applicable Subsequent
Cutoff Date and (iv) not have a final scheduled payment date later than the
Final Scheduled Maturity Date. In addition, as of the Cutoff Date or the
applicable Subsequent Cutoff Date, no Receivable was or shall be noted in the
Servicer's records as having an Obligor who is the subject of a bankruptcy
proceeding. No selection procedures believed by First Merchants or the Seller to
be adverse to the Securityholders were or will be used in selecting the
Receivables.
During the Funding Period, pursuant to the Receivables Purchase Agreement,
the Seller is obligated to purchase from First Merchants and, pursuant to the
Sale and Servicing Agreement, sell to the Trust, Subsequent Receivables subject
to the availability thereof. The aggregate principal balance of the Subsequent
Receivables is anticipated by First Merchants to equal approximately
$36,168,001.73. On each Subsequent Transfer Date, First Merchants will convey
the Subsequent Receivables to the Seller pursuant to the Receivables Purchase
Agreement and the applicable Subsequent Purchase Agreement executed by First
Merchants and the Seller on the Subsequent Transfer Date and including as an
exhibit a schedule identifying the Subsequent Receivables transferred on such
date. The Seller will convey the Subsequent Receivables to the Trust on such
Subsequent Transfer Date pursuant to the Sale and Servicing Agreement and the
applicable Subsequent Transfer Agreement executed by the Seller and the Owner
Trustee on the Subsequent Transfer Date and including as an exhibit a schedule
identifying the Subsequent Receivables transferred on such date. The purchase
price for each Subsequent Receivable will be withdrawn from the Pre-Funding
Account, a portion of such amount will be deposited into the Spread Account and
the remainder will be paid to the Seller by the Trust and then to First
Merchants by the Seller.
Any conveyance of Subsequent Receivables is subject to the following
conditions, among others: (i) as of the respective Subsequent Cutoff Date, each
such Subsequent Receivable must satisfy the eligibility criteria specified under
"The Receivables Pool--General" in the Prospectus and in the Sale
S-30
<PAGE>
and Servicing Agreement; (ii) the Security Insurer (so long as no Security
Insurer Default shall have occurred and be continuing) shall have approved the
transfer of such Subsequent Receivables to the Trust; (iii) neither First
Merchants nor the Seller will have selected such Subsequent Receivables in a
manner that either believes is adverse to the interests of the Security Insurer
or the Securityholders; (iv) First Merchants and the Seller will deliver certain
opinions of counsel to the Owner Trustee, the Indenture Trustee, the Security
Insurer and the Rating Agencies with respect to the validity of the conveyance
of such Subsequent Receivables; and (v) the Rating Agencies shall confirm that
the ratings on the Securities have not been withdrawn or reduced as a result of
the transfer of such Subsequent Receivables to the Trust. Because the Subsequent
Receivables may be originated after the Initial Receivables, following their
conveyance to the Trust the characteristics of the Receivables, including the
Subsequent Receivables, are likely to vary from those of the Initial
Receivables.
In addition, the obligation of the Trust to purchase the Subsequent
Receivables on a Subsequent Transfer Date is subject to the condition that the
Receivables in the Trust, including the Subsequent Receivables to be conveyed to
the Trust on such Subsequent Transfer Date, meet the following criteria: (i) the
weighted average APR of the Initial Receivables, together with all Subsequent
Receivables as of the applicable Subsequent Cutoff Date, is not less than 20%
and (ii) the original term of each Subsequent Receivable is not greater than 66
months. As to clause (i) in the immediately preceding sentence, such criteria
will be based on the characteristics of the Initial Receivables on the Initial
Cutoff Date and the Subsequent Receivables as of the Subsequent Cutoff Date
applicable thereto.
Except for the criteria described in the preceding paragraphs, there are no
required characteristics of the Subsequent Receivables. Therefore, following the
transfer of Subsequent Receivables to the Trust, the aggregate characteristics
of the entire pool of Receivables included in the Trust, including the
composition of the Receivables, the geographic distribution, the distribution by
remaining principal balance, the distribution by APR, the distribution by
remaining term, the distribution of Precomputed Receivables and Simple Interest
Receivables and the distribution of the Receivables secured by new and used
vehicles, are likely to vary from those of the Initial Receivables.
COMPOSITION OF INITIAL RECEIVABLES
As of the Cutoff Date, approximately 85% of the Initial Receivables by
aggregate principal balance, constituting approximately 88% of the number of
Contracts, represented financing of used vehicles. The remainder of the Initial
Receivables represented financing of new vehicles. The composition and
distribution by APR, remaining term and geographic location of the Initial
Receivables as of the Cutoff Date are set forth in the following tables.
COMPOSITION OF THE INITIAL RECEIVABLES
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AGGREGATE AVERAGE AVERAGE AVERAGE
WEIGHTED PRINCIPAL NUMBER OF PRINCIPAL REMAINING ORIGINAL
AVERAGE APR BALANCE RECEIVABLES BALANCE TERM TERM
- --------------- --------------- --------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
20.36% $108,504,998.27 9,381 $11,566.46 53 months 55 months
</TABLE>
S-31
<PAGE>
DISTRIBUTION OF THE INITIAL RECEIVABLES BY APR
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
NUMBER OF AGGREGATE PRINCIPAL
APR RANGE RECEIVABLES PRINCIPAL BALANCE BALANCE(1)
- ------------------------------------------- --------------- ----------------- --------------
<S> <C> <C> <C>
12.00% to 12.99%........................... 1 $ 7,666.12 0.01%
14.00% to 14.99%........................... 17 256,742.98 0.24%
15.00% to 15.99%........................... 216 3,303,715.81 3.04%
16.00% to 16.99%........................... 155 2,210,744.88 2.04%
17.00% to 17.99%........................... 1,165 15,993,237.54 14.74%
18.00% to 18.99%........................... 1,497 19,467,703.58 17.94%
19.00% to 19.99%........................... 835 10,168,572.46 9.37%
20.00% to 20.99%........................... 1,122 12,730,968.62 11.73%
21.00% to 21.99%........................... 1,652 18,138,704.20 16.72%
22.00% to 22.99%........................... 545 5,940,833.50 5.48%
23.00% to 23.99%........................... 692 7,283,273.11 6.71%
24.00% to 24.99%........................... 454 4,461,086.60 4.11%
25.00% to 25.99%........................... 553 4,789,287.53 4.41%
26.00% to 26.99%........................... 191 1,489,825.89 1.37%
27.00% to 27.99%........................... 128 1,137,055.99 1.05%
28.00% to 28.99%........................... 84 628,220.07 0.58%
29.00% to 29.99%........................... 69 478,564.35 0.44%
30.00% and greater......................... 5 18,795.04 0.02%
----- ----------------- --------------
Totals..................................... 9,381 $108,504,998.27 100.00%
----- ----------------- --------------
----- ----------------- --------------
</TABLE>
- ------------------------
(1) Percentages may not add to 100% because of rounding.
DISTRIBUTION OF THE INITIAL RECEIVABLES BY INTEREST TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
NUMBER OF AGGREGATE PRINCIPAL
TYPE RECEIVABLES PRINCIPAL BALANCE BALANCE(1)
- ------------------------------------------- --------------- ----------------- --------------
<S> <C> <C> <C>
Precomputed Receivables(1)................. 5,597 $ 64,028,346.73 59.01%
Simple Interest Receivables................ 3,784 44,476,651.54 40.99%
----- ----------------- --------------
Totals..................................... 9,381 $108,504,998.27 100.00%
----- ----------------- --------------
----- ----------------- --------------
</TABLE>
- ------------------------
(1) Substantially all of the Precomputed Receivables are Rule of 78's
Receivables.
S-32
<PAGE>
DISTRIBUTION OF THE INITIAL RECEIVABLES BY GEOGRAPHIC LOCATION(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
NUMBER OF AGGREGATE PRINCIPAL
STATE RECEIVABLES PRINCIPAL BALANCE BALANCE(2)
- ------------------------------------------- --------------- ----------------- --------------
<S> <C> <C> <C>
Alabama.................................... 169 $ 1,973,241.78 1.82%
Arizona.................................... 268 3,354,204.98 3.09%
California................................. 738 8,708,398.42 8.03%
Colorado................................... 570 6,503,846.05 5.99%
Connecticut................................ 10 122,171.57 0.11%
Delaware................................... 12 144,450.43 0.13%
Florida.................................... 790 9,277,353.62 8.55%
Georgia.................................... 1057 12,119,246.55 11.17%
Idaho...................................... 3 26,068.81 0.02%
Illinois................................... 318 3,730,029.76 3.44%
Indiana.................................... 190 2,065,981.73 1.90%
Kansas..................................... 56 632,400.05 0.58%
Kentucky................................... 158 1,756,184.53 1.62%
Maine...................................... 8 75,869.40 0.07%
Maryland................................... 225 2,722,859.06 2.51%
Massachusetts.............................. 147 1,617,060.58 1.49%
Minnesota.................................. 106 1,175,098.64 1.08%
Mississippi................................ 78 892,170.91 0.82%
Missouri................................... 388 4,487,131.27 4.14%
Montana.................................... 5 54,317.00 0.05%
New Hampshire.............................. 23 240,008.30 0.22%
New Jersey................................. 107 1,224,280.23 1.13%
North Carolina............................. 373 4,233,205.39 3.90%
Ohio....................................... 492 5,403,450.57 4.98%
Oklahoma................................... 187 2,092,889.49 1.93%
Oregon..................................... 88 952,496.11 0.88%
Pennsylvania............................... 114 1,297,550.70 1.20%
Rhode Island............................... 10 114,793.07 0.11%
South Carolina............................. 294 3,219,573.97 2.97%
Tennessee.................................. 364 3,935,446.75 3.63%
Texas...................................... 1277 15,393,281.35 14.19%
Utah....................................... 203 2,534,583.57 2.34%
Vermont.................................... 6 55,709.73 0.05%
Virginia................................... 317 3,595,781.37 3.31%
Washington................................. 193 2,305,646.34 2.12%
Wyoming.................................... 37 468,216.19 0.43%
----- ----------------- --------------
Totals..................................... 9381 $108,504,998.27 100.00%
----- ----------------- --------------
----- ----------------- --------------
</TABLE>
- ------------------------
(1) Based on the location of the dealer office. In some instances, a dealer may
have originated an Initial Receivable with an Obligor who resides in a
different state than the one in which the dealer office is located.
(2) Percentages may not add to 100% because of rounding.
S-33
<PAGE>
DISTRIBUTION OF THE INITIAL RECEIVABLES BY REMAINING TERM TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
REMAINING TERM NUMBER OF AGGREGATE PRINCIPAL
TO SCHEDULED MATURITY RECEIVABLES PRINCIPAL BALANCE BALANCE(1)
- ------------------------------------------- --------------- ----------------- --------------
<S> <C> <C> <C>
10.0 to 14.9 months........................ 7 $ 14,101.02 0.01%
15.0 to 19.9 months........................ 30 113,115.23 0.10%
20.0 to 24.9 months........................ 71 349,822.77 0.32%
25.0 to 29.9 months........................ 101 572,305.09 0.53%
30.0 to 34.9 months........................ 220 1,436,677.21 1.32%
35.0 to 39.9 months........................ 419 2,985,171.97 2.75%
40.0 to 44.9 months........................ 1,061 8,886,132.50 8.19%
45.0 to 49.9 months........................ 1,783 17,665,397.61 16.28%
50.0 to 54.9 months........................ 1,942 23,470,124.59 21.63%
55.0 to 59.9 months........................ 2,159 30,439,047.98 28.05%
60.0 to 67.9 months........................ 1,588 22,573,102.30 20.80%
----- ----------------- --------------
Totals..................................... 9,381 $108,504,998.27 100.00%
----- ----------------- --------------
----- ----------------- --------------
</TABLE>
- ------------------------
(1) Percentages may not add to 100% because of rounding.
All of the Receivables provide for the payment by the related Obligor of a
specific total amount of payments, payable in substantially equal monthly
installments on each scheduled payment date, which total represents the amount
financed plus interest charges on the amount financed for the term of such
Receivable. Each Receivable provides for allocation of payments according to (i)
the "sum of periodic balances" or "sum of monthly payments" method (a "Rule of
78's Receivable"), (ii) the actuarial method (an "Actuarial Receivable" and,
together with Rule of 78's Receivables, the "Precomputed Receivables") or (iii)
the simple interest method (a "Simple Interest Receivable").
Under a Rule of 78's Receivable, the rate at which the amount of finance
charges is earned and, correspondingly, the amount of each scheduled monthly
payment allocated to reduction of the outstanding principal balance of the
related Receivable are calculated in accordance with the "Rule of 78's." Under
the Rule of 78's, the portion of a payment allocable to interest is determined
by multiplying the total amount of add-on interest payable over the term of the
Receivable by a fraction, the denominator of which is equal to the sum of a
series of numbers beginning with one and ending with the number of scheduled
monthly payments due under the related Contract, and the numerator of which, for
any given month, would be the number of payments remaining under such Contract
before giving effect to the payment to which the fraction is being applied. The
applicable fraction is then multiplied by the total add-on interest payable over
the term of the Contract to determine the amount of interest earned during that
month. The difference between the amount of the scheduled monthly payment made
by the Obligor and the amount of earned add-on interest calculated for the month
is applied to principal reduction.
An Actuarial Receivable provides for amortization of the loan over a series
of fixed level monthly installments. Each scheduled monthly payment is deemed to
consist of an amount of interest equal to the stated APR of the Receivable
multiplied by the outstanding principal balance of the Receivable and an amount
of principal equal to the remainder of such scheduled monthly payment.
All payments received by the Servicer on or in respect of Precomputed
Receivables, including the final scheduled payment, will be allocated pursuant
to the Sale and Servicing Agreement on an actuarial basis. No adjustment will be
made in the event of early or late payments, although in the latter case the
Obligor will be subject to a late charge.
S-34
<PAGE>
Payments on Simple Interest Receivables will be applied first to interest
accrued through the date immediately preceding the day of payment and then to
unpaid principal. Accordingly, if an Obligor pays an installment before its due
date, the portion of the payment allocated to interest for the payment period
will be less than if the payment had been made on the due date and the portion
of the payment applied to reduce the principal balance will be correspondingly
greater and the principal balance will be amortized more rapidly than scheduled.
Conversely, if an Obligor pays an installment after its due date, the portion of
the payment allocable to interest for the payment period will be greater than if
the payment had been made on the due date, the portion of the payment applied to
reduce the principal balance will be correspondingly less, and the principal
balance will be amortized more slowly than scheduled, in which case a larger
portion of the principal balance may be due on the final scheduled payment date.
In the event of a prepayment in full (voluntarily or by acceleration) of a
Precomputed Receivable, a "rebate" will be made to the Obligor of that portion
of the total amount of payments under such Receivable allocable to "unearned"
finance charges. In the event of the prepayment in full (voluntarily or by
acceleration) of a Simple Interest Receivable, a "rebate" will not be made to
the Obligor, but the Obligor will be required to pay interest only to the date
immediately preceding the date of prepayment. The amount of a rebate under a
Precomputed Receivable generally will be less than or equal to the remaining
scheduled payments of interest that would have been due under a Simple Interest
Receivable for which all remaining payments were made on schedule.
The amount of a rebate under a Rule of 78's Receivable calculated in
accordance with the Rule of 78's generally will be less than had such rebate
been calculated on an actuarial basis. However, Rule of 78's Receivables
originated in certain states require rebates based on the actuarial method.
Distributions to Securityholders will not be affected by Rule of 78's rebates
under the Rule of 78's Receivables because pursuant to the Sale and Servicing
Agreement such distributions will be determined using the actuarial method.
Amounts received upon prepayment in full of a Rule of 78's Receivable in excess
of the then outstanding principal balance of such Receivable and accrued
interest thereon (calculated pursuant to the actuarial method) will not be
passed through to Securityholders, but will be paid to the Servicer as
additional servicing compensation.
THE SELLER AND FIRST MERCHANTS
THE SELLER
The Seller is a wholly-owned subsidiary of First Merchants. The Seller was
incorporated in the State of Delaware on February 7, 1996. The principal
executive offices of the Seller are located at 570 Lake Cook Road, Suite 126B,
Deerfield, Illinois 60015; telephone (847) 948-9300.
The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by First Merchants under any Insolvency Laws will not result in the
consolidation of the assets and liabilities of the Seller or the Trust with
those of First Merchants. These steps include the creation of the Seller as a
separate, limited-purpose subsidiary pursuant to a certificate of incorporation
containing certain limitations on its activities (including restrictions on the
nature of the Seller's business, the requirement of an independent director
being on the Seller's Board of Directors and a restriction on the Seller's
ability to commence a voluntary case or proceeding under any Insolvency Law
without the prior unanimous affirmative vote of all of its directors).
FIRST MERCHANTS
First Merchants is a specialty finance company primarily engaged in
financing the purchase of used automobiles by acquiring dealer-originated retail
installment contracts. Since First Merchants' incorporation in March 1991, it
has expanded its operations by targeting and servicing an under-served
market--financing used automobile purchases by consumers who have limited access
to traditional sources of credit. First Merchants serves two customers, the
automobile dealer and, indirectly, the dealer's customer, the "non-prime"
borrower. See "First Merchants' Automobile Financing Program-- General."
S-35
<PAGE>
First Merchants is a Delaware corporation. First Merchants' principal
executive office and mailing address is 570 Lake Cook Road, Suite 126,
Deerfield, Illinois 60015 and its telephone number is (847) 948-9300. The common
stock of First Merchants is quoted on The Nasdaq Stock Market's National Market
under the symbol "FMAC." First Merchants is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith files reports and other information with the Securities and
Exchange Commission.
First Merchants will act as the initial servicer of the Receivables pursuant
to the Sale and Servicing Agreement and will be compensated for acting as
Servicer. First Merchants will be appointed as initial custodian of the
Receivables and the Receivables will be delivered to and held by First Merchants
in such capacity. Prior to delivery of the Receivables to First Merchants, as
custodian, First Merchants will stamp the Receivables to reflect their sale and
assignment to the Seller and the Trust and the pledge to the Indenture Trustee;
however, First Merchants will not have the certificates of title of the Financed
Vehicles amended or reissued. In the absence of amendments to the certificates
of title, the Trust may not have perfected security interests in the Financed
Vehicles securing the Receivables originated in some states. See "Certain Legal
Aspects of the Receivables" in the Prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Trust to purchase the Receivables from the Seller and to fund the Pre-Funding
Account and the Capitalized Interest Account. The Seller will apply the net
proceeds to it to purchase the Receivables from First Merchants and to fund the
initial deposit to the Spread Account. First Merchants will use the net proceeds
it receives from the Seller to repay indebtedness and for other general
corporate purposes.
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. A copy of the
Indenture will be filed with the Commission following the issuance of the
Securities. The following summary describes certain terms of the Notes and the
Indenture. The summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Notes and
the Indenture. The following summary supplements and, to the extent inconsistent
therewith, replaces the description of the general terms and provisions of the
Notes of any given series and the related Indenture set forth in the Prospectus,
to which description reference is hereby made.
PAYMENTS OF INTEREST
Interest on the principal balance of the Class A-1 Notes and the Class A-2
Notes will accrue at the Class A-1 Rate and Class A-2 Rate, respectively, and
will be payable to the holders of the Class A-1 Notes and the Class A-2 Notes on
each Distribution Date, commencing January 15, 1997. Interest on the Class A-1
Notes, with respect to any Distribution Date, will accrue from and including the
most recent Distribution Date on which interest was paid on the Notes (or, in
the case of the first Distribution Date, from and including the Closing Date)
to, but excluding, such Distribution Date (each, a "Floating Rate Interest
Accrual Period"). Interest on the Class A-1 Notes will be calculated on the
basis of the actual number of days in each Floating Rate Interest Accrual Period
divided by 360. Interest on the Class A-2 Notes, with respect to any
Distribution Date, will accrue from and including the 15th day of the preceding
calendar month (or, in the case of the first Distribution Date, from and
including the Closing Date) to and including the 14th day of the calendar month
in which such Distribution Date occurs. Interest on the
S-36
<PAGE>
Class A-2 Notes will be calculated on the basis of a 360-day year consisting of
twelve 30-day months. Interest accrued as of any Distribution Date but not paid
on such Distribution Date will be due on the next Distribution Date, together
with interest on such overdue interest (to the extent lawful) at the Class A-1
Rate or the Class A-2 Rate, as applicable. Interest payments on the Notes will
generally be made from the Total Distribution Amount remaining after payment of
the Servicing Fee (and any trustee fees not paid by the Servicer). In the event
such remaining amount is insufficient to pay the Noteholders' Interest
Distributable Amount in full, such shortfall will be paid, first, from amounts,
if any, available in the Spread Account and, second, by the Security Insurer
pursuant to the Notes Policy. See "Description of the Transfer and Servicing
Agreements--Distributions." Interest payments to holders of the Class A-1 Notes
and the Class A-2 Notes will have the same priority. Under certain
circumstances, amounts available to make interest payments on the Notes could be
less than the full amount of interest payable on the Notes on a Distribution
Date, in which case the Noteholders will receive their ratable share of such
amount, based on the aggregate amount of interest due on such date on each class
of the Notes.
PAYMENTS OF PRINCIPAL
Principal payments will be made to the Class A-1 Noteholders on each
Distribution Date in an amount equal to the Class A-1 Principal Distributable
Amount for such date. After the Class A-1 Notes have been paid in full,
principal payments will be made to the Class A-2 Noteholders on each
Distribution Date in an amount equal to the Class A-2 Principal Distributable
Amount. Holders of Class A-2 Notes are also entitled to receive as principal
certain additional amounts under the circumstances and to the extent set forth
herein. Payment of the Noteholders' Principal Distributable Amount on each
Distribution Date will be made from the Total Distribution Amount remaining
after payment of the Servicing Fee (and any trustee fees not paid by the
Servicer) and the Noteholders' Interest Distributable Amount. In the event such
remaining amount is insufficient to pay the Noteholders' Principal Distributable
Amount in full, such shortfall will be paid, first, from amounts, if any,
available in the Spread Account after payment of the Noteholders' Interest
Distributable Amount and, second, by the Security Insurer pursuant to the Notes
Policy.
The "Class A-1 Principal Distributable Amount" with respect to each
Distribution Date will equal the sum of (i) the Class A-1 Monthly Principal
Distributable Amount and (ii) the Class A-1 Principal Carryover Shortfall, if
any, for such Distribution Date. The "Class A-1 Monthly Principal Distributable
Amount" for any Distribution Date until the Class A-1 Notes are paid in full
will equal 100% of the Regular Principal Distribution Amount. The "Regular
Principal Distribution Amount" on any Distribution Date will be the sum of the
following amounts, without duplication, with respect to the related Collection
Period: (i) that portion of all collections on the Receivables allocable to
principal; (ii) the aggregate outstanding principal balance of all Receivables
that became Liquidated Receivables during such Collection Period; (iii) that
portion allocable to principal of the aggregate amount of Cram Down Losses
incurred during the related Collection Period; and (iv) that portion allocable
to principal of the Purchase Amount of all Receivables that became Purchased
Receivables during or in respect of such Collection Period.
No principal payments will be made on the Class A-2 Notes until the Class
A-1 Notes have been paid in full. On each Distribution Date, commencing on the
Distribution Date on which the Class A-1 Notes are paid in full, principal of
the Class A-2 Notes will be payable in an amount equal to the Class A-2
Principal Distributable Amount for the related Collection Period, to the extent
of funds available therefor. The "Class A-2 Principal Distributable Amount" with
respect to each Distribution Date will equal the sum of (i) the Class A-2
Monthly Principal Distributable Amount and (ii) the Class A-2 Principal
Carryover Shortfall, if any, for such Distribution Date. The "Class A-2 Monthly
Principal Distributable Amount" for any Distribution Date on or after the
Distribution Date on which the Class A-1 Notes are paid in full will equal 100%
of the Regular Principal Distribution Amount (or, on the Distribution Date on
which the Class A-1 Notes are paid in full, 100% of the Regular Principal
Distribution Amount remaining after the
S-37
<PAGE>
Class A-1 Notes are paid in full). In addition, on any Distribution Date on or
after the Distribution Date on which the Class A-1 Notes are paid in full, the
Class A-2 Notes will receive as a payment of principal of such Notes, to the
extent of funds available therefor, an amount (the "Class A-2 Additional
Principal Distribution Amount") equal to 50% of the portion, if any, of the
Total Distribution Amount for the related Collection Period that remains after
the payment of (a) the Servicing Fee (together with any portion of the Servicing
Fee that remains unpaid from prior Distribution Dates), (b) any accrued and
unpaid fees owed to the Owner Trustee and the Indenture Trustee, to the extent
such fees are not paid by the Servicer, (c) the Noteholders' Interest
Distributable Amount, (d) the Noteholders' Principal Distributable Amount, (e)
the Certificateholders' Interest Distributable Amount, (f) any amounts owed to
the Security Insurer under the Insurance Agreement and (g) any deficiency in the
Spread Account Required Amount.
"Liquidated Receivable" means a Receivable with respect to which any of the
following shall have occurred: (i) the related Financed Vehicle has been
repossessed for 90 or more days, (ii) such Receivable is a defaulted receivable
with respect to which the Servicer has determined in good faith that all amounts
expected to be recovered have been received or (iii) a payment under the related
Contract is 150 or more days (or, if the related Obligor is a debtor under
Chapter 13 of the U.S. Bankruptcy Code, 210 or more days) delinquent.
"Security Insurer Default" means any one of the following events shall have
occurred and be continuing: (i) the Security Insurer shall have failed to make a
required payment when due under a Policy; (ii) the Security Insurer shall have
(A) filed a petition or commenced any case or proceeding under any provision or
chapter of the United States Bankruptcy Code, the New York State Insurance Law
or any other similar federal or state law relating to insolvency, bankruptcy,
rehabilitation, liquidation, or reorganization, (B) made a general assignment
for the benefit of its creditors or (C) had an order for relief entered against
it under the United States Bankruptcy Code, the New York State Insurance Law or
any other similar federal or state law relating to insolvency, bankruptcy,
rehabilitation, liquidation, or reorganization that is final and nonappealable;
or (iii) a court of competent jurisdiction, the New York Department of Insurance
or any other competent regulatory authority shall have entered a final and
nonappealable order, judgment or decree (A) appointing a custodian, trustee,
agent, or receiver for the Security Insurer or for all or any material portion
of its property or (B) authorizing the taking of possession by a custodian,
trustee, agent, or receiver of the Security Insurer or of all or any material
portion of its property.
As used herein, "Class A-1 Principal Carryover Shortfall" means, with
respect to any Distribution Date, the amount, if any, of Class A-1 Principal
Distributable Amount that was due but unpaid on the immediately preceding
Distribution Date, and "Class A-2 Principal Carryover Shortfall" means, with
respect to any Distribution Date, the amount, if any, of Class A-2 Principal
Distributable Amount that was due but unpaid on the immediately preceding
Distribution Date.
The principal balance of the Class A-1 Notes, to the extent not previously
paid, will be due on the Class A-1 Final Scheduled Distribution Date and the
principal balance of the Class A-2 Notes, to the extent not previously paid,
will be due on the Class A-2 Final Scheduled Distribution Date. The actual date
on which the aggregate outstanding principal amount of either the Class A-1
Notes or the Class A-2 Notes is paid in full may be earlier than the applicable
Final Scheduled Distribution Date due to a variety of factors, including those
described herein under "Weighted Average Life of the Securities."
CREDIT ENHANCEMENT
THE POLICIES. Concurrently with the issuance of the Securities, the
Security Insurer will issue the Notes Policy to the Indenture Trustee and the
Certificates Policy to the Owner Trustee for the benefit of the Noteholders and
the Certificateholders, respectively. Under the Policy, the Security Insurer
will
S-38
<PAGE>
unconditionally and irrevocably guarantee (i) the full, complete and timely
payment of (a) the Noteholders' Interest Distributable Amount, (b) the
Noteholders' Principal Distributable Amount, (c) the Certificateholders'
Interest Distributable Amount and (d) the Certificateholders' Principal
Distributable Amount and (ii) the full and complete payment of any interest or
principal amounts that are paid to Securityholders and subsequently recovered
from any such holder pursuant to a final, nonappealable order of a court of
competent jurisdiction under applicable bankruptcy or insolvency laws. See "The
Policies."
THE SPREAD ACCOUNT. On the Closing Date, the Seller will establish the
Spread Account with the Collateral Agent pursuant to the Spread Account
Agreement. The Spread Account will not be property of the Trust, but will be
held by the Collateral Agent and pledged to the Indenture Trustee and the Owner
Trustee for the benefit of the Securityholders and the Security Insurer. All
amounts on deposit in the Spread Account on any Distribution Date will be
available to make up shortfalls in the Noteholders' Interest Distributable
Amount, the Noteholders' Principal Distributable Amount, the Certificateholders'
Interest Distributable Amount and the Certificateholders' Principal
Distributable Amount.
On the Closing Date, the Seller will make the initial deposit to the Spread
Account, and, on each Subsequent Transfer Date, the Seller will cause to be
deposited in the Spread Account each additional amount comprising the Spread
Account Initial Deposit as required by the Spread Account Agreement. On each
Distribution Date thereafter on which the amount on deposit in the Spread
Account is less than the Spread Account Required Amount, the Total Distribution
Amount remaining after the distribution on such Distribution Date of the
Noteholders' Interest Distributable Amount, the Noteholders' Principal
Distributable Amount, the Certificateholders' Interest Distributable Amount and
the Certificateholders' Principal Distributable Amount, and all amounts due to
the Servicer, the Owner Trustee, the Indenture Trustee and the Security Insurer,
up to an amount equal to such shortfall, will be distributed to the Collateral
Agent for deposit to the Spread Account. The "Spread Account Required Amount"
with respect to any Distribution Date will be determined in accordance with the
Insurance Agreement and the Spread Account Agreement. The Spread Account
Required Amount may be increased or decreased over time as a result of certain
floors, caps or triggers as set forth in the Insurance Agreement and the Spread
Account Agreement.
On each Distribution Date, amounts on deposit in the Spread Account in
excess of the Spread Account Required Amount (after giving effect to
distributions made on that date) may be released to the Seller or to certain
other entities pursuant to the Sale and Servicing Agreement and the Spread
Account Agreement, subject to certain terms and conditions set forth in those
Agreements. The Securityholders will have no further interest in or rights with
respect to any amounts so released from the Spread Account.
SUBORDINATION OF THE CERTIFICATES. No distribution of interest will be made
to Certificateholders on any Distribution Date until the Class A-1 and Class A-2
Notes have been paid the Noteholders' Interest Distributable Amount and the
Noteholders' Principal Distributable Amount for such Distribution Date, and no
distribution of principal will be made to Certificateholders on any Distribution
Date unless and until the Class A-1 and Class A-2 Notes have been paid in full.
This subordination is intended to enhance the likelihood of timely receipt by
the Noteholders of the full amount of interest and principal distributable to
them on each Distribution Date and to afford the Noteholders limited protection
against losses in respect of the Receivables.
MANDATORY REDEMPTION
The Notes are subject to partial mandatory redemption on the Mandatory
Redemption Date if any amount remains on deposit in the Pre-Funding Account
after giving effect to the purchase of all Subsequent Receivables, including
those purchases, if any, made on the last day of the Funding Period. If the
amount on deposit in the Pre-Funding Account is $150,000 or less, then such
amount will be
S-39
<PAGE>
applied in reduction of the principal balance of the Class A-1 Notes. If the
amount on deposit in the Pre-Funding Account exceeds $150,000, then such amount
will be applied in reduction of the principal balance of each Class of Notes and
the Certificates pro rata, based on the respective principal balances thereof as
of the preceding Distribution Date.
OPTIONAL REDEMPTION
The Class A-2 Notes and the Certificates will be subject to early
retirement, in whole but not in part, on any Distribution Date on which the
Servicer exercises its option to purchase the Receivables. The Servicer
generally may purchase the Receivables as of the last day of any Collection
Period on or after the date on which the Pool Balance has been reduced to 10% or
less of the Initial Pool Balance; however, the Servicer may not exercise its
option to purchase the Receivables without the consent of the Security Insurer
if (i) an unreimbursed claim has previously been made under the Policies, (ii)
if such purchase of the Receivables by the Servicer would result in a claim
being made under the Policies or (iii) if such purchase of the Receivables by
the Servicer would result in any amount owed to the Security Insurer remaining
unpaid. Any such purchase of the Receivables by the Servicer will result in the
early retirement of the Class A-2 Notes and the Certificates at a purchase price
equal to the outstanding principal amount thereof plus accrued and unpaid
interest thereon.
CERTAIN PROVISIONS OF THE INDENTURE
INDENTURE EVENTS OF DEFAULT; RIGHTS UPON INDENTURE EVENT OF DEFAULT. "Events
of Default" under the Indenture ("Indenture Events of Default") will consist of:
(i) a default for five days or more in the payment of any interest on any Note
when the same becomes due and payable; (ii) a default in the payment of
principal of any Note when the same becomes due and payable; (iii) a default in
the observance or performance in any material respect of any covenant or
agreement of the Trust made in the Indenture and the continuation of any such
default for a period of 30 days after notice thereof is given to the Trust by
the Indenture Trustee or to the Trust and the Indenture Trustee by the holders
of 25% of the aggregate outstanding principal amount of the Notes; (iv) any
representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made if such breach is not cured
within 30 days after notice thereof is given to the Trust by the Indenture
Trustee or to the Trust and the Indenture Trustee by the holders of 25% of the
aggregate outstanding principal amount of the Notes; or (v) certain events of
bankruptcy, insolvency, receivership or liquidation with respect to the Trust.
Unless a Security Insurer Default has occurred, Indenture Events of Default also
will include Insurance Agreement Events of Default under the Insurance
Agreement, but only if the Security Insurer delivers to the Trust and the
Indenture Trustee, and does not rescind, a written notice specifying that such
Insurance Agreement Event of Default constitutes an Indenture Event of Default.
The amount of principal required to be paid to Noteholders under the Indenture
on any Distribution Date will generally be limited to amounts available to be
deposited in the Note Distribution Account; therefore, the failure to pay
principal on a class of Notes will generally not result in the occurrence of an
Indenture Event of Default until the applicable Final Scheduled Distribution
Date for such class of Notes.
If an Indenture Event of Default occurs and is continuing, the right of the
Indenture Trustee or holders of a majority in principal amount of the Notes to
declare the Notes to be immediately due and payable will depend upon whether or
not a Security Insurer Default has also occurred. If an Indenture Event of
Default occurs and a Security Insurer Default has not occurred, the Security
Insurer, and not the Indenture Trustee or the Noteholders, will have the right,
but not the obligation, to cause the Indenture Trustee to foreclose on the
Receivables and to deliver the proceeds of the liquidation thereof in accordance
with the terms of the Indenture. If the Security Insurer does not so cause the
Indenture Trustee to
S-40
<PAGE>
liquidate the Receivables and to prepay the Notes, or if the proceeds of such
liquidation of the Receivables are not sufficient to reduce the outstanding
principal amount of both the Class A-1 Notes and the Class A-2 Notes to zero,
and the Security Insurer does not elect to otherwise prepay the Notes in full,
following the occurrence of an Indenture Event of Default the Indenture Trustee
will continue to submit claims under the Notes Policy for any shortfalls in the
Noteholders' Interest Distributable Amount or the Noteholders' Principal
Distributable Amount. The Security Insurer may elect, upon receipt of a claim
under the Notes Policy following an Indenture Event of Default, to pay all or
any portion of the outstanding principal amount of the Notes plus accrued
interest thereon. See "The Policies" herein.
If both an Indenture Event of Default and a Security Insurer Default occur
and are continuing, then the Indenture Trustee (or the holders of not less than
a majority of the outstanding principal amount of the Notes) may declare the
Notes to be immediately due and payable. Under such circumstances, the Indenture
Trustee may institute proceedings to foreclose on the Receivables, may exercise
any other remedies as a secured party, including selling the Receivables, or may
elect to maintain possession of the Receivables and continue to apply
collections on the Receivables as if there had been no declaration of
acceleration. The Indenture Trustee will be prohibited from selling the
Receivables following an Indenture Event of Default, however, unless (i) the
holders of all the outstanding Notes consent to such sale; (ii) the proceeds of
such sale are sufficient to pay in full the principal of and accrued interest on
such outstanding Notes at the date of such sale; or (iii) the Indenture Trustee
determines that the proceeds of the Receivables would not be sufficient on an
ongoing basis to make all payments on the Notes as such payments would have
become due if such obligations had not been declared due and payable and the
Indenture Trustee obtains the consent of the holders of Notes representing a
majority of the aggregate outstanding principal amount of the Notes.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Indenture Event of Default occurs and is continuing
with respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Noteholders if the Indenture Trustee reasonably believes
it will not be adequately indemnified against the costs, expenses and
liabilities that it might incur in complying with such request. Subject to the
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority of the aggregate outstanding principal
amount of the Notes will have the right to direct the time, method and place of
conducting any proceeding or exercising any remedy available to the Indenture
Trustee; in addition, the holders of Notes representing a majority of the
aggregate outstanding principal amount of the Notes may, in certain cases, waive
any Indenture Event of Default except a default in the payment of principal of
or interest on any Note or a default in respect of a covenant or provision of
the Indenture that cannot be modified or amended without the waiver or consent
of the holders of all the outstanding Notes.
No holder of a Note will have the right to institute any proceeding with
respect to the Indenture unless (i) such holder previously has given to the
Indenture Trustee written notice of a continuing Indenture Event of Default;
(ii) the holders of not less than 25% of the outstanding principal amount of the
Notes have made written request to the Indenture Trustee to institute such
proceeding in its own name as Indenture Trustee; (iii) such holder or holders
have offered the Indenture Trustee reasonable indemnity; (iv) the Indenture
Trustee has for 60 days failed to institute such proceeding; and (v) no
direction inconsistent with such written request has been given to the Indenture
Trustee during such 60-day period by the holders of a majority of the
outstanding principal amount of the Notes.
None of the Indenture Trustee or the Owner Trustee in its individual
capacity, any Certificateholder or any of their respective owners,
beneficiaries, agents, officers, directors, employees, affiliates, successors,
or assigns will, in the absence of an express agreement to the contrary, be
personally liable for the payment of principal of or interest on the Notes or
for the agreements of the Trust contained in the Indenture.
S-41
<PAGE>
Each Noteholder, by accepting a Note, and the Indenture Trustee will
covenant that they will not at any time institute against the Trust or the
Seller any bankruptcy, reorganization or other proceeding under any federal or
state bankruptcy or similar law.
The Trust may not engage in any activity other than as described herein. The
Trust may not incur, assume or guarantee any indebtedness other than
indebtedness incurred pursuant to the Notes and the Indenture.
CERTAIN COVENANTS. The Trust may not consolidate with or merge into any
other entity unless (i) the entity formed by or surviving such consolidation or
merger is organized under the laws of the United States, any state or the
District of Columbia; (ii) such entity expressly assumes the Trust's obligation
to make due and punctual payments on the Notes and to perform or observe every
agreement and covenant of the Trust under the Indenture; (iii) no Indenture
Event of Default shall have occurred and be continuing immediately after such
merger or consolidation; (iv) the Trust has been advised by each Rating Agency
that such merger or consolidation will not result in the qualification,
reduction or withdrawal of such Rating Agency's then-current rating of either
class of the Notes; (v) the Trust shall have received an opinion of counsel to
the effect that such consolidation or merger will have no material adverse tax
consequence to the Trust or to any Noteholder; and (vi) provided that a Security
Insurer Default has not occurred, the Security Insurer consents to such merger
or consolidation.
The Trust will not (i) except as expressly permitted by the Indenture or the
Transfer and Servicing Agreements, sell, transfer, exchange or otherwise dispose
of any of the assets of the Trust; (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the Notes (other
than amounts withheld under the Code or applicable state tax laws) or assert any
claim against any present or former holder of the Notes because of the payment
of taxes levied or assessed upon the Trust; (iii) dissolve or liquidate in whole
or in part; (iv) permit the validity or effectiveness of the Indenture to be
impaired or permit any person to be released from any covenants or obligations
with respect to the Notes under the Indenture except as may be expressly
permitted thereby; (v) permit any lien, charge, excise, claim, security
interest, mortgage, or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any part thereof, or
any interest therein or the proceeds thereof; or (vi) permit the lien of the
Indenture not to constitute a valid first priority security interest (other than
with respect to a tax, mechanics' or similar lien) in the assets of the Trust.
MODIFICATION OF INDENTURE. The Trust and the Indenture Trustee may, with
the consent of the Security Insurer (so long as no Security Insurer Default has
occurred) and of the holders of a majority of the aggregate outstanding
principal amount of the Notes, execute a supplemental indenture to add
provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Noteholders. However, without the consent of the holder of each outstanding Note
affected thereby, no supplemental indenture may (i) change the due date of any
installment of principal of or interest on the Notes or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin or currency in
which the Notes or any interest thereon is payable; (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment; (iii) reduce the percentage of the aggregate outstanding
amount of the Notes, the consent of the holders of which is required for any
such supplemental indenture or for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Trust, any
other obligor on the Notes, the Seller or an affiliate of any of them; (v)
reduce the percentage of the aggregate outstanding amount of the Notes, the
consent of the holders of which is required to direct the Indenture Trustee to
sell or liquidate the Receivables if the proceeds of such sale would be
insufficient to pay the principal amount and accrued and unpaid interest on the
outstanding Notes; (vi) decrease the percentage of the aggregate principal
amount of the Notes required to amend the sections of the
S-42
<PAGE>
Indenture that specify the percentage of the aggregate principal amount of the
Notes necessary to amend the Indenture or certain other related agreements; or
(vii) permit the creation of any lien ranking prior to or on a parity with the
lien of the Indenture with respect to any of the collateral for the Notes or,
except as otherwise permitted or contemplated in the Indenture, terminate the
lien of the Indenture on the collateral or deprive any holder of the Notes of
the security afforded by the lien of the Indenture.
The Trust and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Security Insurer (provided no Security
Insurer Default has occurred) but without obtaining the consent of the
Noteholders, for the purpose of, among other things, adding any provisions to or
changing in any manner or eliminating any of the provisions of the Indenture or
of modifying in any manner the rights of the Noteholders; provided that such
action does not, as evidenced by an opinion of counsel, materially and adversely
affect the interests of any Noteholder.
SATISFACTION AND DISCHARGE OF INDENTURE. The Indenture will be discharged
with respect to the collateral securing the Notes upon the delivery to the
Indenture Trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for the
payment in full of all the Notes.
THE INDENTURE TRUSTEE
Harris Trust and Savings Bank, an Illinois banking corporation, will be the
Indenture Trustee under the Indenture. The Indenture Trustee may resign at any
time, in which event the Trust will be obligated to appoint a successor
Indenture Trustee. The Trust may also remove the Indenture Trustee if the
Indenture Trustee ceases to be eligible to continue as such under the Indenture
or if the Indenture Trustee becomes insolvent. In such circumstances, the Trust
will be obligated to appoint a successor Indenture Trustee. No resignation or
removal of the Indenture Trustee and appointment of a successor Indenture
Trustee will become effective until acceptance of the appointment by the
successor Indenture Trustee.
FORM, EXCHANGE, REGISTRATION AND TITLE
The Notes and Certificates will initially be registered in the name of Cede
& Co. ("Cede"), the nominee of The Depository Trust Company ("DTC").
Securityholders may hold their Securities in the United States through DTC, or,
solely in the case of the Notes, in Europe through CEDEL Bank, societe anonyme
("CEDEL") or the Euroclear System ("Euroclear"), if they are participants of
such systems, or indirectly through organizations that are participants in such
systems.
Cede, as nominee for DTC, will hold the global Notes and Certificates. CEDEL
and Euroclear will hold omnibus positions on behalf of the CEDEL Participants
and the Euroclear Participants, respectively, through customers' securities
accounts in CEDEL's and Euroclear's names on the books of their respective
depositaries (collectively, the "Depositaries") which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the 1934 Act.
DTC accepts securities for deposit from its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants in such securities through electronic
book-entry changes in accounts of Participants, thereby eliminating the need for
physical movement of securities. Participants include securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly.
S-43
<PAGE>
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Securityholders who are not Participants but desire to purchase, sell or
otherwise transfer ownership of the Securities may do so only through
Participants (unless and until Definitive Securities are issued). In addition,
Securityholders will receive all distributions of principal of and interest on
the Securities from the Indenture Trustee or Owner Trustee (collectively, the
"Trustees"), as applicable, through DTC and Participants. Securityholders will
not receive or be entitled to receive physical securities representing their
respective interests in the Securities, except under the limited circumstances
described below.
Unless and until Definitive Securities are issued, it is anticipated that
the only Securityholder will be Cede, as nominee of DTC. Beneficial owners of
the Securities will not be Securityholders as that term is used in the
Agreement. Beneficial owners are only permitted to exercise the rights of
Securityholders indirectly through Participants and DTC.
While the Securities are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Unless and until Definitive
Securities are issued, beneficial owners who are not Participants may transfer
ownership of Securities only through Participants by instructing such
Participants to transfer the 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 the Securities will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited.
Physical Notes or Certificates will be issued in registered form to
Securityholders, or their nominees, rather than to DTC (such Securities being
referred to herein as "Definitive Securities"), only if (i) DTC or the Seller
advises the applicable Trustee in writing that DTC is no longer willing or able
to discharge
S-44
<PAGE>
properly its responsibilities as nominee and depository with respect to such
Securities and the Seller or such Trustee is unable to locate a qualified
successor, (ii) the Seller, at its sole option and with the consent of such
Trustee, elects to terminate the book-entry system through DTC or (iii) in the
case of the Notes, after the occurrence of an Indenture Event of Default, DTC,
at the direction of Noteholders having a majority in interest of the Notes,
advises the Indenture Trustee in writing that the continuation of a book-entry
system through DTC (or a successor thereto) to the exclusion of any physical
securities being issued to Noteholders is no longer in the best interest of
Noteholders. Upon issuance of Definitive Securities to Securityholders, such
Securities will be transferable directly (and not exclusively on a book-entry
basis), and registered holders will deal directly with the applicable Trustee
with respect to transfers, notices and distributions.
DTC has advised the Seller and the Trustees that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by a Noteholder under the Indenture or a Certificateholder under the Trust
Agreement only at the direction of one or more Participants to whose DTC account
the Securities are credited. DTC has advised the Seller that DTC will take such
action with respect to any Percentage Interests of the Securities only at the
direction of and on behalf of such Participants with respect to such Percentage
Interests of the Securities. DTC may take actions, at the direction of the
related Participants, with respect to some Securities that conflict with actions
taken with respect to other Securities.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants. 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 and may include the underwriters of any class of Securities.
Indirect access to CEDEL is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
securities and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC described above. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office (the "Euroclear Operator" or
"Euroclear"), under contract with Euroclear Clearance System, S.C., a Belgian
cooperative corporation (the "Euroclear 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 Euroclear Cooperative. The Euroclear Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to the Euroclear
System is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
S-45
<PAGE>
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific securities
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Certain
Federal and State Income Tax Consequences." CEDEL or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Noteholder under the Indenture on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf through
DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of the Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
In the event that any of DTC, CEDEL or Euroclear should discontinue its
services, the Seller would seek an alternative depositary (if available) or
cause the issuance of Definitive Securities to Securityholders or their nominees
in the manner described above.
Issuance of the Securities in book-entry form rather than as physical
securities may adversely affect the liquidity of the Securities in the secondary
market and the ability of Securityholders to pledge them. In addition, since
distributions on the Securities will be made by the Trustees to DTC and DTC will
credit such distributions to the accounts of its Participants, which will
further credit them to the accounts of indirect participants of Securityholders,
Securityholders may experience delays in the receipt of such distributions.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the terms of the Trust
Agreement, a form of which has been filed as an exhibit to the Registration
Statement. A copy of the Trust Agreement will be filed with the Commission
following the issuance of the Securities. The following summary describes
certain terms of the Certificates and the Trust Agreement. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Certificates and the Trust Agreement.
The following summary supplements and, to the extent inconsistent therewith,
replaces the description of the general terms and provisions of the Certificates
of any given series and the related Trust Agreement set forth in the Prospectus,
to which description reference is hereby made.
S-46
<PAGE>
DISTRIBUTIONS OF INTEREST INCOME
Certificateholders will be entitled to distributions of interest on each
Distribution Date beginning on January 15, 1997 in an amount equal to the
Certificateholders' Interest Distributable Amount. As used herein,
"Certificateholders' Interest Distributable Amount" means, with respect to any
Distribution Date, interest accrued at the Pass-Through Rate on the Certificate
Balance as of the immediately preceding Distribution Date (or, in the case of
the first Distribution Date, as of the Closing Date) from and including the 15th
day of the preceding calendar month (or, in the case of the first Distribution
Date, from and including the Closing Date) to and including the 14th day of the
calendar month in which such Distribution Date occurs, after giving effect to
all distributions of principal to the Certificateholders on such immediately
preceding Distribution Date, plus any interest due but not distributed to
Certificateholders on previous Distribution Dates, with interest on such overdue
interest (to the extent lawful) at the Pass Through Rate (the
"Certificateholders' Interest Carryover Shortfall"). The Certificateholders'
Interest Distributable Amount will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. Interest distributions with respect to the
Certificates generally will be funded from the portion of the Total Distribution
Amount remaining after the distribution of the Servicing Fee (and any trustee
fees that are not paid by the Servicer), the Noteholders' Interest Distributable
Amount and the Noteholders' Principal Distributable Amount.
DISTRIBUTIONS OF PRINCIPAL PAYMENTS
No distributions of principal on the Certificates will be made until the
Class A-2 Notes have been paid in full. On each Distribution Date, commencing on
the Distribution Date on which the Class A-2 Notes are paid in full, principal
of the Certificates will be payable in an amount equal to the
Certificateholders' Principal Distributable Amount for the related Collection
Period, to the extent of funds available therefor following payment of the
Certificateholders' Interest Distributable Amount. The "Certificateholders'
Principal Distributable Amount" on any Distribution Date on or after the
Distribution Date on which the Class A-2 Notes are paid in full will equal 100%
of the Regular Principal Distribution Amount (less, on the Distribution Date on
which the Class A-2 Notes are paid in full, the portion thereof payable on the
Class A-2 Notes) plus any principal portion of the Certificateholders' Principal
Distributable Amount that was due and unpaid on the immediately preceding
Distribution Date (the "Certificateholders' Principal Carryover Shortfall"), and
will be calculated by the Servicer in the manner described under "Description of
the Transfer and Servicing Agreements--Distributions." The principal balance of
the Certificates, to the extent not previously paid, will be due on the
Certificate Final Scheduled Distribution Date.
MANDATORY PREPAYMENT
The Certificates are subject to partial mandatory prepayment on the
Mandatory Redemption Date if more than $150,000 remains on deposit in the
Pre-Funding Account after giving effect to the purchase of all Subsequent
Receivables, including those purchases, if any, made on the last day of the
Funding Period. Such amount will be applied in reduction of the principal
balance of each Class of Notes and the Certificates pro rata, based on the
respective principal balances thereof as of the preceding Distribution Date.
OPTIONAL PREPAYMENT
If the Servicer exercises its option to purchase the Receivables when the
Pool Balance declines to 10% or less of the Initial Pool Balance,
Certificateholders will receive an amount in respect of the Certificates equal
to the outstanding Certificate Balance together with accrued interest at the
Pass Through Rate, which distribution shall effect early retirement of the
Certificates. See "Description of the Notes--Optional Redemption" herein.
S-47
<PAGE>
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Holders of the Class A-2 Notes and the Certificates will not receive any
principal payments until the Class A-1 Notes have been paid in full, and the
Certificateholders will not receive any principal payments until the Class A-2
Notes have been paid in full. See "Description of the Notes--Payments of
Principal" and "Description of the Certificates" herein. As the rate of payment
of principal of the Certificates and each class of Notes will depend on the rate
of payment (including prepayments) of the principal balance of the Receivables,
final payment of the Class A-1 Notes, the Class A-2 Notes or Certificates could
occur significantly earlier than the Class A-1 Final Scheduled Distribution
Date, Class A-2 Final Scheduled Distribution Date or the Certificate Final
Scheduled Distribution Date, as applicable.
Payments on the Receivables may be in the form of scheduled amortization or
prepayments. Prepayments will include prepayments in full, partial prepayments,
liquidations due to defaults, losses caused by the issuance of an order by a
court in any insolvency proceeding reducing the amount owed under a Receivable,
as well as receipts of proceeds from physical damage, loss upon repossession,
credit life and credit accident and health insurance policies and the Purchase
Amounts of Purchased Receivables. The Receivables may be prepaid at any time
without penalty to the Obligors. The rate of prepayment of the Receivables may
be influenced by a variety of economic, social and other factors, including the
fact that an Obligor generally may not sell or transfer the Financed Vehicle
securing a Receivable without the consent of First Merchants. The rate of
prepayments on the Receivables also may be affected by the nature of the
Obligors and the Financed Vehicles and servicing decisions. See "Risk
Factors--Nature of Obligors and Financed Vehicles; Servicing" and "--Maturity
and Prepayment Assumptions." In addition, under certain circumstances, First
Merchants or the Servicer may be obligated to purchase Receivables with respect
to which it is in breach of certain representations, warranties or covenants
under the Receivables Purchase Agreement or Sale and Servicing Agreement, as
applicable. See also "Description of the Notes--Optional Redemption" regarding
the Servicer's option to purchase the Receivables when the Pool Balance is
reduced to 10% or less of the Initial Pool Balance and "Description of the
Transfer and Servicing Agreements--Insolvency Event" regarding the sale of the
Receivables if an Insolvency Event occurs with respect to the Seller.
Any reinvestment risks resulting from a faster or slower incidence of
prepayment of the Receivables will be borne entirely by the Securityholders.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Receivables Purchase
Agreement, the Sale and Servicing Agreement, the Administration Agreement and
the Trust Agreement (collectively, the "Transfer and Servicing Agreements").
Forms of the Transfer and Servicing Agreements have been filed as exhibits to
the Registration Statement. A copy of the Sale and Servicing Agreement will be
filed with the Commission following the issuance of the Securities. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all the provisions of the Transfer and Servicing Agreements.
The following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Transfer
and Servicing Agreements set forth in the Prospectus, to which description
reference is hereby made.
SALE AND ASSIGNMENT OF RECEIVABLES; SUBSEQUENT RECEIVABLES
On the Closing Date, First Merchants will sell and assign the Initial
Receivables to the Seller, without recourse, pursuant to the Receivables
Purchase Agreement, and the Seller will sell and assign the Initial Receivables
to the Trust, without recourse, pursuant to the Sale and Servicing Agreement.
Each Initial Receivable will be identified in a schedule to the Receivables
Purchase Agreement and the Sale and Servicing Agreement.
S-48
<PAGE>
In the Receivables Purchase Agreement, First Merchants will represent and
warrant to the Seller that, among other things, (i) the information provided
with respect to the Initial Receivables is correct in all material respects as
of the Cutoff Date; (ii) the Obligor on each Initial Receivable is required to
maintain physical damage insurance covering the Financed Vehicle in accordance
with First Merchants' normal requirements; (iii) upon the purchase of the
Initial Receivables by the Seller, the Initial Receivables will be free and
clear of all security interests, liens, charges and encumbrances, and no
offsets, defenses or counterclaims will have been asserted or threatened under
such Initial Receivables; (iv) immediately prior to the sale of the Initial
Receivables by First Merchants to the Seller and by the Seller to the Trust,
each of the Initial Receivables will be secured by a first priority perfected
security interest in the related Financed Vehicle in favor of First Merchants;
and (v) each Initial Receivable, at the time it was originated, complied and, at
the Closing Date, will comply in all material respects with applicable federal
and state laws, including, without limitation, consumer credit,
truth-in-lending, equal credit opportunity and disclosure laws. First Merchants
will be obligated to repurchase for the Purchase Amount any Initial Receivable
with respect to which it is in breach of a representation or warranty unless
such breach is cured in a timely manner. The "Purchase Amount" with respect to
any Initial Receivable will equal the unpaid principal balance owed by the
Obligor thereof plus interest on such amount at the applicable APR to the last
day of the month of repurchase.
The right of the Seller to enforce First Merchants' repurchase obligation
under the Receivables Purchase Agreement will be assigned to the Trust in the
Sale and Servicing Agreement. The repurchase obligation will constitute the sole
remedy available to the Seller, the Trust, the Indenture Trustee or the
Securityholders with respect to First Merchants for any such uncured breach.
There is no assurance that First Merchants will have the financial ability to
effect any repurchase of Receivables.
In addition, during the Funding Period, pursuant to the Sale and Servicing
Agreement, the Seller will be obligated to sell to the Trust Subsequent
Receivables having an aggregate principal balance equal to approximately
$36,168,001.73 (such amount being equal to the initial Pre-Funded Amount) to the
extent that such Subsequent Receivables are available.
During the Funding Period, on each Subsequent Transfer Date, subject to the
conditions described under "The Receivables Pool", the Seller will sell and
assign to the Trust, without recourse, the Seller's entire interest in the
Subsequent Receivables designated by the Seller as of the related Subsequent
Cutoff Date and identified in a schedule attached to the Subsequent Transfer
Agreement relating to such Subsequent Receivables executed on such date by the
Seller. Upon the conveyance of Subsequent Receivables to the Trust on a
Subsequent Transfer Date, (i) the Pool Balance will increase by an amount equal
to the aggregate principal balance of such Subsequent Receivables, (ii) an
amount to be agreed upon by the Seller and the Security Insurer will be
withdrawn from the Pre-Funding Account and will be deposited into the Spread
Account, and (iii) an amount equal to the excess of the aggregate principal
balance of such Subsequent Receivables over the amount described in clause (ii)
will be withdrawn from the Pre-Funding Account and paid to the Seller.
SERVICING PROCEDURES
The Servicer will follow its currently employed standards, or such more
exacting standards as the Servicer may employ in the future, in servicing the
Receivables. The Servicer will make reasonable efforts to collect all payments
due with respect to the Receivables and, in a manner consistent with the Sale
and Servicing Agreement, will continue such collection procedures as it follows
with respect to automotive retail installment sale contracts it services for
itself and others. Consistent with its normal procedures, the Servicer may, in
its discretion and subject to the consent of the Security Insurer, arrange with
an Obligor to extend the payment due date under the related Receivable. No such
arrangement will modify the amount of the scheduled payments or extend the final
payment date on any Receivable beyond the last day of the Collection Period
relating to the Final Scheduled Maturity Date. If the Servicer
S-49
<PAGE>
grants an extension with respect to a Receivable other than in accordance with
the aforementioned limitations, the Servicer will be required to purchase the
Receivable for the Purchase Amount.
On or before the earlier of (i) the eighth calendar day of each month (or if
such eighth day is not a Business Day, the next succeeding Business Day) and
(ii) the fifth Business Day preceding the related Distribution Date (each such
day, a "Determination Date"), the Servicer will prepare and deliver to the
Indenture Trustee, the Owner Trustee, the Backup Servicer, the Security Insurer
and the Rating Agencies a certificate (the "Servicer's Certificate") setting
forth, among other things, the amount collected on the Receivables during the
related Collection Period, including the Purchase Amounts for any Purchased
Receivables and the unpaid principal balance of any Receivables that became
Liquidated Receivables during such Collection Period, and any other information
necessary to enable the Indenture Trustee and the Owner Trustee to make all
required distributions and to deliver the Statement to Securityholders on the
related Distribution Date.
ACCOUNTS
On or before the Closing Date, the Servicer or the Seller will establish, or
cause to be established, the Post Office Boxes, the Spread Account and the
additional accounts described below, which will be used by the Servicer and the
Indenture Trustee or Owner Trustee, as applicable, in connection with the
servicing of the Receivables and making distributions pursuant to the Sale and
Servicing Agreement.
POST OFFICE BOXES AND LOCAL COLLECTION ACCOUNTS. On or prior to the Closing
Date, First Merchants will modify the payment statements sent to Obligors so
that payments made with respect to the Receivables on and after the Cutoff Date
will be addressed to one of several segregated post office boxes established by
First Merchants (the "Post Office Boxes"). Payments mailed to the Post Office
Boxes will be collected on a daily basis by the Servicer and deposited by the
Servicer into one of several accounts (each, a "Local Collection Account")
established in the name of the Indenture Trustee in banking institutions
approved by the Security Insurer. All amounts in any Local Collection Account
with respect to the Receivables will be swept within two Business Days to the
Collection Account. Any payment by an Obligor on a Receivable that is
inadvertently delivered to First Merchants rather than mailed to the applicable
Post Office Box will be deposited by First Merchants directly into the
applicable Local Collection Account, from which it will be swept to the
Collection Account.
COLLECTION ACCOUNT AND NOTE DISTRIBUTION ACCOUNT. On or prior to the
Closing Date, the Indenture Trustee will establish and maintain in the name of
the Indenture Trustee (a) the Collection Account, into which all payments made
on or in respect of the Receivables will be swept from the Local Collection
Accounts, and (b) an account into which amounts released from the Collection
Account and the Spread Account and payments made by the Security Insurer
pursuant to the Notes Policy, in each such case, for payment to the Noteholders
will be deposited and from which all distributions to the Noteholders will be
made (the "Note Distribution Account").
Funds in the Collection Account will be invested as provided in the Sale and
Servicing Agreement in Eligible Investments. "Eligible Investments" are
generally limited to investments approved by the Security Insurer and rated in
the highest investment category by each of the Rating Agencies. Any earnings
(net of losses and related investment expenses) on amounts on deposit in the
Collection Account will be included in the Interest Distribution Amount and
distributed on the next Distribution Date pursuant to the Sale and Servicing
Agreement.
The Collection Account and the Note Distribution Account (collectively, the
"Trust Accounts") will be maintained as Eligible Deposit Accounts. "Eligible
Deposit Account" means either (a) a segregated account with an Eligible
Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of
S-50
<PAGE>
such depository institution have a credit rating from each Rating Agency in one
of its generic rating categories that signifies investment grade. "Eligible
Institution" means (a) the corporate trust department of the Indenture Trustee
or the Owner Trustee or (b) a depository institution organized under the laws of
the United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), (i) which has either (A) a
long-term unsecured debt rating acceptable to each Rating Agency or (B) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
each Rating Agency and (ii) whose deposits are insured by the Federal Deposit
Insurance Corporation.
CERTIFICATE DISTRIBUTION ACCOUNT. In addition to the Trust Accounts, the
Servicer will establish an account in the name of the Owner Trustee (the
"Certificate Distribution Account") into which amounts released from the
Collection Account and the Spread Account and payments made by the Security
Insurer pursuant to the Certificates Policy, in each such case, for distribution
to the Certificateholders will be deposited and from which all distributions to
the Certificateholders will be made. The Certificate Distribution Account will
be maintained as an Eligible Deposit Account.
PRE-FUNDING ACCOUNT. On the Closing Date, a cash amount (the "Pre-Funded
Amount") equal to approximately $36,168,001.73 will be deposited into an account
(the "Pre-Funding Account") which will be established in the name of the
Indenture Trustee. The Pre-Funding Account will be an asset of the Trust and
will be pledged to the Indenture Trustee pursuant to the Indenture. Such amount
will be funded from the sale of the Securities and is expected to be used to
acquire Subsequent Receivables. The "Funding Period" is the period from and
including the Closing Date until the earliest of (i) the Determination Date on
which the amount on deposit in the Pre-Funding Account is $150,000 or less, (ii)
the occurrence of an Event of Default under either the Sale and Servicing
Agreement or the Indenture and (iii) the Determination Date in March 1997. The
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Receivables in accordance with the Sale and
Servicing Agreement. The Seller expects that the Pre-Funded Amount will be
reduced to less than $150,000 on or before the Determination Date in March 1997.
Any Pre-Funded Amount remaining at the end of the Funding Period will be payable
as a principal distribution to the Securityholders as a mandatory redemption or
prepayment on the immediately following Distribution Date.
CAPITALIZED INTEREST ACCOUNT. On the Closing Date, a cash amount will be
deposited in an account (the "Capitalized Interest Account") which will be
established in the name of the Indenture Trustee. The Capitalized Interest
Account will be an asset of the Trust, and will be pledged to the Indenture
Trustee pursuant to the Indenture. The amount so deposited in the Capitalized
Interest Account, including reinvestment income thereon, will be applied
(together with reinvestment income on the Pre-Funding Account) on each
Distribution Date up to and including the Mandatory Redemption Date to the
amount of interest accrued at the weighted average of the Class A-1 Rate, Class
A-2 Rate and the Pass-Through Rate on the amount by which the sum of the
Certificate Balance and the Note Balance exceeds the Pool Balance. Any amounts
remaining in the Capitalized Interest Account not needed for such purpose will
be paid to the Seller on the Distribution Date immediately following the end of
the Funding Period.
DISTRIBUTIONS
DEPOSITS TO COLLECTION ACCOUNT. On or before each Determination Date, the
Servicer will provide the Indenture Trustee and the Owner Trustee with a
certificate (the "Servicer's Certificate") in which the Servicer will set forth
certain information with respect to the related Collection Period, including the
amount of aggregate collections on the Receivables and the aggregate Purchase
Amount of Receivables to be repurchased by First Merchants or purchased by the
Servicer.
S-51
<PAGE>
The "Total Distribution Amount" with respect to each Distribution Date will
equal the sum of the Regular Principal Distribution Amount (other than the
portion thereof attributable to Realized Losses or Cram Down Losses) and an
amount (the "Interest Distribution Amount") equal to the sum of the following
amounts with respect to the related Collection Period: (i) that portion of all
collections on the Receivables allocable to interest; (ii) that portion of all
net liquidation proceeds allocable to interest; (iii) that portion allocable to
interest of the Purchase Amount of each Receivable that became a Purchased
Receivable during or in respect of the related Collection Period; (iv) any
investment income (net of related expenses) from the investment of amounts on
deposit in the Collection Account, Pre-Funding Account and Capitalized Interest
Account; and (v) amounts released from the Capitalized Interest Account.
The Interest Distribution Amount and the Regular Principal Distribution
Amount on any Distribution Date shall exclude all payments and proceeds
(including net liquidation proceeds) of any Receivables the Purchase Amount of
which has been included in the Total Distribution Amount in a prior Collection
Period.
The first Collection Period will begin on November 14, 1996 and will
continue through December 31, 1996. The first Distribution Date will occur on
January 15, 1997, on which date the Noteholders' Principal Distributable Amount
will include those collections received in respect of the Receivables for the
two previous calendar months allocable to principal, as described herein. Each
Collection Period thereafter will consist of one calendar month. The following
sets forth an example of a hypothetical monthly distribution:
<TABLE>
<S> <C>
January 1--January 31 COLLECTION PERIOD. Scheduled payments, prepayments and other
proceeds on or with respect to the Receivables are collected by the
Servicer for deposit to the Local Collection Accounts and the
Collection Account.
February 8 DETERMINATION DATE. On or before this date the Servicer will notify
the Owner Trustee and the Indenture Trustee of, among other things,
the amounts available in the Collection Account and the amounts
required to be distributed on the Payment Date.
February 14 RECORD DATE. Distributions on the Distribution Date will be made to
Securityholders of record at the close of business on this date.
February 15 DISTRIBUTION DATE. The Indenture Trustee will pay the Servicing Fee,
any amounts owed to the Indenture Trustee and the Owner Trustee (to
the extent not paid by the Servicer), the Noteholders' Interest
Distributable Amount, the Noteholders' Principal Distributable
Amount, the Certificateholders' Interest Distributable Amount, the
Certificateholders' Principal Distributable Amount and amounts owed
to the Security Insurer; transfer the required amounts, if any, to
the Spread Account; pay the Class A-2 Additional Principal
Distribution Amount, if any; and pay any remaining amount to the
Collateral Agent to be applied pursuant to the Spread Account
Agreement.
</TABLE>
DEPOSITS TO THE DISTRIBUTION ACCOUNTS. On each Distribution Date, the
Servicer will instruct the Indenture Trustee to make the following deposits and
distributions, to the extent of the Total Distribution Amount, in the following
order of priority:
(i) to the Servicer, the Servicing Fee and all unpaid Servicing Fees
from prior Collection Periods;
S-52
<PAGE>
(ii) to the Owner Trustee and the Indenture Trustee, from the Total
Distribution Amount remaining after the application of clause (i), any
applicable fees due on such date, but only to the extent not paid by the
Servicer;
(iii) to the Note Distribution Account, from the Total Distribution
Amount remaining after the application of clauses (i) and (ii), the
Noteholders' Interest Distributable Amount;
(iv) to the Note Distribution Account, from the Total Distribution
Amount remaining after the application of clauses (i) through (iii), the
Noteholders' Principal Distributable Amount;
(v) to the Certificate Distribution Account, from the Total Distribution
Amount remaining after the application of clauses (i) through (iv), the
Certificateholders' Interest Distributable Amount;
(vi) only after the Class A-2 Notes have been paid in full, to the
Certificate Distribution Account, from the Total Distribution Amount
remaining after the application of clauses (i) through (v), the
Certificateholders' Principal Distributable Amount;
(vii) to the Security Insurer, from the Total Distribution Amount
remaining after the application of clauses (i) through (vi), any amounts due
to the Security Insurer under the Insurance Agreement;
(viii) to the Spread Account, from the Total Distribution Amount
remaining after the application of clauses (i) through (vii), a maximum
amount equal to any deficiency in the Spread Account Required Amount;
(ix) only after the Class A-1 Notes have been paid in full, to the Note
Distribution Account, from the Total Distribution Amount remaining after the
application of clauses (i) through (viii), the Class A-2 Additional
Principal Distribution Amount; and
(x) to the Collateral Agent, any remaining amount, to be applied
pursuant to the Spread Account Agreement.
For purposes hereof, the following terms shall have the following meanings:
"Noteholders' Interest Distributable Amount" means, with respect to any
Distribution Date, the sum of the Class A-1 Interest Distributable Amount for
such Distribution Date and the Class A-2 Interest Distributable Amount for such
Distribution Date.
"Noteholders' Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of the Class A-1 Principal Distributable Amount for
such Distribution Date and the Class A-2 Principal Distributable Amount for such
Distribution Date; PROVIDED, HOWEVER, that the Noteholders' Principal
Distributable Amount shall not exceed the outstanding principal balance of the
Notes; and PROVIDED, FURTHER, that (i) the Noteholders' Principal Distributable
Amount on the Class A-1 Final Scheduled Distribution Date shall not be less than
the amount that is necessary (after giving effect to other amounts to be
deposited in the Note Distribution Account on such Distribution Date and
allocable to principal) to reduce the outstanding principal balance of the Class
A-1 Notes to zero; and (ii) the Noteholders' Principal Distributable Amount on
the Class A-2 Final Scheduled Distribution Date shall not be less than the
amount that is necessary (after giving effect to other amounts to be deposited
in the Note Distribution Account on such Distribution Date and allocable to
principal) to reduce the outstanding principal balance of the Class A-2 Notes to
zero.
On each Distribution Date, all amounts on deposit in the Note Distribution
Account generally will be paid in the following order of priority:
(i) to the Noteholders, accrued and unpaid interest on the outstanding
principal balance of the Class A-1 Notes or Class A-2 Notes, as applicable,
at the Class A-1 Rate and the Class A-2 Rate, respectively;
(ii) to the Class A-1 Noteholders in reduction of principal until the
principal balance of the Class A-1 Notes has been reduced to zero; and
S-53
<PAGE>
(iii) to the Class A-2 Noteholders in reduction of principal until the
principal balance of the Class A-2 Notes has been reduced to zero.
On each Distribution Date, all amounts on deposit in the Certificate
Distribution Account will be distributed to the Certificateholders in the
following order of priority:
(i) to the Certificateholders, accrued and unpaid interest on the
Certificate Balance at the Pass-Through Rate; and
(ii) on each Distribution Date on or after which the Class A-2 Notes
have been paid in full, to the Certificateholders in reduction of principal
until the Certificate Balance has been reduced to zero.
LIST OF SECURITYHOLDERS
Three or more Noteholders or Certificateholders, or one or more Noteholders
or Certificateholders evidencing not less than 25% of the Note Balance or
Certificate Balance, as applicable, may by written request to the Indenture
Trustee or Owner Trustee, as applicable, obtain access to the list of like
Securityholders maintained by the Indenture Trustee or Owner Trustee for the
purpose of communicating with other like Securityholders with respect to their
rights under the Indenture and Notes, or Trust Agreement and Certificates, as
applicable. The Owner Trustee or Indenture Trustee may elect not to afford the
requesting Securityholders access to such list if it agrees to mail the desired
communication or proxy, on behalf of and at the expense of the requesting
Securityholders, to all like Securityholders.
REPORTS TO SECURITYHOLDERS
Prior to each Distribution Date, the Servicer will prepare and provide to
the Indenture Trustee and the Owner Trustee a statement to be delivered to the
Noteholders and the Certificateholders (the "Statement to Securityholders") on
such Distribution Date. Each such Statement to Securityholders will include the
following information with respect to the Securities and the related
Distribution Date or Collection Period, as applicable:
(i) the amount of the distribution allocable to principal of each class
of Notes;
(ii) the amount of the distribution allocable to interest on or with
respect to each class of Notes;
(iii) the amount of the distribution allocable to principal of the
Certificates;
(iv) the amount of the distribution allocable to interest on or with
respect to the Certificates;
(v) the Pool Balance as of the close of business on the last day of the
related Collection Period;
(vi) the outstanding aggregate principal balance of, and the Note Pool
Factor for, each class of Notes after giving effect to all payments reported
under clause (i) above on such date;
(vii) the Certificate Balance and the Certificate Pool Factor after
giving effect to all payments reported under clause (iii) above on such
date;
(viii) the amount, if any, of the distribution payable pursuant to claims
under the Policies;
(ix) the amount of any Class A-2 Additional Principal Distribution
Amount distributable to Class A-2 Noteholders on such date;
(x) the amount of the Servicing Fee and the amount of any fees payable
to the Owner Trustee or the Indenture Trustee from monies on deposit in the
Collection Account;
(xi) the amount of any deposit to the Spread Account and the amount and
application of any funds withdrawn from the Spread Account;
S-54
<PAGE>
(xii) the aggregate principal balance of all Receivables that became
Liquidated Receivables or Purchased Receivables during the related
Collection Period;
(xiii) the amounts of the aggregate Realized Losses and aggregate Cram
Down Losses, if any, separately identified, for the related Collection
Period;
(xiv) the aggregate principal balance of Receivables that are 30 to 59
days, 60 to 89 days or 90 days or more delinquent;
(xv) the Class A-1 Interest Carryover Shortfall, the Class A-1 Principal
Carryover Shortfall, the Class A-2 Interest Carryover Shortfall, the Class
A-2 Principal Carryover Shortfall, the Certificateholders' Interest
Carryover Shortfall and the Certificateholders' Principal Carryover
Shortfall, if any, in each case after giving effect to payments on such
Distribution Date, and any change in such amounts from the preceding
statement;
(xvi) the aggregate Purchase Amounts for Receivables, if any, that were
purchased during or with respect to such Collection Period;
(xvii) for each such date during the Funding Period, the remaining amount
in the Pre-Funding Account and the amount remaining in the Capitalized
Interest Account; and
(xviii) the amount remaining in the Pre-Funding Account following the end
of the Funding Period that has not been used to fund the purchase of
Subsequent Receivables and is being passed through as payments of principal
on one or both Classes of Notes and/or the Certificates.
Each amount set forth pursuant to clauses (i), (ii), (iii), (iv), (viii),
(ix) and (xv) will be expressed as a dollar amount per $1,000 of the initial
principal balance of the Certificates or applicable class of Notes.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Trust, the Indenture Trustees
and Owner Trustee will mail to each person who at any time during such calendar
year has been a Noteholder or Certificateholder, as applicable, and received any
payment on the Notes or Certificates, a statement containing certain information
for the purposes of such Securityholder's preparation of federal income tax
returns. See "Certain Federal Income Tax Consequences."
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee on each
Distribution Date in an amount equal to the product of the Servicing Fee Rate
and the Pool Balance as of the first day of the related Collection Period. As
long as First Merchants is the Servicer, a portion of the Servicing Fee will be
paid to the Backup Servicer on each Distribution Date as compensation for its
agreeing to stand by as successor Servicer and for performing certain other
functions. The Servicer will also collect and retain any late fees, prepayment
charges and other administrative fees or similar charges allowed by applicable
law with respect to the Receivables.
The Servicing Fee will compensate the Servicer for performing the functions
of a third party servicer of automotive receivables, as an agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of Obligors on the Receivables, investigating delinquencies, reporting
tax information to Obligors, paying costs related to the disposition of
defaulted accounts, and policing the collateral. The Servicing Fee also will
compensate the Servicer for administering the Receivables, including accounting
for collections and furnishing monthly and annual statements to the Indenture
Trustee, the Owner Trustee and the Security Insurer and generating federal
income tax information. The Servicing Fee also will reimburse the Servicer for
certain taxes, accounting fees, outside auditor fees, data processing costs, and
other costs incurred in connection with administering the Receivables and for
payment of the fees of the Backup Servicer.
S-55
<PAGE>
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that a firm of independent
public accountants will furnish to the Indenture Trustee, the Owner Trustee, the
Security Insurer and the Rating Agencies within 120 days after the end of each
fiscal year, a statement as to compliance by the Servicer during the twelve
months that ended as of the end of such fiscal year (or in the case of the first
such certificate, the period from the Closing Date to the end of such fiscal
year) with certain standards relating to the servicing of the Receivables.
The Sale and Servicing Agreement will also provide for the delivery to the
Indenture Trustee, the Owner Trustee, the Security Insurer and the Rating
Agencies, within 120 days after the end of each fiscal year, of a certificate
signed by an officer of the Servicer stating that the Servicer has fulfilled its
obligations under the Sale and Servicing Agreement throughout the preceding
fiscal year (or in the case of the first such certificate, the period from the
Closing Date to the end of such fiscal year) or, if there has been a default in
the fulfillment of any such obligation, describing each such default and the
status thereof. The Servicer has agreed to give the Indenture Trustee, the Owner
Trustee and the Security Insurer notice of any Servicer Termination Event under
the Sale and Servicing Agreement.
Copies of such accountants' statements and officer's certificates may be
obtained by Securityholders on request in writing addressed to the Indenture
Trustee or Owner Trustee, as applicable.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement will provide that the Servicer may not
resign from its obligations and duties as Servicer thereunder except with the
prior written approval of the Security Insurer or upon determination that its
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until a successor Servicer has assumed
the servicing obligations and duties under the Sale and Servicing Agreement. In
the event First Merchants resigns as Servicer or is terminated as Servicer, the
Backup Servicer has agreed to assume the servicing obligations and duties under
the Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither the
Servicer nor any of its directors, officers, employees or agents will be under
any liability to the Trust or the Securityholders for taking any action or for
refraining from taking any action pursuant to the Sale and Servicing Agreement
or for errors in judgment; PROVIDED, HOWEVER, that neither the Servicer nor any
such person will be protected against any liability that would otherwise be
imposed by reason of willful misfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Sale and Servicing Agreement will provide
that the Servicer is under no obligation to appear in, prosecute or defend any
legal action that is not incidental to its servicing responsibilities under the
Sale and Servicing Agreement and that, in its opinion, may cause it to incur any
expense or liability.
Under the circumstances specified in the Sale and Servicing Agreement, any
entity into which the Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which the Servicer is a party, or
any entity succeeding to the business of the Servicer, which corporation or
other entity, in each of the foregoing cases, assumes the obligations of the
Servicer, will be the successor to the Servicer under the Sale and Servicing
Agreement.
SERVICER TERMINATION EVENT
A "Servicer Termination Event" under the Sale and Servicing Agreement will
mean the occurrence and continuance of any of the following: (i) any failure by
the Servicer to deposit to any Local Collection Account or the Collection
Account any proceeds or payments required to be so delivered that continues
unremedied for two Business Days (one Business Day with respect to payments of
Purchase Amounts), or any failure to deliver the Servicer's Certificate by the
applicable Determination Date; (ii) any failure by the Servicer duly to observe
or perform in any material respect any other covenant or agreement under
S-56
<PAGE>
the Sale and Servicing Agreement, which failure continues unremedied for 30 days
after the giving of written notice of such failure to the Servicer by (a) the
Indenture Trustee or (b) if a Security Insurer Default has not occurred, the
Security Insurer or (c) if a Security Insurer Default has occurred, the holders
of Notes representing more than 25% of the Note Balance; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings with respect to the Servicer or, so long as First Merchants
is the Servicer, the Seller; (iv) so long as a Security Insurer Default has not
occurred, the failure of the Security Insurer to deliver a Servicer Extension
Notice to the Servicer at the end of any 3-month servicing period; (vi) so long
as a Security Insurer Default has not occurred, the occurrence of any one of
certain events set forth in the Insurance Agreement; or (vii) the termination of
the Servicer as servicer with respect to any other trust that has issued one or
more classes of asset backed securities with respect to which the Security
Insurer has issued a financial insurance guaranty policy.
RIGHTS UPON SERVICER TERMINATION EVENT
As long as a Servicer Termination Event remains unremedied, (x) provided no
Security Insurer Default has occurred, the Security Insurer in its sole and
absolute discretion or (y) if a Security Insurer Default has occurred, then the
Indenture Trustee or holders of Notes evidencing 25% or more of the Note
Balance, may terminate all the rights and obligations of the Servicer under the
Sale and Servicing Agreement, whereupon the Backup Servicer or such other
successor Servicer as shall have been appointed by the Security Insurer
(provided no Security Insurer Default has occurred) or the Indenture Trustee, as
the case may be, will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Sale and Servicing Agreement and will be
entitled to similar compensation arrangements. There is no assurance that the
succession of a successor Servicer will not result in a material disruption in
the performance of the duties of the Servicer.
WAIVER OF PAST DEFAULTS
The Security Insurer and, if a Security Insurer Default shall have occurred
and be continuing, the holders of Notes evidencing not less than a majority of
the aggregate outstanding principal amount of the Notes may waive any default by
the Servicer in the performance of its obligations under the Sale and Servicing
Agreement and its consequences. No such waiver shall impair the Security
Insurer's or the Noteholders' rights with respect to subsequent defaults.
BACKUP SERVICER
If a Servicer Termination Event occurs under the Sale and Servicing
Agreement while First Merchants is Servicer, or if First Merchants is terminated
as Servicer or resigns as Servicer, the Backup Servicer has agreed to act as
successor Servicer. The Backup Servicer will receive a fee on each Distribution
Date for agreeing to stand by as successor Servicer and for performing certain
other functions. Such fee will be payable to the Backup Servicer from the
Servicing Fee payable to First Merchants.
AMENDMENT
Each of the Transfer and Servicing Agreements may be amended by the parties
thereto, with the consent of the Security Insurer (provided no Security Insurer
Default has occurred) but without the consent of the Noteholders or
Certificateholders, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Transfer and Servicing
Agreements or of modifying in any manner the rights of the Securityholders
thereunder; provided, that any such action will not, as evidenced by an opinion
of counsel, materially and adversely affect the interests of any Securityholder.
The Transfer and Servicing Agreements may also be amended from time to time
by the parties thereto with the consent of the Security Insurer (provided no
Security Insurer Default has occurred) and of the Noteholders evidencing at
least a majority of the Note Balance, or of the Certificateholders
S-57
<PAGE>
evidencing at least a majority of the Certificate Balance in the case of the
Trust Agreement, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Transfer and Servicing
Agreements or of modifying in any manner the rights of the Noteholders or
Certificateholders; provided, that no such amendment may (i) increase or reduce
in any manner the amount of, or accelerate or delay the timing of, collections
of payments on or in respect of the Receivables or distributions that are
required to be made for the benefit of the Noteholders or Certificateholders or
(ii) reduce the aforesaid percentage of the Notes or Certificates that is
required to consent to any such amendment, without the consent of the holders of
all of the outstanding Notes or Certificates, as applicable.
INSOLVENCY EVENT
If an Insolvency Event occurs with respect to the Seller, the Receivables
will be liquidated and the Trust will be terminated 90 days after the date of
such Insolvency Event unless, before the end of such 90-day period, the Owner
Trustee shall have received written instructions from (i) Certificateholders
representing more than 50% of the Certificate Balance, (ii) Noteholders
representing more than 50% of the aggregate outstanding principal amount of each
class of Notes, and (iii) the Security Insurer (provided no Security Insurer
Default has occurred), to the effect that each such party disapproves of the
liquidation of the Receivables and termination of the Trust. Promptly after the
occurrence of an Insolvency Event with respect to the Seller, notice thereof is
required to be given to the Securityholders; provided, however, that any failure
to give such notice will not prevent or delay the termination of the Trust. Upon
any such termination of the Trust, the Owner Trustee shall, or shall direct the
Indenture Trustee to, promptly sell the assets of the Trust (other than the
Trust Accounts) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation of
the Receivables will be treated as collections on the Receivables and deposited
in the Collection Account. If the proceeds from the liquidation of the
Receivables and any amounts on deposit in the Trust Accounts are not sufficient
to pay the Notes or Certificates in full, the amount of principal returned to
the holders thereof will be reduced and some or all of the Securityholders will
incur a loss.
The Trust Agreement provides that the Owner Trustee will not have the power
to commence a voluntary proceeding in bankruptcy with respect to the Trust
without the unanimous prior approval of all the Certificateholders and the
Security Insurer (provided that a Security Insured Default has not occurred) and
the delivery to the Owner Trustee by each Certificateholder (including the
Seller) of a certificate certifying that such Certificateholder reasonably
believes that the Trust is insolvent.
SELLER LIABILITY
In the Trust Agreement the Seller will agree to be liable directly to any
injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a Securityholder in the capacity of an
investor in the Securities) arising out of or based on the arrangement created
by the Trust Agreement as though such arrangement created a partnership under
the Delaware Revised Uniform Limited Partnership Act in which the Seller was a
general partner.
TERMINATION
The obligations of the Servicer, the Seller, the Administrator (as defined
herein), the Owner Trustee and the Indenture Trustee with respect to the Trust
pursuant to the Transfer and Servicing Agreements will terminate upon the
earliest to occur of (i) the maturity or other liquidation of the last
Receivable in the Receivables Pool and the disposition of any amounts received
upon liquidation of any such remaining Receivables, (ii) the payment to
Securityholders of all amounts required to be paid to them pursuant to the
Transfer and Servicing Agreements and (iii) the purchase by the Servicer of all
of the Receivables as of the end of any Collection Period after the Pool Balance
is reduced to 10% or less of the Initial Pool Balance.
S-58
<PAGE>
ADMINISTRATION AGREEMENT
First Merchants, in its capacity as the Administrator (the "Administrator"),
will enter into the Administration Agreement with the Trust and the Indenture
Trustee pursuant to which the Administrator will agree to provide the notices
and to perform other administrative obligations required by the Indenture. As
compensation for the performance of the Administrator's obligations under the
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to a monthly administration fee, which fee
will be paid by the Servicer.
THE POLICIES
The following paragraphs summarize the material terms of the Policies. This
summary is qualified by reference to the provisions of the Policies.
Simultaneously with the issuance of the Securities, the Security Insurer
will deliver the Notes Policy to the Indenture Trustee and the Certificates
Policy to the Owner Trustee for the benefit of the Noteholders and the
Certificateholders, respectively. Under the Policies, the Security Insurer will
unconditionally and irrevocably guarantee to the Indenture Trustee and Owner
Trustee for the benefit of the related Securityholders the full and complete
payment of (i) the Noteholders' Interest Distributable Amount, (ii) the
Noteholders' Principal Distributable Amount, (iii) the Certificateholders'
Interest Distributable Amount, (iv) the Certificateholders' Principal
Distributable Amount (collectively, the "Guaranteed Payments") and (v) the
amount of any interest or principal distributed to Securityholders that is
subsequently avoided in whole or in part as a preference payment under
applicable law. The Guaranteed Payments under the Policies will not include any
interest amounts owed on the Securities because the appropriate notice and
certificate for payment in proper form was not timely Received (as defined
below) by the Security Insurer. In the event the Indenture Trustee or the Owner
Trustee fails to make a claim under the related Policy, Securityholders do not
have the right to make a claim directly under such Policy, but may sue to compel
the Indenture Trustee, in the case of Notes Policy, or the Owner Trustee, in the
case of the Certificates Policy, to do so.
Payment of claims on the Policies made in respect of shortfalls on
Guaranteed Payments will be made by the Security Insurer following Receipt by
the Security Insurer of the appropriate notice for payment on the later to occur
of (i) 12:00 noon, New York City time, on the third Business Day following
Receipt of such notice for payment and (ii) 12:00 noon, New York City time, on
the date on which such payment is due on the Securities.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be paid under
either Policy, the Security Insurer shall cause such payment to be made no
earlier than the later of (x) the date when due to be paid pursuant to the Order
referred to below and (y) the first to occur of (a) the fourth Business Day
following Receipt by the Security Insurer from the Indenture Trustee or Owner
Trustee, as the case may be, of (i) a certified copy of the order (the "Order")
of the court or other governmental body that exercised jurisdiction to the
effect that the Securityholder is required to return principal or interest paid
on the Securities during the term of such Policy because such payments were
avoidable as preference payments under applicable bankruptcy law, (ii) a
certificate of the Securityholder that the Order has been entered and is not
subject to any stay and (iii) an assignment duly executed and delivered by the
Securityholder, in such form as is reasonably required by the Security Insurer
and provided to the Securityholder by the Security Insurer, irrevocably
assigning to the Security Insurer all rights and claims of the Securityholder
relating to or arising under the Securities against the assets of the Trust or
otherwise with respect to such preference payment, or (b) the date of Receipt by
the Security Insurer from the Indenture Trustee or Owner Trustee or the
Securityholder, as the case may be, of the items referred to in clauses (i),
(ii) and (iii) above if, at least four Business Days prior to such date of
Receipt, the Security Insurer shall have Received written notice from the
Indenture Trustee or Owner Trustee that such items were to be delivered on such
date and such date was specified in such notice. Such payment shall be disbursed
to the receiver, conservator, debtor-in-
S-59
<PAGE>
possession or trustee in bankruptcy named in the Order and not to the Indenture
Trustee or Owner Trustee or any Securityholder directly (unless a Securityholder
has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Indenture Trustee or Owner Trustee for
distribution to such Securityholder upon proof of such payment reasonably
satisfactory to the Security Insurer). In connection with the foregoing, the
Security Insurer shall have the rights provided pursuant to the Sale and
Servicing Agreement.
The terms "Receipt" and "Received", with respect to each Policy, shall mean
actual delivery to the Security Insurer and to its fiscal agent, if any, prior
to 12:00 noon, New York City time, on a Business Day; delivery either on a day
that is not a Business Day or after 12:00 noon, New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under a Policy by the Indenture Trustee or Owner Trustee is
not in proper form or is not properly completed, executed or delivered, it shall
be deemed not to have been Received, and the Security Insurer or its fiscal
agent shall promptly so advise the Indenture Trustee or Owner Trustee and the
Indenture Trustee or Owner Trustee may submit an amended notice.
The Security Insurer's obligation under the Policies to make Guaranteed
Payments shall be discharged to the extent funds are transferred to the
Indenture Trustee as provided in the Policies, whether or not such funds are
properly applied by the Indenture Trustee.
The Security Insurer shall be subrogated to the rights of each
Securityholder to receive payments of principal and interest to the extent of
any payment by the Security Insurer under the Policies.
Claims under the Policies will rank equally with any other unsecured debt
and unsubordinated obligations of the Security Insurer except for certain
obligations in respect of tax and other payments to which preference is or may
become afforded by statute. Claims against the Security Insurer under the
Policies constitute pari passu claims against the general assets of Financial
Security. The terms of the Policies cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
First Merchants, the Seller or the Trust. The Notes Policy may not be canceled
or revoked prior to payment in full of the Notes. The Certificates Policy may
not be canceled or revoked prior to payment in full of the Certificates.
The Policies are not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law.
FINANCIAL SECURITY ASSURANCE INC.
GENERAL
Financial Security Assurance Inc. (for the purposes of this Section,
"Financial Security") is a monoline insurance company incorporated in 1984 under
the laws of the State of New York. Financial Security is licensed to engage in
financial guaranty insurance business in all 50 states, the District of Columbia
and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities--thereby enhancing the credit rating of those securities--in
consideration for the payment of a premium to the insurer. Financial Security
and its subsidiaries principally insure asset-backed, collateralized and
municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both
S-60
<PAGE>
newly issued securities sold in the primary market and outstanding securities
sold in the secondary market that satisfy Financial Security's underwriting
criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
US WEST Capital Corporation and the Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any insurance policy issued by Financial Security or to make any
additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by Financial Security or any
of its domestic operating insurance company subsidiaries are reinsured among
such companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, Financial Security reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a transaction-by-
transaction basis. Such reinsurance is utilized by Financial Security as a risk
management device and to comply with certain statutory and rating agency
requirements; it does not alter or limit Financial Security's obligations under
any financial guaranty insurance policy.
RATING OF CLAIMS-PAYING ABILITY
Financial Security's claims-paying ability is rated "Aaa" by Moody's and
"AAA" by Standard & Poor's, Nippon Investors Service Inc. and Standard & Poor's
(Australia) Pty. Ltd. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies.
CAPITALIZATION
The following table sets forth the capitalization of Financial Security and
its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
<S> <C>
(UNAUDITED)
Deferred Premium Revenue (net of prepaid reinsurance
premiums)........................................... $ 358,145
-----------
Shareholder's Equity:
Common Stock........................................ 15,000
Additional Paid-In Capital.......................... 666,470
Unrealized Gain on Investments (net of deferred
income taxes)..................................... 2,482
Accumulated Earnings................................ 111,231
-----------
Total Shareholder's Equity...................... 795,183
-----------
Total Deferred Premium Revenue and Shareholder's
Equity........................................ $ 1,153,328
-----------
-----------
</TABLE>
S-61
<PAGE>
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security and Subsidiaries, and the notes
thereto, incorporated by reference herein. Copies of the statutory quarterly and
annual statements filed with the State of New York Insurance Department by
Financial Security are available upon request to the State of New York Insurance
Department.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents described in the Prospectus under
"Incorporation of Certain Documents by Reference," the financial statements of
the Security Insurer included in, or as exhibits to, the following documents
which have been filed with the Commission by Holdings are hereby incorporated by
reference in the Registration Statement of which this Prospectus Supplement and
the Prospectus form a part:
(a) Annual Report on Form 10-K for the year ended December 31, 1995,
(b) Quarterly Report on Form 10-Q for the period ended March 31, 1996,
(c) Quarterly Report on Form 10-Q for the period ended June 30, 1996,
and
(d) Quarterly Report on Form 10-Q for the period ended September
30,1996.
All financial statements of Financial Security included in documents filed
by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Securities shall be deemed to be incorporated
by reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing of such documents.
INSURANCE REGULATION
Financial Security is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York,
Financial Security is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
In the opinion of Brown & Wood LLP, special federal tax counsel to the
Trust, for federal income tax purposes, the Notes will be characterized as debt,
and the Trust will not be characterized as an association (or a publicly traded
partnership) that is taxable as a corporation. In the opinion of Sonnenschein
Nath & Rosenthal, special Illinois tax counsel to the Trust, the same
characterization will apply for Illinois income tax purposes. Each Noteholder,
by the acceptance of a Note, will agree to treat the Notes as indebtedness, and
each Certificateholder, by acceptance of a Certificate, will agree to treat the
Trust as a partnership for federal income tax and Illinois income tax purposes.
S-62
<PAGE>
ERISA CONSIDERATIONS
THE NOTES
The Notes may be purchased by an employee benefit plan or an individual
retirement account (a "Plan") subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") or Section 4975 of the Code. A fiduciary of a
Plan must determine that the purchase of a Note is consistent with its fiduciary
duties under ERISA and does not result in a nonexempt prohibited transaction as
defined in Section 406 of ERISA or Section 4975 of the Code. For additional
information regarding treatment of the Notes under ERISA, see "ERISA
Considerations" in the Prospectus.
The Notes may not be purchased with the assets of a Plan if the Seller, the
Servicer, the Indenture Trustee, the Owner Trustee or any of their affiliates
(a) has investment or administrative discretion with respect to such Plan
assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets for a fee and pursuant to an
agreement or understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be based
on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
THE CERTIFICATES
The Certificates may not be acquired by (a) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to the provisions of Title I
of ERISA, (b) a plan described in Section 4975(e)(1) of the Code or (c) any
entity whose underlying assets include plan assets by reason of a plan's
investment in the entity or which uses plan assets to acquire Certificates. By
its acceptance of a Certificate, each Certificateholder will be deemed to have
represented and warranted that it is not subject to the foregoing limitation. In
this regard, purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case interpreting
the fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance
Co. v. Harris Trust and Savings Bank (decided December 13, 1993). In John
Hancock, the Supreme Court ruled that assets held in an insurance company's
general account may be deemed to be "plan assets" for ERISA purposes under
certain circumstances. Prospective purchasers should determine whether the
decision affects their ability to make purchases of the Certificates. In
particular, such an insurance company should consider the exemptive relief
granted by the Department of Labor for transactions involving insurance company
general accounts in Prohibited Transactions Exemption 95-60, 60 Fed. Reg. 35925
(July 12, 1995). For additional information regarding treatment of the
Certificates under ERISA, see "ERISA Considerations" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated December 10, 1996, among the Seller, First Merchants and the Underwriters
(the "Underwriting Agreement"), the Seller has agreed to cause the Trust to sell
to the underwriters named below (the "Underwriters"), and each of the
Underwriters has severally agreed to purchase, the principal amount of the
Securities set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF PRINCIPAL
CLASS A-1 CLASS A-2 AMOUNT OF
UNDERWRITER NOTES NOTES CERTIFICATES
- ---------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Salomon Brothers Inc................................ $50,500,000 $18,943,000 $5,787,000
Bear, Stearns & Co. Inc............................. $50,500,000 $18,943,000
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Securities if any Securities are purchased. In the event
S-63
<PAGE>
of default by an Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
Distribution of the Securities may be made by the Underwriters from time to
time in one or more negotiated transactions, or otherwise, at varying prices to
be determined at the time of sale. The Underwriters may effect such transactions
by selling the Securities to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriters. In connection with the sale of the Securities, the
Underwriters may be deemed to have received compensation from the Seller in the
form of underwriting compensation. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Securities may be
deemed to be underwriters and any commissions received by them and any profit on
the resale of the Securities positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Securities Act").
Each of the Underwriters has severally represented and agreed that (i) it
has not offered or sold and, prior to the expiration of the period of six months
from the Closing Date, will not offer or sell any Notes to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulation 1995; (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the Notes
in, from or otherwise involving the United Kingdom; and (iii) it has only issued
or passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the Notes to a person who is of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995, or is a person to whom such document
may otherwise lawfully be issued or passed on.
The Underwriting Agreement provides that First Merchants and the Seller will
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, or contribute to payments the Underwriters may be
required to make in respect thereof.
LEGAL MATTERS
Certain legal matters will be passed upon for the Seller and First Merchants
by Sonnenschein Nath & Rosenthal. Certain legal matters with respect to the
federal income tax matters discussed under "Certain Federal and State Income Tax
Consequences" herein will be passed upon by Brown & Wood LLP, special federal
tax counsel to the Seller. Certain Illinois tax matters will be passed upon for
the Seller by Sonnenschein Nath & Rosenthal. Sonnenschein Nath & Rosenthal from
time to time renders legal services to the Seller, the Servicer and their
affiliates. Certain legal matters will be passed upon for the Underwriters by
Brown & Wood LLP. Certain legal matters relating to the Policies will be passed
upon for the Security Insurer by Steven D. Thomas, General Counsel, Financial
Security Assurance Inc. The Security Insurer is represented by Thacher Proffitt
& Wood.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1995, incorporated by reference
in this Prospectus Supplement, have been incorporated herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
S-64
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------- -------------------
<S> <C>
Account Service Centers................................................ S-23
Actuarial Receivable................................................... S-34
ADG.................................................................... S-23
Administrator.......................................................... S-59
Aggregate Risks........................................................ S-62
APR.................................................................... S-11
Backup Servicer........................................................ S-3
Business Day........................................................... S-5
Capitalized Interest Account........................................... S-1, S-13, S-51
Cede................................................................... S-43
CEDEL.................................................................. S-1, S-43
CEDEL Participants..................................................... S-45
Certificate Balance.................................................... S-9
Certificate Distribution Account....................................... S-51
Certificate Final Scheduled Distribution Date.......................... S-10
Certificateholders..................................................... S-9
Certificateholders' Interest Distributable Amount...................... S-9, S-47
Certificateholders' Interest Carryover Shortfall....................... S-9, S-47
Certificateholders' Monthly Interest Distributable Amount.............. S-9
Certificateholders' Monthly Principal Distributable Amount............. S-10
Certificateholders' Principal Carryover Shortfall...................... S-10, S-47
Certificateholders' Principal Distributable Amount..................... S-10, S-47
Certificates........................................................... S-1, S-4
Certificates Policy.................................................... S-4
Class A-1 Final Scheduled Distribution Date............................ S-8
Class A-1 Interest Carryover Shortfall................................. S-6
Class A-1 Interest Distributable Amount................................ S-6
Class A-1 Monthly Interest Distributable Amount........................ S-6
Class A-1 Monthly Principal Distributable Amount....................... S-7, S-37
Class A-1 Notes........................................................ S-1, S-3
Class A-1 Principal Carryover Shortfall................................ S-7, S-38
Class A-1 Principal Distributable Amount............................... S-7, S-37
Class A-1 Rate......................................................... S-5
Class A-2 Additional Principal Distribution Amount..................... S-8, S-38
Class A-2 Final Scheduled Distribution Date............................ S-8
Class A-2 Interest Carryover Shortfall................................. S-6
Class A-2 Interest Distributable Amount................................ S-6
Class A-2 Monthly Interest Distributable Amount........................ S-6
Class A-2 Monthly Principal Distributable Amount....................... S-8, S-37
Class A-2 Notes........................................................ S-1, S-3
Class A-2 Principal Carryover Shortfall................................ S-7, S-38
Class A-2 Principal Distributable Amount............................... S-7, S-37
Class A-2 Rate......................................................... S-5
Closing Date........................................................... S-11
Code................................................................... S-18
Collateral Agent....................................................... S-3
Collection Account..................................................... S-16
</TABLE>
S-65
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------- -------------------
<S> <C>
Collection Period...................................................... S-7
Commission............................................................. S-2
Contracts.............................................................. S-11
Cram Down Loss......................................................... S-7
Cutoff Date............................................................ S-4
Dealer Agreement....................................................... S-25
Dealer Service Centers................................................. S-23
Definitive Securities.................................................. S-44
Depositaries........................................................... S-43
Determination Date..................................................... S-50
Distribution Date...................................................... S-5
DTC.................................................................... S-1, S-43
Eligible Deposit Account............................................... S-50
Eligible Institution................................................... S-51
Eligible Investments................................................... S-50
ERISA.................................................................. S-18, S-63
Euroclear.............................................................. S-1, S-43, S-45
Euroclear Cooperative.................................................. S-45
Euroclear Operator..................................................... S-45
Euroclear Participants................................................. S-45
Exchange Act........................................................... S-2
Final Scheduled Maturity Date.......................................... S-12
Financed Vehicles...................................................... S-4
Financial Security..................................................... S-60
First Merchants........................................................ S-3
Floating Rate Interest Accrual Period.................................. S-6, S-36
Franchised Dealers..................................................... S-23
Funding Period......................................................... S-12, S-51
Guaranteed Payments.................................................... S-13, S-59
Holdings............................................................... S-61, S-62
Indenture.............................................................. S-1, S-4
Indenture Event(s) of Default.......................................... S-20, S-40
Indenture Trustee...................................................... S-1, S-3
Independent Dealers.................................................... S-23
Initial Class A-1 Note Balance......................................... S-3
Initial Class A-2 Note Balance......................................... S-3
Initial Pool Balance................................................... S-10
Initial Receivables.................................................... S-1, S-4
Insurance Agreement.................................................... S-13
Interest Distribution Amount........................................... S-9, S-52
LIBOR.................................................................. S-5
LIBOR Business Day..................................................... S-6
LIBOR Determination Date............................................... S-5
Liquidated Receivable.................................................. S-38
Local Collection Account............................................... S-16, S-50
Mandatory Redemption Date.............................................. S-8, S-20
Master Spread Account Agreement........................................ S-14
Moody's................................................................ S-18
Non-Prime Borrowers.................................................... S-11, S-23
</TABLE>
S-66
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------- -------------------
<S> <C>
Note Balance........................................................... S-4
Note Distribution Account.............................................. S-50
Noteholders............................................................ S-5
Noteholders' Interest Distributable Amount............................. S-6, S-53
Noteholders' Principal Distributable Amount............................ S-8, S-53
Notes.................................................................. S-1, S-3
Notes Policy........................................................... S-4
Obligor................................................................ S-12
Order.................................................................. S-59
Owner Trustee.......................................................... S-1, S-3
Participants........................................................... S-43
Pass-Through Rate...................................................... S-8
Plan................................................................... S-63
Policies............................................................... S-4
Pool Balance........................................................... S-10
Post Office Boxes...................................................... S-16, S-50
Precomputed Receivables................................................ S-34
Pre-Funded Amount...................................................... S-12, S-51
Pre-Funding Account................................................... S-1, S-4, S-12, S-51
Purchase Amount........................................................ S-49
Rating Agencies........................................................ S-18
Realized Losses........................................................ S-9
Receipt................................................................ S-60
Receivables............................................................ S-1, S-4
Receivables Purchase Agreement......................................... S-4
Received............................................................... S-60
Record Date............................................................ S-5
Regular Principal Distribution Amount.................................. S-7, S-37
Rule of 78's........................................................... S-34
Rule of 78's Receivable................................................ S-34
Rules.................................................................. S-44
Sale and Servicing Agreement........................................... S-11
Securities............................................................. S-1, S-4
Securities Act......................................................... S-64
Securityholders........................................................ S-9
Security Insurer....................................................... S-3
Security Insurer Default............................................... S-38
Seller................................................................. S-1, S-3
Servicer............................................................... S-3
Servicer Termination Event............................................. S-56
Servicer's Certificate................................................. S-50, S-51
Servicing Fee.......................................................... S-16
Servicing Fee Rate..................................................... S-16
Simple Interest Receivable............................................. S-34
Single Risks........................................................... S-62
Spread Account......................................................... S-13
Spread Account Agreement............................................... S-14
Spread Account Initial Deposit......................................... S-14
Spread Account Required Amount......................................... S-14, S-39
</TABLE>
S-67
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------- -------------------
<S> <C>
Standard & Poor's...................................................... S-18
Statement to Securityholders........................................... S-54
Subsequent Cutoff Date................................................. S-4
Subsequent Purchase Agreement.......................................... S-12
Subsequent Receivables................................................. S-1, S-4
Subsequent Transfer Agreement.......................................... S-12
Subsequent Transfer Date............................................... S-12
Telerate Page 3750..................................................... S-5
Terms and Conditions................................................... S-46
Total Distribution Amount.............................................. S-9, S-52
Transfer and Servicing Agreements...................................... S-48
Trust.................................................................. S-1, S-3
Trust Accounts......................................................... S-50
Trust Agreement........................................................ S-1, S-3
Trustees............................................................... S-44
Underwriters........................................................... S-63
Underwriting Agreement................................................. S-63
</TABLE>
S-68
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Securities
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through DTC and, in the
case of the Notes, 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.
Capitalized terms used but not defined in this Annex I have the meanings
assigned to them in the Prospectus Supplement and the Prospectus.
Secondary market trading between investors holding Global Securities through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through 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 similar issues of pass-through
certificates. Investors' 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 payments 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 similar issues
of pass-through certificates 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
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by the respective
Depositary to the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Securities credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position 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 pre-position
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 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 Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through 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 bonds to
the DTC Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. The payment will then be reflected in the
account of the CEDEL Participant or Euroclear Participant the following day, and
receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account, would be back-valued to the value date (which would be
the preceding day, when settlement
A-2
<PAGE>
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
debit in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the CEDEL 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:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of
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 Securityholders 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 Securityholder or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
A-3
<PAGE>
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The holder 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 includible 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>
PROSPECTUS
- --------------------------------------------------------------------------------
FIRST MERCHANTS AUTO TRUSTS
ASSET BACKED NOTES
ASSET BACKED CERTIFICATES
--------------------------
FIRST MERCHANTS ACCEPTANCE CORPORATION
- ------------------------------------------------------------
The Asset Backed Notes (the "Notes") and the Asset Backed Certificates (the
"Certificates" and, together with the Notes, the "Securities") described herein
may be sold from time to time in one or more series, in amounts, at prices and
on terms to be determined at the time of sale and to be set forth in a
supplement to this Prospectus (a "Prospectus Supplement"). Each series of
Securities, which will include one or more classes of Certificates and may also
include one or more classes of Notes, will be issued by a trust to be formed
with respect to such series (each, a "Trust"). Each Trust will be formed
pursuant to either (i) a Trust Agreement to be entered into between either First
Merchants Acceptance Corporation (the "Company") or a special-purpose finance
subsidiary of the Company organized and established by the Company (each such
special-purpose finance subsidiary, a "Transferor"), as depositor, and the
Trustee specified in the related Prospectus Supplement (the "Trustee") or (ii) a
Pooling and Servicing Agreement to be entered into among the Trustee, either the
Company or a Transferor, as seller, and the Company, as servicer (the
"Servicer"). If a series of Securities includes Notes, such Notes will be issued
and secured pursuant to an Indenture between the Trust and the Indenture Trustee
specified in the related Prospectus Supplement (the "Indenture Trustee") and
will represent indebtedness of the related Trust. The Certificates of a series
will represent fractional undivided interests in the related Trust. Each
Prospectus Supplement will specify which class or classes of Notes, if any,
and/or which class or classes of Certificates of the related series are being
offered thereby. The property of each Trust will include a pool of motor vehicle
retail installment sale contracts and installment loans secured by new or used
automobiles, light duty trucks, vans and minivans (the "Receivables"), certain
monies due or received thereunder on and after the applicable Cutoff Date set
forth in the related Prospectus Supplement, security interests in the vehicles
financed thereby and certain other property all as described herein and in such
Prospectus Supplement (the "Trust Property"). In addition, if so specified in
the related Prospectus Supplement, the property of the Trust will include monies
on deposit in a trust account (the "Pre-Funding Account") and/or monies on
deposit in a trust account (the "Collateral Reinvestment Account") to be
established with the Indenture Trustee, which will be used to purchase
additional motor vehicle retail installment sale contracts and installment loans
(the "Subsequent Receivables") from the Seller (as defined herein) from time to
time during the Funding Period or Revolving Period specified in such Prospectus
Supplement.
Except as otherwise provided in the related Prospectus Supplement, each class of
Securities of any series will represent the right to receive a specified amount
of payments of principal and interest on the related Receivables, at the rates,
on the dates and in the manner described herein and in such Prospectus
Supplement. If a series includes multiple classes of Securities, the rights of
one or more classes of Securities to receive payments may be senior or
subordinate to the rights of one or more of the other classes of such series.
Distributions on Certificates of a series may be subordinated in priority to
payments due on the Notes, if any, of such series to the extent described herein
and in the related Prospectus Supplement. A series may include one or more
classes of Notes and/or Certificates which differ from the other classes of such
series 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 Notes or Certificates 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. The rate of payment in respect of
principal of any class of Notes and the rate of distributions in respect of the
Certificate Balance of the Certificates of any class will depend on the priority
of payment of such class and the rate and timing of payments (including
prepayments, defaults, liquidations and repurchases of Receivables) on the
related Receivables. A rate of payment lower or higher than that anticipated may
affect the weighted average life of each class of Securities in the manner
described herein and in the related Prospectus Supplement.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
ON PAGE 14 OF THIS PROSPECTUS AND IN THE RELATED PROSPECTUS SUPPLEMENT.
--------------------------
EXCEPT AS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, THE NOTES OF
A SERIES WILL REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES OF A SERIES WILL
REPRESENT BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND WILL NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN, AND ARE NOT GUARANTEED OR INSURED BY, FIRST
MERCHANTS ACCEPTANCE CORPORATION OR ANY OF ITS AFFILIATES OR ANY GOVERNMENTAL
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------------
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE USED TO
CONSUMMATE SALES OF SECURITIES OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
-----------------------------
The date of this Prospectus is December 5, 1996.
<PAGE>
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, the Servicer will prepare and
forward to the Applicable Trustee (as defined herein), for distribution to the
related Securityholders, certain monthly and annual reports concerning such
Securities and the related Trust. In addition, within the prescribed period of
time for tax reporting purposes after the end of each calendar year during the
term of each Trust, the Applicable Trustee will mail to each person who at any
time during such calendar year has been a registered Securityholder with respect
to such Trust and received any payment thereon a statement containing certain
information for the purposes of such Securityholder's preparation of federal
income tax returns. See "Certain Federal Income Tax Consequences" and "Certain
Information Regarding the Securities--Reports to Securityholders" herein.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Securities being
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement, which is available
for inspection without charge at the public reference facilities of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the regional offices of the Commission at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and Seven World Trade Center,
Suite 1300, New York, New York 10048. Copies of such information can be obtained
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from an underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Seller or the
underwriters with respect to the related Trust will promptly deliver, or cause
to be delivered, without charge, to such investor a paper copy of the Prospectus
Supplement and Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Company 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,
after the date of this Prospectus and prior to the termination of the offering
of the Securities offered by such Trust shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the dates of 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
subsequently filed document that 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 a part of this Prospectus.
The Company on behalf of any Trust will provide without charge to each
person, including any beneficial owner, to whom a copy of this Prospectus is
delivered, on the written or oral request of 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 into
the documents incorporated herein by reference). Requests for such copies should
be directed to Secretary, First Merchants Acceptance Corporation, 570 Lake Cook
Road, Suite 126, Deerfield, Illinois 60015; telephone (847) 948-9300.
2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used in this summary
are defined elsewhere in this Prospectus on the pages indicated in the "Index of
Terms".
<TABLE>
<S> <C>
Issuer............................ With respect to each series of Securities, the Trust to
be formed pursuant to either a Trust Agreement (as
amended and supplemented from time to time, a "Trust
Agreement") between the Seller and the Trustee for such
Trust or a Pooling and Servicing Agreement (a "Pooling
and Servicing Agreement") among the Trustee, the Seller
and First Merchants Acceptance Corporation, as servicer
(the "Servicer") for such Trust. Each Trust that is
taxable as a partnership will be referred to herein as
an "Owner Trust" and each Trust that is taxable as a
grantor trust under subpart E, Part I of subchapter J of
the Code (as hereinafter defined) will be referred to
herein as a "Grantor Trust".
Company........................... First Merchants Acceptance Corporation ("First
Merchants" or the "Company"), a Delaware corporation.
The Company's principal executive offices are located at
570 Lake Cook Road, Suite 126, Deerfield, Illinois
60015, and its telephone number is (847) 948-9300. See
"The Company and the Seller".
Seller............................ With respect to each series of Securities, either the
Company or a special-purpose finance subsidiary of the
Company (each such special-purpose finance subsidiary, a
"Transferor").
Servicer.......................... First Merchants Acceptance Corporation (the "Servicer"
or "First Merchants").
Trustee........................... With respect to each series of Securities, the Trustee
specified in the related Prospectus Supplement.
Indenture Trustee................. With respect to any series of Securities that is issued
by an Owner Trust and includes one or more classes of
Notes, the Indenture Trustee specified in the related
Prospectus Supplement.
Securities Offered................ Each series of Securities issued by an Owner Trust will
include one or more classes of Certificates and may also
include one or more classes of Notes. Each series of
Securities issued by a Grantor Trust will include one or
more classes of Certificates, but will not include any
Notes. Each class of Notes will be issued pursuant to an
indenture (each, an "Indenture") between the related
Owner Trust and the Indenture Trustee specified in the
related Prospectus Supplement. Each class of
Certificates will be issued pursuant to the related
Trust Agreement or the related Pooling and Servicing
Agreement. The related Prospectus Supplement will
specify which class or
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
classes of Notes and/or Certificates of the related
series are being offered thereby.
The Notes......................... Unless otherwise specified in the related Prospectus
Supplement, Notes will be available for purchase in
denominations of $1,000 and integral multiples thereof
and will be available in book-entry form only. Unless
otherwise specified in the related Prospectus
Supplement, Noteholders will be able to receive
Definitive Notes (as defined herein) only in the limited
circumstances described herein or in such Prospectus
Supplement. See "Certain Information Regarding the
Securities--Definitive Securities".
Unless otherwise specified in the related Prospectus
Supplement, each class of Notes will have a stated
principal amount and will accrue interest thereon at a
specified rate (with respect to each class of Notes, the
"Interest Rate"). Each class of Notes may have a
different Interest Rate, which may be a fixed, variable
or adjustable Interest Rate, 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 such Interest Rate.
With respect to a series that includes two or more
classes of Notes, each such class may differ from the
other class or classes of such series as to the timing
and priority of payments, seniority, allocations of
losses, Interest Rate or amount of payments of principal
or interest, or payments of principal or interest in
respect of any such class or classes may or may not be
made upon the occurrence of specified events or on the
basis of collections from designated portions of the
Receivables Pool (as defined herein).
In addition, a series may include one or more classes of
Notes ("Strip Notes") entitled to (i) principal payments
with disproportionate, nominal or no interest payments
or (ii) interest payments with disproportionate, nominal
or no principal payments.
If the Servicer exercises its option to purchase the
Receivables of a Trust (or, if not, to the extent
provided in the related Prospectus Supplement, if
satisfactory bids for the purchase of such Receivables
are received) in the manner and on the respective terms
and conditions described under "Description of the
Transfer and Servicing Agreements--Termination", the
outstanding Notes will be redeemed as set forth in such
Prospectus Supplement. In addition, if the related
Prospectus Supplement provides that the property of a
Trust will include monies in a Pre-Funding Account or
Collateral Reinvestment Account that will be used to
purchase additional Receivables after the Closing Date,
one or more classes of the outstanding Notes will be
subject to partial redemption at or immediately
following the end of the Funding Period or Revolving
Period
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
(each as defined herein and in such Prospectus
Supplement), as applicable, in an amount and in the
manner specified in such Prospectus Supplement. In the
event of such partial redemption, the Noteholders may be
entitled to receive a prepayment premium from the Trust,
in the amount and to the extent provided in the related
Prospectus Supplement.
The Certificates.................. Unless otherwise specified in the related Prospectus
Supplement, Certificates will be available for purchase
in a minimum denomination of $1,000 and integral
multiples thereof and will be available in book-entry
form only. Unless otherwise specified in the related
Prospectus Supplement, Certificateholders will be able
to receive Definitive Certificates (as defined herein)
only in the limited circumstances described herein or in
such Prospectus Supplement. See "Certain Information
Regarding the Securities--Definitive Securities".
Unless otherwise specified in the related Prospectus
Supplement, each class of Certificates will have a
stated Certificate Balance specified in such Prospectus
Supplement (the "Certificate Balance") and will accrue
interest on such Certificate Balance at a specified rate
(with respect to each class of Certificates, the "Pass
Through Rate"). Each class of Certificates may have a
different Pass Through Rate, which may be a fixed,
variable or adjustable Pass Through Rate, or any
combination of the foregoing. The related Prospectus
Supplement will specify the Pass Through Rate for each
class of Certificates or the method for determining such
Pass Through Rate.
With respect to a series that includes two or more
classes of Certificates, each such class may differ from
the other class or classes of such series as to the
timing and priority of distributions, seniority,
allocations of losses, Pass Through Rate or amount of
distributions in respect of principal or interest, or
distributions in respect of principal or interest in
respect of any such class or classes may or may not be
made upon the occurrence of specified events or on the
basis of collections from designated portions of the
Receivables Pool.
In addition, a series may include one or more classes of
Certificates ("Strip Certificates") entitled to (i)
distributions in respect of principal with
disproportionate, nominal or no interest distributions
or (ii) interest distributions with disproportionate,
nominal or no distributions in respect of principal.
If a series of Securities includes classes of Notes,
distributions on the Certificates of such series may be
subordinated in priority of payment to payments on such
Notes to the extent specified in the related Prospectus
Supplement.
If the Servicer exercises its option to purchase the
Receivables of a Trust (or, if not, and if and to the
extent provided in the related Prospectus Supplement, if
satisfactory bids for the purchase of such Receivables
are received) in the manner and on
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
the respective terms and conditions described under
"Description of the Transfer and Servicing
Agreements--Termination", Certificateholders will
receive as a prepayment in respect of the Certificates
an amount specified in such Prospectus Supplement. In
addition, if the related Prospectus Supplement provides
that the property of a Trust will include monies in a
Pre-Funding Account or Collateral Reinvestment Account
that will be used to purchase additional Receivables
after the Closing Date, one or more classes of the
outstanding Certificates may receive a partial
prepayment of principal at or immediately following the
end of the Funding Period or Revolving Period, as
applicable, in an amount and in the manner specified in
such Prospectus Supplement. In the event of such partial
prepayment, the Certificateholders may be entitled to
receive a prepayment premium from the Trust, in the
amount and to the extent provided in the related
Prospectus Supplement.
Master Trusts; Issuance of
Additional Series............... If so provided in the related Prospectus Supplement, the
Seller may cause one or more of the Trusts (any such
Trust, a "Master Trust") to issue additional series of
Securities from time to time. Under each Trust Agreement
relating to a Master Trust (each, a "Master Trust
Agreement"), the Seller may determine the terms of any
such new series. See "The Trusts--Master Trusts".
The Seller may cause the related Trustee to offer any
such new series to the public or other investors, in
transactions either registered under the Securities Act
or exempt from registration thereunder, directly or
through one or more underwriters or placement agents, in
fixed-price offerings or in negotiated transactions or
otherwise.
A new series to be issued by a Master Trust which has a
series outstanding may be issued only upon satisfaction
of the conditions described herein under "The
Trusts--Master Trusts". Securities secured by
Receivables held by a Master Trust shall be entitled to
monies received relating to such Receivables on a PARI
PASSU basis with other Securities issued pursuant to the
other Trust Agreements or Pooling and Servicing
Agreements, as applicable by such Master Trust.
Cross-Collateralization........... As described in the related Trust Agreement or Pooling
and Servicing Agreement, as applicable, and the related
Prospectus Supplement, the source of payment for
Securities of each series will be the assets of the
related Trust Property only.
However, as may be described in the related Prospectus
Supplement, a series or class of Securities may include
the right to receive monies from a common pool of credit
enhancement which may be available for more than one
series of Securities, such as a master reserve account,
master insurance policy or a master collateral pool
consisting of similar Receivables. Notwithstanding the
foregoing, and as described in the related
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Prospectus Supplement, no payment received on any
Receivable held by any Trust may be applied to the
payment of Securities issued by any other Trust (except
to the limited extent that certain collections in excess
of the amounts needed to pay the related Securities may
be deposited in a common master reserve account or an
overcollateralization account that provides credit
enhancement for more than one series of Securities
issued pursuant to the related Trust Agreement or
Pooling and Servicing Agreement, as applicable).
The Trust Property................ The property of each Trust will include a pool of motor
vehicle retail installment sale contracts and
installment loans secured by new or used automobiles,
light duty trucks, vans and minivans (the
"Receivables"), certain monies due or received
thereunder on and after the applicable Cutoff Date set
forth in the related Prospectus Supplement, security
interests in the vehicles financed thereby (the
"Financed Vehicles"), certain accounts and the proceeds
thereof and any proceeds from claims under certain
related insurance policies. On the Closing Date
specified in the related Prospectus Supplement with
respect to a Trust, the Seller will, if so specified in
such Prospectus Supplement, sell or transfer Receivables
(the "Initial Receivables") having an aggregate
principal balance specified in such Prospectus
Supplement as of the date specified therein (the
"Initial Cutoff Date") to such Trust pursuant to either,
in the case of certain Owner Trusts, a Sale and
Servicing Agreement among the Seller, the Servicer and
the Owner Trust (a "Sale and Servicing Agreement") or,
in the case of Grantor Trusts and certain other Owner
Trusts, the related Pooling and Servicing Agreement
among the Seller, the Servicer and the Trustee. The
property of each Trust will also include amounts on
deposit in certain trust accounts, including the related
Collection Account, any Pre-Funding Account, any
Collateral Reinvestment Account, any Reserve Account (as
defined herein) and any other account identified in the
applicable Prospectus Supplement and such other property
as is specified in such Prospectus Supplement, including
notes or other securities evidencing or backed by
Receivables, security interests in the Financed Vehicles
and related property ("Receivables Backed Assets").
To the extent provided in the related Prospectus
Supplement, from time to time (as frequently as daily)
during the period (the "Funding Period") specified in
such Prospectus Supplement, the Seller will be obligated
(subject only to the availability thereof) to sell, and
the related Trust will be obligated to purchase (subject
to the satisfaction of certain conditions described in
the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement), additional Receivables (the
"Subsequent Receivables") having an aggregate principal
balance approximately equal to the amount on deposit
(the "Pre-
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Funded Amount") in an account (the "Pre-Funding
Account") on the related Closing Date.
In addition, if so provided in the related Prospectus
Supplement, in lieu of a Funding Period, during the
period (the "Revolving Period") from the Closing Date
until the first to occur of (i) such event or events as
are described in such Prospectus Supplement (each, an
"Early Amortization Event") or (ii) the last day of the
Collection Period (as defined herein) preceding a
Distribution Date specified in such Prospectus
Supplement, an account will be maintained in the name of
the related Trustee or Indenture Trustee (the
"Collateral Reinvestment Account"). The amount on
deposit in the Collateral Reinvestment Account on the
Closing Date may, if so specified in the related
Prospectus Supplement, include an amount to be deposited
out of the net proceeds of the sale of the related
Securities. During the Revolving Period, principal will
not be distributed on the Securities of the related
series. Instead, principal collections, together with
(if and to the extent described in the related
Prospectus Supplement) interest collections on the
Receivables that are in excess of amounts required to be
distributed therefrom, will be deposited from time to
time in the Collateral Reinvestment Account and will be
used to purchase Subsequent Receivables.
As used in this Prospectus, the term Receivables will
include the Initial Receivables transferred to a Trust
on the Closing Date as well as any Subsequent
Receivables transferred to such Trust during the related
Funding Period or Revolving Period, if any.
Amounts on deposit in any Pre-Funding Account during the
related Funding Period or in any Collateral Reinvestment
Account during the related Revolving Period will be
invested by the applicable Trustee (as directed by the
Servicer) in Eligible Investments, and any resultant
investment income, less any related investment expenses
("Investment Income"), will be added, on the
Distribution Date immediately following the date on
which such Investment Income is paid to the Trust, to
interest collections on the Receivables for the related
Collection Period and distributed in the manner
specified in the related Prospectus Supplement. Any
funds remaining in a Pre-Funding Account at the end of
the related Funding Period or in a Collateral
Reinvestment Account at the end of the related Revolving
Period will be distributed as a prepayment or early
distribution of principal to holders of one or more
classes of the Notes and/or Certificates of the related
series of Securities, in the amounts and in accordance
with the payment priorities specified in the related
Prospectus Supplement. In no event will a Funding Period
continue for more than one year after the related
Closing Date. See "Risk Factors--Pre-Funding Accounts",
"--Sales of Subsequent Receivables" and
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
"Description of the Transfer and Servicing Agreements--
Accounts".
The Company will acquire the Receivables from one or
more motor vehicle dealers ("Dealers"), pursuant to
agreements with the Dealers, or from financial
institutions or other holders of the Receivables that
have originated the Receivables or have purchased them
from Dealers or other originating entities. The
Receivables for any given Receivables Pool will be sold
by the Company to the Trust or to a Transferor (which
will in turn sell the Receivables to the Trust) and will
be selected from the contracts and loans owned by the
Seller based on the criteria specified in the related
Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, and described herein and in
the related Prospectus Supplement.
Credit and Cash Flow Enhancement.. If and to the extent specified in the related Prospectus
Supplement, credit enhancement with respect to a Trust
or any class or classes of Securities may include any
one or more of the following: subordination of one or
more other classes of Securities, reserve funds, a
Reserve Account, spread accounts, overcollateralization,
insurance policies, letters of credit, credit or
liquidity facilities, cash collateral accounts, surety
bonds, guaranteed investment contracts, swaps or other
interest rate protection agreements, repurchase
obligations, yield supplement agreements, other
agreements with respect to third party payments or other
support, cash deposits or other arrangements. To the
extent specified in the related Prospectus Supplement, a
form of credit enhancement will be subject to certain
limitations and exclusions from coverage thereunder.
Reserve Account................... If and to the extent specified in the related Prospectus
Supplement, a Reserve Account will be created for a
Trust with an initial deposit by the Seller of cash or
certain investments having a value equal to the amount
specified in such Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, funds in
the Reserve Account will thereafter be supplemented by
the deposit of amounts remaining on any Distribution
Date after making all other distributions required on
such date and any amounts deposited from time to time
from the Pre-Funding Account or Collateral Reinvestment
Account in connection with a purchase of Subsequent
Receivables. Amounts in the Reserve Account, if any,
will be available to cover shortfalls in amounts due to
the holders of those classes of Securities specified in
the related Prospectus Supplement in the manner and
under the circumstances specified therein. The related
Prospectus Supplement will also specify to whom and the
manner and circumstances under which amounts on deposit
in the Reserve Account (after giving effect to all other
required distributions to be made by the applicable
Trust) in excess of the Specified Reserve Account
Balance (as defined in such Prospectus Supplement) will
be distributed.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Transfer and Servicing
Agreements...................... With respect to each Trust, the Seller will sell the
related Receivables and such other Trust Property as is
specified in the related Prospectus Supplement to such
Trust pursuant to a Sale and Servicing Agreement or a
Pooling and Servicing Agreement, as applicable. The
rights and benefits of an Owner Trust under any Sale and
Servicing Agreement will, if such Owner Trust issues
Notes, be assigned to the related Indenture Trustee as
collateral for such Notes pursuant to the related
Indenture. The Servicer will agree with each Trust to be
responsible for servicing, managing, maintaining custody
of and making collections on the Receivables. The
Company will undertake certain administrative duties
under an Administration Agreement with respect to each
Owner Trust that is formed pursuant to a Trust
Agreement.
If so provided in the related Prospectus Supplement, the
Servicer will advance scheduled payments not timely made
with respect to Precomputed Receivables (a "Precomputed
Advance") and will advance shortfalls in interest
payments with respect to Simple Interest Receivables (a
"Simple Interest Advance"), in each case to the extent
that the Servicer, in its sole discretion, expects to be
able to recoup such Precomputed Advance or Simple
Interest Advance from subsequent payments on or with
respect to the Receivables or from any other source
identified in such Prospectus Supplement. As used
herein, "Advance" means any Precomputed Advance or
Simple Interest Advance. The Servicer will be entitled
to reimbursement of Advances from subsequent payments on
or with respect to the Receivables or from other sources
to the extent described in the related Prospectus
Supplement.
Unless otherwise provided in the related Prospectus
Supplement, the Seller will be obligated to repurchase
any Receivable in which the interest of the applicable
Trust is materially and adversely affected as a result
of a breach of any representation or warranty made by
the Seller in the related Sale and Servicing Agreement
or Pooling and Servicing Agreement, as applicable, if
such breach is not cured in a timely manner following
the discovery by or notice to the Seller thereof.
Unless otherwise provided in the related Prospectus
Supplement, the Servicer will be obligated to purchase
any Receivable if, among other things, it extends the
date for final payment by the Obligor (as defined
herein) of such Receivable beyond the last day of the
Collection Period relating to the applicable Final
Scheduled Maturity Date (as defined in such Prospectus
Supplement), changes the annual percentage rate ("APR")
or amount of a scheduled payment of such Receivable or
fails to maintain a perfected security interest in the
related Financed Vehicle.
Unless otherwise specified in the related Prospectus
Supplement, the Servicer will be entitled to receive a
fee for servicing
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
the Receivables of each Trust equal to a specified
percentage of the aggregate principal balance of the
related Receivables Pool, as set forth in such
Prospectus Supplement, plus certain late fees,
prepayment charges and other administrative fees or
similar charges. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment
of Expenses" herein and in the related Prospectus
Supplement.
Certain Legal Aspects of the
Receivables; Repurchase
Obligations..................... In connection with the sale of the Receivables, security
interests in the Financed Vehicles securing the
Receivables will be assigned by the Company to (i) the
related Trust pursuant to either a Sale and Servicing
Agreement or a Pooling and Servicing Agreement and may
be pledged by the Trust pursuant to an Indenture as
security for the Notes, if any, or (ii) a Transferor
pursuant to a Receivables Purchase Agreement, which
Transferor will, in turn, assign such security interests
to the Trust pursuant to either a Sale and Servicing
Agreement or a Pooling and Servicing Agreement. Due to
the administrative burden and expense, however, the
certificates of title to the Financed Vehicles will not
be amended or reissued to reflect the sale of the
Receivables to either a Transferor or the Trust or the
pledge pursuant to any Indenture. In the absence of such
amendments, either the related Trust, the Applicable
Trustee or both may not have a perfected security
interest in the Financed Vehicles securing the
Receivables in some states. The Company will be
obligated to repurchase any Receivables sold to the
related Trust or to a Transferor (and subsequently sold
by such Transferor to such Trust) as to which there did
not exist on the Closing Date a first priority perfected
security interest in the name of the Company in the
related Financed Vehicle if such failure materially and
adversely affects the interest of the Transferor or such
Trust in such Receivable and if such failure is not
cured in a timely manner.
To the extent their respective security interests in a
Financed Vehicle are perfected, the related Trust and
the Applicable Trustee will have a prior claim over
subsequent purchasers of such Financed Vehicle and
holders of subsequently perfected security interests
therein. However, as against liens for repairs or
storage of a Financed Vehicle or for taxes unpaid by the
related Obligor, or through fraud or negligence, the
related Trust or the Applicable Trustee could lose its
security interest or the priority of its security
interest in a Financed Vehicle. The Company will not
have any obligation to repurchase a Receivable with
respect to which the related Trust or the Applicable
Trustee loses its security interest or the priority of
its security interest in the related Financed Vehicle
after the Closing Date due to any such lien for repairs,
storage or taxes or the negligence or fraud of a third
party.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Federal and state consumer protection laws impose
requirements upon creditors in connection with
extensions of credit and collections of retail
installment loans, and certain of these laws make an
assignee of such a loan liable to the obligor thereon
for any violation by the lender. Unless otherwise speci-
fied in the related Prospectus Supplement, the Seller
will be obligated to repurchase from the applicable
Trust any Receivable that fails to comply with such
requirements.
Tax Status........................ Unless the Prospectus Supplement specifies that the
related Trust will be a Grantor Trust and, except as
otherwise provided in such Prospectus Supplement, upon
the issuance of the related series of Securities, (a)
Federal Tax Counsel (as defined herein) to such Trust
will deliver an opinion to the effect that, for federal
income tax purposes: (i) any Notes of such series will
be characterized as debt and (ii) such Trust will not be
characterized as an association (or a publicly traded
partnership) taxable as a corporation and (b) Illinois
Tax Counsel (as defined herein) to such Trust will
deliver an opinion to the effect that the same
characterizations should apply for Illinois income tax
purposes as for federal income tax purposes. In respect
of any such series, each Noteholder, if any, 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 such Trust as a partnership in which such
Certificateholder is a partner for federal income and
Illinois income tax purposes. Alternative character-
izations of such Trust and such Certificates are
possible, but would not result in materially adverse tax
consequences to Certificateholders.
If a Prospectus Supplement specifies that the related
Trust will be a Grantor Trust and, except as otherwise
provided in such Prospectus Supplement, upon the
issuance of the related series of Certificates, Federal
Tax Counsel to such Trust will deliver an opinion to the
effect that such Trust will be treated as a grantor
trust for federal income tax purposes and will not be
subject to federal income tax.
See "Certain Federal Income Tax Consequences" and "Cer-
tain State Tax Consequences with Respect to Owner
Trusts" for additional information concerning the
application of federal and Illinois tax laws.
ERISA Considerations.............. Subject to the considerations discussed under "ERISA
Considerations" herein and in the related Prospectus
Supplement, and unless otherwise specified therein, any
Notes of a series issued by an Owner Trust and any
Certificates that are issued by a Grantor Trust and that
meet certain Department of Labor requirements are
eligible for purchase by employee benefit plans.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Unless otherwise specified in the related Prospectus
Supplement, the Certificates of any series that are
subordinate to any other Security of that series may not
be acquired by any employee benefit plan subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or by any individual retirement
account. See "ERISA Considerations" herein and in the
related Prospectus Supplement.
Ratings........................... It is a condition to the issuance of the Securities to
be offered hereunder that they be rated in one of the
four highest rating categories by at least one
nationally recognized statistical rating organization. A
rating is not a recommendation to purchase, hold or sell
Securities inasmuch as such rating does not comment as
to market price or suitability for a particular inves-
tor. Ratings of Securities will address the likelihood
of the payment of principal and interest thereon
pursuant to their terms. The ratings of Securities will
not address the likelihood of an Early Amortization
Event. There can be no assurance that a rating will
remain for a given period of time or that a rating will
not be lowered or withdrawn entirely by a rating agency
if in its judgment circumstances in the future so
warrant. For more detailed information regarding the
ratings assigned to any class of a particular series of
Securities, see "Summary of Terms--Rating of the
Securities" or "--Ratings of the Certificates", as
applicable, and "Risk Factors--Ratings of the Secu-
rities" or "--Ratings of the Certificates", as
applicable, in the related Prospectus Supplement.
</TABLE>
13
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus and in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of any series of Securities, prospective investors should carefully
consider the following risk factors before investing in any class or classes of
Securities of any such series.
PRE-FUNDING ACCOUNTS AND COLLATERAL REINVESTMENT ACCOUNTS. If so provided
in the related Prospectus Supplement, on the Closing Date the Pre-Funded Amount
specified in such Prospectus Supplement will be deposited into the Pre-Funding
Account. In no event will the Pre-Funded Amount exceed 40% of the initial
aggregate principal amount of the Notes and/or Certificates of the related
series of Securities. In addition, if so specified in the related Prospectus
Supplement, on the Closing Date specified amounts will be deposited into the
Collateral Reinvestment Account. During the Revolving Period, principal will not
be distributed on the Securities of the related series, and principal
collections, together with (if and to the extent described in the related
Prospectus Supplement) interest collections on the Receivables that are in
excess of amounts required to be distributed therefrom, will be deposited from
time to time in the Collateral Reinvestment Account. The Pre-Funded Amount and
the amounts on deposit in the Collateral Reinvestment Account will be used to
purchase Subsequent Receivables from the Seller (which, if not the Company, in
turn, will acquire such Subsequent Receivables from the Company) from time to
time during the related Funding Period or Revolving Period, as applicable.
During such Funding Period or Revolving Period and until such amounts are
applied by the Trustee to purchase Subsequent Receivables, amounts on deposit in
the Pre-Funding Account or the Collateral Reinvestment Account will be invested
by the Applicable Trustee (as instructed by the Servicer) in Eligible
Investments. Any investment income with respect thereto (net of any related
investment expenses) will be added to amounts received on or in respect of the
Receivables during the related Collection Period (as defined herein) and
allocated to interest. Such amounts will be distributed on the Distribution Date
pursuant to the payment priorities specified in the related Prospectus
Supplement. No Funding Period will end more than one year after the related
Closing Date.
To the extent that the entire Pre-Funded Amount or the entire amount on
deposit in the Collateral Reinvestment Account has not been applied to the
purchase of Subsequent Receivables by the end of the related Funding Period or
Revolving Period, any amounts remaining in the Pre-Funding Account or the
Collateral Reinvestment Account will be distributed as a prepayment of principal
to Noteholders and Certificateholders (collectively, the "Securityholders") on
the Distribution Date at or immediately following the end of such Funding Period
or Revolving Period, in the amounts and pursuant to the priorities set forth in
the related Prospectus Supplement.
SALES OF SUBSEQUENT RECEIVABLES. If so provided in the related Prospectus
Supplement, the Seller will be obligated pursuant to the Pooling and Servicing
Agreement or Sale and Servicing Agreement, as applicable, to sell Subsequent
Receivables to the Trust, and the Trust will be obligated to purchase such
Subsequent Receivables, subject only to the satisfaction of certain conditions
set forth in the Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable, and described in such Prospectus Supplement. If the
principal amount of the eligible Subsequent Receivables acquired by the Company
from Dealers or other originators during a Funding Period or Revolving Period is
less than the Pre-Funded Amount or the amount on deposit in the Collateral
Reinvestment Account, as the case may be, the Company may have insufficient
Subsequent Receivables to transfer to a Trust. As a result, holders of one or
more classes of the related series of Securities may receive a prepayment or
early distribution of principal at the end of the Funding Period or Revolving
Period as described above under "--Pre-Funding Accounts and Collateral
Reinvestment Accounts".
Any conveyance of Subsequent Receivables to a Trust is subject to the
satisfaction, on or before the related transfer date (each, a "Subsequent
Transfer Date"), of the following conditions precedent, among others: (i) each
such Subsequent Receivable must satisfy the eligibility criteria specified in
the
14
<PAGE>
related Pooling and Servicing Agreement or Sale and Servicing Agreement, as
applicable; (ii) the Seller shall not have selected such Subsequent Receivables
in a manner that is adverse to the interests of holders of the related
Securities; (iii) as of the respective Cutoff Dates (as such term is defined in
the related Prospectus Supplement) for such Subsequent Receivables, all of the
Receivables in the Trust, including the Subsequent Receivables to be conveyed to
the Trust as of such date, must satisfy the parameters described under "The
Receivables Pools" herein and "The Receivables Pool" in such Prospectus
Supplement; and (iv) the Seller must execute and deliver to such Trust a written
assignment conveying such Subsequent Receivables to such Trust. In addition, as
and to the extent specified in the related Prospectus Supplement, the conveyance
of Subsequent Receivables to a Trust is subject to the satisfaction of the
condition subsequent, among others, which must be satisfied within the
applicable time period specified in such Prospectus Supplement, that the Seller
deliver certain legal opinions to the related Trustee with respect to the
validity of the conveyance of the Subsequent Receivables to the Trust. If any
such conditions precedent or conditions subsequent are not met with respect to
any Subsequent Receivables within the time period specified in the related
Prospectus Supplement, the Seller will be required to repurchase such Subsequent
Receivables from the related Trust, at a purchase price equal to the related
Purchase Amounts (as defined herein) therefor.
Except as described herein and in the related Prospectus Supplement, there
will be no other required characteristics of Subsequent Receivables. Therefore,
the characteristics of the entire Receivables Pool included in any Trust may
vary significantly as Subsequent Receivables are conveyed to such Trust from
time to time during the Funding Period or Revolving Period. See "The Receivables
Pools" herein.
CERTAIN LEGAL ASPECTS--SECURITY INTERESTS IN FINANCED VEHICLES. In
connection with the sale and assignment of the Receivables by the Company to
either the related Trust or a Transferor, if any, and by such Transferor to such
Trust and any pledge of the Receivables by such Trust to the related Indenture
Trustee, the security interests in the related Financed Vehicles granted to the
Company by the Obligors on such Receivables will be transferred and assigned by
the Company to either such Trust or such Transferor and by such Transferor, if
any, to such Trust and may be pledged by such Trust to the Indenture Trustee as
security for the Notes, if any. Due to the administrative burden and expense,
however, the certificates of title to the Financed Vehicles will not be amended
or reissued to reflect the assignment of such security interests by the Company
to the related Trust or related Transferor, if any, or by such Transferor to
such Trust or any pledge pursuant to an Indenture. In the absence of such
amendments, either the Trust, the Applicable Trustee or both may not have a
perfected security interest in the Financed Vehicles securing the Receivables in
some states. In addition, by not identifying the related Trust as the secured
party on the certificate of title, the security interest of either such Trust,
the Indenture Trustee or both could be defeated through the negligence or fraud
of the Company or as a result of the imposition of a lien for repairs or storage
of a Financed Vehicle or for taxes unpaid by the related Obligor. The Company
will make certain representations and warranties in the related Receivables
Purchase Agreement (in the case of a sale of the Receivables from the Company to
a Transferor) or in the related Sale and Servicing Agreement or Pooling and
Servicing Agreement (in the case of a sale of the Receivables from the Company
to the related Trust) with respect to its conveyance of a perfected security
interest in the Financed Vehicles and will be obligated to repurchase from the
Trust any Receivable with respect to which the interest of either the Trust, the
Applicable Trustee or both is materially and adversely affected by (1) the
failure to amend or reissue the certificate of title of the Financed Vehicle to
reflect the Trust's interest therein or (2) the failure of the Company to have a
first priority perfected security interest in its name in the Financed Vehicle
on the Closing Date if such failure is not cured in a timely manner. The
Servicer also will be obligated under the related Sale and Servicing Agreement
or Pooling and Servicing Agreement to purchase from the Trust any Receivable
with respect to which the Servicer fails to maintain a perfected security
interest in the name of the Company in the related Financed Vehicle if such
failure (i) is not cured in a timely manner and (ii) materially and adversely
affects the interest of the Trust in such Receivable. The repurchase obligations
of the Company and the
15
<PAGE>
Servicer will constitute the sole remedy available to the Trust with respect to
the Company or the Servicer for any such uncured breach or failure.
To the extent that the Trust's and the Indenture Trustee's security interest
in a Financed Vehicle is perfected, the Trust and the Indenture Trustee will
have a prior claim under applicable state laws over subsequent purchasers of
such Financed Vehicle and holders of subsequently perfected security interests
therein. However, as against liens for repairs or storage of a Financed Vehicle
or taxes unpaid by the Obligor on the Receivable secured thereby, the Trust and
the Applicable Trustee could lose their respective security interests or the
priority of such security interests in a Financed Vehicle. In addition, even if
the Seller, the Trust or the Applicable Trustee were to be identified as the
secured party on the certificate of title of a Financed Vehicle, such secured
party's security interest could be defeated by the fraud or forgery of the
vehicle owner or by administrative errors by applicable state or local agencies
responsible for titling vehicles. The Company will not have any obligation to
repurchase a Receivable with respect to which the Trust or the Applicable
Trustee loses its security interest in the related Financed Vehicle after the
Closing Date due to any such lien for repairs, storage or taxes or due to the
negligence or fraud of a third party.
CERTAIN LEGAL ASPECTS--CONSUMER PROTECTION LAWS. Federal and state consumer
protection laws impose requirements on creditors in connection with extensions
of credit and collections of retail installment loans, and certain of these laws
make an assignee of such a loan liable to the obligor thereon for any violation
by the lender. Unless otherwise specified in the related Prospectus Supplement,
the Seller will be obligated to repurchase from the applicable Trust any
Receivable that does not comply with such consumer protection law requirements.
Most states impose requirements and restrictions relating to foreclosure
sales of vehicles and on obtaining deficiency judgments relating to such sales.
A Trust may not realize the full amount due on a Receivable because of the
application of those requirements and restrictions, or because of depreciation,
damage or loss of a Financed Vehicle or other factors. Federal bankruptcy laws
and related state laws also may interfere with or affect the ability of a
secured party to realize upon collateral or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a creditor from repossessing a Financed Vehicle and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the Financed Vehicle at the time of the bankruptcy, leaving the
creditor as a general unsecured creditor for the remainder of the indebtedness.
CERTAIN LEGAL ASPECTS--INSOLVENCY CONSIDERATIONS. The Company will take
steps in structuring the transactions contemplated hereby that are intended to
ensure that the voluntary or involuntary application for relief by the Company
under the United States Bankruptcy Code or similar applicable state laws
("Insolvency Laws") will not result in the consolidation of the assets and
liabilities of any Transferor with those of the Company. These steps include the
creation of such Transferor, if any, as a separate, limited-purpose entity
pursuant to a certificate of incorporation containing certain limitations
(including restrictions on the nature of its business, the requirement that an
independent director be on its Board of Directors and a restriction on its
ability to commence a voluntary case or proceeding under any Insolvency Law
without the prior unanimous affirmative vote of all its directors). In
connection with the issuance of the Securities, counsel to the Company will
deliver its opinion to the effect that the assets and liabilities of the related
Trust and the related Transferor, if any, would not be consolidated with those
of the Company in the case of a proceeding under any Insolvency Law in respect
of the Company. However, there can be no assurance that the assets and
liabilities of the related Trust and the related Transferor, if any, would not
be consolidated with those of the Company in a proceeding under an Insolvency
Law. See "The Company and the Seller".
First Merchants will warrant either (i) to a Transferor, if any, in the
related Receivables Purchase Agreement or (ii) to the related Trust in the
related Sale and Servicing Agreement or Pooling and
16
<PAGE>
Servicing Agreement that the sale of the related Receivables to such Transferor
or Trust, respectively, by the Company will be a valid sale. In addition, the
Company will treat the transactions described herein as sales of the Receivables
to such Transferor or such Trust and will commit to take all actions that are
required to perfect such Transferor's or such Trust's ownership interests in the
Receivables, and the related Transferor, if any, will treat the transactions
described herein as sales to such Trust of all of such Transferor's right, title
and interest in and to the Receivables and will take all actions required to
protect such Trust's ownership interest in the Receivables. Notwithstanding the
foregoing, if the Company or any Transferor were to become a debtor in a
bankruptcy case, and if a creditor or trustee-in-bankruptcy of such debtor or
such debtor itself were to take the position that the sales of the Receivables
to such Transferor or Trust, as applicable, should be recharacterized as pledges
of the Receivables to secure a borrowing of the debtor, then delays in payments
to such Trust of collections on the Receivables could occur or (should the court
rule in favor of any such trustee, debtor or creditor) reductions in the amounts
of such payments could result. If the sales of Receivables to any Transferor or
Trust are recharacterized as pledges, a tax or government lien arising before
the transfer of such Receivables to such Transferor or Trust, as applicable,
might have priority over such Trust's interest in such Receivables. Each Trust
will receive an opinion of counsel to the effect that the transactions
contemplated herein will be treated as sales and the Receivables would not be
part of the Company's or any Transferor's bankruptcy estate and would not be
available to the Company's or any Transferor's creditors or, in the alternative,
that the transferor will have a perfected first priority security interest in
the Receivables.
The U.S. Court of Appeals for the Tenth Circuit in its decision in Octagon
Gas Systems, Inc. v. Rimmer (In re Meridian Reserve, Inc.) (decided May 27,
1993) determined that "accounts," a defined term under the Uniform Commercial
Code, would be included in the bankruptcy estate of a transferor regardless of
whether the transfer is treated as a sale or a secured loan. Although the
Receivables are likely to be viewed as "chattel paper," as defined under the
Uniform Commercial Code, rather than as accounts, the Octagon holding is equally
applicable to chattel paper. The circumstances under which the Octagon ruling
would apply are not fully known and the extent to which the Octagon decision
will be followed in other courts or outside the Tenth Circuit is not certain. If
the holding in the Octagon case were applied in a bankruptcy of the Company or
any Transferor, even if the transfer of Receivables were treated as a sale, the
Receivables would be part of the Company's or such Transferor's bankruptcy
estate and would be subject to claims of certain creditors, and delays and
reductions in payments to the Securityholders could result.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Trust that is not a grantor trust, if an Insolvency Event occurs with
respect to the Seller, the Indenture Trustee or Trustee for such Trust will
promptly sell, dispose of or otherwise liquidate the related Receivables in a
commercially reasonable manner on commercially reasonable terms, except under
certain limited circumstances. The proceeds from any such sale, disposition or
liquidation of Receivables will be treated as collections on the Receivables and
deposited in the Collection Account of such Trust. If the proceeds from the
liquidation of the Receivables and any amounts on deposit in the Reserve
Account, if any, the Note Distribution Account, if any, and the Certificate
Distribution Account with respect to any such Trust and any amounts available
from any credit enhancement are not sufficient to pay any Notes and the
Certificates of the related series in full, the amount of principal returned to
any Noteholders or the Certificateholders will be reduced and such Noteholders
and Certificateholders will incur a loss. See "Description of the Transfer and
Servicing Agreements--Insolvency Event".
NATURE OF OBLIGORS AND FINANCED VEHICLES; SERVICING. The Obligors on the
Receivables are primarily "non-prime" borrowers who have limited access to
traditional sources of consumer credit. The inability of a borrower to finance
an automobile purchase by means of traditional credit sources is generally due
to various factors, including such individual's impaired credit history and the
absence or limited extent of his or her credit history. Typical "non-prime"
borrowers include young borrowers (18 to 25 years old) who are trying to
establish an initial credit rating, previously bankrupt borrowers who are
17
<PAGE>
reestablishing their credit rating, slow payers of credit cards and department
store accounts and borrowers who desire payment terms slightly longer than the
maximum term permitted by traditional sources of automobile financing. The
average interest rate charged by the Company to such "non-prime" borrowers is
generally higher than that charged by commercial banks, savings and loans,
credit unions and finance companies affiliated with major automobile
manufacturers and other traditional sources of consumer credit, which typically
impose more stringent credit requirements. As a result, the Obligors generally
are considered to have a higher risk of default on a finance contract than most
automobile purchasers. Such risk of default may increase in times of economic
downturn in the areas in which such obligors reside. As a result of the credit
profile of the Obligors and the APRs of the Receivables, the historical credit
loss and delinquency rates on the Receivables may be higher than those
experienced by banks and the captive finance companies of the automobile
manufacturers. In the event of a default under a Receivable, the only source of
repayment may be liquidation proceeds from the related Financed Vehicle; the
Financed Vehicles securing the Receivables will consist primarily of used
vehicles which may not have a liquidation value sufficient to pay in full the
amount financed by the related Receivable. See "First Merchants' Automobile
Financing Program--Credit Loss Experience" and "--Delinquency Experience" in the
related Prospectus Supplement.
The servicing of receivables of customers with such credit profiles requires
special skill and diligence. The Servicer believes that its credit loss and
delinquency experience reflect in part its trained staff and collection
procedures. If the Company is removed as Servicer, or if the Company resigns or
is terminated as Servicer by the Security Insurer (as defined in the related
Prospectus Supplement), if any, then a backup servicer, if any, or other
successor servicer will agree to assume the obligations of successor servicer
under the related Sale and Servicing Agreement or the related Pooling and
Servicing Agreement. There can be no assurance, however, that collections with
respect to the Receivables would not be adversely affected by a change in
servicer.
TRUST'S RELATIONSHIP TO THE SELLER, THE COMPANY AND THEIR AFFILIATES. None
of the Company, any Transferor or any of their affiliates is generally obligated
to make any payments in respect of any Notes, the Certificates or the
Receivables of a given Trust.
However, in connection with the sale of Receivables by the Seller to a given
Trust, the Seller will make representations and warranties with respect to the
characteristics of such Receivables and, in certain circumstances, the Seller
may be required to repurchase Receivables with respect to which such
representations and warranties have been breached. See "Description of the
Transfer and Servicing Agreements--Sale and Assignment of Receivables". In
addition, under certain circumstances, the Servicer may be required to purchase
Receivables or to advance amounts with respect to payments due on the
Receivables. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures". Moreover, if the Company were to cease acting
as Servicer, delays in processing payments on the Receivables and information in
respect thereof could occur and result in delays in payments to the
Securityholders.
The related Prospectus Supplement may set forth certain additional
information regarding the Company and any Transferor. In addition, the Company
is subject to the information requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files reports
and other information with the Securities and Exchange Commission (the
"Commission"). For further information regarding the Company, reference is made
to such reports and other information, which are available as described under
"Available Information".
SUBORDINATION OF CERTAIN CLASSES OF SECURITIES. To the extent specified in
the related Prospectus Supplement, distributions of interest and principal on
one or more classes of Notes or Certificates of a series may be subordinated in
priority of payment to interest and principal due on certain of the Notes, if
any, of such series or one or more classes of Certificates of such series.
18
<PAGE>
LIMITED ASSETS OF THE TRUST. None of the Trusts will have, nor will any
Trust be permitted or expected to have, any significant assets or sources of
funds other than the Receivables and, to the extent provided in the related
Prospectus Supplement, a Pre-Funding Account, a Collateral Reinvestment Account,
a Reserve Account and any other credit enhancement or Trust Property. The Notes
of any series will represent obligations solely of, and the Certificates of any
series will represent interests solely in, the related Trust, and neither the
Notes nor the Certificates of any series will be insured or guaranteed by the
Seller, the Servicer, the applicable Trustee, any Indenture Trustee or any other
person or entity. Consequently, holders of the Securities of any series must
rely for repayment upon payments on the related Receivables and, if and to the
extent available, amounts on deposit in the Pre-Funding Account (if any), the
Collateral Reinvestment Account (if any), the Reserve Account (if any) and any
other credit enhancement, all as specified in the related Prospectus Supplement.
MASTER TRUSTS. As may be described in the related Prospectus Supplement, a
Master Trust may issue from time to time more than one series. While the terms
of any additional series will be specified in a supplement to the related Master
Trust Agreement, the provisions of such supplement and, therefore, the terms of
such additional series, will not be subject to prior review by, or consent of,
holders of the Securities of any series previously issued by such Master Trust.
Such terms may include methods for determining applicable investor percentages
and allocating collections, provisions creating different or additional security
or credit enhancements and any other provisions which are made applicable only
to such series. The obligation of the related Trustee to issue any new series is
subject to the condition, among others, that such issuance will not result in
any Rating Agency (as such term is defined in the related Prospectus Supplement)
reducing or withdrawing its rating of the Securities of any outstanding series
(any such reduction or withdrawal is referred to herein as a "Ratings Effect").
There can be no assurance, however, that the terms of any series might not have
an impact on the timing or amount of payments received by a Securityholder of
another series issued by the same Master Trust. See "The Trusts--Master Trusts".
MATURITY AND PREPAYMENT CONSIDERATIONS. All the Receivables are prepayable
at any time. (For this purpose, the term "prepayments" includes prepayments in
full, partial prepayments (including those related to rebates of extended
warranty contract costs and insurance premiums), liquidations due to default,
losses caused by the issuance of an order by a court in any insolvency
proceeding reducing the amount owed under a Receivable, as well as receipts of
proceeds from physical damage, credit life and disability insurance policies and
certain other Receivables repurchased for administrative reasons.) The rate of
prepayments on the Receivables may be influenced by a variety of economic,
social and other factors, including the fact that an Obligor generally may not
sell or transfer the Financed Vehicle securing a Receivable without the consent
of the Seller. The rate of prepayment on the Receivables may also be influenced
by the structure of the loan. In addition, under certain circumstances, the
Seller will be obligated to repurchase Receivables pursuant to a Sale and
Servicing Agreement or Pooling and Servicing Agreement as a result of breaches
of representations and warranties and, under certain circumstances, the Servicer
will be obligated to purchase Receivables pursuant to a Sale and Servicing
Agreement or Pooling and Servicing Agreement as a result of breaches of certain
covenants. See "Description of the Transfer and Servicing Agreements--Sale and
Assignment of Receivables". Any reinvestment risks resulting from a faster or
slower incidence of prepayment of Receivables held by a given Trust will be
borne entirely by the Securityholders of the related series of Securities. See
also "Description of the Transfer and Servicing Agreements--Termination"
regarding the Servicer's option to purchase the Receivables of a given
Receivables Pool and "--Insolvency Event" regarding the sale of the Receivables
owned by an Owner Trust if an Insolvency Event with respect to the Seller
occurs.
Holders of Notes and Certificates should consider, in the case of Securities
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Receivables could result in an actual yield that is
less than the anticipated yield and, in the case of any Securities purchased at
a
19
<PAGE>
premium, the risk that a faster than anticipated rate of principal payments on
the Receivables could result in an actual yield that is less than the
anticipated yield.
RISK OF COMMINGLING. With respect to each Trust, the Servicer will deposit
all payments on the related Receivables (from whatever source) and all proceeds
of such Receivables collected during each Collection Period into the Collection
Account of such Trust within two business days of receipt thereof. However, if
so provided in the related Prospectus Supplement, in the event that the Company
satisfies certain requirements for monthly or less frequent remittances and the
Rating Agencies affirm their ratings of the related Securities at the initial
level, then for so long as the Company is the Servicer and provided that (i)
there exists no Servicer Default (as defined herein) and (ii) each other
condition to making such monthly or less frequent deposits as may be specified
by the Rating Agencies and described in such Prospectus Supplement is satisfied,
the Servicer will not be required to deposit such amounts into the Collection
Account of such Trust until on or before the business day preceding each
Distribution Date. The Servicer will deposit the aggregate Purchase Amount of
Receivables purchased by the Servicer into the applicable Collection Account on
or before the business day preceding each Distribution Date. Pending deposit
into such Collection Account, collections may be invested by the Servicer at its
own risk and for its own benefit and will not be segregated from funds of the
Servicer. If the Servicer were unable to remit such funds, the applicable
Securityholders might incur a loss. To the extent set forth in the related
Prospectus Supplement, the Servicer may, in order to satisfy the requirements
described above, obtain a letter of credit or other security for the benefit of
the related Trust to secure timely remittances of collections on the related
Receivables and payment of the aggregate Purchase Amount with respect to
Receivables purchased by the Servicer.
SERVICER DEFAULT. Unless otherwise provided in the related Prospectus
Supplement with respect to a series of Securities issued by an Owner Trust that
includes Notes, in the event a Servicer Default occurs, the related Indenture
Trustee or the Noteholders with respect to such series, as described under
"Description of the Transfer and Servicing Agreements--Rights upon Servicer
Default", may remove the Servicer without the consent of the Trustee or any of
the Certificateholders with respect to such series. The Trustee or the
Certificateholders with respect to such series will not have the ability to
remove the Servicer if a Servicer Default occurs. In addition, the Noteholders
of such series have the ability, with certain specified exceptions, to waive
defaults by the Servicer, including defaults that could materially adversely
affect the Certificateholders of such series. See "Description of the Transfer
and Servicing Agreements--Waiver of Past Defaults".
RATINGS OF THE SECURITIES. It is a condition to the issuance of the
Securities to be offered hereunder that they be rated in one of the four highest
rating categories by at least one nationally recognized statistical rating
organization. A rating is not a recommendation to purchase, hold or sell
Securities inasmuch as such rating does not comment as to market price or
suitability for a particular investor. Ratings of Securities will address the
likelihood of the payment of principal and interest thereon pursuant to their
terms. The ratings of Securities will not address the likelihood of an Early
Amortization Event. There can be no assurance that a rating will remain for a
given period of time or that a rating will not be lowered or withdrawn entirely
by a rating agency if in its judgment circumstances in the future so warrant.
For more detailed information regarding the ratings assigned to any class of a
particular series of Securities, see "Summary of Terms--Rating of the
Securities" and "Risk Factors--Ratings of the Securities" in the related
Prospectus Supplement.
BOOK-ENTRY REGISTRATION. Unless otherwise specified in the related
Prospectus Supplement, each class of Securities of a given series will be
initially represented by one or more certificates registered in the name of Cede
& Co. ("Cede"), or any other nominee for The Depository Trust Company ("DTC")
set forth in such Prospectus Supplement (Cede, or such other nominee, "DTC's
Nominee"), and will not be registered in the names of the holders of the
Securities of such series or their nominees. Because of this, unless and until
Definitive Securities (as defined herein) for such series are issued, holders of
such
20
<PAGE>
Securities will not be recognized by the applicable Trustee or any applicable
Indenture Trustee as "Certificateholders", "Noteholders" or "Securityholders",
as the case may be (as such terms are used herein or in the related Pooling and
Servicing Agreement or related Indenture and Trust Agreement, as applicable).
Hence, until Definitive Securities are issued, holders of such Securities will
be able to exercise the rights of Securityholders only indirectly through DTC
and its participating organizations. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Definitive Securities".
21
<PAGE>
THE TRUSTS
With respect to each series of Securities, the Seller will establish a
separate Trust pursuant to the respective Trust Agreement or Pooling and
Servicing Agreement, as applicable, for the transactions described herein and in
the related Prospectus Supplement. The property of each Trust will include a
pool (a "Receivables Pool") of motor vehicle retail installment sales contracts
and installment loans generally between dealers (the "Dealers") and purchasers
(the "Obligors") of new and used automobiles, light duty trucks, vans and
minivans and, unless otherwise provided in the related Prospectus Supplement,
all payments due thereunder on and after the applicable Cutoff Date in the case
of Precomputed Receivables (as defined herein) and all payments received
thereunder on and after the applicable Cutoff Date in the case of Simple
Interest Receivables (as defined herein). The Company will acquire the
Receivables of each Receivables Pool from Dealers, pursuant to agreements with
the Dealers ("Dealer Agreements"), or from financial institutions or other
holders of the Receivables that have originated the Receivables or have
purchased them from Dealers or other originating entities. Such Receivables will
subsequently be sold to the Seller and will continue to be serviced by the
Servicer. On the applicable Closing Date, after the issuance of the Certificates
and any Notes of a given series, the Seller will sell the Initial Receivables of
the applicable Receivables Pool to the Trust to the extent, if any, specified in
the related Prospectus Supplement. If and to the extent so provided in the
related Prospectus Supplement, Subsequent Receivables will be conveyed to the
Trust as frequently as daily during the Funding Period. In addition, if so
provided in the related Prospectus Supplement, the property of a Trust may also
include monies deposited into the Collateral Reinvestment Account on the Closing
Date. During the Revolving Period, principal will not be distributed on the
Securities of the related series, and principal collections on the Receivables
of such series, together with (if and to the extent described in the related
Prospectus Supplement) interest collections on such Receivables that are in
excess of amounts required to be distributed therefrom, will be deposited from
time to time in the Collateral Reinvestment Account and will be used by the
Trust to purchase Subsequent Receivables during such Revolving Period. Any
Subsequent Receivables so conveyed will also be assets of the applicable Trust,
subject, in the case of any Owner Trust that issues Notes, to the prior rights
of the related Indenture Trustee and the Noteholders, if any, in such Subsequent
Receivables. The property of each Trust will also include (i) such amounts as
from time to time may be held in separate trust accounts established and
maintained pursuant to the related Sale and Servicing Agreement or Pooling and
Servicing Agreement and the proceeds of such accounts, as described herein and
in the related Prospectus Supplement; (ii) security interests in the Financed
Vehicles and any other interest of the Seller in such Financed Vehicles; (iii)
the rights to proceeds from claims on certain physical damage, credit life and
disability insurance policies covering the Financed Vehicles or the Obligors, as
the case may be; (iv) the interest of the Seller in any proceeds from recourse
to Dealers or other originators on Receivables or Financed Vehicles with respect
to which the Servicer has determined that eventual repayment in full is
unlikely; (v) any property that shall have secured a Receivable and that shall
have been acquired by the applicable Trust; and (vi) any and all proceeds of the
foregoing. To the extent specified in the related Prospectus Supplement, a
Pre-Funding Account, a Collateral Reinvestment Account, a Reserve Account or
other form of credit enhancement or such other property, including Receivables
Backed Assets, may be a part of the property of any given Trust or may be held
by the Trustee or an Indenture Trustee for the benefit of holders of the related
Securities. Additionally, pursuant to contracts between the Company and the
Dealers or lenders, the Dealers or lenders have an obligation after origination
to repurchase Receivables as to which they have made certain misrepresentations.
The Servicer will continue to service the Receivables held by each Trust and
will receive fees for such services. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment of Expenses" herein and
in the related Prospectus Supplement. To facilitate the servicing of the
Receivables, the Seller and each Trustee will authorize the Servicer to retain
physical possession of the Receivables held by each Trust and other documents
relating thereto as custodian for each such
22
<PAGE>
Trust. Due to the administrative burden and expense, the certificates of title
to the Financed Vehicles will not be amended to reflect the sale and assignment
of the security interest in the Financed Vehicles to each Trust. In the absence
of such an amendment, any Trust may not have a perfected security interest in
the Financed Vehicles in all states. See "Certain Legal Aspects of the
Receivables" and "Description of the Transfer and Servicing Agreements--Sale and
Assignment of Receivables".
If the protection provided to any Noteholders of a given series by the
subordination of the related Certificates and by the Reserve Account, if any, or
other credit enhancement for such series or the protection provided to
Certificateholders by any such Reserve Account or other credit enhancement is
insufficient, such Noteholders or Certificateholders, as the case may be, would
have to look principally to the Obligors on the related Receivables, the
proceeds from the repossession and sale of Financed Vehicles which secure
defaulted Receivables and the proceeds from any recourse against Dealers or
other originators with respect to such Receivables. In such event, certain
factors, such as the applicable Trust's not having perfected security interests
in the Financed Vehicles in all states, may affect the Servicer's ability to
repossess and sell the collateral securing the Receivables, and thus may reduce
the proceeds to be distributed to the holders of the Securities of such series.
See "Description of the Transfer and Servicing Agreements--Distributions",
"--Credit and Cash Flow Enhancement" and "Certain Legal Aspects of the
Receivables".
The principal offices of each Trust and the related Trustee will be
specified in the applicable Prospectus Supplement.
THE TRUSTEE
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale of
the related Securities will be limited solely to the express obligations of such
Trustee set forth in the related Trust Agreement and the Sale and Servicing
Agreement or the related Pooling and Servicing Agreement, as applicable. A
Trustee may resign at any time, in which event the Servicer, or its successor
(or, in the case of an Owner Trust that issues Notes, the Administrator (as
defined herein) thereof), will be obligated to appoint a successor trustee. The
Administrator of any Owner Trust that issues Notes and the Servicer in respect
of any Grantor Trust may also remove the Trustee if the Trustee ceases to be
eligible to continue as Trustee under the related Trust Agreement or Pooling and
Servicing Agreement, as applicable, or if the Trustee becomes insolvent. In such
circumstances, the Administrator or Servicer, as applicable, will be obligated
to appoint a successor trustee. Any resignation or removal of a Trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
MASTER TRUSTS
If so provided in the related Prospectus Supplement, each Trust Agreement or
Pooling and Servicing Agreement, as applicable, may provide that, pursuant to
any one or more supplements thereto, the Seller may direct the related Trustee
to issue from time to time new series subject to the conditions described below
(each such issuance, a "Master Trust New Issuance"). Each Master Trust New
Issuance will have the effect of decreasing the residual interest in the related
Master Trust. Under each such Master Trust Agreement, the Seller may designate,
with respect to any newly issued series: (i) its name or designation; (ii) its
initial principal amount (or method for calculating such amount); (iii) its
Interest Rate (or a formula for the determination thereof); (iv) the
Distribution Dates and the date or dates from which interest shall accrue; (v)
the method for allocating collections to Securityholders of such series; (vi)
any bank accounts to be used by such series and the terms governing the
operation of any such bank accounts; (vii) the percentage used to calculate
monthly servicing fees; (viii) the provider and terms of any form of credit
enhancement with respect thereto; (ix) the terms on which the Securities of such
series may be repurchased or remarketed to other investors; (x) the number of
classes of Securities of such series and, if such series consists of more than
one class, the rights and priorities of each such
23
<PAGE>
class; (xi) the extent to which the Securities of such series will be issuable
in book-entry form; (xii) the priority of such series with respect to any other
series; and (xiii) any other relevant terms. None of the Seller, the Servicer,
the related Trustee or any Master Trust is required or intends to obtain the
consent of any Securityholder of any outstanding series to issue any additional
series.
Each Master Trust Agreement provides that the Seller may designate terms
such that each Master Trust New Issuance has an amortization period which may
have a different length and begin on a different date than such periods for any
series previously issued by the related Master Trust and then outstanding.
Moreover, each Master Trust New Issuance may have the benefits of credit
enhancements issued by enhancement providers different from the providers of the
credit enhancement, if any, with respect to any series previously issued by the
related Master Trust and then outstanding. Under each Master Trust Agreement,
the related Trustee shall hold any such credit enhancement only on behalf of the
Securityholders to which such credit enhancement relates. The Seller will have
the option under each Master Trust Agreement to vary among series the terms upon
which a series may be repurchased by the Issuer or remarketed to other
investors. As more fully described in a related Prospectus Supplement, there is
no limit to the number of Master Trust New Issuances that the Seller may cause
under a Master Trust Agreement. Each Master Trust will terminate only as
provided in the related Master Trust Agreement. There can be no assurance that
the terms of any Master Trust New Issuance might not have an impact on the
timing and amount of payments received by Securityholders of another series
issued by the same Master Trust.
Under each Master Trust Agreement and pursuant to a related supplement, a
Master Trust New Issuance may occur only upon the satisfaction of certain
conditions provided in each such Master Trust Agreement. The obligation of the
related Trustee to authenticate the Securities of any such Master Trust New
Issuance and to execute and deliver the supplement to the related Master Trust
Agreement is subject to the satisfaction of the following conditions: (a) on or
before the date upon which the Master Trust New Issuance is to occur, the Seller
shall have given the related Trustee, the Servicer, the Rating Agencies and
certain related providers of credit enhancement, if any, written notice of such
Master Trust New Issuance and the date upon which the Master Trust New Issuance
is to occur; (b) the Seller shall have delivered to such Trustee a supplement to
such Master Trust Agreement, in form satisfactory to such Trustee, executed by
each party to such Master Trust Agreement other than such Trustee; (c) the
Seller shall have delivered to such Trustee any related credit enhancement
agreement; (d) such Trustee shall have received confirmation from the Rating
Agency that such Master Trust New Issuance will not result in any Rating Agency
reducing or withdrawing its rating with respect to any other series or class of
such Trust (any such reduction or withdrawal is referred to herein as a "Ratings
Effect"); (e) the Seller shall have delivered to such Trustee, the Rating Agency
and certain providers of credit enhancement, if any, an opinion of counsel
acceptable to such Trustee that for federal income tax purposes (i) following
such Master Trust New Issuance the related Master Trust will not be deemed to be
an association (or publicly traded partnership) taxable as a corporation, (ii)
such Master Trust New Issuance will not affect the tax characterization as debt
of Securities of any outstanding series or class issued by such Master Trust
that were characterized as debt at the time of their issuance and (iii) such
Master Trust New Issuance will not cause or constitute an event in which gain or
loss would be recognized by any Securityholders or such Master Trust; and (f)
any other conditions specified in any supplement. Upon satisfaction of the above
conditions, the related Trustee shall execute the supplement to the related
Master Trust Agreement and issue the Securities of such new series.
24
<PAGE>
THE RECEIVABLES POOLS
GENERAL
The Receivables in each Receivables Pool have been or will be purchased by
the Company from Dealers or lenders in the ordinary course of business through
the Company's branches located in the United States. The retail installment sale
contracts and installment loans are purchased pursuant to the Dealer Agreements
or other lender agreements. The Company purchases contracts and loans in
accordance with its credit standards, which are based upon the vehicle buyer's
ability and willingness to repay the obligation as well as the value of the
vehicle being financed. The Company will sell retail installment sale contracts
and installment loans that it acquires to either (i) the related Trust pursuant
to a Sale and Servicing Agreement or a Pooling and Servicing Agreement or (ii) a
Transferor pursuant to a Receivables Purchase Agreement.
The Receivables to be held by each Trust will be selected from the Company's
portfolio for inclusion in a Receivables Pool by several criteria, including
that, unless otherwise provided in the related Prospectus Supplement, each
Receivable (i) is secured by a new or used vehicle, (ii) was originated or
acquired (either from a Dealer, financial institution or other holder of the
Receivables) by the Company in the United States, (iii) provides for level
monthly payments (except for the last payment, which may be minimally different
from the level payments that fully amortize the amount financed over the
original term to maturity of the related Receivable, (iv) is a Precomputed
Receivable or a Simple Interest Receivable and (v) satisfies the other criteria,
if any, set forth in such Prospectus Supplement. No selection procedures
believed by the Seller to be adverse to the Securityholders of any series were
or will be used in selecting the related Receivables.
"Precomputed Receivables" consist of either (i) monthly actuarial
receivables ("Actuarial Receivables") or (ii) receivables that provide for
allocation of payments according to the "sum of periodic balances" or "sum of
monthly payments" method ("Rule of 78's Receivables"). An Actuarial Receivable
provides for amortization of the loan over a series of fixed level payment
monthly installments. Each monthly installment, including the monthly
installment representing the final payment on the Receivable, consists of an
amount of interest equal to 1/12 of the APR of the loan multiplied by the unpaid
principal balance of the loan, and an amount of principal equal to the remainder
of the monthly payment. A Rule of 78's Receivable provides for the payment by
the obligor of a specified total amount of payments, payable in equal monthly
installments on each due date, which total represents the principal amount
financed and add-on interest in an amount calculated at the stated APR for the
term of the receivable. The rate at which such amount of add-on interest is
earned and, correspondingly, the amount of each fixed monthly payment allocated
to reduction of the outstanding principal are calculated in accordance with the
"Rule of 78's".
"Simple Interest Receivables" are receivables that provide for the
amortization of the amount financed under each receivable over a series of fixed
level monthly payments. However, unlike the monthly payment under an Actuarial
Receivable, each monthly payment consists of an installment of interest which is
calculated on the basis of the outstanding principal balance of the receivable
multiplied by the stated APR and further multiplied by the period elapsed (as a
fraction of a calendar year) since the preceding payment of interest was made.
As payments are received under a Simple Interest Receivable, the amount received
is applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if an obligor pays
a fixed monthly installment before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if an obligor pays a fixed
monthly installment after its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be greater than it would have been had the payment been made as scheduled, and
the portion of the
25
<PAGE>
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, the obligor pays a fixed monthly installment until the
final scheduled payment date, at which time the amount of the final installment
is increased or decreased as necessary to repay the then outstanding principal
balance.
In the event of the prepayment in full (voluntarily or by acceleration) of a
Rule of 78's Receivable, under the terms of the contract or loan, a "refund" or
"rebate" will be made to the obligor of the portion of the total amount of
payments then due and payable under the contract or loan allocable to "unearned"
add-on interest, calculated in accordance with a method equivalent to the Rule
of 78's. If an Actuarial Receivable is prepaid in full, with minor variations
based upon state law, the Actuarial Receivable requires that the rebate be
calculated on the basis of a constant interest rate. If a Simple Interest
Receivable is prepaid, rather than receive a rebate, the obligor is required to
pay interest only to the date of prepayment. The amount of a rebate under a Rule
of 78's Receivable generally will be less than the amount of a rebate on an
Actuarial Receivable and generally will be less than the remaining scheduled
payments of interest that would have been due under a Simple Interest Receivable
for which all payments were made on schedule.
Unless otherwise provided in the related Prospectus Supplement, each Trust
will account for the Rule of 78's Receivables as if such Receivables were
Actuarial Receivables. Amounts received upon prepayment in full of a Rule of
78's Receivable in excess of the then outstanding principal balance of such
Receivable and accrued interest thereon (calculated pursuant to the actuarial
method) will not be paid to the Noteholders, if any, or passed through to the
Certificateholders of the applicable series but will be paid to the Servicer as
additional servicing compensation.
Information with respect to each Receivables Pool will be set forth in the
related Prospectus Supplement, including, to the extent appropriate, the
composition, the distribution by APR and by the states of origination, the
portion of such Receivables Pool consisting of Precomputed Receivables and of
Simple Interest Receivables and the portion of such Receivables Pool secured by
new vehicles and by used vehicles.
DELINQUENCIES, REPOSSESSIONS AND NET LOSSES
Certain information concerning the experience of the Company pertaining to
delinquencies, repossessions and net losses with respect to new and used retail
automobile, light duty truck, van and minivan receivables (including receivables
previously sold which the Company continues to service) will be set forth in
each Prospectus Supplement. There can be no assurance that the delinquency,
repossession and net loss experience on any Receivables Pool will be comparable
to prior experience or to such information.
26
<PAGE>
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the Notes, if any, and the Certificates of any
series will generally be influenced by the rate at which the principal balances
of the related Receivables are paid, which payment may be in the form of
scheduled amortization or prepayments. (For this purpose, the term "prepayments"
includes prepayments in full, partial prepayments (including those related to
rebates of extended warranty contract costs and insurance premiums),
liquidations due to default, losses caused by the issuance of an order by a
court in any insolvency proceeding reducing the amount owed under a Receivable,
as well as receipts of proceeds from physical damage, credit life and disability
insurance policies and certain other Receivables repurchased by the Seller or
the Servicer for administrative reasons.) All of the Receivables are prepayable
at any time without penalty to the Obligor. The rate of prepayment of automotive
receivables is influenced by a variety of economic, social and other factors,
including the fact that an Obligor generally may not sell or transfer the
Financed Vehicle securing a Receivable without the consent of the Seller. The
rate of prepayment on the Receivables may also be influenced by the structure of
the loan. In addition, under certain circumstances, the Company or a Transferor,
if any, will be obligated to repurchase Receivables from a given Trust pursuant
to the related Sale and Servicing Agreement or Pooling and Servicing Agreement
as a result of breaches of representations and warranties and, under certain
circumstances, the Servicer will be obligated to purchase Receivables from such
Trust pursuant to such Sale and Servicing Agreement or Pooling and Servicing
Agreement as a result of breaches of certain covenants. See "Description of the
Transfer and Servicing Agreements--Sale and Assignment of Receivables" and
"--Servicing Procedures". See also "Description of the Transfer and Servicing
Agreements--Termination" regarding the Servicer's option to purchase the
Receivables from a given Trust and "--Insolvency Event" regarding the sale of
the Receivables owned by an Owner Trust if an Insolvency Event with respect to
the Seller applicable to such Trust occurs.
In light of the above considerations, there can be no assurance as to the
amount of principal payments to be made on the Notes, if any, or the
Certificates of a given series on each Distribution Date since such amount will
depend, in part, on the amount of principal collected on the related Receivables
Pool during the applicable Collection Period. Any reinvestment risks resulting
from a faster or slower incidence of prepayment of Receivables will be borne
entirely by the Noteholders, if any, and the Certificateholders of a given
series. The related Prospectus Supplement may set forth certain additional
information with respect to the maturity and prepayment considerations
applicable to the particular Receivables Pool and the related series of
Securities.
27
<PAGE>
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each class of Notes will be a seven-digit decimal
which the Servicer will compute prior to each distribution with respect to such
class of Notes indicating the remaining outstanding principal balance of such
class of Notes, as of the applicable Distribution Date (after giving effect to
payments to be made on such Distribution Date), as a fraction of the initial
outstanding principal balance of such class of Notes. The "Certificate Pool
Factor" for each class of Certificates will be a seven-digit decimal which the
Servicer will compute prior to each distribution with respect to such class of
Certificates indicating the remaining Certificate Balance of such class of
Certificates, as of the applicable Distribution Date (after giving effect to
distributions to be made on such Distribution Date), as a fraction of the
initial Certificate Balance of such class of Certificates. Each Note Pool Factor
and each Certificate Pool Factor will initially be 1.0000000 and thereafter will
decline to reflect reductions in the outstanding principal balance of the
applicable class of Notes, or the reduction of the Certificate Balance of the
applicable class of Certificates, as the case may be. A Noteholder's portion of
the aggregate outstanding principal balance of the related class of Notes is the
product of (i) the original denomination of such Noteholder's Note and (ii) the
applicable Note Pool Factor. A Certificateholder's portion of the aggregate
outstanding Certificate Balance for the related class of Certificates is the
product of (a) the original denomination of such Certificateholder's Certificate
and (b) the applicable Certificate Pool Factor.
Unless otherwise provided in the related Prospectus Supplement, the
Noteholders, if any, and the Certificateholders will receive reports on or about
each Distribution Date concerning, with respect to the Collection Period
immediately preceding such Distribution Date, payments received on the
Receivables, the Pool Balance (as such term is defined in such Prospectus
Supplement), each Certificate Pool Factor or Note Pool Factor, as applicable,
and various other items of information. In addition, Securityholders of record
during any calendar year will be furnished information for tax reporting
purposes not later than the latest date permitted by law. See "Certain
Information Regarding the Securities--Reports to Securityholders".
USE OF PROCEEDS
Unless otherwise provided in the related Prospectus Supplement, the net
proceeds from the sale of the Securities of a series will be applied by the
applicable Trust (i) to the purchase of the Receivables from the Seller, (ii) to
make the initial deposit into the Reserve Account, if any, (iii) to make the
deposit, if any, of the Pre-Funded Amount into the Pre-Funding Account, if any,
and (iv) to make the initial deposit, if any, to the Collateral Reinvestment
Account, if any. Unless otherwise specified in the related Prospectus
Supplement, the Seller will use that portion of such net proceeds paid to it
with respect to any such Trust for general corporate purposes.
28
<PAGE>
THE COMPANY AND THE SELLER
THE COMPANY
The Company is a specialty finance company primarily engaged in financing
the purchase of used automobiles by acquiring dealer-originated retail
installment contracts and installment loans. Since the Company's incorporation
in March 1991, it has expanded its operations by targeting and servicing an
under-served market--financing used automobile purchases by consumers who have
limited access to traditional sources of credit. In general, the Company serves
two customers, the automobile dealer and, indirectly, the dealer's customer, the
"non-prime" borrower. See "First Merchants' Automobile Financing
Program--General" in the related Prospectus Supplement.
The Company is a Delaware corporation. The Company's principal executive
office and mailing address is 570 Lake Cook Road, Suite 126, Deerfield, Illinois
60015 and its telephone number is (847) 948-9300. The common stock of the
Company is quoted on The Nasdaq Stock Market's National Market under the symbol
"FMAC". The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission.
The Company will take steps in structuring the transactions contemplated
hereby that are intended to ensure that the voluntary or involuntary application
for relief by the Company under any Insolvency Laws will not result in the
consolidation of the assets and liabilities of the related Transferor, if any,
or the related Trust with those of the Company. These steps include the creation
of a Transferor as a separate, limited-purpose subsidiary pursuant to a
certificate of incorporation containing certain limitations on its activities
(including restrictions on the nature of such Transferor's business, the
requirement of an independent director being on such Transferor's Board of
Directors and a restriction on such Transferor's ability to commence a voluntary
case or proceeding under any Insolvency Law without the prior unanimous
affirmative vote of all of its directors).
THE SELLER
With respect to each series of Securities, the Seller will be either the
Company or a Transferor. Each Transferor, if any, will be a special-purpose
finance subsidiary of the Company.
29
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
Each Owner Trust may issue one or more classes of Notes pursuant to an
Indenture, a form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The following summary does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related Prospectus Supplement, each class
of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Trust, the "Depository"), except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. The Company has been informed by DTC that DTC's
nominee will be Cede, unless another nominee is specified in the related
Prospectus Supplement. Accordingly, such nominee is expected to be the holder of
record of the Notes of each class. Unless and until Definitive Notes (as defined
herein) are issued under the limited circumstances described herein or in the
related Prospectus Supplement, no Noteholder will be entitled to receive a
physical certificate representing a Note. All references herein and in the
related Prospectus Supplement to actions by Noteholders refer to actions taken
by DTC upon instructions from its participating organizations (the
"Participants"), and all references herein and in the related Prospectus
Supplement to distributions, notices, reports and statements to Noteholders
refer to distributions, notices, reports and statements to DTC or its nominee,
as the registered holder of the Notes, for distribution to Noteholders in
accordance with DTC's procedures with respect thereto. See "Certain Information
Regarding the Securities--Book-Entry Registration" and "--Definitive
Securities".
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each class of Notes of a given series will be described in the
related Prospectus Supplement. The right of holders of any class of Notes to
receive payments of principal and interest may be senior or subordinate to the
rights of holders of any other class or classes of Notes of such series, as
described in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, payments of interest on the Notes of such series
will be made prior to payments of principal thereon. If so provided in the
related Prospectus Supplement, a series may include one or more classes of Strip
Notes entitled to (i) principal payments with disproportionate, nominal or no
interest payments or (ii) interest payments with disproportionate, nominal or no
principal payments. Each class of Notes may have a different Interest Rate,
which may be a fixed, variable or adjustable Interest Rate (and which may be
zero for certain classes of Strip Notes), or any combination of the foregoing.
The related Prospectus Supplement will specify the Interest Rate for each class
of Notes of a given series or the method for determining such Interest Rate. See
also "Certain Information Regarding the Securities--Fixed Rate Securities" and
"--Floating Rate Securities". One or more classes of Notes of a series may be
redeemable in whole or in part under the circumstances specified in the related
Prospectus Supplement, including, if a Pre-Funding Account or Collateral
Reinvestment Account has been established with respect to a related series, from
amounts remaining in the applicable account at the end of the Funding Period or
Revolving Period, as the case may be, or as a result of the Servicer's
exercising its option to purchase the related Receivables Pool.
To the extent specified in any Prospectus Supplement, one or more classes of
Notes of a given series may have fixed principal payment schedules, as set forth
in such Prospectus Supplement; Noteholders of such Notes would be entitled to
receive as payments of principal on any given Distribution Date the applicable
amounts set forth on such schedule with respect to such Notes, in the manner and
to the extent set forth in the related Prospectus Supplement.
30
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, payments to
holders of Notes of all classes within a series in respect of interest will have
the same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement (each,
a "Distribution Date"), in which case each class of Noteholders will receive its
ratable share (based upon the aggregate amount of interest due to the holders of
such class of Notes) of the aggregate amount available to be distributed in
respect of interest on the Notes of such series. See "Description of the
Transfer and Servicing Agreements--Distributions" and "--Credit and Cash Flow
Enhancement".
In the case of a series of Securities which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
Prospectus Supplement. Payments in respect of principal of and interest on any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class. One or more classes of Notes of a series may be redeemable in whole
or in part under the circumstances specified in the related Prospectus
Supplement, including, if a Pre-Funding Account or Collateral Reinvestment
Account has been established with respect to the related series, from amounts
remaining in the applicable account at the end of the Funding Period or
Revolving Period, as the case may be, or as a result of the exercise by the
Servicer, a subservicer or such other party as may be specified in the related
Prospectus Supplement of its option to purchase the related Receivables Pool.
See "Description of the Transfer and Servicing Agreements--Termination".
CERTAIN PROVISIONS OF THE INDENTURE
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to the Notes
of a given series, unless otherwise specified in the related Prospectus
Supplement, "Events of Default" under the related Indenture will include the
following: (i) a default for five days or more in the payment of any interest on
any such Note; (ii) a default in the payment of the principal, or any
installment of the principal, of any such Note when the same becomes due and
payable; (iii) a default in the observance or performance of any covenant or
agreement of the applicable Trust made in such Indenture and the continuation of
any such default for a period of 30 days after notice thereof is given to such
Trust by the applicable Indenture Trustee or to such Trust and such Indenture
Trustee by the holders of at least 25% in principal amount of such Notes then
outstanding; (iv) any representation or warranty made by such Trust in such
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, if
such breach is not cured within 30 days after notice thereof is given to such
Trust by the applicable Indenture Trustee or to such Trust and such Indenture
Trustee by the holders of at least 25% in principal amount of such Notes then
outstanding; or (v) certain events of bankruptcy, insolvency, receivership or
liquidation of the applicable Trust. However, the amount of principal required
to be paid to Noteholders of such series under the related Indenture will
generally be limited to amounts available to be deposited in the applicable Note
Distribution Account. Therefore, unless otherwise specified in the related
Prospectus Supplement, the failure to pay principal on a class of Notes
generally will not result in the occurrence of an Event of Default until the
final scheduled Distribution Date for such class of Notes.
Unless otherwise specified in the related Prospectus Supplement, if an Event
of Default should occur and be continuing with respect to the Notes of any
series, the related Indenture Trustee or holders of a majority in principal
amount of such Notes then outstanding may declare the principal of such Notes to
be immediately due and payable. Unless otherwise specified in the related
Prospectus Supplement, such declaration may, under certain circumstances, be
rescinded by the holders of a majority in principal amount of such Notes then
outstanding.
If the Notes of any series are declared due and payable following an Event
of Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on
31
<PAGE>
Trust Property, exercise remedies as a secured party, sell the related
Receivables or elect to have the applicable Trust maintain possession of such
Receivables and continue to apply collections on such Receivables as if there
had been no declaration of acceleration. Unless otherwise specified in the
related Prospectus Supplement, however, such Indenture Trustee is prohibited
from selling such Receivables following an Event of Default, other than a
default in the payment of any principal of, or a default for five days or more
in the payment of any interest on, any Note of such series, unless (i) the
holders of all such outstanding Notes consent to such sale, (ii) the proceeds of
such sale are sufficient to pay in full the principal of and the accrued
interest on such outstanding Notes at the date of such sale or (iii) such
Indenture Trustee determines that the proceeds of the Receivables would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such obligations had not been declared due and
payable, and such Indenture Trustee obtains the consent of the holders of a
majority of the aggregate outstanding principal amount of such Notes.
Subject to the provisions of the applicable Indenture relating to the duties
of the related Indenture Trustee, if an Event of Default occurs and is
continuing with respect to a series of Notes, such Indenture Trustee will be
under no obligation to exercise any of the rights or powers under such Indenture
at the request or direction of any of the holders of such Notes if such
Indenture Trustee reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which might be incurred by it in
complying with such request. Subject to the provisions for indemnification and
certain limitations contained in the related Indenture, the holders of a
majority in principal amount of the outstanding Notes of a given series will
have the right to direct the time, method and place of conducting any proceeding
or any remedy available to the applicable Indenture Trustee, and the holders of
a majority in principal amount of such Notes then outstanding 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
such Indenture that cannot be modified without the waiver or consent of all the
holders of each such outstanding Note.
Unless otherwise specified in the related Prospectus Supplement, no holder
of a Note of any series will have the right to institute any proceeding with
respect to the related Indenture, unless (i) such holder previously has given to
the applicable Indenture Trustee written notice of a continuing Event of
Default, (ii) the holders of not less than 25% in principal amount of the
outstanding Notes of such series have made written request to such Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee, (iii)
such holder or holders have offered such Indenture Trustee reasonable indemnity,
(iv) such Indenture Trustee has for 60 days failed to institute such proceeding
and (v) no direction inconsistent with such written request has been given to
such Indenture Trustee during such 60-day period by the holders of a majority in
principal amount of such outstanding Notes.
In addition, unless otherwise specified in the related Prospectus
Supplement, each Indenture Trustee and the related Noteholders, by accepting the
related Notes, will covenant that they will not at any time institute against
the Seller or the applicable Trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
With respect to any Trust, neither the related Indenture Trustee nor the
related Trustee in its individual capacity, nor any holder of a Certificate
representing an ownership interest in such Trust nor any of their respective
owners, beneficiaries, agents, officers, directors, employees, affiliates,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the related Notes or for the agreements of such Trust contained in the
applicable Indenture.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless, among such other
requirements as may be specified in the related Prospectus Supplement, (i) the
entity formed by or surviving such consolidation or merger is organized under
the laws of the United States, any state or the District of Columbia, (ii) such
entity expressly
32
<PAGE>
assumes such Trust's obligation to make due and punctual payments upon the Notes
of the related series and to perform or observe every agreement and covenant of
such Trust under the Indenture, (iii) no Event of Default shall have occurred
and be continuing immediately after such merger or consolidation, (iv) such
Trust has been advised that the rating of the Notes (and, if so provided in such
Indenture, the Certificates) of such series then in effect would not be reduced
or withdrawn by the Rating Agencies as a result of such merger or consolidation
and (v) such Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any related Noteholder or Certificateholder.
No Owner Trust will, among other things, (i) except as expressly permitted
by the applicable Indenture, the applicable Transfer and Servicing Agreements or
certain related documents with respect to such Trust (collectively, the "Related
Documents"), sell, transfer, exchange or otherwise dispose of any of the assets
of such Trust, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of the Notes of the related series (other than
amounts properly withheld under the Code or applicable state law) or assert any
claim against any present or former holder of such Notes because of the payment
of taxes levied or assessed upon such Trust, (iii) permit the validity or
effectiveness of such Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to such Notes under such
Indenture except as may be expressly permitted thereby or (iv) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance to be
created on or extend to or otherwise arise upon or burden the assets of such
Trust or any part thereof, or any interest therein or the proceeds thereof.
No Trust may engage in any activity other than as described herein or in the
Prospectus Supplement. No Trust will incur, assume or guarantee any indebtedness
other than indebtedness incurred pursuant to the related Notes and the related
Indenture, pursuant to any Advances made to it by the Servicer or otherwise in
accordance with the Related Documents.
MODIFICATION OF INDENTURE. Each Owner Trust and the related Indenture
Trustee may, with the consent of the holders of a majority of the outstanding
Notes of the related series, execute a supplemental indenture to add provisions
to, change in any manner or eliminate any provisions of, the related Indenture,
or modify (except as provided below) in any manner the rights of the related
Noteholders.
However, unless otherwise specified in the related Prospectus Supplement
with respect to a series of Notes, without the consent of the holder of each
such outstanding Note affected thereby, no supplemental indenture will: (i)
change the due date of any installment of principal of or interest on any such
Note or reduce the principal amount thereof, the interest rate specified thereon
or the redemption price with respect thereto or change any place of payment
where or the coin or currency in which any such Note or any interest thereon is
payable; (ii) impair the right to institute suit for the enforcement of certain
provisions of the related Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes of such series, the
consent of the holders of which is required for any such supplemental indenture
or the consent of the holders of which is required for any waiver of compliance
with certain provisions of such Indenture or of certain defaults thereunder and
their consequences as provided for in such Indenture; (iv) modify or alter the
provisions of such Indenture regarding the voting of Notes held by the
applicable Trust, any other obligor on such Notes, the Seller or an affiliate of
any of them; (v) reduce the percentage of the aggregate outstanding amount of
such Notes, the consent of the holders of which is required to direct the
related Indenture Trustee to sell or liquidate the Receivables if the proceeds
of such sale would be insufficient to pay the principal amount and accrued but
unpaid interest on the outstanding Notes of such series; (vi) decrease the
percentage of the aggregate principal amount of such Notes required to amend the
sections of such Indenture which specify the applicable percentage of the
aggregate principal amount of the Notes of such series necessary to amend such
Indenture or certain other related agreements; or (vii) permit the creation of
any lien ranking prior to or on a parity with the lien of such Indenture with
respect to any of the collateral for such Notes or, except as otherwise
permitted or contemplated in such Indenture, terminate the lien of
33
<PAGE>
such Indenture on any such collateral or deprive the holder of any such Note of
the security afforded by the lien of such Indenture.
Unless otherwise provided in the applicable Prospectus Supplement, an Owner
Trust and the applicable Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of the Noteholders of the related
series, for the purpose of, among other things, adding any provisions to or
changing in any manner or eliminating any of the provisions of the related
Indenture or of modifying in any manner the rights of such Noteholders; provided
that such action will not materially and adversely affect the interest of any
such Noteholder.
ANNUAL COMPLIANCE STATEMENT. Each Owner Trust that issues Notes will be
required to file annually with the related Indenture Trustee a written statement
as to the fulfillment of its obligations under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. The Indenture Trustee for each Owner
Trust that issues Notes will be required to mail each year to all related
Noteholders a brief report relating to its eligibility and qualification to
continue as Indenture Trustee under the related Indenture, any amounts advanced
by it under the Indenture, the amount, interest rate and maturity date of
certain indebtedness owing by the related Owner Trust to the applicable
Indenture Trustee in its individual capacity, the property and funds physically
held by such Indenture Trustee as such and any action taken by it that
materially affects the related Notes and that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee for any series may resign at any
time, in which event the related Owner Trust will be obligated to appoint a
successor trustee for such series. An Owner Trust may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, such Owner Trust will be obligated to appoint a successor
trustee for the applicable series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any series of Notes
does not become effective until acceptance of the appointment by the successor
trustee for such series.
34
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of Certificates of the
related series will be issued pursuant to the terms of a Trust Agreement or a
Pooling and Servicing Agreement, a form of each of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Certificates and the Trust Agreement or Pooling and Servicing Agreement, as
applicable.
Unless otherwise specified in the related Prospectus Supplement and except
for the Certificates, if any, of a given series purchased by the Seller, each
class of Certificates will initially be represented by one or more Certificates
registered in the name of the Depository, except as set forth below. Unless
otherwise specified in the related Prospectus Supplement and except for the
Certificates, if any, of a given series purchased by the Seller, the
Certificates will be available for purchase in minimum denominations of $1,000
and integral multiples thereof in book-entry form only. The Company has been
informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any series that are
not purchased by the Seller. Unless and until Definitive Certificates (as
defined herein) are issued under the limited circumstances described herein or
in the related Prospectus Supplement, no Certificateholder (other than the
Seller) will be entitled to receive a physical certificate representing a
Certificate. All references herein and in the related Prospectus Supplement to
actions by Certificateholders refer to actions taken by DTC upon instructions
from the Participants, and all references herein and in the related Prospectus
Supplement to distributions, notices, reports and statements to
Certificateholders refer to distributions, notices, reports and statements to
DTC or its nominee, as the case may be, as the registered holder of the
Certificates, for distribution to Certificateholders in accordance with DTC's
procedures with respect thereto. See "Certain Information Regarding the
Securities-- Book-Entry Registration" and "--Definitive Securities". Any
Certificates of a given series owned by the Seller or its affiliates will be
entitled to equal and proportionate benefits under the applicable Trust
Agreement or Pooling and Servicing Agreement, except that such Certificates will
be deemed not to be outstanding for the purpose of determining whether the
requisite percentage of Certificateholders has given any request, demand,
authorization, direction, notice or consent or taken any other action under the
Related Documents (other than the commencement by the related Trust of a
voluntary proceeding in bankruptcy as described under "Description of the
Transfer and Servicing Agreements--Insolvency Event").
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of losses,
Pass Through Rate and amount of or method of determining distributions with
respect to principal of and interest on each class of Certificates of a given
series will be described in the related Prospectus Supplement. Distributions of
interest on such Certificates will be made on the Distribution Dates specified
in the related Prospectus Supplement and will be made prior to distributions
with respect to principal of such Certificates. To the extent provided in the
related Prospectus Supplement, a series may include one or more classes of Strip
Certificates entitled to (i) distributions in respect of principal with
disproportionate, nominal or no interest distributions or (ii) interest
distributions with disproportionate, nominal or no distributions in respect of
principal. Each class of Certificates may have a different Pass Through Rate,
which may be a fixed, variable or adjustable Pass Through Rate (and which may be
zero for certain classes of Strip Certificates) or any combination of the
foregoing. The related Prospectus Supplement will specify the Pass Through Rate
for each class of Certificates of a given series or the method for determining
such Pass Through Rate. See also "Certain Information Regarding the
Securities--Fixed Rate Securities" and "--Floating Rate Securities". Unless
otherwise provided in the related Prospectus Supplement, distributions in
35
<PAGE>
respect of the Certificates of a given series that includes Notes may be
subordinated to payments in respect of the Notes of such series as more fully
described in such Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions in respect of interest on and
principal of any class of Certificates will be made on a pro rata basis among
all the Certificateholders of such class.
In the case of a series of Certificates which includes two or more classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of interest and principal, and any schedule or formula
or other provisions applicable to the determination thereof, of each such class
shall be as set forth in the related Prospectus Supplement. One or more classes
of Certificates of a series may be redeemable in whole or in part under the
circumstances specified in the related Prospectus Supplement, including, if a
Pre-Funding Account or Collateral Reinvestment Account has been established with
respect to the related series, from amounts remaining in the applicable account
at the end of the Funding Period or Revolving Period, as the case may be, or as
a result of the exercise by the Servicer, a subservicer or such other party as
may be specified in such Prospectus Supplement of its option to purchase the
related Receivables Pool. See "Description of the Transfer and Servicing
Agreements-- Termination".
36
<PAGE>
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities (other than certain classes of Strip Notes or Strip
Certificates) may bear interest at a fixed rate per annum ("Fixed Rate
Securities") or at a variable or adjustable rate per annum ("Floating Rate
Securities"), as more fully described below and in the applicable Prospectus
Supplement. Each class of Fixed Rate Securities will bear interest at the
applicable per annum Interest Rate or Pass Through Rate, as the case may be,
specified in the applicable Prospectus Supplement. Unless otherwise set forth in
the applicable Prospectus Supplement, interest on each class of Fixed Rate
Securities will be computed on the basis of a 360-day year of twelve 30-day
months. See "Description of the Notes--Principal and Interest on the Notes" and
"Description of the Certificates--Distributions of Principal and Interest".
FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as such term is defined in the related
Prospectus Supplement with respect to a class of Floating Rate Securities) at a
rate per annum determined by reference to an interest rate basis (the "Base
Rate"), plus or minus the Spread, if any, or multiplied by the Spread
Multiplier, if any, in each case as specified in such Prospectus Supplement. The
"Spread" is the number of basis points (one basis point equals one one-hundredth
of a percentage point) that may be specified in the applicable Prospectus
Supplement as being applicable to such class, and the "Spread Multiplier" is the
percentage that may be specified in the applicable Prospectus Supplement as
being applicable to such class.
The applicable Prospectus Supplement will designate one of the following
Base Rates as applicable to a given Floating Rate Security: (i) LIBOR (a "LIBOR
Security"), (ii) the Commercial Paper Rate (a "Commercial Paper Rate Security"),
(iii) the Treasury Rate (a "Treasury Rate Security"), (iv) the Federal Funds
Rate (a "Federal Funds Rate Security"), (v) the CD Rate (a "CD Rate Security")
or (vi) such other Base Rate as is set forth in such Prospectus Supplement. The
"Index Maturity" for any class of Floating Rate Securities is the period of
maturity of the instrument or obligation from which the Base Rate is calculated.
"H.15(519)" means the publication entitled "Statistical Release H.15(519),
Selected Interest Rates", or any successor publication, published by the Board
of Governors of the Federal Reserve System. "Composite Quotations" means the
daily statistical release entitled "Composite 3:30 p.m. Quotations for U.S.
Government Securities" published by the Federal Reserve Bank of New York.
"Interest Reset Date" will be the first day of the applicable Interest Reset
Period, or such other day as may be specified in the related Prospectus
Supplement with respect to a class of Floating Rate Securities.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (i) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period and (ii) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities will be
issued will appoint, and enter into agreements with, a calculation agent (each,
a "Calculation Agent") to calculate interest rates on each such class of
Floating Rate Securities issued with respect thereto. The applicable Prospectus
Supplement will set forth the identity of the Calculation Agent for each such
class of Floating Rate Securities of a given series, which may be either the
related Trustee or Indenture Trustee with respect to such series. All
determinations of interest by the Calculation Agent shall, in the absence of
manifest error,
37
<PAGE>
be conclusive for all purposes and binding on the holders of Floating Rate
Securities of a given class. Unless otherwise specified in the applicable
Prospectus Supplement, all percentages resulting from any calculation of the
rate of interest on a Floating Rate Security will be rounded, if necessary, to
the nearest 1/100,000 of 1% (.0000001), with five one-millionths of a percentage
point rounded upward.
CD RATE SECURITIES. Each CD Rate Security will bear interest for each
Interest Reset Period at the interest rate calculated with reference to the CD
Rate and the Spread or Spread Multiplier, if any, specified in such Security and
in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the "CD
Rate" for each Interest Reset Period shall be the rate as of the second business
day prior to the Interest Reset Date for such Interest Reset Period (a "CD Rate
Determination Date") for negotiable certificates of deposit having the Index
Maturity designated in the applicable Prospectus Supplement as published in
H.15(519) under the heading "CDs (Secondary Market)". In the event that such
rate is not published prior to 3:00 p.m., New York City time, on the Calculation
Date (as defined below) pertaining to such CD Rate Determination Date, then the
"CD Rate" for such Interest Reset Period will be the rate on such CD Rate
Determination Date for negotiable certificates of deposit of the Index Maturity
designated in the applicable Prospectus Supplement as published in Composite
Quotations under the heading "Certificates of Deposit". If by 3:00 p.m., New
York City time, on such Calculation Date such rate is not yet published in
either H.15(519) or Composite Quotations, then the "CD Rate" for such Interest
Reset Period will be calculated by the Calculation Agent for such CD Rate
Security and will be the arithmetic mean of the secondary market offered rates
as of 10:00 a.m., New York City time, on such CD Rate Determination Date, of
three leading nonbank dealers in negotiable U.S. dollar certificates of deposit
in The City of New York selected by the Calculation Agent for such CD Rate
Security for negotiable certificates of deposit of major United States money
center banks of the highest credit standing (in the market for negotiable
certificates of deposit) with a remaining maturity closest to the Index Maturity
designated in the related Prospectus Supplement in a denomination of $5,000,000;
PROVIDED, HOWEVER, that if the dealers selected as aforesaid by such Calculation
Agent are not quoting offered rates as mentioned in this sentence, the "CD Rate"
for such Interest Reset Period will be the same as the CD Rate for the
immediately preceding Interest Reset Period.
The "Calculation Date" pertaining to any CD Rate Determination Date shall be
the first to occur of (a) the tenth calendar day after such CD Rate
Determination Date or, if such day is not a business day, the next succeeding
business day or (b) the second business day preceding the date any payment is
required to be made for any period following the applicable Interest Reset Date.
COMMERCIAL PAPER RATE SECURITIES. Each Commercial Paper Rate Security will
bear interest for each Interest Reset Period at the interest rate calculated
with reference to the Commercial Paper Rate and the Spread or Spread Multiplier,
if any, specified in such Security and in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Commercial Paper Rate" for each Interest Reset Period will be determined by the
Calculation Agent for such Commercial Paper Rate Security as of the second
business day prior to the Interest Reset Date for such Interest Reset Period (a
"Commercial Paper Rate Determination Date") and shall be the Money Market Yield
(as defined below) on such Commercial Paper Rate Determination Date of the rate
for commercial paper having the Index Maturity specified in the applicable
Prospectus Supplement, as such rate shall be published in H.15(519) under the
heading "Commercial Paper". In the event that such rate is not published prior
to 3:00 p.m., New York City time, on the Calculation Date (as defined below)
pertaining to such Commercial Paper Rate Determination Date, then the
"Commercial Paper Rate" for such Interest Reset Period shall be the Money Market
Yield on such Commercial Paper Rate Determination Date of the rate for
commercial paper of the specified Index Maturity as published in Composite
Quotations under the heading "Commercial Paper". If by 3:00 p.m., New York City
time, on such Calculation Date such
38
<PAGE>
rate is not yet published in either H.15(519) or Composite Quotations, then the
"Commercial Paper Rate" for such Interest Reset Period shall be the Money Market
Yield of the arithmetic mean of the offered rates, as of 11:00 a.m., New York
City time, on such Commercial Paper Rate Determination Date of three leading
dealers of commercial paper in The City of New York selected by the Calculation
Agent for such Commercial Paper Rate Security for commercial paper of the
specified Index Maturity placed for an industrial issuer whose bonds are rated
"AA" or the equivalent by a nationally recognized rating agency; PROVIDED,
HOWEVER, that if the dealers selected as aforesaid by such Calculation Agent are
not quoting offered rates as mentioned in this sentence, the "Commercial Paper
Rate" for such Interest Reset Period will be the same as the Commercial Paper
Rate for the immediately preceding Interest Reset Period.
"Money Market Yield" shall be a yield calculated in accordance with the
following formula:
<TABLE>
<S> <C> <C> <C> <C>
D X 360 X 100
Money Market Yield = 360-(D X M)
</TABLE>
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the specified Index Maturity.
The "Calculation Date" pertaining to any Commercial Paper Rate Determination
Date shall be the first to occur of (a) the tenth calendar day after such
Commercial Paper Rate Determination Date or, if such day is not a business day,
the next succeeding business day or (b) the second business day preceding the
date any payment is required to be made for any period following the applicable
Interest Reset Date.
FEDERAL FUNDS RATE SECURITIES. Each Federal Funds Rate Security will bear
interest for each Interest Reset Period at the interest rate calculated with
reference to the Federal Funds Rate and the Spread or Spread Multiplier, if any,
specified in such Security and in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Federal Funds Rate" for each Interest Reset Period shall be the effective rate
on the Interest Reset Date for such Interest Reset Period (a "Federal Funds Rate
Determination Date") for Federal Funds as published in H.15(519) under the
heading "Federal Funds (Effective)". In the event that such rate is not
published prior to 3:00 p.m., New York City time, on the Calculation Date (as
defined below) pertaining to such Federal Funds Rate Determination Date, the
"Federal Funds Rate" for such Interest Reset Period shall be the rate on such
Federal Funds Rate Determination Date as published in Composite Quotations under
the heading "Federal Funds/Effective Rate". If by 3:00 p.m., New York City time,
on such Calculation Date such rate is not yet published in either H.15(519) or
Composite Quotations, then the "Federal Funds Rate" for such Interest Reset
Period shall be the rate on such Federal Funds Rate Determination Date made
publicly available by the Federal Reserve Bank of New York which is equivalent
to the rate which appears in H.15(519) under the heading "Federal Funds
(Effective)"; PROVIDED, HOWEVER, that if such rate is not made publicly
available by the Federal Reserve Bank of New York by 3:00 p.m., New York City
time, on such Calculation Date, the "Federal Funds Rate" for such Interest Reset
Period will be the same as the Federal Funds Rate in effect for the immediately
preceding Interest Reset Period. In the case of a Federal Funds Rate Security
that resets daily, the interest rate on such Security for the period from and
including a Monday to but excluding the succeeding Monday will be reset by the
Calculation Agent for such Security on such second Monday (or, if not a business
day, on the next succeeding business day) to a rate equal to the average of the
Federal Funds Rates in effect with respect to each such day in such week.
The "Calculation Date" pertaining to any Federal Funds Rate Determination
Date shall be the next succeeding business day.
39
<PAGE>
LIBOR SECURITIES. Each LIBOR Security will bear interest for each Interest
Reset Period at the interest rate calculated with reference to LIBOR and the
Spread or Spread Multiplier, if any, specified in such Security and in the
applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, with
respect to LIBOR indexed to the offered rates for U.S. dollar deposits, "LIBOR"
for each Interest Reset Period will be established by the Calculation Agent for
any LIBOR Security and will equal the offered rate for United States dollar
deposits for one month that appears on Telerate Page 3750 as of 11:00 a.m.,
London time, on the second LIBOR Business Day prior to the Interest Reset Date
for such Interest Reset Period (the "LIBOR Determination Date"). "Telerate Page
3750" means the display page so designated on the Dow Jones Telerate Service (or
such other page as may replace that page on that service or such other service
as may be nominated by the information vendor for the purpose of displaying
London interbank offered rates of major banks). If such rate appears on Telerate
Page 3750 on a LIBOR Determination Date, LIBOR for the related Interest Reset
Period will be such rate. If on any LIBOR Determination Date such offered rate
does not appear on Telerate Page 3750, the Calculation Agent will request each
of the reference banks (which will be major banks that are engaged in
transactions in the London interbank market selected by the Calculation Agent)
to provide the Calculation Agent with its offered quotation for United States
dollar deposits for one month to prime banks in the London interbank market as
of 11:00 a.m., London time, on such date. If at least two reference banks
provide the Calculation Agent with such offered quotations, LIBOR with respect
to such date will be the arithmetic mean (rounded upwards, if necessary, to the
nearest one-sixteenth of one percent) of all such quotations. If on such date
fewer than two of the reference banks provide the Calculation Agent with such
offered quotations, LIBOR with respect to such date will be the arithmetic mean
(rounded upwards, if necessary, to the nearest one-sixteenth of one percent) of
the offered per annum rates that one or more leading banks in The City of New
York selected by the Calculation Agent are quoting as of 11:00 a.m., New York
City time, on such date to leading European banks for United States dollar
deposits for one month; PROVIDED, HOWEVER, that if such banks are not quoting as
described above, LIBOR with respect to such date will be LIBOR applicable to the
immediately preceding Interest Reset Period. "LIBOR Business Day" as used herein
means a day that is both a Business Day and a day on which banking institutions
in the City of London, England are not required or authorized by law to be
closed.
TREASURY RATE SECURITIES. Each Treasury Rate Security will bear interest
for each Interest Reset Period at the interest rate calculated with reference to
the Treasury Rate and the Spread or Spread Multiplier, if any, specified in such
Security and in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Treasury Rate" for each Interest Period will be the rate for the auction held
on the Treasury Rate Determination Date (as defined below) for such Interest
Reset Period of direct obligations of the United States ("Treasury bills")
having the Index Maturity specified in the applicable Prospectus Supplement, as
such rate shall be published in H.15(519) under the heading "U.S. Government
Securities--Treasury bills--auction average (investment)" or, in the event that
such rate is not published prior to 3:00 p.m., New York City time, on the
Calculation Date (as defined below) pertaining to such Treasury Rate
Determination Date, the auction average rate (expressed as a bond equivalent on
the basis of a year of 365 or 366 days, as applicable, and applied on a daily
basis) on such Treasury Rate Determination Date as otherwise announced by the
United States Department of the Treasury. In the event that the results of the
auction of Treasury bills having the specified Index Maturity are not published
or reported as provided above by 3:00 p.m., New York City time, on such
Calculation Date, or if no such auction is held on such Treasury Rate
Determination Date, then the "Treasury Rate" for such Interest Reset Period
shall be calculated by the Calculation Agent for such Treasury Rate Security and
shall be the yield to maturity (expressed as a bond equivalent on the basis of a
year of 365 or 366 days, as applicable, and applied on a daily basis) of the
arithmetic mean of the secondary market bid rates, as of approximately 3:30
p.m., New York City time, on such Treasury Rate Determination Date, of three
leading primary United States government securities dealers
40
<PAGE>
selected by such Calculation Agent for the issue of Treasury bills with a
remaining maturity closest to the specified Index Maturity; PROVIDED, HOWEVER,
that if the dealers selected as aforesaid by such Calculation Agent are not
quoting bid rates as mentioned in this sentence, then the "Treasury Rate" for
such Interest Reset Period will be the same as the Treasury Rate for the
immediately preceding Interest Reset Period.
The "Treasury Rate Determination Date" for each Interest Reset Period will
be the day of the week in which the Interest Reset Date for such Interest Reset
Period falls on which Treasury bills would normally be auctioned. Treasury bills
are normally sold at auction on Monday of each week, unless that day is a legal
holiday, in which case the auction is normally held on the following Tuesday,
except that such auction may be held on the preceding Friday. If, as the result
of a legal holiday, an auction is so held on the preceding Friday, such Friday
will be the Treasury Rate Determination Date pertaining to the Interest Reset
Period commencing in the next succeeding week. If an auction date shall fall on
any day that would otherwise be an Interest Reset Date for a Treasury Rate
Security, then such Interest Reset Date shall instead be the business day
immediately following such auction date.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Calculation Date" pertaining to any Treasury Rate Determination Date shall be
the first to occur of (a) the tenth calendar day after such Treasury Rate
Determination Date or, if such a day is not a business day, the next succeeding
business day or (b) the second business day preceding the date any payment is
required to be made for any period following the applicable Interest Reset Date.
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, DTC will
act as securities depository for each class of Securities offered hereby. Each
class of Securities initially will be represented by one or more certificates
registered in the name of Cede, the nominee of DTC. As such, it is anticipated
that the only "Noteholder" and/or "Certificateholder" with respect to a series
of Securities will be Cede, as nominee of DTC. Beneficial owners of the
Securities ("Security Owners") will not be recognized by the related Indenture
Trustee as "Noteholders", as such term is used in each Indenture, or by the
related Trustee as "Certificateholders", as such term is used in each Trust
Agreement and Pooling and Servicing Agreement, and Security Owners will be
permitted to exercise the rights of Noteholders or Certificateholders only
indirectly through DTC and its Participants.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code as in effect in the State of New York,
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. DTC was created to hold securities for the Participants and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Unless otherwise specified in the related Prospectus Supplement, Security
Owners that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or an interest in, the
Securities may do so only through Participants and Indirect Participants. In
addition, all Security Owners will receive all distributions of principal and
interest from the related Indenture Trustee or the related Trustee, as
applicable (the "Applicable Trustee"), through Participants. Under a book-entry
format, Security Owners may experience some delay in their receipt of payments,
since such payments will be forwarded by the Applicable Trustee to DTC's
nominee. DTC will then forward such payments to the Participants, which
thereafter will forward them to Indirect Participants or Security Owners.
41
<PAGE>
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and to
receive and transmit distributions of principal of and interest on the
Securities. Participants and Indirect Participants with which Security Owners
have accounts with respect to the Securities similarly are required to make
book-entry transfers and to receive and transmit such payments on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess physical certificates representing the Securities, the Rules provide a
mechanism by which Participants and Indirect Participants will receive payments
and transfer interests, directly or indirectly, on behalf of Security Owners.
Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge Securities to persons or entities that do not participate in the
DTC system, or otherwise take actions with respect to such Securities, may be
limited due to the lack of a physical certificate representing such Securities.
DTC has advised the Company that it will take any action permitted to be
taken by a Security Owner under the Indenture, Trust Agreement or Pooling and
Servicing Agreement, as applicable, only at the direction of one or more
Participants to whose account with DTC the Securities are credited. DTC may take
conflicting actions with respect to other undivided interests to the extent that
such actions are taken on behalf of Participants whose holdings include such
undivided interests.
Except as required by law, none of the Seller, the Servicer, the related
Administrator or the Applicable Trustee will have any liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests of Securities of any series held by DTC's nominee, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
DEFINITIVE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the Notes,
if any, and the Certificates of a given series will be issued in fully
registered, certificated form ("Definitive Notes" and "Definitive Certificates",
respectively, and collectively referred to herein as "Definitive Securities") to
Noteholders or Certificateholders or their respective nominees, rather than to
DTC or its nominee, only if (i) the related Administrator of an Owner Trust or
Trustee of a Grantor Trust, as applicable, determines that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to such Securities and such Administrator or Trustee is unable to locate
a qualified successor (and if it is an Administrator that has made such
determination, such Administrator so notifies the Applicable Trustee in
writing), (ii) the Administrator or Trustee, as applicable, at its option,
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default or a Servicer Default with respect to such
Securities, Security Owners representing at least a majority of the outstanding
principal amount of the Notes or the Certificates, as the case may be, of such
series advise the Applicable Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) with
respect to such Notes or Certificates is no longer in the best interest of the
related Security Owners.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC or the Applicable Trustee will be required to notify all
applicable Security Owners of a given series through Participants of the
availability of Definitive Securities. Upon surrender by DTC of the definitive
certificates representing the corresponding Securities and receipt of
instructions for re-registration, the Applicable Trustee will reissue such
Securities as Definitive Securities to such Security Owners.
Distributions of principal of, and interest on, such Definitive Securities
will thereafter be made by the Applicable Trustee in accordance with the
procedures set forth in the related Indenture or the related Trust Agreement or
Pooling and Servicing Agreement, as applicable, directly to holders of
Definitive Securities in whose names the Definitive Securities were registered
at the close of business on the
42
<PAGE>
applicable Record Date specified for such Securities in the related Prospectus
Supplement. Such distributions will be made by check mailed to the address of
such holder as it appears on the register maintained by the Applicable Trustee.
The final payment on any such Definitive Security, however, will be made only
upon presentation and surrender of such Definitive Security at the office or
agency specified in the notice of final distribution to the applicable
Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the Applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities that includes Notes, on or prior
to each Distribution Date, the Servicer will prepare and provide to the related
Indenture Trustee a statement to be delivered to the related Noteholders on such
Distribution Date, and on or prior to each Distribution Date, the Servicer will
prepare and provide to the related Trustee a statement to be delivered to the
related Certificateholders. With respect to each series of Securities, each such
statement to be delivered to Noteholders will include (to the extent applicable)
the following information (and any other information so specified in the related
Prospectus Supplement) as to the Notes of such series with respect to such
Distribution Date or the period since the previous Distribution Date, as
applicable, and each such statement to be delivered to Certificateholders will
include (to the extent applicable) the following information (and any other
information so specified in such Prospectus Supplement) as to the Certificates
of such series with respect to such Distribution Date or the period since the
previous Distribution Date, as applicable:
(i) the amount of the distribution allocable to principal of each class
of such Notes and to the Certificate Balance of each class of such
Certificates;
(ii) the amount of the distribution allocable to interest on or with
respect to each class of Securities of such series;
(iii) the Pool Balance as of the close of business on the last day of
the preceding Collection Period;
(iv) the aggregate outstanding principal balance and the Note Pool
Factor for each class of such Notes, and the Certificate Balance and the
Certificate Pool Factor for each class of such Certificates, each as of the
related record date;
(v) the amount of the Servicing Fee paid to the Servicer with respect to
the related Collection Period or Collection Periods, as the case may be;
(vi) the Interest Rate or Pass Through Rate for the next period for any
class of Notes or Certificates of such series with variable or adjustable
rates;
(vii) the amount of the aggregate realized losses, if any, for the
related Collection Period;
(viii) the Noteholders' Interest Carryover Shortfall, the Noteholders'
Principal Carryover Shortfall, the Certificateholders' Interest Carryover
Shortfall and the Certificateholders' Principal Carryover Shortfall (each
such term, if applicable, as defined in the related Prospectus Supplement),
if any, in each case as applicable to each class of Securities, and the
change in such amounts from the preceding statement;
(ix) the aggregate Purchase Amounts for receivables, if any, that were
repurchased in the related Collection Period;
(x) the balance of the Reserve Account (if any) on such date, after
giving effect to changes therein on such date;
43
<PAGE>
(xi) for each such date during the Funding Period (if any), the
remaining Pre-Funded Amount;
(xii) for the first such date that is on or immediately following the end
of the Funding Period (if any), the amount of any remaining Pre-Funded
Amount that has not been used to fund the purchase of Subsequent Receivables
and is being passed through as payments of principal on the Securities of
such series;
(xiii) for each such date during the Revolving Period (if any), the
remaining amount in the Collateral Reinvestment Account; and
(xiv) for the first such date that is on or immediately following the end
of the Revolving Period (if any), the amount remaining in the Collateral
Reinvestment Account that has not been used to fund the purchase of
Subsequent Receivables and is being passed through as payments of principal
on the Securities of such series.
Each amount set forth pursuant to subclauses (i), (ii), (v) and (viii) with
respect to the Notes or the Certificates of any series will be expressed as a
dollar amount per $1,000 of the initial principal balance of such Notes or the
initial Certificate Balance of such Certificates, as applicable.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of each Trust, the Applicable Trustee
will mail to each person who at any time during such calendar year has been a
registered Securityholder with respect to such Trust and received any payment
thereon a statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Certain Federal
Income Tax Consequences".
LIST OF SECURITYHOLDERS
Unless otherwise specified in the related Prospectus Supplement with respect
to the Notes of any series, three or more holders of the Notes of such series or
one or more holders of such Notes evidencing not less than 25% of the aggregate
outstanding principal balance of such Notes may, by written request to the
related Indenture Trustee, obtain access to the list of all Noteholders
maintained by such Indenture Trustee for the purpose of communicating with other
Noteholders with respect to their rights under the related Indenture or under
such Notes. Such Indenture Trustee may elect not to afford the requesting
Noteholders access to the list of Noteholders if it agrees to mail the desired
communication or proxy, on behalf of and at the expense of the requesting
Noteholders, to all Noteholders of such series.
Unless otherwise specified in the related Prospectus Supplement with respect
to the Certificates of any series, three or more holders of the Certificates of
such series or one or more holders of such Certificates evidencing not less than
25% of the Certificate Balance of such Certificates may, by written request to
the related Trustee, obtain access to the list of all Certificateholders
maintained by such Trustee for the purpose of communicating with other
Certificateholders with respect to their rights under the related Trust
Agreement or Pooling and Servicing Agreement or under such Certificates.
44
<PAGE>
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of each Sale and Servicing
Agreement or Pooling and Servicing Agreement pursuant to which a Trust will
purchase Receivables and other Trust Property from the Seller and the Servicer
will agree to service such Receivables, each Trust Agreement or Pooling and
Servicing Agreement, as applicable, pursuant to which a Trust will be created
and Certificates will be issued and each Administration Agreement pursuant to
which the Company will undertake certain administrative duties with respect to
an Owner Trust that issues Notes (collectively, the "Transfer and Servicing
Agreements"). Forms of the Transfer and Servicing Agreements have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
This summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, all the provisions of the Transfer and Servicing
Agreements.
SALE AND ASSIGNMENT OF RECEIVABLES
On the Closing Date specified with respect to any given Trust in the related
Prospectus Supplement (the "Closing Date"), the Seller will, if so specified in
such Prospectus Supplement, transfer and assign to the applicable Trustee,
without recourse, pursuant to a Sale and Servicing Agreement or a Pooling and
Servicing Agreement, as applicable, its entire interest in the Initial
Receivables, including its security interests in the related Financed Vehicles.
Each such Receivable will be identified in a schedule appearing as an exhibit to
such Pooling and Servicing Agreement or Sale and Servicing Agreement (a
"Schedule of Receivables"). The applicable Trustee will, concurrently with such
transfer and assignment, execute and deliver the related Notes and/or
Certificates. Unless otherwise provided in the related Prospectus Supplement,
the net proceeds received from the sale of the Certificates and the Notes of a
given series will be applied to the purchase of the related Receivables and
other Trust Property from the Seller and, to the extent specified in such
Prospectus Supplement, to the deposit of the Pre-Funded Amount into the
Pre-Funding Account and the initial deposit into the Collateral Reinvestment
Account. The related Prospectus Supplement for a given Trust will specify
whether, and the terms, conditions and manner under which, Subsequent
Receivables will be sold by the Seller to the applicable Trust from time to time
during any Funding Period or Revolving Period on each date specified as a
transfer date in such Prospectus Supplement (each, a "Subsequent Transfer
Date").
In each Sale and Servicing Agreement or Pooling and Servicing Agreement, the
Seller will represent and warrant to the applicable Trust, among other things,
that: (i) the information provided in the related Schedule of Receivables is
correct in all material respects as of the applicable Cutoff Date; (ii) the
Obligor on each related Receivable is required to maintain physical damage
insurance covering the Financed Vehicle in accordance with the Seller's normal
requirements; (iii) as of the applicable Closing Date or the applicable
Subsequent Transfer Date, if any, to the best of its knowledge, the related
Receivables are free and clear of all security interests, liens, charges and
encumbrances and no offsets, defenses or counterclaims have been asserted or
threatened; (iv) as of the Closing Date or the applicable Subsequent Transfer
Date, if any, each of such Receivables is or will be secured by a first priority
perfected security interest in favor of the Seller in the Financed Vehicle; and
(v) each related Receivable, at the time it was originated, complied and, as of
the Closing Date or the applicable Subsequent Transfer Date, if any, complies in
all material respects with applicable federal and state laws, including, without
limitation, consumer credit, truth in lending, equal credit opportunity and
disclosure laws; and the Seller will make any other representations and
warranties that may be set forth in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, as of the
last day of the second (or, if the Seller elects, the first) month following the
discovery by or notice to the Seller of a breach of any representation or
warranty of the Seller that materially and adversely affects the interests of
the related Trust in any Receivable, the Seller, unless the breach is cured,
will repurchase such Receivable from such Trust at a price equal to the unpaid
principal balance owed by the Obligor thereof plus interest
45
<PAGE>
thereon at the respective APR to the last day of the month of repurchase (the
"Purchase Amount"). The repurchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee and any Noteholders or
Indenture Trustee in respect of such Trust for any such uncured breach.
Pursuant to each Sale and Servicing Agreement or Pooling and Servicing
Agreement, to assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Seller and each Trust will designate the Servicer as
custodian to maintain possession, as such Trust's agent, of the related motor
vehicle retail installment sale contracts and installment loans and any other
documents relating to the Receivables. The Seller's and the Servicer's
accounting records and computer systems will reflect the sale and assignment of
the related Receivables to the applicable Trust, and Uniform Commercial Code
("UCC") financing statements reflecting such sale and assignment will be filed.
ACCOUNTS
With respect to Owner Trusts that issue Notes, the Servicer will establish
and maintain with the related Indenture Trustee one or more accounts, in the
name of the Indenture Trustee on behalf of the related Noteholders and
Certificateholders, into which all payments made on or with respect to the
related Receivables will be deposited (the "Collection Account"). The Servicer
will establish and maintain with such Indenture Trustee an account, in the name
of such Indenture Trustee on behalf of such Noteholders, into which amounts
released from the Collection Account and any Pre-Funding Account, Collateral
Reinvestment Account, Reserve Account or other credit enhancement for payment to
such Noteholders will be deposited and from which all distributions to such
Noteholders will be made (the "Note Distribution Account"). With respect to each
Owner Trust and each Grantor Trust, the Servicer will establish and maintain
with the related Trustee an account, in the name of such Trustee on behalf of
such Certificateholders, into which amounts released from the Collection Account
and any Pre-Funding Account, any Collateral Reinvestment Account, Reserve
Account or other credit or cash flow enhancement for distribution to such
Certificateholders will be deposited and from which all distributions to such
Certificateholders will be made (the "Certificate Distribution Account"). With
respect to each Grantor Trust and each Owner Trust that does not issue Notes,
the Servicer will also establish and maintain the Collection Account and any
other Trust Account (as defined herein) in the name of the related Trustee on
behalf of the related Certificateholders.
If so provided in the related Prospectus Supplement, the Servicer will
establish for each series of Securities an additional account (the "Payahead
Account"), in the name of the related Indenture Trustee (in the case of Owner
Trusts that issue Notes) or Trustee (in the case of a Grantor Trust or an Owner
Trust that does not issue Notes), into which, to the extent required in the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, early payments made by or on behalf of Obligors on Precomputed
Receivables will be deposited until such time as such payments become due. Until
such time as payments are transferred from the Payahead Account to the
Collection Account, they will not constitute collected interest or collected
principal and will not be available for distribution to Noteholders or
Certificateholders.
If so provided in the related Prospectus Supplement, the Servicer will
establish and maintain a Pre-Funding Account, in the name of the related Trustee
on behalf of the related Securityholders, into which the Seller will deposit the
Pre-Funded Amount on the related Closing Date. The Pre-Funded Amount will not
exceed 40% of the initial aggregate principal amount of the Notes and
Certificates of the related series. In addition, if so provided in the related
Prospectus Supplement, the Servicer will establish and maintain a Collateral
Reinvestment Account, in the name of the related Trustee on behalf of the
related Securityholders, into which the Seller will deposit the amount, if any,
specified in such Prospectus Supplement. During the Revolving Period, principal
will not be distributed on the Securities of the related series, and principal
collections, together with (if and to the extent described in the related
Prospectus Supplement) interest collections on the Receivables that are in
excess of amounts required to be distributed therefrom, will be deposited from
time to time in the Collateral Reinvestment Account. The
46
<PAGE>
Pre-Funded Amount and the amounts on deposit in the Collateral Reinvestment
Account will be used by the related Trustee to purchase Subsequent Receivables
from the Seller from time to time during the Funding Period and Revolving
Period, respectively. The amounts on deposit in the Pre-Funding Account during
the Funding Period and the amount on deposit in the Collateral Reinvestment
Account will be invested by the Trustee in Eligible Investments. Any Investment
Income received on the Eligible Investments during a Collection Period will be
included in the interest distribution amount on the following Distribution Date.
The Funding Period or Revolving Period, if any, for a Trust will begin on the
related Closing Date and will end on the date specified in the related
Prospectus Supplement, which, in the case of the Funding Period, in no event
will be later than the date that is one year after such Closing Date. Any
amounts remaining in the Pre-Funding Account at the end of the Funding Period or
in the Collateral Reinvestment Account at the end of the Revolving Period will
be distributed to the related Securityholders in the manner and priority
specified in the related Prospectus Supplement, as a prepayment of principal of
the related Securities.
Any other accounts to be established with respect to a Trust, including any
Reserve Account, will be described in the related Prospectus Supplement.
For any series of Securities, funds in the Collection Account, the Note
Distribution Account, if any, any Pre-Funding Account, any Collateral
Reinvestment Account, any Reserve Account and other accounts identified as such
in the related Prospectus Supplement (collectively, the "Trust Accounts") will
be invested as provided in the related Sale and Servicing Agreement or Pooling
and Servicing Agreement in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Rating Agencies rating such
Securities as being consistent with the rating of such Securities and may
include motor vehicle retail installment sale contracts and installment loans.
Except as described below or in the related Prospectus Supplement, Eligible
Investments are limited to obligations or securities that mature on or before
the date of the next distribution for such series. However, to the extent
permitted by the Rating Agencies, funds in any Reserve Account may be invested
in securities that will not mature prior to the date of the next distribution
with respect to such Certificates or Notes and will not be sold to meet any
shortfalls. Thus, the amount of cash in any Reserve Account at any time may be
less than the balance of the Reserve Account. If the amount required to be
withdrawn from any Reserve Account to cover shortfalls in collections on the
related Receivables (as provided in the related Prospectus Supplement) exceeds
the amount of cash in the Reserve Account, a temporary shortfall in the amounts
distributed to the related Noteholders or Certificateholders could result, which
could, in turn, increase the average life of the Notes or the Certificates of
such series. Except as otherwise specified in the related Prospectus Supplement,
investment earnings on funds deposited in the Trust Accounts, net of losses and
investment expenses (collectively, "Investment Earnings"), shall be deposited in
the applicable Collection Account on each Distribution Date and shall be treated
as collections of interest on the related Receivables.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means, with respect to a Trust, (a) the corporate trust
department of the related Indenture Trustee or the related Trustee, as
applicable, or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), (i) which has either (A) a
long-term unsecured debt rating acceptable to the Rating Agencies or (B) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies and (ii) whose deposits are insured up to applicable limits
by the FDIC.
47
<PAGE>
SERVICING PROCEDURES
The Servicer will make reasonable efforts to collect all payments due with
respect to the Receivables held by any Trust and will, consistent with the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, follow
such collection procedures as it follows with respect to comparable motor
vehicle retail installment sale contracts and installment loans it services for
itself or others. Consistent with its normal procedures, the Servicer may, in
its discretion, arrange with the Obligor on a Receivable to extend or modify the
payment schedule, but no such arrangement will, for purposes of any Sale and
Servicing Agreement or Pooling and Servicing Agreement, modify the original due
dates or the amount of the scheduled payments or extend the final payment date
of any Receivable beyond the last day of the Collection Period relating to the
Final Scheduled Maturity Date (as such term is defined with respect to any
Receivables Pool in the related Prospectus Supplement). Some of such
arrangements may result in the Servicer purchasing the Receivable for the
Purchase Amount, while others may result in the Servicer making Advances. The
Servicer may sell the Financed Vehicle securing the respective Receivable at
public or private sale, or take any other action permitted by applicable law.
See "Certain Legal Aspects of the Receivables".
If so specified in the related Prospectus Supplement, a "backup servicer"
may be appointed and assigned certain oversight servicing responsibilities with
respect to the Receivables. The identity of any backup servicer, as well as a
description of its responsibilities, of any fees payable to such backup servicer
and the source of payment of such fees, will be included in the related
Prospectus Supplement.
COLLECTIONS
With respect to each Trust, the Servicer will deposit all payments on the
related Receivables (from whatever source) and all proceeds of such Receivables
collected during each collection period specified in the related Prospectus
Supplement (each, a "Collection Period") into the related Collection Account
within two business days after receipt thereof.
Collections on a Precomputed Receivable made during a Collection Period
shall be applied first to repay any outstanding Precomputed Advances made by the
Servicer with respect to such Receivable (as described below), and to the extent
that collections on a Precomputed Receivable during a Collection Period exceed
the outstanding Precomputed Advances, the collections shall then be applied to
the scheduled payment on such Receivable. If any collections remaining after the
scheduled payment is made are insufficient to prepay the Precomputed Receivable
in full, then, unless otherwise provided in the related Prospectus Supplement,
generally such remaining collections (the "Payaheads") shall be transferred to
and kept in the Payahead Account, until such later Collection Period as the
collections may be transferred to the Collection Account and applied either to
the scheduled payment or to prepay such Receivable in full.
ADVANCES
If so provided in the related Prospectus Supplement, to the extent the
collections of interest and principal on a Precomputed Receivable with respect
to a Collection Period fall short of the respective scheduled payment, the
Servicer will make a Precomputed Advance of the shortfall. The Servicer will be
obligated to make a Precomputed Advance on a Precomputed Receivable only to the
extent that the Servicer, in its sole discretion, expects to recoup such advance
from subsequent collections or recoveries on such Receivable or other
Precomputed Receivables in the related Receivables Pool or from any other source
of funds identified in the related Prospectus Supplement. The Servicer will
deposit the Precomputed Advance in the applicable Collection Account on or
before the business day preceding the applicable Distribution Date. To the
extent possible, the Servicer will recoup its Precomputed Advance from
subsequent payments by or on behalf of the respective Obligor or from insurance
or liquidation proceeds with respect to the Receivable and will release its
right to reimbursement in conjunction with its
48
<PAGE>
purchase of the Receivable as Servicer, or, upon the determination that
reimbursement from the preceding sources is unlikely, will recoup its
Precomputed Advance from any collections made on other Precomputed Receivables
in the related Receivables Pool or from any other source of funds identified in
the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, on or before the
business day prior to each applicable Distribution Date, the Servicer shall
deposit into the related Collection Account as a Simple Interest Advance an
amount equal to the amount of interest that would have been due on the related
Simple Interest Receivables at their respective APRs for the related Collection
Period (assuming that such Simple Interest Receivables are paid on their
respective due dates) minus the amount of interest actually received on such
Simple Interest Receivables during such Collection Period. If such calculation
results in a negative number, an amount equal to such amount shall be paid to
the Servicer in reimbursement of outstanding Simple Interest Advances. In
addition, in the event that a Simple Interest Receivable becomes a Liquidated
Receivable (as such term is defined in the related Prospectus Supplement), the
amount of accrued and unpaid interest thereon (but not including interest for
the then current Collection Period) shall be withdrawn from the Collection
Account and paid to the Servicer in reimbursement of outstanding Simple Interest
Advances. No advances of principal will be made with respect to Simple Interest
Receivables. As used herein, "Advances" means both Precomputed Advances and
Simple Interest Advances.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the Prospectus Supplement with respect to any
Trust, the Servicer will be entitled to receive the Servicing Fee for each
Collection Period in an amount equal to a specified percentage per annum (as set
forth in the related Prospectus Supplement, the "Servicing Fee Rate") of the
Pool Balance as of the first day of the related Collection Period (the
"Servicing Fee"). The Servicing Fee (together with any portion of the Servicing
Fee that remains unpaid from prior Distribution Dates) will be paid solely to
the extent of the Interest Distribution Amount. However, unless otherwise
specified in the related Prospectus Supplement, the Servicing Fee will be paid
prior to the distribution of any portion of the Interest Distribution Amount to
the Noteholders or the Certificateholders of the given series.
Unless otherwise provided in the related Prospectus Supplement with respect
to a given Trust, the Servicer will also collect and retain any late fees,
prepayment charges and other administrative fees or similar charges allowed by
applicable law with respect to the related Receivables and will be entitled to
reimbursement from such Trust for certain liabilities. Payments by or on behalf
of Obligors will be allocated to scheduled payments and late fees and other
charges in accordance with the Servicer's normal practices and procedures.
The Servicing Fee will compensate the Servicer for performing the functions
of a third party servicer of motor vehicle receivables as an agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of Obligors on the Receivables, investigating delinquencies, sending
payment coupons to Obligors, reporting tax information to Obligors, paying costs
of collections and disposition of defaults and policing the collateral. The
Servicing Fee also will compensate the Servicer for administering the particular
Receivables Pool, including making Advances, accounting for collections and
furnishing monthly and annual statements to the related Trustee and Indenture
Trustee with respect to distributions and generating federal income tax
information for such Trust and for the related Noteholders and
Certificateholders. The Servicing Fee also will reimburse the Servicer for
certain taxes, the fees of the related Trustee and Indenture Trustee, if any,
accounting fees, outside auditor fees, data processing costs and other costs
incurred in connection with administering the applicable Receivables Pool.
49
<PAGE>
DISTRIBUTIONS
With respect to each series of Securities, beginning on the Distribution
Date specified in the related Prospectus Supplement, distributions of principal
and interest (or, where applicable, of principal or interest only) on each class
of such Securities entitled thereto will be made by the Applicable Trustee to
the Noteholders and the Certificateholders of such series. The timing,
calculation, allocation, order, source and priorities of, and the requirements
for, all payments to the holders of each class of Notes, if any, and all
distributions to the holders of each class of Certificates of such series will
be set forth in the related Prospectus Supplement.
With respect to each Trust, on each Distribution Date collections on the
related Receivables will be transferred from the Collection Account to the Note
Distribution Account, if any, and the Certificate Distribution Account for
distribution to Noteholders, if any, and Certificateholders to the extent
provided in the related Prospectus Supplement. Credit enhancement, such as a
Reserve Account, will be available to cover any shortfalls in the amount
available for distribution on such date to the extent specified in the related
Prospectus Supplement. As more fully described in the related Prospectus
Supplement, and unless otherwise specified therein, distributions in respect of
principal of a class of Securities of a given series will be subordinated to
distributions in respect of interest on such class, and distributions in respect
of one or more classes of Certificates of such series may be subordinated to
payments in respect of Notes, if any, of such series or to distributions in
respect of other classes of Certificates of such series. Distributions of
principal on the Securities of a series may be based on the amount of principal
collected or due, or the amount of Realized Losses incurred, in a Collection
Period.
CREDIT AND CASH FLOW ENHANCEMENT
The amounts and types of credit and cash flow enhancement arrangements, if
any, and the provider thereof, if applicable, with respect to each class of
Securities of a given series will be set forth in the related Prospectus
Supplement. If and to the extent provided in the related Prospectus Supplement,
credit and cash flow enhancement may be in the form of subordination of one or
more classes of Securities, Reserve Accounts, spread accounts,
overcollateralization, letters of credit, credit or liquidity facilities, surety
bonds, insurance policies, guaranteed investment contracts, swaps or other
interest rate protection agreements, repurchase obligations, yield supplement
agreements, other agreements with respect to third party payments or other
support, cash deposits or such other arrangements as may be described in such
Prospectus Supplement, or any combination of two or more of the foregoing. If
specified in the applicable Prospectus Supplement, credit or cash flow
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit or cash flow enhancement for a series
of Securities may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit enhancement for
the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of such class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
such Securityholders will experience losses. Unless otherwise specified in the
related Prospectus Supplement, the credit enhancement for a class or series of
Securities will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance and interest thereon. If
losses occur which exceed the amount covered by any credit enhancement or which
are not covered by any credit enhancement, Securityholders of any class or
series will bear their allocable share of deficiencies, as described in the
related Prospectus Supplement. In addition, if a form of credit enhancement
covers more than one series of Securities, Securityholders of any such series
will be subject to the risk that such credit enhancement will be exhausted by
the claims of Securityholders of other series.
RESERVE ACCOUNT. If so provided in the related Prospectus Supplement,
pursuant to the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, the Seller will establish for a series
50
<PAGE>
or class of Securities an account, as specified in such Prospectus Supplement
(the "Reserve Account"), which will be maintained with the related Trustee or
Indenture Trustee, as applicable. Unless otherwise provided in the related
Prospectus Supplement, the Reserve Account will be funded by an initial deposit
by the Seller on the Closing Date in the amount set forth in such Prospectus
Supplement and, if the related series has a Funding Period, will also be funded
on each Subsequent Transfer Date to the extent described in such Prospectus
Supplement. As further described in the related Prospectus Supplement, the
amount on deposit in the Reserve Account will be increased on each Distribution
Date thereafter up to the Specified Reserve Account Balance (as defined in such
Prospectus Supplement) by the deposit therein of the amount of collections on
the related Receivables remaining on each such Distribution Date after the
payment of all other required payments and distributions on such date. The
related Prospectus Supplement will describe the circumstances and the manner
under which distributions may be made out of the Reserve Account, either to
holders of the Securities covered thereby or to the Seller or to any other
entity.
NET DEPOSITS
If so specified in the related Prospectus Supplement as an administrative
convenience, unless the Servicer is required to remit collections daily (see
"--Collections" above), the Servicer will be permitted to make the deposit of
collections, aggregate Advances and Purchase Amounts for any Trust for or with
respect to the related Collection Period net of distributions to be made to the
Servicer for such Trust with respect to such Collection Period. The Servicer may
cause to be made a single, net transfer from the Collection Account to the
related Payahead Account, if any, or vice versa. The Servicer, however, will
account to the Trustee, any Indenture Trustee, the Noteholders, if any, and the
Certificateholders with respect to each Trust as if all deposits, distributions
and transfers were made individually. With respect to any Trust that issues both
Certificates and Notes, if the related Distribution Dates do not coincide with
Distribution Dates, all distributions, deposits or other remittances made on a
Distribution Date will be treated as having been distributed, deposited or
remitted on the Distribution Date for the applicable Collection Period for
purposes of determining other amounts required to be distributed, deposited or
otherwise remitted on such Distribution Date.
STATEMENTS TO TRUSTEES AND TRUST
Prior to each Distribution Date with respect to each series of Securities,
the Servicer will provide to the applicable Indenture Trustee, if any, and the
applicable Trustee as of the close of business on the last day of the preceding
Collection Period a statement setting forth substantially the same information
as is required to be provided in the periodic reports provided to
Securityholders of such series described under "Certain Information Regarding
the Securities--Reports to Securityholders".
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement and Pooling and Servicing Agreement will
provide that a firm of independent public accountants will furnish annually to
the related Trust and Indenture Trustee or Trustee, as applicable, a statement
as to compliance by the Servicer during the preceding twelve months (or, in the
case of the first such statement, from the applicable Closing Date) with certain
standards relating to the servicing of the applicable Receivables, the
Servicer's accounting records and computer files with respect thereto and
certain other matters.
Each Sale and Servicing Agreement and Pooling and Servicing Agreement will
also provide for delivery to the related Trust and the Indenture Trustee or
Trustee, as applicable, substantially simultaneously with the delivery of such
accountants' statement referred to above, of a certificate signed by an officer
of the Servicer stating that the Servicer has fulfilled its obligations under
the Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, throughout the preceding twelve months (or, in the case of the first
such certificate, from the applicable Closing Date) or, if there has been a
default
51
<PAGE>
in the fulfillment of any such obligation, describing each such default. The
Servicer has agreed to give each Indenture Trustee and/or each Trustee notice of
certain Servicer Defaults under the related Sale and Servicing Agreement or
Pooling and Servicing Agreement, as applicable.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
Each Sale and Servicing Agreement and Pooling and Servicing Agreement will
provide that the Company may not resign from its obligations and duties as
Servicer thereunder, except upon determination that the Company's performance of
such duties is no longer permissible under applicable law. No such resignation
will become effective until the related Indenture Trustee or Trustee, as
applicable, or a successor servicer has assumed the Company's servicing
obligations and duties under such Sale and Servicing Agreement or Pooling and
Servicing Agreement.
Each Sale and Servicing Agreement and Pooling and Servicing Agreement will
further provide that neither the Servicer nor any of its directors, officers,
employees and agents will be under any liability to the related Trust or the
related Noteholders or Certificateholders for taking any action or for
refraining from taking any action pursuant to such Sale and Servicing Agreement
or Pooling and Servicing Agreement or for errors in judgment; except that
neither the Servicer nor any such person will be protected against any liability
that would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of the Servicer's duties thereunder or by reason
of reckless disregard of its obligations and duties thereunder. In addition,
each Sale and Servicing Agreement and Pooling and Servicing Agreement will
provide that the Servicer is under no obligation to appear in, prosecute or
defend any legal action that is not incidental to the Servicer's servicing
responsibilities under such Sale and Servicing Agreement or Pooling and
Servicing Agreement and that, in its opinion, may cause it to incur any expense
or liability.
Under the circumstances specified in each Sale and Servicing Agreement and
Pooling and Servicing Agreement, any entity into which the Servicer may be
merged or consolidated, or any entity resulting from any merger or consolidation
to which the Servicer is a party, or any entity succeeding to the business of
the Servicer or, with respect to its obligations as Servicer, any corporation
50% or more of the voting stock of which is owned, directly or indirectly, by
the Company, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor of the Servicer
under such Sale and Servicing Agreement or Pooling and Servicing Agreement.
Under each Sale and Servicing Agreement and Pooling and Servicing Agreement,
the Servicer may appoint a subservicer to perform all or any portion of its
obligations as Servicer; however, in the event that the Servicer does appoint
any such subservicer, the Servicer will remain obligated and liable to the
related Trustee and Securityholders for servicing and administering the
Receivables and will also be responsible for any fees and expenses of the
subservicer.
SERVICER DEFAULT
Except as otherwise provided in the related Prospectus Supplement, "Servicer
Default" under each Sale and Servicing Agreement and Pooling and Servicing
Agreement will consist of (i) any failure by the Servicer to deliver to the
Applicable Trustee for deposit in any of the Trust Accounts or the Certificate
Distribution Account any required payment or to direct the Applicable Trustee to
make any required distributions therefrom, which failure continues unremedied
for five business days after written notice from the Applicable Trustee is
received by the Servicer or after discovery of such failure by the Servicer;
(ii) any failure by the Servicer duly to observe or perform in any material
respect any other covenant or agreement in such Sale and Servicing Agreement or
Pooling and Servicing Agreement, which failure materially and adversely affects
the rights of the Noteholders or the Certificateholders of the related
52
<PAGE>
series and which continues unremedied for 60 days after the giving of written
notice of such failure (A) to the Servicer by the Applicable Trustee or (B) to
the Servicer and to the Applicable Trustee by holders of Notes or Certificates
of such series, as applicable, evidencing not less than 25% in principal amount
of such outstanding Notes or of such Certificate Balance; and (iii) the
occurrence of an Insolvency Event with respect to the Servicer. "Insolvency
Event" means, with respect to any person, any of the following events or
actions: certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings with respect to such person and
certain actions by such person indicating its insolvency, reorganization
pursuant to bankruptcy proceedings or inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT
In the case of Owner Trusts that issue Notes, unless otherwise provided in
the related Prospectus Supplement, as long as a Servicer Default under a Sale
and Servicing Agreement remains unremedied, the related Indenture Trustee or
holders of Notes of the related series evidencing not less than 25% of the
principal amount of such Notes then outstanding may terminate all the rights and
obligations of the Servicer under such Sale and Servicing Agreement, whereupon
such Indenture Trustee or a successor servicer appointed by such Indenture
Trustee will succeed to all the responsibilities, duties and liabilities of the
Servicer under such Sale and Servicing Agreement and will be entitled to similar
compensation arrangements. In the case of any Grantor Trust and any Owner Trust
that does not issue Notes, unless otherwise provided in the related Prospectus
Supplement, as long as a Servicer Default under the related Pooling and
Servicing Agreement remains unremedied, the related Trustee or holders of
Certificates of the related series evidencing not less than 25% of the principal
amount of such Certificates then outstanding may terminate all the rights and
obligations of the Servicer under such Pooling and Servicing Agreement,
whereupon such Trustee or a successor servicer appointed by such Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Pooling and Servicing Agreement and will be entitled to similar
compensation arrangements. If, however, a bankruptcy trustee or similar official
has been appointed for the Servicer, and no Servicer Default other than such
appointment has occurred, such trustee or official may have the power to prevent
any such Indenture Trustee, Noteholders, Trustee or Certificateholders from
effecting a transfer of servicing. In the event that such Indenture Trustee or
Trustee is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor with a net worth of
at least $100,000,000 (or such other amount as is specified in the related
Prospectus Supplement) and whose regular business includes the servicing of
motor vehicle receivables. Such Indenture Trustee or Trustee may make such
arrangements for compensation to be paid, which in no event may be greater than
the servicing compensation to the Servicer under such Sale and Servicing
Agreement or Pooling and Servicing Agreement.
WAIVER OF PAST DEFAULTS
With respect to each Owner Trust that issues Notes, unless otherwise
provided in the related Prospectus Supplement, the holders of Notes evidencing
at least a majority in principal amount of the then outstanding Notes of the
related series (or the holders of the Certificates of such series evidencing not
less than a majority of the outstanding Certificate Balance, in the case of any
Servicer Default which does not adversely affect the related Indenture Trustee
or such Noteholders) may, on behalf of all such Noteholders and
Certificateholders, waive any default by the Servicer in the performance of its
obligations under the related Sale and Servicing Agreement and its consequences,
except a Servicer Default in making any required deposits to or payments from
any of the Trust Accounts or to the Certificate Distribution Account in
accordance with such Sale and Servicing Agreement. With respect to each Grantor
Trust and each Owner Trust that is formed pursuant to a Pooling and Servicing
Agreement, holders of Certificates of such series evidencing not less than a
majority of the principal amount of such Certificates then outstanding may, on
behalf of all such Certificateholders, waive any default by the Servicer in the
performance of its obligations under the related Pooling and Servicing
Agreement, except
53
<PAGE>
a Servicer Default in making any required deposits to or payments from the
Certificate Distribution Account or the related Trust Accounts in accordance
with such Pooling and Servicing Agreement. No such waiver will impair such
Noteholders' or Certificateholders' rights with respect to subsequent defaults.
AMENDMENT
Unless otherwise provided in the related Prospectus Supplement, each of the
Transfer and Servicing Agreements may be amended by the parties thereto, without
the consent of the related Noteholders or Certificateholders, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Transfer and Servicing Agreements or of modifying in any
manner the rights of such Noteholders or Certificateholders; PROVIDED that such
action will not, in the opinion of counsel satisfactory to the related Trustee
or Indenture Trustee, as applicable, materially and adversely affect the
interest of any such Noteholder or Certificateholder.
Unless otherwise specified in the related Prospectus Supplement, the
Transfer and Servicing Agreements may also be amended by the Seller, the
Servicer, the related Trustee and any related Indenture Trustee with the consent
of the holders of Notes evidencing at least a majority in principal amount of
then outstanding Notes, if any, of the related series and the holders of the
Certificates of such series evidencing at least a majority of the principal
amount of such Certificates then outstanding, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Transfer and Servicing Agreements or of modifying in any manner the rights
of such Noteholders or Certificateholders; PROVIDED, HOWEVER, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments on the related Receivables or
distributions that are required to be made for the benefit of such Noteholders
or Certificateholders or (ii) reduce the aforesaid percentage of the Notes or
Certificates of such series which are required to consent to any such amendment,
without the consent of the holders of all the outstanding Notes or Certificates,
as the case may be, of such series.
INSOLVENCY EVENT
With respect to any Owner Trust that issues Notes, if an Insolvency Event
occurs with respect to the Seller, the related Receivables of such Trust will be
liquidated and the Trust will be terminated 90 days after the date of such
Insolvency Event, unless, before the end of such 90-day period, the related
Trustee shall have received written instructions from (i) holders of each class
of Certificates (excluding any Certificates held by the Seller) with respect to
such Trust representing more than 50% of the aggregate unpaid principal amount
of each such class (not including the principal amount of such Certificates held
by the Seller) and (ii) holders of each class of Notes, if any, with respect to
such Trust representing more than 50% of the aggregate unpaid principal amount
of each such class, to the effect that each such party disapproves of the
liquidation of such Receivables and termination of such Trust. Promptly after
the occurrence of an Insolvency Event with respect to the Seller, notice thereof
is required to be given to the related Securityholders; PROVIDED that any
failure to give such required notice will not prevent or delay termination of
such Trust. Upon termination of any Trust, the related Trustee shall, or shall
direct the related Indenture Trustee to, promptly sell the assets of such Trust
(other than the Trust Accounts and the Certificate Distribution Account) in a
commercially reasonable manner and on commercially reasonable terms. The
proceeds from any such sale, disposition or liquidation of the Receivables of
such Trust will be treated as collections on such Receivables and deposited in
the related Collection Account. With respect to any Trust, if the proceeds from
the liquidation of the related Receivables and any amounts on deposit in the
Reserve Account (if any), the Payahead Account (if any), the Note Distribution
Account (if any) and the Certificate Distribution Account are not sufficient to
pay in full the Notes, if any, and the Certificates of the related series, the
amount of principal returned to Noteholders and Certificateholders thereof will
be reduced and some or all of such Noteholders and Certificateholders will incur
a loss.
54
<PAGE>
Each Trust Agreement will provide that the applicable Trustee does not have
the power to commence a voluntary proceeding in bankruptcy with respect to the
related Trust without the unanimous prior approval of all Certificateholders
(including the Seller) of such Trust and the delivery to such Trustee by each
such Certificateholder (including the Seller) of a certificate certifying that
such Certificateholder reasonably believes that such Trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and the
satisfaction and discharge of the related Indenture, the related Trustee will
succeed to all the rights of the Indenture Trustee, and the Certificateholders
of such series will succeed to all the rights of the Noteholders of such series,
under the related Sale and Servicing Agreement, except as otherwise provided
therein.
SELLER LIABILITY
In the case of each Owner Trust that issues Notes, under each Trust
Agreement, the Seller will agree to be liable directly to an injured party for
the entire amount of any losses, claims, damages or liabilities (other than
those incurred by a Noteholder or a Certificateholder in the capacity of an
investor with respect to such Owner Trust) arising out of or based on the
arrangement created by such Trust Agreement as though such arrangement created a
partnership under the Delaware Revised Uniform Limited Partnership Act in which
the Seller was a general partner.
TERMINATION
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Trust, the obligations of the Servicer, the Seller, the related
Trustee and the related Indenture Trustee, if any, pursuant to the Transfer and
Servicing Agreements will terminate upon the earliest to occur of (i) the
maturity or other liquidation of the last related Receivable and the disposition
of any amounts received upon liquidation of any such remaining Receivables, (ii)
the payment to Noteholders, if any, and Certificateholders of the related series
of all amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements and (iii) the occurrence of either of the events described
in the two immediately following paragraphs.
Unless otherwise provided in the related Prospectus Supplement, in order to
avoid excessive administrative expense, the Servicer will be permitted at its
option to purchase from each Trust, as of the end of any applicable Collection
Period, if the then outstanding Pool Balance with respect to the Receivables
held by such Trust is 10% or less of the Initial Pool Balance (as defined in
such Prospectus Supplement, the "Initial Pool Balance"), all remaining related
Receivables at a price equal to the aggregate of the Purchase Amounts thereof as
of the end of such Collection Period.
If and to the extent provided in the related Prospectus Supplement with
respect to a Trust, the Applicable Trustee will, within ten days following a
Distribution Date as of which the Pool Balance is equal to or less than the
percentage of the Initial Pool Balance specified in such Prospectus Supplement,
solicit bids for the purchase of the Receivables remaining in such Trust, in the
manner and subject to the terms and conditions set forth in such Prospectus
Supplement. If the Applicable Trustee receives satisfactory bids as described in
such Prospectus Supplement, then the Receivables remaining in such Trust will be
sold to the highest bidder.
As more fully described in the related Prospectus Supplement, any
outstanding Notes of the related series will be redeemed concurrently with
either of the events specified above, and the subsequent distribution to the
related Certificateholders of all amounts required to be distributed to them
pursuant to the applicable Trust Agreement or Pooling and Servicing Agreement
will effect early retirement of the Certificates of such series.
55
<PAGE>
ADMINISTRATION AGREEMENT
The Company, in its capacity as administrator (the "Administrator"), will
enter into an agreement (an "Administration Agreement") with each Owner Trust
that issues Notes and the related Indenture Trustee pursuant to which the
Administrator will agree, to the extent provided in such Administration
Agreement, to provide the notices and to perform other administrative
obligations required by the related Indenture. Unless otherwise specified in the
related Prospectus Supplement with respect to any such Trust, as compensation
for the performance of the Administrator's obligations under the applicable
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to a monthly administration fee (the
"Administration Fee"), which fee will be paid by the Servicer.
56
<PAGE>
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTEREST IN VEHICLES
The Receivables in general evidence the credit sale of new and used
automobiles, light duty trucks, vans and minivans by dealers to Obligors and
also constitute personal property security agreements granting the holder of
such Receivables a security interest in the Financed Vehicles under the
applicable UCC. Perfection of security interests in the Financed Vehicles is
generally governed by the motor vehicle registration laws of the state in which
a Financed Vehicle is located. In almost all states in which the Receivables
have been originated, a security interest in automobiles, light duty trucks,
vans and minivans is perfected by notation of the secured party's lien on the
vehicle's certificate of title.
All of the Receivables purchased by the Company name the Company as obligee
(by assignment or otherwise) and as the secured party. The Company also takes
all actions necessary under the laws of the state in which the Financed Vehicle
is located to perfect the Company's security interest in the Financed Vehicle,
including, where applicable, having a notation of its lien recorded on such
vehicle's certificate of title.
The Company will sell its interests in Receivables and assign its security
interests in the Financed Vehicles securing the Receivables to either (i) the
related Trust pursuant to either a Sale and Servicing Agreement or a Pooling and
Servicing Agreement or (ii) a Transferor pursuant to a Receivables Purchase
Agreement, which Transferor will, in turn, sell such interests and assign such
security interests to the Trust pursuant to either a Sale and Servicing
Agreement or a Pooling and Servicing Agreement. However, because of the
administrative burden and expense, the certificates of title to the Financed
Vehicles will not be amended to reflect any Transferor or the Trust as the new
secured party on the certificate of title relating to the Financed Vehicles.
Each Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, provides that the Company, as custodian, will hold any certificates
of title and the documents and other items relating to the Financed Vehicles in
its possession on behalf of the Trust and the Indenture Trustee.
With respect to certain limitations on the enforceability of the Indenture
Trustee's security interest, see "Risk Factors--Certain Legal Aspects".
Under the laws of most states, the perfected security interest in a Financed
Vehicle would continue for four months after such vehicle is moved to a state
other than the state in which it is initially registered, and thereafter until
the owner of the Financed Vehicle re-registers it in the new state. A majority
of states generally require surrender of a certificate of title in connection
with the re-registration of a vehicle; accordingly, a secured party must
surrender possession if it holds the certificate of title to the vehicle, or, in
the case of a vehicle registered in a state providing for the notation of a lien
on the certificate of title but not possession by the secured party, assuming no
fraud or negligence, the secured party noted on the certificate of title would
receive notice of surrender if the security interest is noted on the certificate
of title. Thus, the secured party would have the opportunity to re-perfect its
security interest in the vehicle in the state of relocation. In states that do
not require a certificate of title for registration of a motor vehicle, a re-
registration could defeat perfection. In the ordinary course of servicing
Receivables, the Servicer takes steps to effect re-perfection upon receipt of
notice of re-registration or information from the Obligor as to relocation.
Similarly, when an Obligor sells a Financed Vehicle, the Servicer must surrender
possession of the certificate of title or will receive notice as a result of its
lien noted thereon and, accordingly, will have an opportunity to require
satisfaction of the related Receivable before release of the lien. Under each
Sale and Servicing Agreement or Pooling and Servicing Agreement, as applicable,
the Servicer is obligated to take appropriate steps, at its own expense, to
maintain perfection of security interests in such Financed Vehicle and is
obligated to repurchase the related Receivable if it fails to do so.
Under the laws of most states, liens for repairs performed on a motor
vehicle, liens for unpaid storage fees and liens for unpaid taxes take priority
over even a perfected security interest in a Financed
57
<PAGE>
Vehicle. The Company will represent that, as of the date of issuance of the
Notes, each security interest in a Financed Vehicle is prior to all other
present liens upon and security interests in such Financed Vehicle. However,
liens for repairs, unpaid storage fees or taxes could arise at any time during
the term of a Receivable. No notice will be given to the Indenture Trustee or
the Noteholders in the event such a lien arises nor will the Company be
obligated to repurchase the related Receivable if such a lien arises after the
Closing Date.
REPOSSESSION
In the event of default by a vehicle purchaser, a holder of a retail
installment sale contract or installment loan has all the remedies of a secured
party under the UCC, except where specifically limited by other state laws.
Among its UCC remedies, the secured party has the right to perform self-help
repossession unless such act would constitute a breach of the peace. Self-help
is the method employed by the Servicer in most cases and is accomplished simply
by retaking possession of the Financed Vehicle. In the event of default by the
Obligor, some jurisdictions require that the Obligor be notified of the default
and be given a time period within which he or she may cure the default prior to
repossession. Generally, the right to cure a default may be exercised on a
limited number of occasions in any one-year period. In cases where the Obligor
objects or raises a defense to repossession, if a Financed Vehicle cannot be
retaken without a breach of the peace, or if otherwise required by applicable
state law, a court order must be obtained from an appropriate court, and the
Financed Vehicle must then be repossessed in accordance with that order.
NOTICE OF SALES; REDEMPTION RIGHTS
The UCC and other state laws require the secured party to provide the
Obligor with reasonable notice of the date, time and place of any public sale or
the date after which any private sale or other intended disposition of the
collateral may be held. All aspects of the disposition of the collateral,
including the method, manner, time, place and terms must be commercially
reasonable. The Obligor has the right to redeem the collateral prior to actual
sale by paying the secured party the unpaid principal balance of the obligation
plus reasonable expenses for repossessing, holding, and preparing the collateral
for disposition and arranging for its sale plus, in some jurisdictions,
reasonable attorneys' fees. In some states the Obligor may have a
post-repossession right to reinstate the terms of the contract or loan and
redeem the collateral by the payment of delinquent installments and expenses
incurred by the secured party in repossessing the collateral.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds obtained upon repossession and resale of the Financed Vehicles
generally will be applied first to the expenses of resale and repossession and
then to the satisfaction of the indebtedness. While some states impose
prohibitions or limitations on deficiency judgments if the net proceeds from
resale do not cover the full amount of the indebtedness, a deficiency judgment
can be sought in those states that do not prohibit or limit such judgments,
provided that certain procedures are followed. However, the deficiency judgment
would be a personal judgment against the Obligor for the shortfall, and a
defaulting Obligor can be expected to have very little capital or sources of
income available following repossession. Therefore, in many cases, it may not be
useful to seek a deficiency judgment or, if one is obtained, it may be settled
at a significant discount.
Occasionally, after resale of collateral and payment of all expenses and all
indebtedness, there is a surplus of funds. In that case, the UCC requires the
secured party to remit the surplus to any holder of a lien with respect to the
collateral or, if no such lienholder exists or there are remaining funds, the
UCC requires the secured party to remit the surplus to the former owner of the
collateral. Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws, may limit or delay the ability of a lender to
repossess and resell collateral or enforce a deficiency judgment.
58
<PAGE>
CONSUMER PROTECTION LAWS
Courts have applied general equitable principles to limit and restrict
secured parties pursuing repossession or litigation involving deficiency
balances. These equitable principles may have the effect of relieving an Obligor
from some or all of the legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protection provided under the 14th Amendment of the Constitution of the United
States. Courts have generally upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by the
creditor do not involve sufficient state action to afford constitutional
protection to consumers.
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance, including requirements regarding the adequate disclosure of loan terms
(including finance charges and deemed finance charges) and limitations on loan
terms (including the permitted finance charge or deemed finance charge),
collection practices and creditor remedies. The application of these laws to
particular circumstances is not always certain and some courts and regulatory
authorities have shown a willingness to adopt novel interpretations of such
laws. These laws include the Truth in Lending Act, the Equal Credit Opportunity
Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair
Credit Billing Act, the Fair Debt Collection Procedures Act, the Moss-Magnuson
Warranty Act, the Federal Reserve Board's Regulations B and Z, the Soldiers' and
Sailors' Civil Relief Act, state adaptations of the Uniform Consumer Credit Code
and state motor vehicle retail installment sales acts, retail installment sales
acts, and other similar laws. State laws generally impose finance charge
ceilings and other restrictions on consumer transactions and often require
contract disclosure in addition to those required under federal law. These
requirements impose specific statutory liabilities upon creditors who fail to
comply with their provisions. In some cases, this liability could affect an
assignee's ability to enforce consumer finance contracts or loans such as the
Receivables.
Under the laws of certain states, finance charges with respect to motor
vehicle retail installment contracts may include the additional amount, if any,
that a purchaser pays as part of the purchase price for a vehicle solely because
the purchaser is buying on credit rather than for cash (a "cash sale
differential"). If a dealer charges such a cash sale differential, applicable
finance charge ceilings could be exceeded.
On August 27, 1996, a purported class action entitled MERCEDES HOFFMAN V.
GROSSINGER MOTOR CORP. AND FIRST MERCHANTS ACCEPTANCE CORPORATION was filed in
the United States District Court for the Northern District of Illinois. The
complaint, as amended on September 27, 1996 (the "Complaint"), alleges
violations of certain Federal and Illinois consumer protection statutes and RICO
and seeks unspecified damages. The Company believes that certain material
allegations in the Complaint are incorrect and that it has meritorious defenses
to the claims made in the Complaint. The Company has filed a motion to dismiss
the Complaint which is currently being briefed by the parties. The Company
intends to vigorously defend this action.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code and other state laws, has the effect of subjecting
an assignee of a seller of goods (and certain related creditors) to all claims
and defenses that the obligor in the transaction could assert against the seller
of the goods. With respect to used automobiles specifically, the FTC Rule
requires that all sellers of used automobiles prepare, complete and display a
Buyer's Guide that explains the warranty coverage for such automobiles.
All of the Receivables will be subject to the requirements of the FTC Rule.
Accordingly, the Trust, as holder of the Receivables, will be subject to any
claims or defenses that the purchaser of the related Financed Vehicle may assert
against the seller of the Vehicle. Such claims are limited to a maximum
59
<PAGE>
liability equal to the amounts actually paid by the Obligor on the Receivable.
If an Obligor were successful in asserting any such claim or defense, such claim
or defense would constitute a breach of the Company's representations and
warranties under the related Receivables Purchase Agreement and would create an
obligation of the Company to repurchase the related Receivable unless the breach
were cured. The Seller will assign its rights under the related Receivables
Purchase Agreement, including its right to cause the Company to repurchase
Receivables with respect to which it is in breach of its representations and
warranties, to the Trust pursuant to either the related Sale and Servicing
Agreement or Pooling and Servicing Agreement. See "Description of the Transfer
and Servicing Agreements--Sale and Assignment of Receivables".
Under most state vehicle dealer licensing laws, sellers of automobiles,
minivans and light duty trucks are required to be licensed to sell vehicles at
retail sale. In addition, with respect to used vehicles, the Federal Trade
Commission's Rule on Sale of Used Vehicles requires that all sellers of used
vehicles prepare, complete and display a "Buyer's Guide" which explains the
warranty coverage for such vehicles. Furthermore, Federal Odometer Regulations
promulgated under the Motor Vehicle Information and Cost Savings Act and the
motor vehicle title laws of most states require that all sellers of used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if
either a Buyer's Guide or Odometer Disclosure Statement was not provided to the
purchaser of a Financed Vehicle, the Obligor may be able to assert a defense
against the seller of the Financed Vehicle. If an Obligor on a Receivable were
successful in asserting any such claim or defense, the Servicer would pursue on
behalf of the Trust any reasonable remedies against the seller or the
manufacturer of the vehicle, subject to certain limitations as to the expense of
any such action to be specified in the Sale and Servicing Agreement.
The Company will warrant under either a Receivables Purchase Agreement, a
Sale and Servicing Agreement or a Pooling and Servicing Agreement that each
Receivable complies with all requirements of law in all material respects.
Accordingly, if an Obligor has a claim against the related Trust for violation
of any law and such claim materially and adversely affects such Trust's interest
in a Receivable, such violation would constitute a breach of the warranties of
the Company under such Receivables Purchase Agreement, Sale and Servicing
Agreement or Pooling and Servicing Agreement and would create an obligation of
the Company to repurchase the Receivable from the Trust unless the breach were
cured. See "Description of the Transfer and Servicing Agreements--Sale and
Assignment of Receivables".
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a secured party
to realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy code, a court may prevent a
secured party from repossessing an automobile and, as part of the rehabilitation
plan, may reduce the amount of the secured indebtedness to the market value of
the automobile at the time of bankruptcy (as determined by the court), leaving
the party providing financing as a general unsecured creditor for the remainder
of the indebtedness. A bankruptcy court may also reduce the monthly payments due
under a contract or loan or change the rate of interest and time of repayment of
the indebtedness.
60
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates. The summary does not purport to deal with federal income tax
consequences applicable to all categories of holders, some of which may be
subject to special rules. For example, it does not discuss the tax treatment of
Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving both
debt and equity interests issued by a trust with terms similar to those of the
Notes and the Certificates. As a result, the IRS may disagree with all or a part
of the discussion below. Prospective investors are urged to consult their own
tax advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the Notes and
the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of special Federal tax counsel to each Trust specified in the
related Prospectus Supplement ("Federal Tax Counsel"), regarding certain federal
income tax matters discussed below. An opinion of Federal Tax Counsel, however,
is not binding on the IRS or the courts. No ruling on any of the issues
discussed below will be sought from the IRS. For purposes of the following
summary, references to the Trust, the Notes, the Certificates and related terms,
parties and documents shall be deemed to refer, unless otherwise specified
herein, to each Trust and the Notes, Certificates and related terms, parties and
documents applicable to such Trust.
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust as a partnership
under the Code or whether the Trust will be treated as a grantor trust. The
Prospectus Supplement for each series of Certificates will specify whether a
partnership election will be made or the Trust will be treated as a grantor
trust.
OWNER TRUSTS
TAX CHARACTERIZATION OF OWNER TRUSTS
Federal Tax Counsel will deliver its opinion that a Trust for which a
partnership election is made 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 Trust Agreement
and related documents will be complied with, and on counsel's conclusions that
(1) the Trust will not have certain characteristics necessary for a business
trust to be classified as an association taxable as a corporation and (2) the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations.
If an Owner Trust were taxable as a corporation for federal income tax
purposes, such Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income on the
Receivables, possibly reduced by its interest expense on the Notes, if any. Any
such corporate income tax could materially reduce cash available to make
payments on the Notes, if any, and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
GENERAL. The following discussion only applies to a Trust which elects to
be treated as a partnership and issues one or more classes of Notes.
Furthermore, the following discussion assumes that all payments on the Notes are
denominated in U.S. dollars and that any such Notes are sold to persons
61
<PAGE>
other than the Seller. If these conditions are not satisfied with respect to any
given series of Notes, any additional tax considerations with respect to such
Notes will be disclosed in the applicable Prospectus Supplement.
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Seller will agree, and the
beneficial owners of the Notes (the "Note Owners") will agree by their purchase
of Notes, to treat the Notes as debt for federal income tax purposes. Federal
Tax Counsel will, except as otherwise provided in the related Prospectus
Supplement, advise the Trust that the Notes will be classified as debt for
federal income tax purposes. The discussion below assumes this characterization
of the Notes is correct.
OID, ETC. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars and that the Notes are not Strip Notes. Moreover,
the discussion assumes that the interest formula for the Notes meets the
requirements for "qualified stated interest" under Treasury regulations (the
"OID regulations") relating to original issue discount ("OID"), and that any OID
on the Notes (I.E., any excess of the principal amount of the Notes over their
issue price) does not exceed a de minimis amount (I.E., 1/4% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID regulations. If these conditions are not satisfied
with respect to any given series of Notes, additional tax considerations with
respect to such Notes will be disclosed in the applicable Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a DE MINIMIS amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
SALE OR OTHER DISPOSITION. If a Note Owner 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 Note Owner will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Note Owner 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 Note Owner
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as
62
<PAGE>
a capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Capital losses generally may
be used only to offset capital gains.
FOREIGN HOLDERS. Interest payments made (or accrued) to a Note Owner who is
a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of the Code and
(ii) provides the Trustee or other person who is otherwise required to withhold
U.S. tax with respect to the Notes with an appropriate statement (on Form W-8 or
a similar form), signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding agent;
in that case, however, the signed statement must be accompanied by a Form W-8 or
substitute form provided by the foreign person that owns the Note. If such
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, 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) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Note Owner fail to
provide the required certification, the Trust will be required to withhold 31
percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of Federal Tax Counsel, the IRS 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, and
most likely in the view of Federal Tax Counsel, the Trust might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) would be "unrelated business
taxable income", income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct their
share of Trust expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY AN OWNER TRUST
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Seller and the Servicer will
agree, and the beneficial owners of Certificates (the "Certificate Owners") will
agree by their purchase of Certificates, to treat the
63
<PAGE>
Trust as a partnership for purposes of 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 Certificate Owners (including the Seller in its capacity
as recipient of distributions from the Reserve Account), and the Notes, if any,
being debt of the partnership. However, the proper characterization of the
arrangement involving the Trust, the Certificates, the Notes, if any, the Seller
and the 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 Seller or the Trust. Any such
characterization would not result in materially adverse tax consequences to
Certificate Owners 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, that all payments on the Certificates are denominated in U.S.
dollars, none of the Certificates are Strip Certificates, and that a series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificate Owner 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 Receivables (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Receivables. The Trust's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of
Receivables.
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 Certificate Owners 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 Receivables that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) any prepayment premium payable to the Certificate Owners for such
month; and (iv) any other amounts of income payable to the Certificate Owners
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Receivables 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 Seller. 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 IRS
would not require a greater amount of income to be allocated to Certificate
Owners. Moreover, even under the foregoing method of allocation, Certificate
Owners 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 Certificate Owners 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 Certificate Owners but Certificate Owners may be purchasing Certificates at
different times and at different prices, Certificate Owners 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.
64
<PAGE>
All of the taxable income allocated to a Certificate Owner 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 miscellaneous itemized deductions are allowed only to the
extent they exceed, in the aggregate, 2% of an individual's adjusted gross
income. Furthermore, Section 68 of the Code provides that itemized deductions
otherwise allowable for a taxable year of an individual taxpayer whose adjusted
gross income exceeds a specified amount will be reduced by the lesser of (i) 3%
of the excess, if any, of adjusted gross income over such amount, or (ii) 80% of
the amount of itemized deductions otherwise allowable for such year.
Accordingly, 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 Certificate Owners on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the Trust
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificate Owners.
DISCOUNT AND PREMIUM. It is believed that the Receivables were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust for the Receivables may be greater or less than
the remaining principal balance of the Receivables at the time of purchase. If
so, the Receivables 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
Receivable-by-Receivable basis.)
If the Trust acquires the Receivables 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 Receivables or to offset any such premium against interest
income on the Receivables. As indicated above, a portion of such market discount
income or premium deduction may be allocated to Certificate Owners.
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 Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust, as a new partnership. 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 Certificate Owner'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).
65
<PAGE>
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Receivables 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 Certificate Owner 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 TRANSFERORS 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 Certificate Owners 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. 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 Certificate Owners. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificate Owner sells its
Certificates at a profit (loss), the purchasing Certificate Owner will have a
higher (lower) basis in the Certificates than the selling Certificate Owner 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 will not make such election. As a
result, Certificate Owners 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 (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificate Owner's allocable share of items of Trust
income and expense to holders and the IRS 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 IRS 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
66
<PAGE>
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 Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificate Owners in any dispute with the IRS. 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 Certificate Owners, and, under
certain circumstances, a Certificate Owner 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 Certificate Owner's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATE OWNERS. It is not clear 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-U.S.
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 that is
allocable to foreign Certificate Owners pursuant to Section 1446 of the Code, as
if such income were effectively connected to a U.S. 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. In determining a holder's withholding status, the
Trust may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. 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. Each foreign holder must obtain a
taxpayer identification number from the IRS and submit that number to the Trust
on Form W-8 in order to assure appropriate crediting of the taxes withheld. A
foreign holder generally would be entitled to file with the IRS 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 U.S. trade or business.
However, interest payments made (or accrued) to a Certificate Owner 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. If these
interest payments are properly characterized as guaranteed payments, then the
interest will not be considered "portfolio interest." As a result, Certificate
Owners will be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a foreign holder would only be entitled to claim a refund
for that portion of the taxes in excess of the taxes that should be withheld
with respect to the guaranteed payments.
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 Certificate Owner fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
67
<PAGE>
GRANTOR TRUSTS
TAX CHARACTERIZATION OF GRANTOR TRUSTS
If a partnership election is not made, Federal Tax Counsel will deliver its
opinion that the Trust will not be classified as an association taxable as a
corporation and that such Trust will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, beneficial owners
of Certificates (referred to herein as "Grantor Trust Certificate Owners") will
be treated for federal income tax purposes as owners of a portion of the Trust's
assets as described below. The Certificates issued by a Trust that is treated as
a grantor trust are referred to herein as "Grantor Trust Certificates".
CHARACTERIZATION. Each Grantor Trust Certificate Owner will be treated as
the owner of a pro rata undivided interest in the interest and principal
portions of the Trust represented by the Grantor Trust Certificates and will be
considered the equitable owner of a pro rata undivided interest in each of the
Receivables and any other assets in the Trust. Any amounts received by a Grantor
Trust Certificate Owner in lieu of amounts due with respect to any Receivable or
other asset in the Trust because of a default or delinquency in payment will be
treated for federal income tax purposes as having the same character as the
payments they replace.
Each Grantor Trust Certificate Owner will be required to report on its
federal income tax return in accordance with such Grantor Trust Certificate
Owner's method of accounting its pro rata share of the entire income from the
Receivables and any other assets in the Trust represented by Grantor Trust
Certificates, including interest, OID, if any, prepayment fees, assumption fees,
any gain recognized upon an assumption and late payment charges received by the
Servicer. Under Sections 162 or 212 each Grantor Trust Certificate Owner will be
entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the Servicer, provided that such amounts are reasonable compensation
for services rendered to the Trust. Grantor Trust Certificate Owners that are
individuals, estates or trusts will be entitled to deduct their share of
expenses only to the extent such expenses plus all other Section 212 expenses
exceed two percent of its adjusted gross income. A Grantor Trust Certificate
Owner using the cash method of accounting must take into account its pro rata
share of income and deductions as and when collected by or paid to the Servicer.
A Grantor Trust Certificate Owner using an accrual method of accounting must
take into account its pro rata share of income and deductions as they become due
or are paid to the Servicer, whichever is earlier. If the servicing fees paid to
the Servicer are deemed to exceed reasonable servicing compensation, the amount
of such excess could be considered as an ownership interest retained by the
Servicer (or any person to whom the Servicer assigned for value all or a portion
of the servicing fees) in a portion of the interest payments on the Receivables.
The Receivables would then be subject to the "coupon stripping" rules of the
Code discussed below.
PREMIUM. The price paid for a Grantor Trust Certificate by a holder will be
allocated to such holder's undivided interest in each asset of the Trust based
on such asset's relative fair market value, so that such holder's undivided
interest in each asset will have its own tax basis. A Grantor Trust Certificate
Owner that acquires an interest in Receivables or Receivables Backed Assets at a
premium may elect to amortize such premium under a constant interest method.
Amortizable bond premium will be treated as an offset to interest income on such
Grantor Trust Certificate. The basis for such Grantor Trust Certificate will be
reduced to the extent that amortizable premium is applied to offset interest
payments. It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under Section 171. A Grantor
Trust Certificate Owner that makes this election for a Grantor Trust Certificate
that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Grantor Trust Certificate Owner acquires during the year
of the election or thereafter.
68
<PAGE>
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Receivable or Receivables Backed Asset prepays in
full, equal to the difference between the portion of the prepaid principal
amount of such asset that is allocable to the Grantor Trust Certificate and the
portion of the adjusted basis of the Grantor Trust Certificate that is allocable
to such asset. If a reasonable prepayment assumption is used to amortize such
premium, it appears that such a loss would be available, if at all, only if
prepayments have occurred at a rate faster than the reasonable assumed
prepayment rate. It is not clear whether any other adjustments would be required
to reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
STRIPPED BONDS AND STRIPPED COUPONS
Although the tax treatment of stripped bonds is not entirely clear, based on
recent guidance by the IRS, each purchaser of a Grantor Trust Certificate will
be treated as the purchaser of a stripped bond which generally should be treated
as a single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Generally, under recently issued
Treasury regulations (the "Section 1286 Treasury Regulations"), if the discount
on a stripped bond is larger than a DE MINIMIS amount (as calculated for
purposes of the OID rules of the Code) such stripped bond will be considered to
have been issued with OID. See "--Original Issue Discount" below. Based on the
preamble to the Section 1286 Treasury Regulations, Federal Tax Counsel is of the
opinion that, although the matter is not entirely clear, the interest income on
the Certificates at the sum of the Pass Through Rate and the portion of the
Servicing Fee Rate that does not constitute excess servicing will be treated as
"qualified stated interest" within the meaning of the Section 1286 Treasury
Regulations and such income will be so treated in the Trustee's tax information
reporting.
ORIGINAL ISSUE DISCOUNT. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to "original issue discount" (currently Sections 1271 through 1273 and
1275) will be applicable to a Grantor Trust Certificate Owner's interest in
those Receivables or Receivables Backed Assets meeting the conditions necessary
for these sections to apply. Generally, a Grantor Trust Certificate Owner that
acquires an undivided interest in a Receivable or Receivables Backed Asset
issued or acquired with OID must include in gross income the sum of the "daily
portions," as defined below, of the OID on such asset for each day on which it
owns a Certificate, including the date of purchase but excluding the date of
disposition. In the case of an original Grantor Trust Certificate Owner, the
daily portions of OID with respect to a Receivable or a Receivables Backed Asset
generally would be determined as follows. A calculation will be made of the
portion of OID that accrues on such asset during each successive monthly accrual
period (or shorter period in respect of the date of original issue or the final
Distribution Date). This will be done, in the case of each full monthly accrual
period, by adding (i) the present value of all remaining payments to be received
on such asset under the prepayment assumption used in respect of such assets and
(ii) any payments received during such accrual period, and subtracting from that
total the "adjusted issue price" of such asset at the beginning of such accrual
period. No representation is made that such assets will prepay at any prepayment
assumption. The "adjusted issue price" of a Receivable or Receivables Backed
Asset at the beginning of the first accrual period is its issue price (as
determined for purposes of the OID rules of the Code) and the "adjusted issue
price" of such asset at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment (other than "qualified stated interest") made at the
end of or during that accrual period. The OID accruing during such accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the period. With respect to an initial
accrual period shorter than a full monthly accrual period, the daily portions of
OID must be determined according to an appropriate allocation under either an
exact or approximate method set forth in the OID Regulations, or some other
reasonable method,
69
<PAGE>
provided that such method is consistent with the method used to determine the
yield to maturity of such assets.
With respect to the Receivables or Receivables Backed Assets, the method of
calculating OID as described above will cause the accrual of OID to either
increase or decrease (but never below zero) in any given accrual period to
reflect the fact that prepayments are occurring at a faster or slower rate than
the prepayment assumption used in respect of such assets. Subsequent purchasers
that purchase such assets at more than a DE MINIMIS discount should consult
their tax advisors with respect to the proper method to accrue such OID.
MARKET DISCOUNT. A Grantor Trust Certificate Owner that acquires an
undivided interest in Receivables or Receivables Backed Assets may be subject to
the market discount rules of Sections 1276 through 1278 to the extent an
undivided interest in a Receivable or Receivables Backed Asset is considered to
have been purchased at a "market discount." Generally, the amount of market
discount is equal to the excess of the portion of the principal amount of such
asset allocable to such holder's undivided interest over such holder's tax basis
in such interest. Market discount with respect to a Grantor Trust Certificate
will be considered to be zero if the amount allocable to the Grantor Trust
Certificate is less than 0.25% of the Grantor Trust Certificate's stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled payment or
a prepayment) or any gain on disposition of a market discount bond shall be
treated as ordinary income to the extent that it does not exceed the accrued
market discount at the time of such payment. The amount of accrued market
discount for purposes of determining the tax treatment of subsequent principal
payments or dispositions of the market discount bond is to be reduced by the
amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the DE MINIMIS rule referred to above applies. Any such deferred
interest expense would not
70
<PAGE>
exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
PREMIUM. To the extent a Grantor Trust Certificate Owner is considered to
have purchased an undivided interest in a Receivable or Receivables Backed Asset
for an amount that is greater than its stated redemption price at maturity of
such asset, such Grantor Trust Certificate Owner will be considered to have
purchased such asset with "amortizable bond premium" equal in amount to such
excess. A Grantor Trust Certificate Owner (who does not hold the Certificate for
sale to customers or in inventory) may elect under Section 171 of the Code to
amortize such premium. Under the Code, premium is allocated among the interest
payments on the assets to which it relates and is considered as an offset
against (and thus a reduction of) such interest payments. With certain
exceptions, such an election would apply to all debt instruments held or
subsequently acquired by the electing holder. Absent such an election, the
premium will be deductible as an ordinary loss only upon disposition of the
Certificate or pro rata as principal is paid on such assets.
ELECTION TO TREAT ALL INTEREST AS OID. The OID regulations permit a Grantor
Trust Certificate Owner to elect to accrue all interest, discount (including DE
MINIMIS market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a Grantor Trust Certificate with market discount, the Certificate
Owner would be deemed to have made an election to include in income currently
market discount with respect to all other debt instruments having market
discount that such Grantor Trust Certificate Owner acquires during the year of
the election or thereafter. Similarly, a Grantor Trust Certificate Owner that
makes this election for a Grantor Trust Certificate that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Grantor Trust Certificate Owner owns or acquires. See "--Premium" herein. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Grantor Trust Certificate is irrevocable.
SUBORDINATE CERTIFICATES. In the event the Trust issues two classes of
Grantor Trust Certificates, one class being a subordinate class and the other
being a senior class (referred to herein as the "Subordinate Certificates" and
"Senior Certificates", respectively) the Trust will be deemed to have acquired
the following assets: (i) the principal portion of each Receivable or
Receivables Backed Asset plus a portion of the interest due on each such asset
(the "Trust Stripped Bond"), and (ii) a portion of the interest due on each such
asset equal to the difference between the pass-through rate on the Subordinate
Certificates and the pass-through rate on the Senior Certificates, if any, which
difference is then multiplied by the Subordinate Class Percentage (the "Trust
Stripped Coupon"). The "Subordinate Class Percentage" equals the initial
aggregate principal amount of the Subordinate Certificates divided by the sum of
the initial aggregate principal amount of the Subordinate Certificates and the
Senior Certificates. The "Senior Class Percentage" equals the initial aggregate
principal amount of the Senior Certificates divided by the sum of the initial
aggregate principal amount of the Subordinate Certificates and the Senior
Certificates.
The Senior Certificateholders in the aggregate will own the Senior Class
Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of such asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder will
be treated as owning its pro rata share in both such assets. The Trust Stripped
Bond will be treated as a "stripped bond" and the Trust Stripped Coupon will be
treated as "stripped
71
<PAGE>
coupons" within the meaning of Section 1286 of the Code. Because the purchase
price paid by each Subordinate Certificateholder will be allocated between that
Certificateholder's interest in the Trust Stripped Bond and the Trust Stripped
Coupon based on the relative fair market values of each asset on the date such
Subordinate Certificate is purchased, the Trust Stripped Bond may be issued with
original issue discount.
TRUST STRIPPED BOND. Except to the extent modified below, the income of the
Trust Stripped Bond represented by a Certificate will be reported in the same
manner as described generally above for holders of Certificates. The interest
income on the Subordinate Certificates at the Senior Certificate pass-through
rate and the portion of the Servicing Fee that does not constitute excess
servicing will be treated as qualified stated interest.
TRUST STRIPPED COUPON. The Trust Stripped Coupon will be treated as a debt
instrument with original issued discount equal to the excess of the total amount
payable with respect to such Trust Stripped Coupon (based on the prepayment
assumption used in pricing the Certificates) over the portion of the purchase
price allocated thereto. The sum of the daily portions of original issue
discount on the Trust Stripped Coupon for each day during a year in which the
Subordinate Certificateholder holds the Trust Stripped Coupon will be included
in the Subordinate Certificateholder's income.
EFFECT OF SUBORDINATION. If the Subordinate Certificateholders receive
distribution of less than their share of the Trust's receipts of principal or
interest (the "Shortfall Amount") because of the subordination of the
Subordinate Certificates, holders of Subordinate Certificates would probably be
treated for federal income tax purposes as if they had (i) received as
distributions their full share of such receipts, (ii) paid over to the Senior
Certificateholders an amount equal to such Shortfall Amount and (iii) retained
the right to reimbursement of such amounts to the extent such amounts are
otherwise available as a result of collections on the Receivables or amounts
available from a Reserve Account or other form of credit enhancement, if any.
Under this analysis, (a) Subordinate Certificateholders would be required to
accrue as current income any interest or OID income of the Trust that was a
component of the Shortfall Amount, even though such amount was in fact paid to
the Senior Certificateholders, (b) a loss would only be allowed to the
Subordinate Certificateholders when their right to receive reimbursement of such
Shortfall Amount became worthless (I.E., when it becomes clear that amount will
not be available from any source to reimburse such loss) and (c) reimbursement
of such Shortfall Amount prior to such a claim of worthlessness would not be
taxable income to Subordinate Certificateholders because such amount was
previously included in income. Those results should not significantly affect the
inclusion of income for Subordinate Certificateholders on the accrual method of
accounting, but could accelerate inclusion of income to Subordinate
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. Subordinate Certificateholders are strongly urged to consult their own
tax advisors regarding the appropriate timing, amount and character of any
losses sustained with respect to the Subordinate Certificates including any loss
resulting from the failure to recover previously accrued interest or discount
income.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. The sale or exchange of a
Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the owner's
adjusted basis in the Grantor Trust Certificate. Such adjusted basis generally
will equal the seller's purchase price for the Grantor Trust Certificate,
increased by the OID included in the seller's gross income with respect to the
Grantor Trust Certificate, and reduced by principal payments on the Grantor
Trust Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Grantor Trust Certificate is a
"capital asset" within the meaning of Section 1221, and will be long-term or
short-term depending on whether the Grantor Trust Certificate has been owned for
the long-term capital gain holding period (currently more than one year).
72
<PAGE>
Grantor Trust Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1), so that gain or loss recognized from the sale of a
Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
NON-U.S. PERSONS. Generally, to the extent that a Grantor Trust Certificate
evidences ownership in underlying Receivables that were issued on or before July
18, 1984, interest or OID paid by the person required to withhold tax under
Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as defined
below) or (ii) a Grantor Trust Certificate Owner holding on behalf of an owner
that is not a U.S. Person will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for interest
by an applicable tax treaty. Accrued OID recognized by the owner on the sale or
exchange of such a Grantor Trust Certificate also will be subject to federal
income tax at the same rate. Generally, such payments would not be subject to
withholding if such Grantor Trust Certificate Owner complies with certain
identification requirements (including delivery of a statement, signed by the
Grantor Trust Certificate Owner under penalties of perjury, certifying that such
Grantor Trust Certificate Owner is not a U.S. Person and providing the name and
address of such Grantor Trust Certificate Owner).
As used herein, a "U.S. Person" means a citizen or resident of the United
States, a corporation or a partnership organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust, the
income of which from sources outside the United States is includible in gross
income for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Servicer will furnish or
make available, within a reasonable time after the end of each calendar year, to
each person who was a Grantor Trust Certificate Owner at any time during such
year, such information as may be deemed necessary or desirable to assist Grantor
Trust Certificate Owners in preparing their federal income tax returns, or to
enable holders to make such information available to beneficial owners or
financial intermediaries that hold Grantor Trust Certificates as nominees on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
CERTAIN STATE TAX CONSEQUENCES WITH RESPECT TO OWNER TRUSTS
The activities to be undertaken by the Servicer in servicing and collecting
the Receivables will take place in Illinois. The State of Illinois imposes a
state income tax on corporations, partnerships and other entities doing business
in the State of Illinois. This discussion relates only to Owner Trusts, and is
based upon present provisions of Illinois statutes and the regulations
promulgated thereunder, and applicable judicial or ruling authority, all of
which are subject to change, which change may be retroactive. No ruling on any
of the issues discussed below will be sought from the Illinois Department of
Revenue.
Because of the variation in each state's tax laws based in whole or in part
upon income, it is impossible to predict tax consequences to holders of Notes
and Certificates in all of the state taxing jurisdictions in which they are
already subject to tax. Noteholders and Certificate Owners are urged to consult
their own tax advisors with respect to state tax consequences arising out of the
purchase, ownership and disposition of Notes and Certificates.
For purposes of the following summary, references to the Trust, the Notes,
the Certificates and related terms, parties and documents shall be deemed to
refer, unless otherwise specified herein, to
73
<PAGE>
each Owner Trust and the Notes, Certificates and related terms, parties and
documents applicable to such Trust.
TAX CONSEQUENCES WITH RESPECT TO THE NOTES
It is expected that special Illinois tax counsel to the Trust ("Illinois Tax
Counsel") will advise each such Trust that issues Notes that, assuming the Notes
will be treated as debt for federal income tax purposes, the Notes will be
treated as debt for Illinois income tax purposes. Accordingly, Note Owners not
otherwise subject to taxation in Illinois should not become subject to taxation
in Illinois solely because of a holder's ownership of Notes. However, a Note
Owner already subject to Illinois's income tax could be required to pay
additional Illinois tax as a result of the holder's ownership or disposition of
Notes.
TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES ISSUED BY AN OWNER TRUST
If the arrangement created by the Trust Agreement is treated as a
partnership (not taxable as a corporation) for federal income tax purposes,
Illinois Tax Counsel will deliver its opinion that the same treatment should
also apply for Illinois tax purposes. The Owner Trust will take the position
that neither it nor the Certificate Owners are, as a result of the transactions
described herein, doing business in Illinois but rather that the Owner Trust
should be viewed as a passive holder of investments. As a result, neither the
Owner Trust nor the Certificate Owners should be subject to Illinois income
taxes (which, if applicable, could possibly result in reduced distributions to
Certificate Owners). Alternative characterizations of the Owner Trust and the
Certificates are possible but would not result in materially adverse tax
consequences to Certificate Owners.
* * *
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S
OR CERTIFICATE OWNER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND CERTIFICATES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan"), from engaging
in certain transactions with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other penalties and liabilities under ERISA and the Code for such persons.
Certain transactions involving a Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Notes or Certificates if assets of the Trust were deemed to be
assets of the Benefit Plan. Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of a Trust would
be treated as plan assets of a Benefit Plan for the purposes of ERISA and the
Code only if the Benefit Plan acquired an "equity interest" in the Trust and
none of the exceptions contained in the Plan Assets Regulation was applicable.
An equity interest is defined under the Plan Assets Regulation as an interest
other than an instrument which is treated as indebtedness under applicable local
law and which has no substantial equity features.
74
<PAGE>
Employee benefit plans that are 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 requirements.
A plan fiduciary considering the purchase of Securities of a given series
should consult its tax and/or legal advisors regarding whether the assets of the
related Trust would be considered plan assets, the possibility of exemptive
relief from the prohibited transaction rules and other issues and their
potential consequences.
THE NOTES
Unless otherwise specified in the Prospectus Supplement, the Notes of each
series may be purchased by an employee benefit plan (as defined in Section 3(3)
of ERISA) that is subject to the provisions of Title I of ERISA or by a plan
described in Section 4975(e)(1) of the Code, including an individual retirement
account (a "Plan"). A fiduciary of the Plan must determine that the purchase of
a Note is consistent with its fiduciary duties under ERISA and does not result
in a nonexempt prohibited transaction (as defined in Section 3(32) of ERISA) and
certain church plans (as defined in Section 3(33) of ERISA) are not subject to
the fiduciary responsibility or prohibited transaction provisions of ERISA or
the Code.
SENIOR CERTIFICATES
Unless otherwise specified in the related Prospectus Supplement, the
following discussion applies only to nonsubordinate Certificates (referred to
herein as "Senior Certificates") issued by a Grantor Trust or an Owner Trust.
The U.S. Department of Labor has granted to the lead Underwriter named in
the Prospectus Supplement an exemption (the "Exemption") from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Benefit Plans of certificates representing
interests in asset-backed pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption include
motor vehicle retail installment sales contracts and installment loans such as
the Receivables. The Exemption will apply to the acquisition, holding and resale
of the Senior Certificates by a Benefit Plan, provided that certain conditions
(certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to
the Senior Certificates are the following:
(1) The acquisition of the Senior Certificates by a Benefit Plan is on
terms (including the price for the Senior Certificates) that are at least as
favorable to the Benefit Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Senior Certificates
acquired by the Benefit Plan are not subordinate to the rights and interests
evidenced by other certificates of the Trust;
(3) The Senior Certificates acquired by the Benefit Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Corporation, Moody's
Investors Service, Inc., Duff & Phelps Inc. or Fitch Investors Service,
Inc.;
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection with
the distribution of the Senior Certificates represents not more than
reasonable compensation for underwriting the Senior Certificates; the sum of
all payments made to and retained by the Seller pursuant to the sale of the
Receivables to the Trust represents not more than the fair market value of
such Receivables; and the
75
<PAGE>
sum of all payments made to and retained by the Servicer represents not more
than reasonable compensation for the Servicer's services under the Agreement
and reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(6) The Benefit Plan investing in the Senior Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest or prohibited transactions only if, among
other requirements, (i) in the case of the acquisition of Senior Certificates in
connection with the initial issuance, at least fifty (50) percent of the Senior
Certificates are acquired by persons independent of the Restricted Group (as
defined below), (ii) the Benefit Plan's investment in Senior Certificates does
not exceed twenty-five (25) percent of all of the Senior Certificates
outstanding at the time of the acquisition, and (iii) immediately after the
acquisition, no more than twenty-five (25) percent of the assets of the Benefit
Plan are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to Plans sponsored by the Seller, any Underwriter, the Trustee, the
Servicer, any obligor with respect to Receivables included in the Trust
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust, or any affiliate of such parties (the
"Restricted Group").
Unless otherwise specified in the Prospectus Supplement, the Company
believes that the Exemption will apply to the acquisition and holding by Benefit
Plans of Senior Certificates sold by the Underwriter or Underwriters named in
the Prospectus Supplement and that all conditions of the Exemption other than
those within the control of the investors have been met. In addition, as of the
date hereof, no obligor with respect to Receivables included in the Trust
constitutes more than five percent of the aggregate unamortized principal
balance of the assets of the Trust.
SUBORDINATE CERTIFICATES
Unless otherwise specified in the Prospectus Supplement, the Certificates
issued by Owner Trusts that also issue Notes and Subordinate Certificates issued
by Grantor Trusts may not be purchased by a Plan or by any entity whose
underlying assets include plan assets by reason of a plan's investment in the
entity. Such purchase of an equity interest in the Trust will result in the
assets of the Trust being deemed assets of a Benefit Plan for the purposes of
ERISA and the Code, and certain transactions involving the Trust may then be
deemed to constitute prohibited transactions under Section 406 of ERISA and
Section 4975 of the Code. A violation of the "prohibited transaction" rules may
result in an excise tax or other penalties and liabilities under ERISA and the
Code for such persons.
By its acceptance of such Certificate, each Certificateholder will be deemed
to have represented and warranted that it is not a Benefit Plan.
If a given series of Certificates may be acquired by a Benefit Plan because
of the application of an exception contained in the Plan Assets Regulation, such
exception will be discussed in the related Prospectus Supplement.
A plan fiduciary considering the purchase of Securities of a given series
should consult its tax and/or legal advisors regarding whether the assets of the
related Trust would be considered plan assets, the possibility of exemptive
relief from the prohibited transaction rules and other issues and their
potential consequences.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes, if any, of a given series and an underwriting agreement
with respect to the Certificates of such series (collectively, the "Underwriting
Agreements"), the Seller will agree to cause the related Trust to sell to the
76
<PAGE>
underwriters named therein and in the related Prospectus Supplement, and each of
such underwriters will severally agree to purchase, the principal amount of each
class of Notes and Certificates, as the case may be, of the related series set
forth in such underwriting agreements and in such Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and Certificates, as the
case may be, described therein which are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may be,
are purchased.
Each Prospectus Supplement will either (i) set forth the price at which each
class of Notes and Certificates, as the case may be, being offered thereby will
be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates or (ii)
specify that the related Notes and Certificates, as the case may be, are to be
resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
such Notes and Certificates, such public offering prices and such concessions
may be changed.
Each Underwriting Agreement will provide that the Seller will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act, or contribute to payments the several underwriters may be
required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust Accounts in
Eligible Investments acquired from such underwriters or from the Seller.
Pursuant to each Underwriting Agreement with respect to a given series of
Securities, the closing of the sale of any class of Securities subject to such
Underwriting Agreement will be conditioned on the closing of the sale of all
other such classes of Securities of that series.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust, the Seller, the Servicer and the
Administrator by Sonnenschein Nath & Rosenthal, New York, New York, and for the
underwriters for such series by Brown & Wood LLP, New York, New York. Certain
federal income tax and other matters will be passed upon for each Trust by Brown
& Wood LLP and certain Illinois state tax and other matters will be passed upon
for each Trust by Sonnenschein Nath & Rosenthal, Chicago, Illinois. It is
anticipated that Sonnenschein Nath & Rosenthal will from time to time render
legal services to the Seller, the Servicer and their affiliates.
77
<PAGE>
INDEX OF TERMS
<TABLE>
<S> <C>
Actuarial Receivables............................................................. 25
Adjusted Issue Price.............................................................. 69
Administration Agreement.......................................................... 56
Administration Fee................................................................ 56
Administrator..................................................................... 56
Advance........................................................................... 10
Advances.......................................................................... 49
Applicable Trustee................................................................ 41
APR............................................................................... 10
Base Rate......................................................................... 37
Benefit Plan...................................................................... 74
Calculation Agent................................................................. 37
Calculation Date.................................................................. 38,39,41
CD Rate........................................................................... 38
CD Rate Determination Date........................................................ 38
CD Rate Security.................................................................. 37
Cede.............................................................................. 20
Certificate Balance............................................................... 5
Certificate Distribution Account.................................................. 46
Certificate Owners................................................................ 63
Certificate Pool Factor........................................................... 28
Certificateholders................................................................ 21,41
Certificates...................................................................... 1
Closing Date...................................................................... 45
Code.............................................................................. 61
Collateral Reinvestment Account................................................... 1,8
Collection Account................................................................ 46
Collection Period................................................................. 48
Commercial Paper Rate............................................................. 37,38
Commercial Paper Rate Determination Date.......................................... 38
Commercial Paper Rate Security.................................................... 38
Commission........................................................................ 2,18
Company........................................................................... 1,3
Composite Quotations.............................................................. 37
Dealer Agreements................................................................. 22
Dealers........................................................................... 9,22
Definitive Certificates........................................................... 42
Definitive Notes.................................................................. 42
Definitive Securities............................................................. 42
Depository........................................................................ 30
Distribution Date................................................................. 31
DTC............................................................................... 20
DTC's Nominee..................................................................... 20
Early Amortization Event.......................................................... 8
Eligible Deposit Account.......................................................... 47
Eligible Institution.............................................................. 47
Eligible Investments.............................................................. 47
ERISA............................................................................. 13
</TABLE>
78
<PAGE>
<TABLE>
<S> <C>
Events of Default................................................................. 31
Exchange Act...................................................................... 18
Exemption......................................................................... 75
Federal Funds Rate................................................................ 39
Federal Funds Rate Determination Date............................................. 39
Federal Funds Rate Security....................................................... 37
Federal Tax Counsel............................................................... 61
Financed Vehicles................................................................. 7
First Merchants................................................................... 3
Fixed Rate Securities............................................................. 37
Floating Rate Securities.......................................................... 37
Foreign Person.................................................................... 63
FTC Rule.......................................................................... 59
Funding Period.................................................................... 7
Grantor Trust..................................................................... 3
Grantor Trust Certificate Owners.................................................. 68
H.15(519)......................................................................... 37
Illinois Tax Counsel.............................................................. 74
Indenture......................................................................... 3
Indenture Trustee................................................................. 1
Index Maturity.................................................................... 37
Indirect Participants............................................................. 41
Initial Cutoff Date............................................................... 7
Initial Pool Balance.............................................................. 55
Initial Receivables............................................................... 7
Insolvency Event.................................................................. 53
Insolvency Laws................................................................... 16
Interest Rate..................................................................... 4
Investment Earnings............................................................... 47
Investment Income................................................................. 8
IRS............................................................................... 61
LIBOR............................................................................. 40
LIBOR Business Day................................................................ 40
LIBOR Determination Date.......................................................... 40
LIBOR Security.................................................................... 37
Master Trust...................................................................... 6
Master Trust Agreement............................................................ 6
Master Trust New Issuance......................................................... 23
Money Market Yield................................................................ 39
Note Distribution Account......................................................... 46
Noteholders....................................................................... 21,41
Note Owners....................................................................... 62
Note Pool Factor.................................................................. 28
Notes............................................................................. 1
Obligors.......................................................................... 22
OID............................................................................... 62
OID Regulations................................................................... 62
Owner Trust....................................................................... 3
Participants...................................................................... 30
Pass Through Rate................................................................. 5
Payahead Account.................................................................. 46
</TABLE>
79
<PAGE>
<TABLE>
<S> <C>
Payaheads......................................................................... 48
Plan.............................................................................. 75
Plan Assets Regulation............................................................ 74
Pooling and Servicing Agreement................................................... 3
Pre-Funded Amount................................................................. 7
Pre-Funding Account............................................................... 1,8
Precomputed Advance............................................................... 10
Precomputed Receivables........................................................... 25
Prospectus Supplement............................................................. 1
Purchase Amount................................................................... 46
Rating Agencies................................................................... 19
Ratings Effect.................................................................... 19,24
Receivables....................................................................... 1,7
Receivables Backed Assets......................................................... 7
Receivables Pool.................................................................. 22
Registration Statement............................................................ 2
Related Documents................................................................. 33
Reserve Account................................................................... 51
Restricted Group.................................................................. 76
Revolving Period.................................................................. 8
Rule of 78's Receivables.......................................................... 25
Rules............................................................................. 42
Sale and Servicing Agreement...................................................... 7
Schedule of Receivables........................................................... 45
Section 1286 Treasury Regulations................................................. 69
Securities........................................................................ 1
Securities Act.................................................................... 2
Security Owners................................................................... 41
Securityholders................................................................... 14,21
Senior Certificates............................................................... 71,75
Senior Class Percentage........................................................... 71
Servicer.......................................................................... 1,3
Servicer Default.................................................................. 52
Servicing Fee..................................................................... 49
Servicing Fee Rate................................................................ 49
Shortfall Amount.................................................................. 72
Short-Term Note................................................................... 62
Simple Interest Advance........................................................... 10
Simple Interest Receivables....................................................... 25
Spread............................................................................ 37
Spread Multiplier................................................................. 37
Strip Certificates................................................................ 5
Strip Notes....................................................................... 4
Subordinate Certificates.......................................................... 71
Subordinate Class Percentage...................................................... 71
Subsequent Receivables............................................................ 1,7
Subsequent Transfer Date.......................................................... 14,45
Telerate Page 3750................................................................ 40
Transfer and Servicing Agreements................................................. 45
Transferor........................................................................ 1,3
Treasury Bills.................................................................... 40
</TABLE>
80
<PAGE>
<TABLE>
<S> <C>
Treasury Rate..................................................................... 40
Treasury Rate Determination Date.................................................. 41
Treasury Rate Security............................................................ 37
Trust............................................................................. 1
Trustee........................................................................... 1
Trust Accounts.................................................................... 47
Trust Agreement................................................................... 3
Trust Property.................................................................... 1
Trust Stripped Bond............................................................... 71
Trust Stripped Coupon............................................................. 71
UCC............................................................................... 46
Underwriting Agreements........................................................... 76
U.S. Person....................................................................... 73
</TABLE>
81
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION,
OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST
MERCHANTS, THE SELLER OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE
TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Reports to Securityholders..................... S-2
Summary........................................ S-3
Risk Factors................................... S-19
First Merchants Automobile Financing Program... S-23
The Trust...................................... S-29
The Receivables Pool........................... S-30
The Seller and First Merchants................. S-35
Use of Proceeds................................ S-36
Description of the Notes....................... S-36
Description of the Certificates................ S-46
Weighted Average Life of the Securities........ S-48
Description of the Transfer and Servicing
Agreements................................... S-48
The Policies................................... S-59
Financial Security Assurance Inc............... S-60
Certain Federal and State Income Tax
Consequences................................. S-62
ERISA Considerations........................... S-63
Underwriting................................... S-63
Legal Matters.................................. S-64
Experts........................................ S-64
Index of Defined Terms......................... S-65
Annex I........................................ A-1
PROSPECTUS
Reports to Securityholders..................... 2
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
Summary of Terms............................... 3
Risk Factors................................... 14
The Trusts..................................... 22
The Receivables Pools.......................... 25
Weighted Average Life of the Securities........ 27
Pool Factors and Trading Information........... 28
Use of Proceeds................................ 28
The Company and the Seller..................... 29
Description of the Notes....................... 30
Description of the Certificates................ 35
Certain Information Regarding the Securities... 37
Description of the Transfer and Servicing
Agreements................................... 45
Certain Legal Aspects of the Receivables....... 57
Certain Federal Income Tax Consequences........ 61
ERISA Considerations........................... 74
Plan of Distribution........................... 76
Legal Matters.................................. 77
Index of Terms................................. 78
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED BY THIS PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
$144,673,000
FIRST MERCHANTS
AUTO TRUST 1996-C
$101,000,000 FLOATING RATE
ASSET BACKED NOTES, CLASS A-1
$37,886,000 6.15%
ASSET BACKED NOTES, CLASS A-2
$5,787,000 6.35%
ASSET BACKED CERTIFICATES
FIRST MERCHANTS
AUTO RECEIVABLES CORPORATION II
SELLER
FIRST MERCHANTS
ACCEPTANCE CORPORATION
SERVICER
[LOGO]
UNDERWRITERS OF THE NOTES
SALOMON BROTHERS INC
BEAR, STEARNS & CO. INC.
UNDERWRITER OF THE CERTIFICATES
SALOMON BROTHERS INC
PROSPECTUS SUPPLEMENT
DATED DECEMBER 10, 1996
