-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DzoYZokn6K5U/05O88u02q3aSEHdHjE2NznuSotq/gE4KPn8HqYDUiQPDj8USOs2 +KNgsmW2VPE5QOmBJGosnA== 0000950134-99-010758.txt : 19991209 0000950134-99-010758.hdr.sgml : 19991209 ACCESSION NUMBER: 0000950134-99-010758 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19991208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSITION AUTO FINANCE III INC CENTRAL INDEX KEY: 0001088419 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 752822604 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-80537 FILM NUMBER: 99770380 BUSINESS ADDRESS: STREET 1: 5422 ALPHA RD STREET 2: SUITE 100 CITY: DALLAS STATE: TX ZIP: 75420 BUSINESS PHONE: 9724040042 MAIL ADDRESS: STREET 1: 5422 ALPHA RD STREET 2: SUITE 100 CITY: DALLAS STATE: TX ZIP: 75420 SB-2/A 1 AMENDMENT NO. 2 TO FORM SB-2 - FILE NO. 333-80537 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1999 WASHINGTON, D.C. 20549 REGISTRATION NO. 333-80537 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TRANSITION AUTO FINANCE III, INC. (Name of small business issuer in its charter) TEXAS 6141 75-2822804 (State or other jurisdiction of (Primary industrial (I.R.S. Employer Identification incorporation or organization) classification code number) No.)
TRANSITION AUTO FINANCE III, INC. KEN LOWE 8144 WALNUT HILL LANE, NUMBER 680 8144 WALNUT HILL LANE, NUMBER 680 DALLAS, TEXAS 75231 DALLAS, TEXAS 75231 (214)360-9966 (214)360-9966 (Address, including zip code, and telephone (Name, address, including zip code and number, including telephone number, area code, of registrant's principal executive including area code, of agent for service) offices and principal place of business)
--------------------- Copies to: VINCE MOUER GERALD MORGAN KUPERMAN, ORR, MOUER & ALBERS, P.C. BURDETT, MORGAN & THOMAS 100 CONGRESS AVENUE, SUITE 1400 5700 S.W. 45TH STREET AUSTIN, TEXAS 78701-4042 AMARILLO, TEXAS 79114
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF DOLLAR AMOUNT OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED TO BE REGISTERED UNIT PRICE REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------- Secured Promissory Notes $20,000,000 N/A $20,000,000 $6,061 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CROSS REFERENCE SHEET (PURSUANT TO RULE 404(a))
ITEM NO. ITEM LOCATION IN PROSPECTUS - ---- ---- ---------------------- 1. Front of Registration Statement and Outside Front Cover Page of Prospectus................................... Front of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover of Prospectus...... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information and Risk Factors................... Prospectus Summary; Risk Factors 4. Use of Proceeds........................................ Use of Proceeds 5. Determination of Offering Plan......................... Underwriting 6. Dilution............................................... Not Applicable 7. Selling Security Holders............................... Not Applicable 8. Plan of Distribution................................... Underwriters 9. Legal Proceedings...................................... Not Applicable 10. Directors, Executive Officers, Promoters and Control Persons.............................................. Management 11. Security Ownership of Certain Beneficial Owners and Management........................................... Principal Stockholders 12. Description of Securities To Be Registered............. Description of the Notes; Collateral for the Notes 13. Interests of Named Experts and Counsel................. Experts, Legal Matters 14. Disclosure of Commission's Position on Indemnification for Securities Act Liabilities....................... Management 15. Organization Within Last Five Years.................... Use of Proceeds; The Company, Security Ownership of Certain Beneficial Owners and Management; Management -- Certain Relationships and Related Transactions 16. Description of Business................................ Available Information; Risk Factors; The Company; Management's Discussion and Analysis of Plan of Operation; Security Ownership of Certain Beneficial Owners and Management; Management; Description of the Notes; Index to Financial Statements 17. Management's Discussion and Analysis of Plan of Operation............................................ The Company; Management's Discussion and Analysis of Plan of Operation 18. Description of Property................................ The Company 19. Certain Relationships and Related Transactions......... The Company -- The Business of the Company; Management -- Certain Relationships and Transactions
-i- 3
ITEM NO. ITEM LOCATION IN PROSPECTUS - ---- ---- ---------------------- 20. Market for Common Equity and Related Stockholder Matters.............................................. Not Applicable 21. Executive Compensation................................. Management 22. Financial Statements................................... Financial statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. Not Applicable
-ii- 4 TRANSITION AUTO FINANCE III, INC. 11% SECURED PROMISSORY NOTES MAXIMUM $20,000,000 MINIMUM $250,000 Who we are: Transition Auto Finance III, Inc., a wholly-owned, single purpose subsidiary of Transition Leasing Management, Inc. What we do: Purchase passenger cars, light trucks, suburban utility vehicles, minivans and motorcycles and lease them to customers with damaged credit ratings; Transition Leasing Management, Inc. performs all services necessary for our operations. Trustee: Trust Management, Inc. --------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR HAS DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK INCLUDING RISKS OF DEFAULT ON THE LEASE CONTRACTS. SEE "RISK FACTORS", BEGINNING ON PAGE 2. --------------------- The offering proceeds will be distributed as follows:
MINIMUM MAXIMUM OFFERING ($250,000) OFFERING ($20,000,000) ------------------- ---------------------- Underwriter's commission and fees........... 8.0% $ 20,000 $ 1,600,000 Other offering expenses..................... 2.0 5,000 400,000 Our net proceeds............................ 90 225,000 18,000,000
--------------------- This offering is being conducted on a "best efforts" basis by our underwriter, Great Nation Investment Corporation. This Offering will terminate on the first to occur of: - March 31, 2000, if we have not received subscriptions totaling $250,000 by that date, - our receipt of $20,000,000 in subscriptions, - December 31, 2000 or - such earlier date as we elect in our sole discretion. --------------------- The date of this Prospectus is , 1999 5 SUMMARY The following summarizes the information that is discussed in more detail in the text of this prospectus. You should read the entirety of this prospectus before making your decision to purchase notes. Terms of the Offering. The material terms of our offering are as set forth on the cover page of this prospectus and as follows: Securities offered: 11% Secured Promissory Notes Maximum offering amount: $20,000,000 Minimum subscription amount: $5,000; if you are using your individual retirement account (IRA), you may subscribe for as little as $2,000 of notes. Minimum offering amount: $250,000; all subscriptions will be held in escrow until we have received subscriptions totaling at least $250,000. Your subscription funds will be deposited in an interest bearing escrow account until we receive subscriptions totaling $250,000 or we terminate this offering, whichever occurs earlier. Terms of the Notes. The basic terms of the notes we are offering to you are as follows: Maturity Date: December 31, 2004. Interest Rate: 11% per annum. Interest Payments: Interest will be payable monthly in arrears, meaning that we will pay interest for each month on or before the fifteenth day of the next month. The first interest payment will be due on the 15th day of the second full month after your note is issued (your note will be issued as of the third business day after your subscription payment is received. Principal Payments: No principal payments will be due until maturity. Sinking Fund: From and after the earlier of December 31, 2002, or the date we deliver to the Trustee a contract unavailability notice, all of our assets, and any proceeds from the collateral securing the notes, will be placed in a sinking fund account and we may use such proceeds only for the repayment of the notes and payment of the trustee's fees and expenses. Redemption: We may redeem the notes, in whole or in part, on any payment date after June 30, 2001. If we redeem less than all of the notes, the trustee will determine which notes are to be redeemed in such fashion as the trustee thinks appropriate. Any redemption will be effected at a price equal to the principal amount of the note outstanding plus interest accrued through the date of the redemption. Collateral for our notes: All of our assets: our vehicles, our lease contracts and, should we lapse into default under the notes, our funds will be held in trust for the benefit of the noteholders. Our Business. We are permitted to engage in only those activities which further our business purpose of leasing vehicles to customers with "sub-prime" credit ratings and to incur only those expenses permitted by the Indenture. We will lease only new and late model (not more than four model years old) used vehicles -- passenger cars, light trucks, minivans, sport utility vehicles and motorcycles. -1- 6 RISK FACTORS An investment in the notes involves a number of risks. In considering a purchase of these securities, you should carefully consider the risks involved, including the following: Limited Assets; Single Purpose Nature; No Guarantor We were organized by Transition Leasing as a single purpose entity. Under the Indenture, we can engage in and conduct only the vehicle leasing business. Accordingly, we will not have any significant assets other than the vehicles, the lease contracts and the accounts into which the net proceeds of this offering and our operating revenues are deposited. No other party, including our sole shareholder, Transition Leasing, will insure or guarantee our obligations under the notes or will be obligated to make capital contributions to us at any time. Consequently, you can rely only on the funds we receive from leasing the vehicles and the funds we receive from the sale of the vehicles, for the payment of interest on and principal of the notes. If such payments and funds are insufficient to permit payment of the sums due on the notes, we will have no other significant assets with which to pay any portion of the deficiency. Adequacy of Repayment Funds Except for the obligation to deposit funds for monthly interest payments, we are not required to satisfy any minimum schedule of payments into the sinking fund account, and prior to the maturity date, we are not required to satisfy any minimum schedule of payments of principal on the notes. After the sinking fund trigger date, which is the earlier of December 31, 2002 or the day we deliver a contract unavailability notice, the funds in the sinking fund account will consist of the net collection proceeds from the lease contracts and vehicles during the period from the sinking fund trigger date to the maturity date and any income earned on such proceeds while they are in the sinking fund account. There is a risk that the funds in the sinking fund account will be insufficient to pay all principal and interest outstanding on the notes on the maturity date. If the funds in the sinking fund account are insufficient to pay all principal and interest outstanding on the notes on the maturity date, we anticipate being able to refinance or sell the remaining lease contracts and vehicles and using the proceeds of any such refinancing or sale to repay any principal and interest then outstanding under the notes. There is a risk, however, that no such refinancing or sale can be consummated or that the proceeds from any such refinancing or sale will be insufficient to repay the principal and interest then outstanding. Poor Credit Decisions We will be dependent upon Transition Leasing's judgment with respect to the subjective and difficult process of leasing automobiles to people with prior substantial credit problems and non-prime credit ratings and making credit decisions in connection therewith. Poor credit decisions by Transition Leasing could impair our ability to repay the notes. Sufficient Number of Lease Customers We will depend on Transition Leasing for purchasing and originating leases and contacts with automobile franchise dealers, independent automobile dealers, and independent leasing companies from whom most of the vehicles will be purchased by us and most of our lessee-customers will be referred. Based on Transition Leasing's recent limited experience, we believe that an adequate supply of eligible customers and lease contracts will be available. If we are unable to locate a sufficient number of additional eligible customers, we could elect to deliver a contract unavailability notice to the trustee, at which time we would cease purchasing vehicles and creating new lease contracts, and all subsequent net collection proceeds from the then existing lease contracts and vehicles, following deduction for payment of interest on the notes and allowed expenses, would be deposited into the sinking fund account for payment of the notes. Our delivery of a contract unavailability notice prior to the time at which the sinking fund trigger date would otherwise occur may have a number of adverse consequences, among them a negative impact -2- 7 on our ability to repay the notes and an incentive for us to redeem the notes earlier than we might otherwise redeem or pay them. Redemption Risk; Yield Considerations If future interest rates decline, our ability to redeem the notes may limit your ability to realize enhancements in the value of the notes resulting from the lower interest rates generally existing in the market. You may not be able to reinvest the redemption proceeds at yields equal to or exceeding the yields on the notes. It is possible that yields on any such reinvestments will be lower, and may be significantly lower, than the yields that could have been realized on the notes. Because the interest which accrues with respect to the notes is payable in arrears (i.e., within 15 days after the end of the month in which it accrues), the yield will be less than the stated rate of 11% per annum. Collection Policies In the event that a lease payment is more than 30 days overdue, Transition Leasing generally will commence repossession of the leased vehicle. However, Transition Leasing believes that collections on the lease contracts will be maximized if it is permitted some latitude to work with customers who may be in technical default for late payment of a single installment, but who have been making payments on a regular and timely basis and who otherwise are not in default. Of course, if a substantial number of defaulting lease customers make no further payments on their lease contracts, the delay in the repossession of their leased vehicles could result in a decrease in our repossession proceeds and could have an adverse impact on our ability to pay the notes. Subjective Determination of Residual Value; Reliance on Remarketing To Satisfy Residual Obligation At lease inception, we must estimate what the value of the vehicle will be at the end of the scheduled lease term, a value generally described in the automobile leasing industry as the "residual value." Our leases are designed to recover the depreciation in the value of each vehicle over the life of the lease, and the projection of residual value is a key element in the way we structure the financial terms of our leases. At the end of the lease term, the proceeds we receive from disposition of the leased vehicle may be less than our expected residual value for a number of reasons. Among possible reasons are a possible inaccuracy of the initial estimate, changes in the market for the specific model of the leased vehicle or the used vehicle market in general, and ineffective remarketing efforts by Transition Leasing. At the end of the scheduled lease term, we generally will dispose of the leased vehicle either by selling it to the lease customer (or some other party related to the lease customer) or by selling it "wholesale" in the used automobile market. If we realize proceeds from such disposition in an amount less than our original estimate of the residual value, whether due to inaccuracy of the original estimate, ineffective remarketing efforts, or adverse changes in the market for that leased vehicle (in the used automobile market in general or otherwise), we may realize a loss on the vehicle. Losses suffered on the disposition of off-lease vehicles could reduce our ability to repay the notes. Lack of Market for Notes The notes will constitute a new issue of securities, and such securities will have no established trading market. We do not intend to list the notes on any national securities exchange or to seek the admission of the notes for quotation and trading in the NASDAQ National Market System. Although certain broker/dealers may determine to make a market in the notes, we do not anticipate that this will occur or that a secondary market will develop at any point during the term of the notes. You will not be able to require us to redeem your notes and you may not be able to liquidate your investment in the notes in the event of an emergency or for any other reason. Moreover, you may not be able to use the notes as collateral for loans. Accordingly, you should not purchase the notes if you have any need for liquidity in your investment. -3- 8 Lien of Trustee Under the terms of the Indenture, the trustee is granted a lien on the property which serves as collateral for the notes. The trustee's lien is superior to that securing the notes and secures the payment to the trustee of the amounts due to it under the terms of Indenture, including any amounts we owe to the trustee pursuant to indemnification provisions within the Indenture. In the case of a default, the trustee's lien will entitle it to be paid any sums owed the trustee before you receive any payments. Delays in Contract Purchases or Acquisitions We expect to purchase or acquire lease contracts as soon as practicable following the receipt of the net proceeds from the sale of notes. Until we use the proceeds for that purpose, we will hold them in an interest-bearing bank account or invest them in money market mutual funds that invest in U.S. government obligations. We have made no provision in this offering for cessation or suspension of the selling effort if we experience a delay in the utilization of investor funds to purchase vehicles and create new leases. If unforeseen delays occur in the purchase of vehicles and creation of lease contracts, our overall profitability and ability to repay the notes could be reduced because the yields of the short-term investment alternatives for such funds are expected to be less than the yields we anticipate receiving from the lease contracts and less than the cost of such funds, i.e., the interest rate payable on the notes. Certain Legal Matters Relating to the Contracts Priority of Liens in Leased Vehicles. Statutory liens for repairs, unpaid storage charges or unpaid taxes may have priority even over a perfected security interest in a vehicle, and certain state and federal laws permit the confiscation of motor vehicles used in unlawful activity. Liens for repairs or taxes, or the confiscation of a vehicle, could arise or occur at any time during the term of a lease contract and may result in the loss or impairment of the trustee's perfected security interest in a motor vehicle. We may not be given any notice in the event such a lien arises or confiscation occurs. Bankruptcy and Deficiency Judgments. Certain statutory provisions, including federal and state bankruptcy and insolvency laws, may limit or delay our ability to repossess, resell or re-lease vehicles or enforce a claim for damages. In addition, we may determine that a damage claim is not an appropriate or economically viable remedy, or we may settle at a discount any judgment that we do obtain. In the event we do not obtain deficiency judgments, and deficiencies are not satisfied or are satisfied at a discount or discharged, in whole or in part, the loss will be borne by us and could adversely affect our ability to repay the notes. Consumer Protection Laws. Numerous federal and state consumer protection laws impose requirements upon the origination, form, and collection of automobile lease contracts. State laws impose finance charge ceilings and other restrictions on consumer transactions and may require certain contact disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. A risk exists that this liability could affect our ability, as lessor under certain of the lease contracts and as an assignee of certain lease contracts, to enforce the lease contracts. In addition, certain of these laws make an assignee of such contract liable to the lease customer for any violation by the assignor. Accordingly, as holder of the lease contracts, we could be subject to liability to a lease customer under one or more of the lease contracts. Transition Leasing will warrant to us that consumer protection laws have not been violated and if a lease customer has a claim or defense under such laws that materially and adversely affects our interest in a lease contract, Transition Leasing will be obligated to repurchase the lease contract. Vicarious Tort Liability as Lessor for Liabilities of Lessees Under the laws of certain states, we could suffer vicarious tort liability as the owner of a vehicle involved in an accident or otherwise causing personal injury or property damage. We will attempt to mitigate this potential liability by requiring that all lease customers carry liability insurance in specified minimum amounts naming us as additional insured and loss payee. In addition, we will maintain -4- 9 contingent and excess automobile liability policies to protect our interest in the event that a lease customer's required insurance is not available or is inadequate in any given case. If we were not adequately protected by insurance, substantial judgment liabilities against us could reduce and even eliminate our ability to repay the notes. Conflicts of Interest We are the third single-purpose vehicle leasing subsidiary formed by Transition Leasing. Prior to forming our Company, Transition Leasing organized Transition Auto Finance, Inc. ("Transition Auto Finance, Inc."), and Transition Auto Finance II, Inc. ("Transition Auto Finance II, Inc."). Transition Auto Finance, Inc. has redeemed all the notes it had issued and no longer conducts business. Transition Auto Finance II, Inc. continues in operation, and expects that it will have fully invested the proceeds of its offering of notes before we use any of the proceeds from our offering to buy vehicles and create leases. If we were to begin to buy vehicles and create leases at the same time Transition Auto Finance II, Inc. is engaging in that same activity, we would be competing against Transition Auto Finance II, Inc. for leasing customers and vehicles. In order to avoid such a conflict of interest, we commit that we will not commence buying vehicles and creating new leases until Transition Auto Finance II, Inc. has completed investing its funds in vehicles and leases. In addition, Transition Leasing has committed that once Transition Auto Finance II, Inc. has fully invested its funds in vehicles and leases, all vehicle lease contracts purchased or originated by Transition Leasing that satisfy our contract criteria will be made available to us, to the extent that we have funds available for such purchases, subject only to right of Transition Auto Finance II, Inc. to acquire vehicle lease contracts and vehicles with proceeds from repossession of its leased vehicles or prepayments of its lease contracts. Transition Leasing has advised us that it probably will continue to form and obtain financing for additional new subsidiaries to engage in the vehicle leasing business in the future. Ken Lowe, our President, Chief Financial Officer and sole director, is the President and sole director of Transition Leasing and of Transition Auto Finance II, Inc.. There are real and on-going conflicts of interest between us and one or both of these two entities. There are and will be conflicts of interest with respect to allocation of management time, services, overhead expenses and functions. Management of Transition Leasing intends to resolve any such conflicts in a manner that is fair and equitable to us. You could be subject to the risk that any particular conflict might be resolved in a manner that adversely affects you and the other noteholders. In addition, we anticipate having a conflict of interest with respect to the decisions as to which lease customers and lease contracts originated by Transition Leasing are to be acquired by us or by parties other than us, including Transition Leasing and affiliates, which may include future subsidiaries. To minimize these conflicts, Transition Leasing has determined that, once Transition Auto Finance II, Inc. has fully invested its funds in vehicles and leasing, any future lease contracts originated by Transition Leasing that satisfy our lease contract criteria will be acquired by us, subject to our having funds available for acquisition of such lease contracts, and subject to the right of Transition Auto Finance II, Inc. to acquire vehicles and lease them to customers using proceeds realized from repossession of vehicles and prepayments of lease contracts. We will pay certain fees to Transition Leasing including: - a marketing fee equal to 57.5% of the customer's down payment with respect to each lease contract; - a purchase administration fee and a document fee totaling $150; - in the case of new lease contracts following the repossession of a leased vehicle, a releasing fee; - a monthly lease contract servicing fee of $20 for each lease contract that has not been assigned for repossession; and - a reimbursement amount equal to Transition Leasing's out-of-pocket expenses in connection with the repossession, repair, remarketing and resale of a leased vehicle. -5- 10 There has been no independent determination of the fairness and reasonableness of the terms of these transactions nor have such terms been negotiated at arms' length. We believe, however, that the fees to be paid to Transition Leasing, including the marketing fee, are reasonable based on comparable fees paid to other lease brokers (or facilitators) in automobile leasing transactions involving customers with non-prime credit ratings. Sale of Small Amount of Notes In the event that we sell only a small amount of notes in excess of the minimum offering amount, the performance of individual lease contracts in the pool securing the notes will have a greater effect on our ability to pay the notes than if a larger amount of the notes are sold. In addition, although most of our expenses will generally vary with the amount of lease contracts or notes, relatively small amounts of fixed fees and expenses payable to the trustee and for on-going banking, accounting and legal services may not vary in proportion with the amount of lease contracts and may be relatively higher if only a small portion of the notes is sold. If the fixed expenses are higher than expected or if we are unable to acquire the number of lease contracts on the proposed terms projected herein, our ability to repay a small amount of notes may be materially adversely affected. -6- 11 CAPITALIZATION The following table sets forth our capitalization as of November 9, 1999, and as adjusted to reflect the sale of the minimum amount of notes offered hereby.
AS OF NOVEMBER 9, 1999 ------------------------- AS ADJUSTED MINIMUM ACTUAL OFFERING ------ ---------------- LIABILITIES 11% Secured Notes Due December 31, 2004................... $250,000 SHAREHOLDERS' EQUITY Common Stock, $0.10 par value, authorized 1,000 shares, issued and outstanding................................. $ 100 $ 100 Paid-In Capital............................................. 900 900 Retained Earnings........................................... 0 TOTAL SHAREHOLDERS' EQUITY........................ 1,000 1,000 TOTAL LIABILITIES AND SHAREHOLDER EQUITY.......... 1,000 251,000
The expenses we have incurred as a result of this offering will be capitalized and amortized over the lives of the notes. The offering expense to be amortized annually will vary according to the amount and timing of the funding of the Notes. For example, if the offering is completed prior to December 31, 2000, the percentage of the total offering expenses that would be charged to operations in the first five years would be 20% per year. Other organizational expenses are capitalized and amortized over a five-year period on a straight-line basis. Our capitalization reflects our asset-backed security structure. Our only significant assets will be the vehicles, the lease contracts with our lease customers, the net proceeds of this offering, the net operating proceeds (revenues from lease contracts and sale of leased vehicles less debt service and allowed expenses), proceeds realized from reinvestment of such net proceeds and excess collection proceeds. See "COLLATERAL FOR THE NOTES." The costs of ongoing operations will be borne by Transition Leasing and will be reimbursed to Transition Leasing through payment of monthly servicing and administration fees. See "THE COMPANY; COLLECTION AND SERVICING OF CONTRACTS -- Payments to Transition Leasing." USE OF PROCEEDS We will use at least 90% of the gross proceeds from the sale of our notes for the purchase of vehicles and the leasing of such vehicles to our customers. We will use 10% of the gross proceeds as follows: - we will pay to the Underwriter sales commissions of 6% of the principal amount of the Notes sold by such Underwriter; - we will reimburse the Underwriter for certain expenses incurred in connection with its due diligence activities with regard to the offering in an amount not to exceed 2.0% of the aggregate principal amount of the notes sold; and - we will use up to 2.0% of the gross proceeds from the sale of the notes to pay offering and organization expenses, including filing and registration fees, legal fees of our counsel, accounting fees, trustee's fees, escrow agent's fees, "blue sky" expenses and printing expenses. These expenses have been or will be paid by Transition Leasing, and we will reimburse Transition Leasing an amount not to exceed such 2.0%. Transition Leasing has agreed to pay expenses of the offering in excess of 2.0% of the gross proceeds from the sale of the notes. We will maintain the proceeds of this offering in our operating account until they have been fully used to acquire vehicles or lease contracts. Under the terms of the Indenture, we may invest all of our deposits in specified types of deposits or securities -- the same type of deposits or securities as the Trustee may utilize for funds that are in the sinking fund account. -7- 12 Our use of the proceeds of this offering is set forth in the table following this paragraph and in the pie charts below the table. In calculating the amount of commissions to be paid to the underwriters of our offering, the table assumes that we will pay to the underwriters the maximum amount of due diligence reimbursement permitted under the terms of the underwriting agreement.
MINIMUM MAXIMUM ($250,000) ($20,000,000) ---------- ------------- Offering and Organizational Expenses........................ $ 5,000 $ 400,000 Broker/Dealer Commissions................................... 20,000 1,600,000 Purchase of Contracts and Leased Vehicles................... 225,000 18,000,000 Total............................................. 250,000 20,000,000
We will pay the offering and organizational expenses to our parent, Transition Leasing, as reimbursement for a portion of such expenses it has paid on our behalf. PIE CHARTS Minimum - $250,000 Purchase of Contracts and Leased Vehicles ($225,000) Broker/Dealer Commissions ($20,000) Offering and Organizational Expenses ($5,000) Maximum - $20,000,000 Purchase of Contracts and Leased Vehicles ($18,000,000) Broker/Dealer Commissions ($1,600,000) Offering and Organizational Expenses ($400,000) -8- 13 The subscription escrow will terminate upon the receipt of subscriptions in the aggregate amount of $250,000 and, upon such termination, we will receive that portion of the proceeds to be used for the purchase of vehicles or lease contracts (estimated in the above table to be $225,000). We will attempt, and anticipate being able, to use the aggregate amount of such proceeds within 60 days of the termination of the escrow and the release of the escrowed funds to us. -9- 14 DESCRIPTION OF THE NOTES The notes will be issued pursuant to an Indenture between ourselves and Trust Management, Inc., who will serve as Trustee. Transition Leasing is a party to the Indenture for the purpose of making certain agreements and representations regarding the purchasing and servicing of the lease contracts with the Trustee for the benefit of noteholders. The Indenture is qualified under the Trust Indenture Act of 1939. An example of the notes and a copy of the Indenture in the form we propose to execute with the Trustee are included as exhibits to the Registration Statement we have filed in connection with this offering. You should review the example of the notes before deciding to subscribe in this offering. Our Indenture is typical of most Indentures -- it is an agreement between ourselves, Transition Leasing and the Trustee, pursuant to which the Trustee is appointed as the agent of the noteholders. The Indenture governs the notes, imposes the noteholder's lien on our assets, and specifies certain obligations and rights that bind us or accrue to our benefit or, similarly, bind you or the Trustee or accrue to your or the Trustee's benefit. The Indenture's terms are incorporated by reference into the notes -- this means that the obligations imposed, and the rights conferred, by the Indenture, even though not set forth within your note, still apply to both the note and the relationship among ourselves, the Trustee and you. The Indenture, in turn, includes obligations and rights which are incorporated by reference from the Trust Indenture Act. We encourage to you to review both the Indenture and the Trust Indenture Act. The following summaries of certain provisions of the notes and the Indenture and the summaries included under "ADDITIONAL INDENTURE PROVISIONS" do not purport to be complete and are subject to the full provisions of the notes and the Indenture. GENERAL Interest Rate 11% per annum Maturity Date December 31, 2004 Aggregate Principal Amount Up to $20,000,000 Recourse While the notes are our general obligations and you will have recourse against our assets, substantially all of our assets will be the lease contracts, the vehicles and the revenues derived from them. See "COLLATERAL FOR THE NOTES." You will have no contractual recourse against Transition Leasing for payment of the notes. Rating We have not sought, and are not required by the Indenture or any other document to obtain, a rating of the notes by a rating agency. Paying Agent and Registrar The Trustee will initially act as the paying agent and registrar. As paying agent, the Trustee will disburse the funds that we submit for payment of the notes. As registrar, the Trustee will maintain the ledger records reflecting ownership of the notes. We have the right to appoint some other person or firm as paying agent or registrar. ISSUANCE OF NOTES; TRANSFERS Denominations Integral multiples of $1,000 Minimum Subscription Amount You must subscribe for a minimum of $5,000 unless you are going to acquire the notes for your individual retirement account, in which case you may invest as little as $2,000. Transfer We may require you to reimburse us for any out-of-pocket costs we incur with respect to your transfer or exchange of a note. -10- 15 INTEREST PAYMENTS Interest Commencement Date Interest will accrue on each note from the date that it is issued (each note will be deemed issued on the third business day after your subscription payment is received). Payments Interest payments will be due and payable monthly on the 15th day of the month following the end of each successive calendar month (for the interest accruing during the prior month) and upon the maturity date. First Interest Payment The first interest payment will be due and payable on the 15th day of the month following the first full calendar month after your note is issued. If your subscription payment is received during the last three business days of any month, your note will be deemed issued in the first three days of the succeeding month and your first interest payment will be payable at least 74 and possibly as much as 80 days after your payment is received. Default Interest Rate Any installment of interest that is not paid when due will accrue interest at the lesser of - 18% per annum; or - the highest lawful rate of interest from the date due to the date of payment, but only to the extent payment of such interest is lawful and enforceable. Effective Interest Rate The effective interest rate of the notes will be lower than the stated interest rate because each payment of interest will be paid 15 days after the month over which it accrued. Payment Source The paying agent will make monthly interest payments out of funds in the sinking fund account. Before each interest payment date occurring prior to the sinking fund trigger date, we will transfer to the sinking fund account from our operating account an amount that, together with any funds in the sinking fund account, is sufficient to pay the accrued interest due on such payment date. Such transfer must be made before we apply any remaining funds in the operating account to any other purpose. Interest payments will be in the form of checks drawn on the sinking fund account. Record Dates Interest payments prior to the maturity date will be mailed by the paying agent to the registered holder of a given note as of the close of business on the first day of the month of the payment. Payments will be sent to the holders to the addresses shown for the holders in the note register maintained by the registrar. PRINCIPAL PAYMENTS Mandatory Principal Payments The principal amount then outstanding on each note, plus all accrued but unpaid interest, will be due and payable on the maturity date, December 31, 2004. The final payment of principal and interest on each note will be made only upon presentation and surrender of such note at the office of the Trustee or the paying agent. Prior to the maturity date, we are not required to make any principal payments. -11- 16 Payment Source Any amounts paid on the maturity date will be paid from the funds accumulated in the sinking fund account. We believe that there will be sufficient funds in the sinking fund account to repay all principal and interest then outstanding on the loans, but this will be a function of a number of factors. See, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION." If the funds in the sinking fund account are not sufficient, we anticipate being able to generate funds from the sale of our vehicles and lease contracts or from using our vehicles and the lease contracts as collateral for a loan from an institutional lender. We have no arrangements at this time for any such sale or loan and our ability to generate funds from such sources will be subject to a number of factors, many of which may be completely beyond our control. See, "RISK FACTORS -- Adequacy of Repayment Funds." Sinking Fund Account On the sinking fund trigger date, we will deposit in the sinking fund account any remaining net proceeds from the sale of the notes that have not been used as of the sinking fund trigger date for the purchase of vehicles and creation of lease contracts. From and after the sinking fund trigger date, all of the funds in our operating account, less expenses that are allowed expenses under the Indenture, will be transferred on at least a monthly basis to the sinking fund account. While a default continues or remains uncured, we must transfer all funds in our operating account, less any amounts owing to the Trustee, to the sinking fund account, and the Trustee will have the right to cause such transfer. See, "DEFAULT," below. The funds which accumulate in the sinking fund account, after payment of the Trustee's expenses, may be used only for payment of the notes. REDEMPTION Timing of Redemptions The amount and timing of any redemption will be at our sole discretion. On any interest payment date after June 30, 2001, we may redeem one or more of the notes, in whole or in part, in accordance with the Indenture. To the extent that funds in the sinking fund account exceed the aggregate amount of interest payable on the notes on the next monthly payment date, we may use funds in the sinking fund account to redeem all or any portion of the notes. Any redemption will have an effect analogous to a principal payment. Redemption Price The redemption price of any given note will be equal to 100% of the outstanding principal amount of such note, plus interest to the date of redemption, without any premium or penalty. Partial Redemption If less than all of the notes are to be redeemed, the Trustee shall select the notes to be redeemed by lot or other method selected by the Trustee. If any note is to be redeemed in part only, a new note in principal amount equal to the unredeemed portion of the original note will be issued upon cancellation of the original note. Notice At least 10 days but not more than 60 days prior to any redemption of your note, we will deliver to you a notice by first class mail, postage prepaid, and our notice will state: - the redemption date; -12- 17 - the portion of the principal amount of your note to be redeemed; - the redemption price; - the name and address of the paying agent; - the requirement that the notes be delivered to the paying agent; and - that interest on the notes ceases to accrue on and after the redemption date. Payment Source Before the sinking fund trigger date, we will utilize funds generated by our operations to pay any redemption amounts. From and after the sinking fund trigger date, we will utilize funds in the sinking fund account to pay any redemption amounts. DEFAULT Sinking Fund Account If we lapse into default regarding our obligations under the Indenture and for so long as such default continues or remains uncured, all funds in the operating account, less any amounts owing to the Trustee, must be transferred on the business day immediately preceding each payment date to the sinking fund account, and the Trustee will have the right to cause such transfer. In addition, during the continuance of a default, the Trustee will have all of its other rights and remedies available for collection of the proceeds on the lease contracts for purposes of obtaining sufficient funds to satisfy the notes. See "ADDITIONAL INDENTURE PROVISIONS -- Rights Upon Event of Default." COLLATERAL FOR THE NOTES GENERAL To collateralize the notes, the Indenture grants to the Trustee a security interest in or lien upon all of our assets, including without limitation, all of our right, title and interest in: - the vehicles; - the lease contracts, and all payments and instruments received with respect thereto; - the Servicing Agreement and the Master Purchasing Agreement; - our operating account and all funds and investments therein; - our master collections account and all funds and investments therein; - the sinking fund account and all funds and investments therein; - all repossessed or returned vehicles (including vehicles returned upon termination of lease contracts); and - all proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or other liquid property. Pursuant to the Indenture, the Trustee has been granted a lien senior to the lien of the Indenture in order to collateralize payment of its fees and expenses as Trustee under the Indenture, except that the Trustee's lien does not attach to money held in the sinking fund account for repayment of principal and interest on the notes. -13- 18 THE CONTRACTS Each of the contracts will be a vehicle lease contract that is - purchased from an independent third party or - acquired in a transaction originated by Transition Leasing. Each lease contract will lease a new vehicle or a late model vehicle that is not more than four model years old at the time of lease (including passenger cars, minivans, sport/utility vehicles, light trucks and motorcycles). We will purchase or acquire lease contracts using the net proceeds from the sale of notes until the sinking fund trigger date. So long as we are not in default under the Indenture, we may use any net collection proceeds from the lease contracts, after deduction for payments of interest and allowed expenses, to purchase vehicles and lease them. See "THE COMPANY -- Purchase of Vehicles." To minimize conflicts of interest among potential buyers with respect to lease contracts originated by Transition Leasing, Transition Leasing has determined that, after Transition Auto Finance II, Inc. has fully invested its funds in vehicles and leases, we will acquire any lease contracts that satisfy our contract criteria to the extent that we have available the funds necessary for such purchases, subject only to the right of Transition Auto Finance II, Inc. to acquire vehicles with proceeds from repossession of its leased vehicles or prepayment of its lease contracts. See "RISK FACTORS -- Conflicts of Interest." We will take the following steps to assure the priority and perfection of the Trustee's security interest in each lease contract and vehicle: - we will deliver each lease contract we acquire to the Trustee and label it with a notice indicating the Trustee's security interest; - we will file a UCC financing statement listing such lease contract, and also covering the proceeds therefrom, in the appropriate public office; and - we will have each vehicle's certificate of title issued to reflect us as the owner and the Trustee as the first lienholder. Together with the Trustee, we may appoint a financial institution to retain possession of the lease contracts and related title documents as custodian and bailee for the Trustee and us. To date, Transition Leasing has done business only in Texas but it is in the process of expanding its operations to other states. The first such state will be Louisiana. We have formed a subsidiary, Transition Auto Finance III LA, L.L.C. to execute leases with Louisiana customers. We may form subsidiaries to do business in other states as Transition Leasing expands its operations, depending upon the legal requirements of doing business in those states. THE SINKING FUND ACCOUNT We have established, in the name of the Trustee, a trust account at Texas Community Bank which we refer to in this prospectus as the sinking fund account. All payments of interest or principal on the notes will be made from funds in the sinking fund account. Funds in the sinking fund account will not be commingled with any other of our monies or the monies of Transition Leasing. All monies deposited from time to time in the sinking fund account will be held for the benefit of the Trustee as part of the collateral for the notes. Payments with respect to the notes that are to be made from the sinking fund account will be made on our behalf by the Trustee or a paying agent, and no funds in the sinking fund account will be paid over to us or Transition Leasing. The funds in the sinking fund account will be employed by the Trustee or the paying agent to pay interest on the notes on each payment date and to effect redemptions of the notes, in our discretion, on any payment date after the sinking fund trigger date. -14- 19 In the absence of a continuing event of default under the Indenture, we will have investment control of the funds in the sinking fund account. During the continuance of an event of default, the Trustee will have such investment control. In both cases, such investment control is limited to investments which are within the restrictions established in the Indenture. Prior to the sinking fund trigger date, all funds designated for payment of interest due with respect to the notes will be deposited in the sinking fund account. After the sinking fund trigger date, all net collection proceeds (including all portions thereof treated for tax or financial accounting purposes as principal or interest) from the lease contracts, following deduction of allowed expenses (including fees payable to Transition Leasing), will no longer be available to us for the purchase of additional lease contracts and will be deposited into and held, along with the income earned thereon, by the Trustee in the sinking fund account for repayment of the notes. With the exception of payments required to pay interest due and payable with respect to the notes, no schedule of minimum required payments into the sinking fund account will exist. See "DESCRIPTION OF THE NOTES -- Payments of Interest." THE CONTRACT PROCEEDS, MASTER COLLECTIONS ACCOUNT AND OPERATING ACCOUNT We have established the master collections account, initially at Texas Community Bank, where all remittance checks, drafts and other instruments for the contracts will be deposited for collection by the financial institution as our agent. All payments made on or with respect to the lease contracts (including all portions thereof deemed to be principal or interest for tax or financial accounting purposes) will be deposited in the master collections account using code numbers assigned to individual lease contracts and separate entities to ensure proper tracing of payments. We have established the operating account, a commercial bank account we maintain for use in holding our proceeds and in paying our expenditures. Prior to the sinking fund trigger date, all funds in the master collection account will be transferred to our operating account. We may invest any funds in the operating account in investments deemed suitable under the Indenture. We intend to invest such funds daily. Transition Leasing, as a party to the Indenture, has acknowledged that: - any collections or other proceeds from the lease contracts in our master collections account and operating account are our property; - any such collections or other proceeds from the lease contracts in Transition Leasing's possession or control are held by Transition Leasing pursuant to the Indenture as our custodian and bailee and the custodian and bailee of the Trustee; and - any such collections or other proceeds are subject to the security interest of the Trustee. Any funds in our master collections account and operating account will be subject to the Trustee's lien and will collateralize payment of the notes. So long as the notes have not been declared due and payable as a result of an event of default and subject to the receipt by the Trustee of any required certificates, we will have the right to cause the funds contained in the operating account to be withdrawn or applied for the following purposes in the following priority: - first, through a direct transfer to the sinking fund account, for the payment of any interest due on the outstanding notes on each payment date; - second, for any amounts due the Trustee for its fees and expenses; - third, except during an event of default, for the payment of any such other allowed expenses as we certify to the Trustee; -15- 20 - fourth, after the sinking fund trigger date or during an event of default, for deposit to the sinking fund account for payment of the notes; and - fifth, prior to the sinking fund trigger date, except during an event of default, for the purchase of such additional lease contracts, as we and Transition Leasing certify to the Trustee as being eligible under the lease contract criteria specified in the Indenture. See, "THE COMPANY -- Purchase of Vehicles." The lease contract proceeds must be sufficient to satisfy fully any application having higher priority before they may be applied to a use having a lower priority. To the extent collected funds are not needed to fund the payment on the notes, the purchase of additional lease contracts, or the payment of allowed expenses, such funds will generally remain in our operating account. We and Transition Leasing will provide quarterly reports to the Trustee certifying to the Trustee the purchasing and servicing activities that have occurred in relation to the lease contracts, the amounts of allowed expenses paid from the operating account and the fact that all payments from the operating account conform with the Indenture and providing a reconciliation of deposits and withdrawals from the operating account. On or before the business day immediately preceding each payment date, we will cause to be transferred directly from the operating account to the sinking fund account an amount that, together with any funds in the sinking fund account, is sufficient to make all interest payments on the notes outstanding on such payment date. See "DESCRIPTION OF THE NOTES -- Interest Payments." "Allowed expenses" will be limited to: - the expenses and fees of the Trustee under the Indenture; - fees charged by Transition Leasing under the Servicing Agreement (including the servicing fee and purchase administration fee) and under the Master Purchasing Agreement; - title transfer fees; - federal, state and local taxes (including corporate franchise taxes but excluding federal, state and local income taxes for which Transition Leasing is responsible under a tax sharing agreement); - legal and accounting fees; - printing expenses for reports, compliance certificates and opinions required by the Indenture; - premiums for vehicle residual value insurance; - charges for vehicle warranty service contracts; - bank service charges and account fees, including a share of such charges and fees, if any, incurred by Transition Leasing for the master collections account); - expenses of repossessing, repairing, remarketing and liquidating the vehicles (as to each vehicle, not to exceed the liquidation proceeds from the vehicle and any insurance proceeds applied to vehicle repairs or required to be refunded to Lessees). Transition Leasing will pay all other general administrative and overhead expenses incurred by us. The following table summarizes our estimates of the anticipated allowed expenses (see "PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS -- Collection of Payments"): -16- 21 SUMMARY OF ESTIMATED ALLOWED EXPENSES
ALLOWED EXPENSES ESTIMATED AMOUNT ---------------- ---------------- Servicing Fees Contract Servicing Fee (paid to Transition Leasing)................................... $20 per month per lease contract Purchase Administration Fee (paid to Transition Leasing)........................ $100 per lease contract purchased License and Title Transfer Fee.................. $86.80 per lease contract State Inspection Fee............................ $19.75 per lease contract Documentary Fee................................. $50.00 per lease contract Marketing Fee (paid to Transition Leasing)...... 57.5% of customer down payment Trustee Fees Acceptance Fee................................ $12,000 Annual Administration......................... $15,000 Note Payments and Registrar Services.......... $5 per year per note Interest Checks............................... $1.00 each Collateral Custodial Services................. $5 per year per lease contract plus $2.50 per acceptance or release of lease contract Bank Fees Master Collections Account.................... $300 to $500 (varies with volume) Operating Account............................. $2,000 per year (varies with number of transactions) Subscription Escrow Account................... $1,000 per year Legal Expenses Annual Attorneys' Opinion to Trustee.......... $2,500 Accounting Expenses Annual Audit.................................. $15,000 Annual Tax Return............................. $1,750 Printing and Mailing.......................... $3,000 Insurance Premiums Residual Value Insurance...................... $500 per year, plus 1.68% of the residual value of each leased vehicle (with $100 deductible for leased vehicles) Contingent Liability and Physical............. $2.00 per leased vehicle per month Total Annual Servicing, Trustee, Bank, Legal, Accounting and Insurance Fees and Premiums.... Estimated to average (i) $559,300 (or $362 per lease contract) if the maximum amount of notes is sold, or (ii) $38,771 or ($775 per outstanding lease contract) if the minimum amount of notes is sold Repossession, (Remarketing, Repair and Resale) (to reimburse Transition Leasing for such expenses)..................................... Estimated to average $100 to $400 for each repossessed leased vehicle, but limited to the related liquidation or insurance proceeds Remarketing Expenses............................ $100 to $400 for each leased vehicle upon expiration of the lease, but limited to the related resale or insurance proceeds Releasing Fee (paid to Transition Leasing)...... 15% of the down payment by the customer (Lessee) with respect to a new lease contract following repossession Federal Income Taxes............................ Varies with taxable income (maximum 35%) Texas Corporate Franchise Taxes................. Greater of 4.5% of taxable income or 1/4 of 1% of taxable capital
-17- 22 PERFECTION OF TRUSTEE'S SECURITY INTEREST IN THE COLLATERAL Set forth below is a description of how each of the types of property which serves as collateral for the notes is made subject to the Trustee's pledge or security interest in favor of the note holders under applicable state law. - Vehicles. The vehicles will be automobiles, trucks or motorcycles subject to the state law in which such vehicle has been leased. Generally, state laws require that liens on vehicles be evidenced either on the title for such vehicles or by a filing under the Uniform Commercial Code in effect in such state. In Texas, for instance, evidence of the Trustee's security interests against such vehicles will be evidenced by notation on a certificate of title issued by the Texas Department of Public Safety. Under Louisiana law, however, a financing statement setting forth specified information converting the vehicle must be filed to perfect a security interest in a vehicle subject to the Vehicle Certificate of Title law. Pursuant to the Indenture and the custodial agreement, the Trustee will maintain actual possession of such certificates of title. - Lease Contracts. The lease contracts will be leases of vehicles which we own. The Uniform Commercial Code in effect in both Texas and Louisiana defines such lease contracts as "chattel paper." The UCC provides that a security interest in chattel paper may be perfected by filing a financing statement, and further provides that a security interest in chattel paper may also be perfected by the collateralized party taking possession of the chattel paper. The Trustee will file a UCC-1 financing statement with respect to the lease contracts and will maintain actual possession of the lease contracts pursuant to the Indenture and the custodial agreement. - Servicing Agreement and Master Purchasing Agreement. The Servicing Agreement and Master Purchasing Agreement are contractual agreements and are considered "general intangibles" under the UCC in effect in both Texas and Louisiana. Security interests in general intangibles are perfected by filing a financing statement. The Trustee will file a UCC-1 financing statement with respect to the Servicing Agreement and Master Purchasing Agreement. - Operating Account, the Master Collections Account and the Sinking Fund Account. The operating account, the master collections account and the sinking fund account are deposit accounts, and pledges of such accounts are not subject to the provisions of the UCC, except with respect to proceeds (Section 9.306 of the UCC) and priorities in proceeds (Section 9.312). Perfection of a pledge of these deposit bank accounts is made pursuant to Texas common law rules covering the pledge of personal property. Pledges are made by the pledgor executing a pledge and assignment agreement in favor of the pledgee and are perfected by the pledgor notifying the depositary bank in writing of the pledge. Security interests with respect to any investments within these accounts will be subject to applicable provisions of the UCC, depending upon the types of investments. At present, the depository bank is Texas Community Bank. - Repossessed or Returned Vehicles. The repossessed or returned vehicles will already be subject to the lien noted on the certificates of title or to a security interest as described in the first point above, and the Trustee shall have actual possession of such certificates of title. - Proceeds. The proceeds of the items above that are subject to perfection under the UCC are subject to the provisions of Section 9.306 of the UCC in effect in Texas and Louisiana, and the Trustee's lien in such proceeds is perfected by perfection of the security interest underlying property as noted above, subject to Section 9.306 of the UCC in effect in Texas and Louisiana. Prepayments by lease customers on the lease contracts will be treated in the same manner as collection proceeds on the lease contracts. Consequently, such prepayments may be used to purchase additional lease contracts prior to the sinking fund trigger date and will not be passed through to noteholders as principal payments. -18- 23 The following chart illustrates the flow of lease contract proceeds from the lease customers through the master collections account and operating account to the applications thereof and the priority of the various applications of such proceeds. FLOW OF CONTRACT PROCEEDS AND PRIORITY OF APPLICATIONS The gross proceeds in the final stage of the above flow chart are applied in the following order: - First, interest is paid by Trustee from transfers to the sinking fund account. - Second, trustee's fees and expenses are paid from the operating account. - Third, if we are not then in default under the Indenture, other allowed expenses are paid from the operating account. - Fourth, if we are not then in default under the Indenture: - After the sinking fund trigger date, any remaining proceeds are deposited into the sinking fund account and held by Trustee for payment of notes. - Before the sinking fund trigger date, any remaining proceeds are used to purchase or acquire additional eligible lease contracts. -19- 24 THE COMPANY GENERAL Formation We were incorporated in the State of Texas on May 26, 1999 and we have no material properties or assets and no operating history. We are a subsidiary of Transition Leasing. Our principal offices are located at 8144 Walnut Hill Lane, #680, Dallas, Texas 75231 and our telephone number is (214) 360-9966. We have formed a Louisiana subsidiary which will own the vehicles leased in Louisiana and be a party to the lease contracts originated by Transition Leasing with Louisiana residents. As of the date of this Prospectus, Transition Leasing has two other subsidiaries -- Transition Auto Finance, Inc. ("Transition Auto Finance, Inc.") and Transition Auto Finance II, Inc. ("Transition Auto Finance II, Inc."). Although Transition Auto Finance, Inc. no longer conducts operations, both Transition Auto Finance II, Inc. and Transition Auto Finance, Inc. were formed as single purpose auto vehicle leasing subsidiaries (we are formed as a single purpose vehicle leasing subsidiary, as well, but we will also lease motorcycles). Transition Auto Finance, Inc. sold all of its vehicles and lease contracts to Transition Auto Finance II, Inc. and repaid its noteholders entirely, prior to the maturity of their notes. Both Transition Auto Finance, Inc. and Transition Auto Finance II, Inc. have made all interest payments in accordance with the terms of the notes they issued. See "THE COMPANY -- Prior Performance of Subsidiaries." The Business of the Company We were established for the sole purposes of: - purchasing vehicles from third parties and leasing them to customers pursuant to lease contracts; - collecting and servicing the lease contracts; - obtaining capital through borrowings or through sale of debt or equity securities to invest in such lease contracts; - remarketing the vehicles upon termination of their lease contracts; and - all related business activities. While the notes remain outstanding, we will be prohibited from engaging in any business inconsistent with the purposes set forth above and from incurring any additional indebtedness other than allowed expenses and any other amounts incurred in the ordinary course of our business. Pursuant to the terms of the Purchasing Agreement and the Servicing Agreement, Transition Leasing will provide substantially all of the activities described above, other than raising capital. The funds necessary to purchase the lease contracts or vehicles will initially be provided from the sale of the notes offered hereby. Subject to the prior payment of interest as it becomes due upon the notes and payment of allowed expenses, the collection proceeds from the lease contracts will be used, until the sinking fund trigger date, and for so long as no event of default exists, to purchase or acquire additional lease contracts. Upon the payment in full of all principal and interest on the notes, the Trustee will release any remaining lease contracts and the titles to the vehicles to us, and the Indenture will terminate. The lease contracts will relate primarily to vehicles in the middle range of the new and late model automobile market, where consumer retail prices typically range from $15,000 to $30,000 and to new and late model Harley-Davidson motorcycles, with consumer retail prices averaging approximately $18,500. We expect that most of the lease contracts will be originated by Transition Leasing. Transition Leasing originates automobile lease contracts through new automobile franchise dealers, independent automobile dealers, independent leasing companies, automobile auctions, and other sources, including the internet site of its wholly-owned subsidiary, Verusauto.com. Transition Leasing anticipates that most motorcycle leases will be originated from sources other than Harley-Davidson dealers, such as independent dealers and other -20- 25 sellers located on the internet, and internally from Transition Leasing's own efforts. Transition Leasing seeks to lease vehicles to individuals who do not have access to other sources of consumer credit because they do not meet the credit standards imposed by automobile retailers or banking institutions, generally because they have past credit problems or non-prime credit ratings. Frequently, the reason that such an individual may have a non-prime credit rating is that, at some time in the past, he has defaulted on one or more financial obligations, or he has filed for relief under the bankruptcy laws, or both. In originating the lease contracts, Transition Leasing takes a more flexible approach and applies a more subjective analysis than those taken by traditional automobile financing sources in determining an applicant's suitability for loan approval. Transition Leasing endeavors to determine whether the applicant's prior credit problems were a result of job displacement, financial hardship beyond the applicant's control or other circumstances that are not indicative of the applicant's current financial condition or payment performance. In addition, Transition Leasing seeks customers that have stable employment providing regular income and possess a strong need to acquire transportation. Transition Leasing believes that by using subjective judgment and knowledge of local conditions, it is able to profitably originate automobile lease contracts for new and late model automobiles to many consumers who would be denied approval for such leases from traditional sources. We will purchase or acquire only lease contracts that satisfy the contract criteria established in the Indenture and the Purchasing Agreement, and believe that the quality and performance of the lease contracts will be enhanced through the consistent application by Transition Leasing of the purchasing, origination and collection criteria established in the Indenture and the Purchasing Agreement. Industry Overview United States automobile sales are estimated to be in excess of 17 million vehicles in 1999. Financing of these vehicles will consume more than $390 billion dollars, making it the largest grouping of consumer installment debt in the U.S. It is estimated that over one-third of this debt will be incurred by borrowers that have a limited credit history or past credit problems that preclude them from securing traditional sources of financing. During 1984 approximately 14.2 million passenger cars and light trucks were sold in this country. Of that total, 9.8% were leased. In 1996, 14.9 million vehicles were sold and 27% of these were leased. Leasing as an alternate method of financing vehicle purchases continues to grow and industry experts forecast that in the year 2000 one-third to one-half of all new automobiles will be leased. In an effort to maintain the number of cars sold in this country, automobile manufacturers are encouraging alternative methods of financing. The average price of new vehicles has continued to escalate over the past two decades, forcing drivers to devote a larger portion of their income to the purchase of automobiles. From 1975 to 1995 the average new car expenditure rose from $4,950 per vehicle to over $20,000 -- a fourfold increase. In 1975, median new vehicle expenditures were 36.1% of median average family incomes; however, in 1995, median new vehicle expenditures were 53.% of median average family incomes. Obviously, the rate of growth in consumer income is not keeping pace with the rise in automotive pricing. Transition Leasing's management believes that this disparity will force more people to choose alternate means of financing an automobile or alter the model, style and age of the automobile they drive. Consumers have a variety of financing alternatives available to them to acquire the use of a new or late model automobile. These alternatives include different types of loans (including fully amortizing, balloon payment and no money down or low down payment loans and leases). The primary benefit of leasing over such alternatives is that leasing typically provides a consumer with the opportunity to acquire the use of a new or late model automobile at a lower monthly payment and initial cash outlay. On the same automobile, the monthly lease payment may be 30-40% lower than conventional financing. This encourages drivers to (i) operate newer and sometimes more expensive vehicles and (ii) to trade or lease vehicles more often. According to CNW Marketing/Research, an automobile leasing market research firm, the number of passenger automobiles and light trucks leased has increased from approximately 912,000 units in 1984 to an estimated 3.1 million units in 1994. Over the same period, leasing has -21- 26 increased as a percentage of comparable new vehicle deliveries from approximately 9.8% to approximately 30%. The increase in new automobile prices in relation to annual median family income has also significantly increased the popularity of leasing. The following table shows the relationship between the average new automobile expenditure and median family income for the periods indicated.
PERCENTAGE OF AVERAGE NEW INCOME NEEDED TO AUTOMOBILE MEDIAN FAMILY PURCHASE YEAR EXPENDITURE(1) INCOME(2) AUTOMOBILES - ---- -------------- ------------- ---------------- 1975 $ 4,950 $13,719 36.1% 1980 7,574 21,023 36.0% 1985 12,022 27,144 44.3% 1990 16,157 33,969 47.6% 1992 18,078 35,776 50.5% 1993 19,223 36,934 53.2% 1994 19,746 37,117 53.1% 1995 20,019 37,239 53.7%
- --------------- (1) Source: U.S. Department of Commerce, Bureau of Economic Analysis (2) Source: U.S. Department of Labor Statistics. Leasing has now been expanded to the "Previously Owned" market as the industry deals with late model autos (i) at the end of their original lease period, (ii) designated as "Program Cars" by dealers, and (iii) recovered from financing institutions as a result of nonpayment and/or repossession. This practice has the added benefit of providing a viable market for late model cars and maintaining the residual value of such cars in the aftermarket. As the divergence of personal income and the price of automobiles continues, the market for alternative financing methods will continue to increase. Government Regulations We and Transition Leasing are subject to regulation under federal, state and local laws and regulations concerning many aspects of their respective businesses. See "RISK FACTORS -- Effect of Government Regulation on Leasing." During the 1995 legislative session, the Texas Legislature passed legislation which significantly increased Texas regulation of motor vehicle leasing, lessors, such as us, and "lease facilitators," such as Transition Leasing. The legislation requires lessors and lease facilitators to obtain a license from the Texas Motor Vehicle Commission. Licenses are granted only upon a showing of compliance with the legislation and the rules of the Commission adopted pursuant to the legislation. Licenses issued by the Commission are for one year, subject to renewal at the discretion of the Commission. We have filed an application with the Texas Motor Vehicle Commission to become licensed as a lessor. Transition Leasing has been issued a license as a lessor under the legislation and, as such, Transition Leasing is deemed to be licensed as a lease facilitator as well. We and Transition Leasing intend to obtain any licenses that may be required in any other state where we purchase and collect lease contracts. The Texas legislation and the regulations adopted by the Commission impose requirements relative to the licensing process (application, maintenance and revocation), and certain record keeping and reporting requirements, including notification of changes in ownership and the closing or relocation of any licensed business location. The legislation prohibits or restricts the paying of fees, directly or indirectly, among automobile dealers, lessors, and lease facilitators. For example, a lessor may not pay a fee to any person for the solicitation of a prospective lessee of motor vehicles unless the person receiving the fee is a duly licensed lease facilitator. A lessor may appoint one or more duly licensed lease facilitators as we have appointed Transition Leasing to represent the lessor and obtain lease customers. -22- 27 The Texas legislation also requires that lease contracts procured by a lease facilitator contain certain required disclosures, including notice of the complaint procedure under the Code. The Texas regulations require a lessor or a lease facilitator to conduct its business from an established and permanent place of business that meets certain requirements. The regulations require a lessor or a lease facilitator to be independent of financial institutions and dealerships in such location and in business activities; however, the Texas legislation does not require a lessor to be independent of its lease facilitators. The regulations provide that upon a change in the majority ownership interest of a licensee, the license will be canceled. Under Louisiana law, any person engaged in the business of leasing or renting automobiles or trucks must first obtain a license from the Louisiana Motor Vehicle Commission. In determining qualifications and eligibility of an applicant for a license, the Motor Vehicle Commission must consider the extent to which the applicant meets the criteria and policies established in Chapter 6 of Title 32 of the Louisiana Revised Statutes of 1950, as amended, La. R.S. 32:1251, et seq., and the regulations promulgated by the Louisiana Motor Vehicle Commission, which include requirements that applicants have an adequate place of business, permanently affixed sign, useable telephone with a listed number, minimum required liability and garage liability insurance, post a bond in the amount of $10,000, and demonstrate business integrity based on the applicant's experience, business history and intention to devote full or part time to the business. In addition, persons employed by licensed motor vehicle lessors whose duties include the leasing or offering for lease of motor vehicles on behalf of the licensee must have a license issued by the Louisiana Motor Vehicle Commission, and must carry this license when engaged in such business. The licenses issued by the Motor Vehicle Commission are for a period of one year. Prior to carrying out any vehicle leasing business in Louisiana, our Louisiana subsidiary will obtain the required licenses from the Motor Vehicle Commission. Under Chapter 4-B of Title 32 of the Louisiana Revised Statutes of 1950, as amended, La. R.S. 32:771, et seq., and the regulations promulgated by the Louisiana Used Motor Vehicle and Parts Commission, lessors of motorcycles are required to obtain a license from the Louisiana Used Motor Vehicle and Parts Commission. In determining qualifications and eligibility of an applicant for a license to lease motorcycles, the Used Motor Vehicle and Parts Commission must consider the extent to which the applicant meets the criteria and policies established in the law and regulations, which require that applicants have an adequate place of business, permanently affixed sign, useable telephone with a listed number, minimum required liability insurance, and demonstrated business integrity based on the applicant's experience, business history and intention to devote full or part time to the business. The licenses issued by the Used Motor Vehicle and Parts Commission are for a period of one year. Prior to carrying out any motorcycle leasing business in Louisiana, our Louisiana subsidiary will obtain the required license from the Used Motor Vehicle and Parts Commission. We must qualify for a license as a lessor in Texas and Louisiana, and, as mentioned above, we have applied for such licenses. In order to qualify for such licenses, we have already begun complying with the requirements of the law, including compliance with the office requirements, sign requirements, lease requirements, and record keeping requirements. We have received opinions of counsel (in Texas, from the law firm of Brown, McCarroll & Oaks Hartline and, in Louisiana, from the law firm of King, LeBlanc & Bland) to the effect that our intended method of business is in compliance with applicable state statutory and regulatory requirements. A copy of these opinions have been filed as exhibits to the Registration Statement of which this Prospectus is a part. While we believe that we and Transition Leasing will be able to comply with the requirements of Texas and Louisiana statutes and regulations, we are unable to predict the extent to which the terms of future regulations promulgated in these states and/or the administration of the legislation by their respective motor vehicle commissions will make the operation of our business and the business of Transition Leasing significantly more difficult and/or costly or otherwise have a material adverse effect on us. -23- 28 The Federal Reserve Board has published final revisions to Regulation M, which implements the Consumer Leasing Act. New requirements under Regulation M include: - a uniform format for lease contracts that requires certain disclosures to be segregated in the document and written in "plain English;" - a calculation of the lease payments that itemizes, among other things, the gross capitalized cost of the lease, the vehicle's residual value, the rent charge and depreciation; - disclosure of the total amount the lessee will pay by the end of the lease; and - certain warnings and disclosures. Our management does not believe that these requirements will materially and adversely impact our or Transition Leasing's leasing activities. As the Texas legislation and revised Regulation M reflect, the business of automobile leasing recently has been the subject of legislative and regulatory scrutiny, and numerous proposals are under consideration that, if enacted, would impose greater regulation and requirements on our and Transition Leasing's activities. Certain of these proposals have been prompted by consumers allegedly being charged unfair prices in leasing transactions, with inadequate disclosure of the leased vehicle prices, imputed interest rates and other charges. These proposals would require greater disclosure in leasing contracts with respect to such matters. Our management is not in a position to predict the effect of any such legislation or regulation on our activities or Transition Leasing's activities. PRIOR PERFORMANCE OF SUBSIDIARIES Prior to our commencing this offering, Transition Leasing organized two subsidiaries which have issued promissory notes and engaged in the same business in which we propose to engage. The first of these subsidiaries, Transition Auto Finance, Inc., was organized in 1994, and in 1996 sold variable rate promissory notes in an aggregate principal amount of $2,883,000. Transition Auto Finance II, Inc., Transition Leasing's second finance subsidiary, was organized in 1997 and, in June 1999, completed its offering of 11% promissory notes in an aggregate principal amount of $10,000,000. All payments on the notes issued by Transition Auto Finance, Inc. and Transition Auto Finance II, Inc. have been timely paid by those entities. Transition Auto Finance, Inc.'s portfolio, which consisted of 151 leases and vehicles, included 35 leases which resulted in early terminations (early payoffs or lease defaults resulting in repossession and lease terminations). Transition Auto Finance II, Inc.'s portfolio, which through August 2, 1999, consisted of 235 leases and vehicles, included 13 leases which resulted in early terminations. Transition Auto Finance, Inc.'s and Transition Auto Finance II, Inc.'s experience with respect to early terminations is set forth below: EARLY TERMINATION RESULTS -- TRANSITION AUTO FINANCE, INC. AND TRANSITION AUTO FINANCE II, INC. JUNE 1, 1997-AUGUST 2, 1999
TRANSITION AUTO FINANCE, INC. TRANSITION AUTO FINANCE II, INC. ---------------------------------- ---------------------------------- NO. OF PERCENTAGE PROFIT NO. OF PERCENTAGE PROFIT(1) CONTRACTS OF TOTAL (LOSS) CONTRACTS OF TOTAL (LOSS) --------- ---------- --------- --------- ---------- --------- Total Contracts Created......... 151 100% 235 100% Contracts Terminated by Repossession.................. 23 15.2% $(75,000) 9 3.8% $(12,373) Contracts Terminated by Early Payoff........................ 12 8.0% $ 39,625 4 1.7% $ 25,860 Total Early Terminations........ 35 23.2% $(35,435) 13 5.5% $ 13,487
-24- 29 As set forth above, we calculate profit or loss on a given lease by subtracting the gross cost of acquiring the vehicle and originating the lease from gross receipts realized from that vehicle. Gross cost consists of: - actual acquisition and origination costs; - expenses of repossession and liquidation; and - marketing fee paid to Transition Leasing Management, Inc. Gross receipts consist of: - the down payment by the customer; - lease payments by the customer up to the early termination date; and - amounts realized upon the subsequent sale of the vehicle. - --------------- We note that the number of early terminations and repossessions, as a percentage of all leases, decreased dramatically in Transition Auto Finance II, Inc., as compared to Transition Auto Finance, Inc. We believe that this decrease is attributable to two primary factors -- Transition Leasing Management, Inc. has improved its credit assessment techniques and a significant portion of Transition Auto Finance II, Inc.'s lease portfolio consists of "seasoned" leases purchased from Transition Auto Finance, Inc. Seasoned leases can be expected to perform better than newly generated leases because the customer under a seasoned lease has, by definition, established a credit history under the lease. Moreover, that customer has invested not only a down payment but a number of lease payments, thereby establishing a greater disincentive to default. In February 1999, Transition Auto Finance II, Inc. purchased from Transition Auto Finance, Inc. all of the vehicles and lease contracts which Transition Auto Finance, Inc. then held. Transition Auto Finance, Inc. then used the proceeds from this sale to redeem all of its outstanding notes. Substantially all of the noteholders whose notes were redeemed used the redemption proceeds to buy notes issued by Transition Auto Finance II, Inc. Transition Leasing, which is the parent company of both Transition Auto Finance, Inc. and Transition Auto Finance II, Inc., determined to cause Transition Auto Finance II, Inc.'s purchase of Transition Auto Finance, Inc.'s leased vehicles and the redemption of Transition Auto Finance, Inc.'s notes for a number of reasons, the most significant of which were: - A desire on the part of Transition Leasing to reduce the interest rate risk associated with Transition Auto Finance, Inc.'s notes (the variable rate could have risen to as much as 15% per annum) by replacing those notes with the 11% notes issued by Transition Auto Finance II, Inc. - Eliminate the duplication of fees associated with two different portfolio programs. This problem exists whenever a sponsor has more than one finance subsidiary but was exacerbated by the relatively small size of Transition Auto Finance, Inc.'s offering. The smaller offering size made the annual fees a much larger percent of Transition Auto Finance, Inc.'s income and assets than might otherwise have been the case. We will not purchase assets from Transition Auto Finance II, Inc. We caution you that the past performance of lease contracts entered into by Transition Auto Finance, Inc. or Transition Auto Finance II, Inc., may not be reliable indicators of the future performance of the lease contracts we will execute. -25- 30 PURCHASE/LEASING OF VEHICLES General Our lease contracts will be originated by Transition Leasing under a Master Purchasing Agreement, between us and Transition Leasing. A copy of the Purchasing Agreement in the form we propose to execute with Transition Leasing has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. We have granted a security interest in the Purchasing Agreement to the Trustee as collateral for the notes and for our obligations under the Indenture. The discussion of the Purchasing Agreement which follows is not, and does not purport to be, complete. We encourage you to review the Purchasing Agreement. Pursuant to the Purchasing Agreement, we may require Transition Leasing to use reasonable efforts to originate such customers, lease contracts and vehicles as will utilize such amount of funds as we may specify to Transition Leasing from time to time. We will be obligated to purchase all lease contracts or vehicles originated by Transition Leasing which satisfy the lease contract and customer criteria set forth in the Purchasing Agreement, subject only to the funds limit that we specify to Transition Leasing. Transition Leasing will originate customers and lease contracts, will purchase vehicles from new automobile franchise dealers, independent automobile dealers and independent leasing companies, will purchase Harley Davidson motorcycles from new motorcycle franchise dealers and independent motorcycle dealers and will manage the lease contracts through their termination. No more than 10% of the net proceeds of this offering will be used to acquire motorcycles. Lease Contract and Credit Criteria We have developed criteria as to the price, down payment, and length of lease term for the lease contracts and make of the vehicles to qualify for purchase or acquisition. We believe that the most significant of these criteria, in general, are as follows: - The lease contracts generally should have original terms that are typically 36 months but may not be more than 48 months; - The customers will be required to make a down payment of not less than 15% of the purchase price of the vehicle and if the vehicle is four model years old, the required down payment will be at least 25% of the vehicle's purchase price; - The customers must have supplied certain credit information, and credit verification procedures must have been performed by Transition Leasing in a manner commensurate with standard industry practice; - The customer's monthly lease payments must have been determined using an implicit annual interest ranging from 16% to 18% of the net capitalized cost of the vehicle less the customer's down payment. We have established certain credit information and criteria to be satisfied by each customer. We believe that the most significant of these criteria, in general, are as follows: - Verifiable home telephone number in customer's residence; - Residence: (1) Evidence of purchase, lease, or rental agreement in customer's name; or (2) Stability -- review time at last two addresses, as well as time in area; - Employment: At least one year with last two employers; - Verifiable income (check stub, W-2, 1099, tax return, or bank statements); - Customer's net disposable income generally at least 2.5 times total monthly debt service (home, car, etc.); -26- 31 - References: (1) Five relatives; and (2) Five personal; - Valid driver's license; - Any previous bankruptcy must have been discharged, or if open, need letter of permission from bankruptcy Trustee; and - Certain exceptions for first time automobile "buyers" are permitted. To verify the foregoing information, Transition Leasing will obtain a copy of the credit application executed by the customer, which application should contain the necessary information to verify by telephone or otherwise the customer's addresses, employment and personal references and authorization to obtain a credit report from a credit reporting agency. The Purchasing Agreement and the Indenture mandate that contracts and lease customers meet the criteria specified above. If Transition Leasing fails to comply with these criteria, we have the right to terminate the Purchasing Agreement and we could appoint another agent to provide the purchasing services; however, as we are a wholly-owned subsidiary of Transition Leasing, it is not likely that we would terminate the Purchasing Agreement. If we suffer a default under the Indenture, the Trustee may, or at the direction of the holders of notes representing 25% of the aggregate principal amount of the outstanding notes will require us to terminate the Purchasing Agreement. The Purchasing Agreement allows Transition Leasing to contract with industry-qualified third parties to perform its obligations thereunder. The performance by any third party will not relieve Transition Leasing from liability for its obligations under the Purchasing Agreement. The Purchasing Agreement and the Indenture require us and Transition Leasing to make certain representations, warranties and covenants with respect to any lease contracts to be purchased or acquired, including, the following: - the conformity of each lease contract with federal, state and local laws; - our compliance in all material respects with federal, state and local laws; - the validity and enforceability of the lease contract and the security interest created thereby in the vehicle. If any of such representations or warranties is discovered to have been incorrect in any material respect with regard to a given lease contract, Transition Leasing is required to cure the defect or purchase the impaired lease contract from us. At the time of any such purchase Transition Leasing will certify to the Trustee that such repurchase has been effected in compliance with all of the provisions of the Indenture and this Prospectus. Vehicle Purchase Price The purchase price which we will pay for any vehicle acquired from independent parties will vary generally with the method by which the lease customer is introduced to Transition Leasing. If dealers or leasing companies introduce the lease customer to Transition Leasing, the purchase price will generally be equal to 95% of manufacturer's suggested retail price ("MSRP"). If the customer is generated by Transition Leasing's in-house marketing staff, the purchase price will generally be less than 95% of MSRP. We will pay to Transition Leasing a marketing fee, a purchase administration fee and a documentary fee with respect to each lease contract. See, "PAYMENTS TO TRANSITION LEASING," below. Down Payment and Monthly Lease Payment We will require the customer to make a down payment to us of not less than 15% of the purchase price of the vehicle. If the vehicle is four model years old, we will require the customer to make a down -27- 32 payment of not less than 25% of the vehicle's purchase price. The customer's monthly lease payment will be computed by applying an implicit interest rate factor of 16% to 18% per annum to an adjusted purchase price equal to 120% of the purchase price for the vehicle, less the amount of the customer's down payment. The lease payment is designed, among other things, to recover the vehicle's depreciation in value over the term of the lease. We calculate this depreciation by amortizing over the term of the lease, the difference between the estimated residual value of the vehicle at the expiration of the lease term, see "THE COMPANY; REMARKETING," and the vehicle's adjusted purchase price. Warranty and Vehicle Insurance To insure that all our vehicles are maintained to factory specifications, we will require that all vehicles be covered by a warranty for the complete duration of the vehicle's lease contract. In the event that the manufacturer's warranty is insufficient to cover both the term and anticipated mileage, the customer is required to purchase an extended warranty to protect the vehicle. Although most state laws, including Texas law, mandate that owners maintain liability insurance for damages arising from their use of a motor vehicle, the owners of the vehicles may not be required to maintain physical damage insurance. We will require lessees under our lease contracts to purchase both liability coverage and physical damage coverage. However, we also will maintain vehicle single interest insurance that will insure us against liability and physical insurance for damages arising from a customer's use of a vehicle in the event that the customer's coverage lapses or is inadequate. The making of significant claims against our policy could result in the non-renewal of such policy, which could have a material adverse effect on us. In addition, we will be named as a loss payee under the lessee's automobile insurance policy. Residual Value and Residual Value Insurance A residual value is the value of a given vehicle upon expiration of its lease contract. When we lease a vehicle, we review appropriate industry guides to determine the estimated value for the specific vehicle upon expiration of the lease contract (typically 36 months). This figure represents the residual value, and the amount of the premium for the residual value insurance coverage we buy is the residual value multiplied by .0168. For example, the residual value premium for a vehicle with a residual value of $10,000 is $10,000 X .0168, or a one-time premium of $168. If the vehicle does not have a wholesale value (as determined by industry guides) at the end of the lease contract equal to or more than the residual value (in this example, $10,000), the insurance company will pay to us the difference between the residual value and the wholesale value, (less a $100 deductible) UNLESS such difference is the result of excessive mileage, excess wear and tear, damage, and/or lease termination expenses. Coverage for each vehicle will continue until Transition Leasing disposes of it. We estimate the residual value of a vehicle at the inception of its lease contract and incorporate it into our lease payment calculations so as to recover the diminution in value from lease inception until expiration. Put another way, the lease terms are intended to amortize the vehicle's depreciation expected to occur over the term of the lease contract. Because we calculate this depreciation using an initial value which is 120% of the actual purchase price of the vehicle less the customer's down payment, we expect that, upon the expiration of a lease contract, the actual residual value of such vehicle will be more than our cost basis, even after adjustment for capital costs. If our expectation is correct, we believe that upon expiration of the contract, we can sell the vehicle for a profit equivalent to the difference between the actual market value and our cost basis. It has been Transition Leasing's experience that profitable resales are possible even when a contract is terminated prior to its expiration. Transition Leasing's experience in such matters is, of course, limited. Our analysis has shown that mileage is the primary factor in determining a vehicle's residual value. By imposing mileage limitations and monitoring the customer's compliance, we can establish accurate residual value estimates. The process of establishing mileage limits begins during the personal interview -28- 33 with the candidate. The goal is to establish an understanding of the candidate's driving needs, distance to work, personal use, and other factors for determining estimated annual mileage. If this estimate exceeds the standard 15,000 miles per year limitation, the customer usually will make a cash payment designed to offset the extra depreciation occasioned by the extra mileage. In some cases, Transition Leasing might agree to modify the terms of the contract and increase the payments to accommodate additional use. To monitor the customer's compliance with the terms of the customer's contract, we require the customer to bring the vehicle to a Transition Leasing office for an annual inspection and to receive the current year registration sticker. If the inspection discloses excess mileage, the customer must then pay 15 cents per excess mile to offset the decline in the vehicle's value. In addition, Transition Leasing may elect to revise the terms of the contract (and thereby increase the customer's payment) to avoid reoccurrence. Transition Leasing will also review the vehicle for damage and, if any damage is found, will take the actions necessary, including an additional monetary charge or repossession. An accurate prediction of residual value is important. If overstated, the scheduled lease payments may not fully recompense us for the vehicle's depreciation over the life of the lease contract and, if understated, may put us at a competitive disadvantage with other sources of vehicle leasing or financing. Moreover, inaccurate estimates may impact dramatically upon the decision of a customer to exercise his option to acquire the leased vehicle at the residual value upon expiration of the contract. See, "REMARKETING." In determining the expected residual value of a vehicle, we use guides and estimates of residual values that are widely accepted in the car leasing industry but there can be no assurances that such guides and estimates will be accurate predictors of the actual residual value we might realize upon our regaining possession of the vehicle. We attempt to reduce this risk by basing lease payments on a residual which is 90% of the residual value we expect. To date, Transition Leasing's experience with respect to its estimation of residual values has been limited largely to repossession and early termination. Generally, vehicles returned upon expiration of their lease have been re-marketed in transactions which have produced net cash gains to the subsidiary which owned the vehicles. The number of such lease contracts has been limited, however, and there can be no assurances that our experience will be similar to that of Transition Leasing or its other subsidiaries. With respect to early termination of lease contracts and repossessions of vehicles, Transition Leasing's experience, generally, has validated the inputs we anticipate using to estimate residual values. Our experience indicates that much of the actual vehicle depreciation occurs in the early periods of the contracts. Termination or repossession which occurs relatively early in the term of a contract will subject us to a greater possibility that the payments under the defaulted contract will not have fully amortized the depreciation, and that the vehicle will be remarketed at a loss. Remarketing losses have the immediate effect of diminishing the collateral securing the repayment of the notes (although the remarketing losses would have to increase significantly over those experienced to date to cause a default on the notes) and the longer term effect of diminishing the aggregate residual value we might realize. We intend to purchase and maintain a residual value insurance policy issued by an insurer rated A by A.M. Best, offering certain limited protection against the possibility that the remarketing of off-lease vehicles will not yield proceeds at least equal to the residual value of the remarketed vehicles. The purpose of the policy is to protect us if there is a dramatic downturn in the market value of a specific vehicle model. An example of such a market development for a specific vehicle is the Audi 5000, which precipitously lost value when information of its perceived "sudden acceleration" problems was widely disseminated. Other examples are the VW diesel Rabbit and the Cadillac diesel. The residual insurance policy will not protect us against loss due to excessive mileage, excessive wear and tear, damage, and lease termination expenses on any specific vehicle or contract. -29- 34 Payments to Transition Leasing In connection with each vehicle whose lease contract is originated by Transition Leasing, without regard to the means by which the lease customer came to Transition Leasing, we will pay Transition Leasing the following fees: - a marketing fee of 57.5% of a customer's down payment to us; - a purchase administration fee equal to $100; - a documentary fee equal to $50. We will use that portion of the customer's down payment remaining after payment of the above fees to pay a portion of the vehicle's purchase price. The marketing fee is payable at inception of the lease contract. The purchase administration fees and the documentary fees generally will be accumulated by us and paid in a single payment each month to Transition Leasing; they are intended to compensate and reimburse Transition Leasing for administering the purchase of the lease contracts, including receipt and approval of dealer drafts and lease contract transfer documents, monitoring compliance with purchase criteria, preparing, organizing and delivering certificates, UCC financing statements and other documents to the Trustee, creation of lease contract files, communications with dealers and independent leasing companies, and other related activities. Under the Indenture, our payment to Transition Leasing of the purchase administration fee is subject to the prior payment of any amounts owing on the notes or to the Trustee. COLLECTION AND SERVICING OF CONTRACTS Our lease contracts will serviced by Transition Leasing under the Servicing Agreement, dated as of , 1999, between us and Transition Leasing. A copy of the Servicing Agreement we propose to execute with Transition Leasing has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. We have granted a security interest in the Servicing Agreement to the Trustee as collateral for the notes and for our obligations under the Indenture. The discussions of the Servicing Agreement which follows are not, and do not purport to be, complete. We encourage you to review the Servicing Agreement. Under the Servicing Agreement, Transition Leasing is obligated to use its own discretion, subject to the requirement that it use the same care and apply the same policies that it would exercise if it owned the lease contracts, in the management, administration and collection of the lease contracts and to bear all costs and expenses incurred in connection therewith. Collections. Transition Leasing will be responsible for administering the collection of the lease contracts, including collecting and posting all payments. All lease customers will be requested, through correspondence and delivery of payment books or monthly statements, to remit payments under their lease contracts directly to the master collection account. Transition Leasing has also agreed to deposit in the master collections account any payment proceeds received directly by Transition Leasing with respect to the lease contracts, including any proceeds from resales of returned or repossessed vehicles and any recoveries from insurance claims on vehicles. The Indenture requires us to transfer at least weekly, from the master collections account to the operating account, all of the funds in the master collections account. Transition Leasing generally will contact any customer on a past due lease contract within fifteen (15) days after the payment due date. Any material extensions, modifications or acceptances of partial payments by customers, and any related necessary lease contract amendments or default waivers must be approved by the Chief Credit Officer or President of Transition Leasing. Transition Leasing is also required to document the reasons for each charge off of any material unpaid amount from a customer under any lease contract. See, "-- Lease Defaults and Repossession," below. -30- 35 Servicing. Among its obligations under the terms of the Servicing Agreement, Transition Leasing will be responsible for: - responding to inquiries of customers on the lease contracts, - investigating delinquencies, - sending payment coupons to customers, - reporting any required tax information to customers, - paying costs of collections - policing the vehicles - furnishing monthly and annual statements to us and the Trustee with respect to collections and proceeds - generating certain information necessary to permit the Company to prepare its required federal and state income tax returns - coordinating the repossession, remarketing, repair and sale of any vehicle. Transition Leasing will instruct the appropriate vehicle licensing authorities to remit vehicle license renewal stickers to Transition Leasing, as opposed to the lease customers. Transition Leasing will require a customer to appear at Transition Leasing's offices to collect the licence renewal sticker, at which time a representative of Transition Leasing will inspect the vehicle for damage or excess mileage and collect any reimbursement for such damage or excess mileage, as well as the license renewal fees. See "PURCHASE OF VEHICLES -- Residual Value and Residual Value Insurance." Lease Defaults and Repossession. We anticipate that we will maximize our return by continuing to collect installments on the lease contract, despite a missed installment by the customer, in lieu of repossessing the vehicle. A customer's failure to make any payments for more than 30 days will, however, generally cause us to commence a repossession action. By paying his current payment and his past due payment plus repossession charges, the customer may be allowed to retain his vehicle pursuant to the lease contract. If default occurs a second time, the vehicle will be repossessed without further opportunity for the customer to cure the default under the lease contract and retain possession of the vehicle, unless otherwise required by applicable law. Upon repossession, Transition Leasing will either re-lease the vehicle or sell the vehicle at wholesale at an automobile auction and use the proceeds thereof to arrange for the purchase and lease of another vehicle. See "THE COMPANY; REMARKETING." If a vehicle is re-leased, we will pay to Transition Leasing a marketing fee. See. "PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS; ACQUISITION; Payments to Transition Leasing." Transition Leasing has agreed to repurchase from us any vehicle which is the subject of a lease contract in default if the vehicle has not been re-leased or wholesaled within two months following the default. The purchase price for any such vehicle will be the purchase price we originally paid for the vehicle (plus applicable sales tax and title transfer and license plate fees) minus (i) 42.5% of the down payment made by the customer (which is that portion of the down payment not paid to Transition Leasing as the marketing fee) and (ii) any monthly lease payments we have received under such defaulted lease contract. We do not expect Transition Leasing to have to purchase a significant number of vehicles under this repurchase obligation but we can offer you no assurances that Transition Leasing will have the financial resources to honor this repurchase obligation if a substantial number of our lease contracts should come into default. At the time of any repurchase by Transition Leasing, it must certify to the Trustee that the repurchase complies with the requirements of the Indenture and this prospectus. Transition Leasing is required to deliver us a report certifying that all lease contracts managed by Transition Leasing were serviced in material accordance with the servicing agreement and that Transition Leasing is not in default under the Servicing Agreement. The report also will contain collection -31- 36 information on each lease contract since the date of the last such report and a reconciliation of the deposits into and withdrawals from our operating account. If Transition Leasing fails to service and collect amounts due from the customers in accordance with the servicing criteria established by the servicing agreement or if certain bankruptcy or insolvency proceedings occur, we have the right to terminate all rights and obligations of Transition Leasing under the Servicing Agreement and to transfer servicing rights to a successor servicer. As we are a wholly-owned subsidiary of the Transition Leasing and we have common management, it is unlikely that we will exercise our right to terminate Transition Leasing's rights and obligations under the Servicing Agreement. See "MANAGEMENT -- Certain Relationship and Related Transactions." Under the Indenture, during the continuance of a default by Transition Leasing of any of its material obligations under the servicing agreement or the Indenture, the Trustee or holders of at least 25% of the aggregate principal amount of the outstanding notes have the right to compel us to terminate the rights and obligations of Transition Leasing under the Servicing Agreement. Payments to Transition Leasing. Transition Leasing is entitled under the Servicing Agreement to receive a fee of $20 per month per outstanding lease contract that has not been assigned for repossession. (Servicing Agreement, Section 3.) The servicing fee is intended to compensate and reimburse Transition Leasing for providing the services required of it thereunder. Under the Indenture, Transition Leasing will also be entitled to reimbursement, as an allowed expense, of the expenses it incurs in the repossession, remarketing, repair and sale of any vehicle to the extent of the related proceeds from its sale or from any recovery on a related insurance policy. (Servicing Agreement, Section 5.J.) Under the Indenture, our payment to Transition Leasing of the servicing fee is subject to the prior payment of any amounts owing on the notes or to the Trustee. (Indenture, Section 4.2.) REMARKETING Transition Leasing will remarket for us each vehicle at the end of its scheduled lease term or in connection with early termination of any lease contract. These remarketing efforts may produce income to us to the extent that vehicle disposition proceeds exceed, in the aggregate, our cost basis in the remarketed vehicles. Transition Leasing will first remarket the vehicles to the original customers or to other related parties brought to the attention of Transition Leasing by the lease customer (e.g., family members, friends, etc.). Transition Leasing will commence its remarketing efforts approximately four months prior to the end of the scheduled contract term. At that time, the lease customer will be contacted by a member of the remarketing department to explain the customer's options upon termination. The lease customer's options will be to buy the vehicle, extend the lease contract or return the vehicle to us. Generally, under the lease contracts, the lease customer will have an option to purchase the vehicle at the end of the scheduled lease term for a purchase price determined at inception of the lease contract. A lease customer generally will purchase the vehicle it has leased if the fixed purchase price is less than its actual fair market value and will return the vehicle to us if the fixed purchase price is in excess of the actual fair market value. Thus, it is unlikely that we will ever be able to effect a sale of a vehicle, either to the current lessee or to a third party, for any amount substantially in excess of the fixed price in the lease contract. If a vehicle is returned to us at the end of the scheduled lease contract term, the vehicle will be inspected for excessive wear and mileage over that permitted under the lease contract and the customer will be billed accordingly. Transition Leasing then will generally sell the vehicle on our behalf at wholesale through regional auctions. TRANSITION LEASING We expect that substantially all of the lease contracts that we will purchase or acquire will be originated by Transition Leasing, our sole shareholder. Transition Leasing was founded on October 17, -32- 37 1994, to lease new and late model automobiles with factory warranties or extended warranty service contracts that extend to the termination of their respective lease contracts. Transition Leasing has formed two subsidiaries to further its lease origination efforts. The first of these subsidiaries is a Louisiana limited liability company, which will originate lease customers and leases in Louisiana. The Louisiana subsidiary will provide the same origination, leasing and servicing services in Louisiana as Transition Leasing provides in Texas. As we do with Transition Leasing, our Louisiana subsidiary will purchase the vehicles and enter into leases with the customers in its name. The second subsidiary, named Verusauto.com, Inc., is to be a Texas corporation and will be organized to originate customers and lease opportunities via the Internet. This subsidiary, which will originate lease customers only via the Internet, will purchase cars and execute leases in its own name and then, if the customer and lease fit our lease contract and purchasing criteria, we will purchase the vehicle and the lease contract from Verusauto.com, Inc. We will pay Verusauto.com, Inc., a price equal to the vehicle purchase price paid by Verusauto.com, Inc. to the vehicle dealer, less 42.5 % of the lease customer's down payment to Verusauto.com, Inc., plus a purchase administration fee and documentary fee totaling $150. In this fashion, we will pay, on a net basis, exactly what we would have paid to Transition Leasing had Transition Leasing originated the lease customer for us and had we paid the vehicle purchase price directly to the vehicle dealer and the marketing fee to Transition Leasing. Transition Leasing is engaged in the business of leasing such automobiles to individuals who do not have access to other sources because they do not meet the credit standards imposed by automobile retailers or banking institutions, generally because these individuals have past credit problems or non-prime credit ratings. In leasing automobiles to its customers, Transition Leasing first determines the dollar amount that the customer is able to pay on a monthly basis, and then assists the customer in selecting an automobile within his price range. After an automobile has been selected by the customer, Transition Leasing arranges for the purchase of the automobile and the entering into of a lease with the customer (i.e., the lessee) with respect to the automobile. Transition Leasing has determined that, once Transition Auto Finance II, Inc. has fully invested its funds in vehicles and leases, any lease contracts originated by Transition Leasing that satisfy our purchase criteria will be made available to the us, to the extent that funds are available for such purchases and subject to the right of Transition Auto Finance II, Inc. to acquire vehicles and lease contracts with proceeds that Transition Auto Finance II, Inc. realizes from repossessions and prepayments. See "RISK FACTORS -- Conflicts of Interest" and "MANAGEMENT -- Certain Relationships and Related Transactions." SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information, as of May 31, 1999, relating to the beneficial ownership of our Common Stock by: - any person or "group," within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange Act"), whom we know to own beneficially 5% or more of our outstanding shares of Common Stock; - each of our officers or directors; and - all of our officers and directors as a group. Except as otherwise indicated, we believe that each of the persons named below possesses sole voting and investment power with respect to the shares of Common Stock beneficially owned by such person. -33- 38 AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
NAME OF DIRECTOR OR EXECUTIVE NUMBER OF SHARES OFFICER OR NAME OF BENEFICIAL OWNER OUTSTANDING PERCENTAGE OF CLASS - ----------------------------------- ---------------- ------------------- Transition Leasing Management, Inc.......................... 1,000 100% 8144 Walnut Hill Lane, Number 680 Dallas, Texas 75231 Kenneth C. Lowe............................................. 0 0 Randall K. Lowe............................................. 0 0 William H. Dreger........................................... 0 0 Kevin Kane.................................................. 0 0 All current officers and directors as a group (5 persons)... 0 0
The information in the above table as to beneficial ownership of Common Stock has been furnished by the respective shareholders, directors and officers. The directors of Transition Leasing could be deemed to share voting and investment powers over the shares of Common Stock owned of record by Transition Leasing. The sole director of Transition Leasing is Kenneth C. Lowe. The sole owners of the common stock of Transition Leasing are Kenneth C. Lowe and Randall K. Lowe. Transition Leasing has a number of preferred shareholders, who have limited voting rights and who may convert their preferred shares into shares of Transition Leasing common stock. The preferred shareholders, on a fully diluted basis, will not own more than 20% of Transition Leasing's voting securities. -34- 39 MANAGEMENT BUSINESS BACKGROUND AND EXPERIENCE The names, ages, backgrounds and principal occupations of our directors and executive officers are set forth below: Kenneth C. "Ken" Lowe, age 63, has served as our sole director, President and Secretary since our inception. Mr. Lowe has served as a director, Vice President and Secretary of Transition Leasing from October 1994 until July 1996 and as a director, President and Secretary of Transition Leasing since July 1996. Since 1993, Mr. Lowe has been Vice President of Young & Lowe, Inc., a private investment banking firm. From 1990 to 1992, Mr. Lowe was President of Custom Data Services, a company that specialized in financial data processing and from 1988 to 1990, Mr. Lowe was President of Westside Communications, which provided telephone equipment service to commercial customers. Mr. Lowe has a Master's of Business Administration from Southern Methodist University and over 20 years of experience in investment banking. Randall K. Lowe, age 30, has served as our Vice President since our inception and Vice President of Transition Leasing since July 1998. Prior to joining us and since 1994, Mr. Lowe served as a credit analyst for Bank One in New Orleans, Louisiana and Dallas, Texas. From 1991 to 1994 Mr. Lowe was a credit analyst and branch office manager for Whitney National Bank, N.A. in New Orleans. Mr. Lowe holds a Bachelor of Science degree from Tulane University. Randall Lowe is the son of Ken Lowe. William H. Dreger, age 55, joined us in September 1999 and serves as our Controller and Chief Accounting Officer. Prior to joining the Company, Mr. Dreger was Chief Financial Officer and Chief Information Officer for Down to Earth, Inc. in Garland, Texas from 1994 to 1999. From 1985 to 1992, Mr. Dreger was President of Stephenson Financial Services, Inc. in North Hollywood, California. Mr. Dreger has a Bachelor of Business Administration from the University of North Texas at Denton, is a Certified Public Accountant and has over 25 years of experience in accounting and systems. Kevin Kane, age 31, joined us in May 1999 as a Vice President and branch office manager of our office in New Orleans, Louisiana which opened in July 1999. From 1993 to 1997, Mr. Kane was with Merrill Lynch and Company in New York in their Litigation and Compliance Department. Mr. Kane is a graduate of Tulane University and Loyola Law School and is a member of the New York State Bar. Except as disclosed above, there are no family relationships among our directors and any of our executive officers. Except as disclosed above, none of our directors hold any directorship in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940. INDEMNIFICATION Our Articles of Incorporation provide that, to the fullest extent permitted by Texas law, our directors and former directors shall not be liable to us or our shareholders for monetary damages occurring in their capacity as a director. Texas law does not currently authorize the elimination or limitation of the liability of a director to the extent the director is found liable (i) for any breach of the director's duty of loyalty to us or our shareholders, (ii) for acts or omissions not in good faith that constitute a breach of duty of our director or which involve intentional misconduct or a knowing violation of law, (iii) for transactions from which the director received an improper benefit, regardless of whether the benefit resulted from an action taken within the scope of the director's office or (iv) for acts or omissions for which the liability of a director is expressly provided by law. Our Articles of Incorporation and Bylaws grant mandatory indemnification to directors and officers to the fullest extent authorized under the Texas Business Corporation Act. In general, a Texas corporation may indemnify a director or officer who was, is or is threatened to be, made a named defendant or respondent in a proceeding by virtue of his position in the corporation if he acted in good faith and in a -35- 40 manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in the case of criminal proceedings, had no reasonable cause to believe his conduct was unlawful. A Texas corporation may indemnify an officer or director in an action brought by or in the right of the corporation only if such director or officer was not found liable to the corporation, unless or only to the extent that a court finds him to be fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transition Leasing owns 100% of our Common Stock. Our officers are also officers of Transition Leasing. Mr. Kenneth Lowe is President and Secretary and a director of Transition Leasing and a director, the President, Chief Financial Officer and Secretary of our company and Transition Auto Finance II, Inc. These officers will devote as much of their time to our business as, in their judgment, is reasonably required. We have real and ongoing conflicts of interest with Transition Auto Finance II, Inc. and Transition Leasing in allocating management time, services, overhead and functions among ourselves, Transition Auto Finance II, Inc. and Transition Leasing. Management of Transition Auto Finance II, Inc. and Transition Leasing intends to resolve any such conflicts in a manner that is fair and equitable to us. However, there can be no assurance that Transition Leasing will not form additional subsidiaries engaged in the same business as us or that any particular conflict may be resolved in a manner that does not adversely affect you. Neither Transition Auto Finance II, Inc. nor Transition Leasing has guaranteed or is otherwise liable for our debts and liabilities. Under the terms of the Servicing Agreement and the Purchasing Agreement, Transition Leasing will be paid various fees and be entitled to reimbursement for its expenses incurred in connection with the repossession, remarketing, repair and resale of vehicles out of the proceeds from such resales. The terms of the Servicing Agreement and the Purchasing Agreement were not negotiated at arm's-length but were determined unilaterally by the management of Transition Leasing. Thus, there are real and ongoing conflicts of interest with respect to these agreements. We did not and do not intend to seek competitive bids from other providers of lease purchasing, administration and collection services. There has been no independent determination of the fairness and reasonableness of the terms of these transactions and relationships. Thus, there is no assurance that such services could not have been obtained from an unaffiliated third party in arm's-length negotiations on terms more favorable to us. In addition, the terms of the new lease contracts to be originated by Transition Leasing will not have been negotiated at arm's-length but will be determined unilaterally by Transition Leasing. Transition Leasing will receive 57.5% of each customer's down payment as a marketing fee. Transition Leasing currently provides purchase and collection services for Transition Auto Finance II, Inc., but does not provide such services to any other party, including affiliates. Transition Leasing, however, may agree in the future, to purchase and service lease contracts for itself, its affiliates and other unrelated parties. We have the right to purchase additional lease contracts originated by Transition Leasing from the net collection proceeds on our existing lease contracts until the earlier of the sinking fund trigger date or an event of default under the Indenture. Management of Transition Leasing will have real and ongoing conflicts of interest in deciding whether to make available to us any automobile lease contracts -36- 41 that it originates or to retain or acquire the contracts for its own benefit or for the benefit of affiliated parties, including future subsidiaries to be engaged in the vehicle leasing business. Transition Leasing has determined that, once Transition Auto Finance II, Inc. has fully invested its funds in vehicles and leases, all vehicle lease contracts purchased or originated by Transition Leasing that satisfy our contract criteria will be made available to us, to the extent that we have funds available for such purchases, subject only to right of Transition Auto Finance II, Inc. to acquire vehicle lease contracts and vehicles with proceeds from repossession of its leased vehicles or prepayments of its lease contracts. See "RISK FACTORS -- Potential Conflicts of Interest." We will use up to 2% of the gross proceeds from the sale of the notes to reimburse Transition Leasing, our parent, for offering and organizational expenses paid by it. The maximum reimbursement will range from $5,000 for the minimum offering of $250,000 to $400,000 for the maximum offering of $20,000,000. Transition Leasing has agreed to pay such expenses to the extent they exceed 2% of the gross proceeds from the sale of the notes. It is expected that such expenses will exceed 2% of the gross proceeds from the sale of the notes, only if the aggregate gross proceeds from sale of the notes are less than $20,000,000. We believe that the transactions between us and Transition Leasing, including the marketing fee and other fees to be paid to Transition Leasing, are reasonable, based on comparable fees paid to lease brokers (or facilitators) in automobile leasing transactions involving customers with non-prime credit ratings. The amount of fees payable to Transition Leasing may not be increased without the consent of holders of at least 75% of the aggregate principal amount of the notes (excluding notes we hold or that are held by our affiliates). See "ADDITIONAL INDENTURE PROVISIONS -- Modification of Indenture" and "RISK FACTORS -- Potential Conflicts of Interest" for additional information. We have joined in a tax sharing agreement with Transition Leasing. In general, under the terms of this agreement, Transition Leasing is responsible for making all payments of federal income taxes due with respect to itself and its subsidiaries to the Internal Revenue Service and all payments of state and local consolidated, combined and unitary income taxes to the applicable state and local authorities. "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS -- Federal Income Tax Liabilities of the Company and Transition Leasing." Under applicable federal tax laws, however, if Transition Leasing fails to make such payments of tax, the subsidiaries, including us, would be responsible for making such payments. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS -- Uncertain Federal Income Tax Liability of the Company and Transition Leasing." We have adopted a policy pursuant to which we will not make loans to officers, directors, stockholders or affiliates of such persons. All ongoing and future transactions with our affiliates will be entered into on terms that are no less favorable to us than those that can be obtained from unaffiliated third parties and must be approved by a majority of our directors. LITIGATION Neither we nor Transition Leasing is the subject of any pending litigation. -37- 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION GENERAL As of the date hereof, we have had no operating history. The net proceeds of the sale of the notes will be employed to purchase vehicles and lease contracts. See "USE OF PROCEEDS." While the notes remain outstanding, we will be prohibited from engaging in any business other than the purchase or other acquisition of vehicles and lease contracts, collection and servicing of the lease contracts (including possession and resale of the vehicles) and the remarketing of the vehicles upon termination of the lease contracts, and from incurring any additional indebtedness other than allowed expenses and any other amounts incurred in the ordinary course of our business. See, "THE COMPANY -- General; The Business of the Company." Our use of the net collection proceeds from the lease contracts will be restricted to payments on the notes and, so long as we are not in default under the Indenture, to payments of allowed expenses and, until the sinking fund trigger date, to the purchase or acquisition of additional eligible lease contracts. See "COLLATERAL FOR THE NOTES -- The Lease Contract Proceeds and Operating Account." CAPITAL RESOURCES AND LIQUIDITY Our primary sources of funds for repayment of the notes will be proceeds from the lease contracts, any income on the reinvestment of such proceeds, and any proceeds from sale or refinancing of the remaining lease contracts at the maturity of the notes. We do not have, nor are we expected to have in the future, any significant source of capital for payment of the notes and our expenses other than such sources. Payment of the principal or interest on the notes is not guaranteed by any other person or entity. See "RISK FACTORS -- Limited Assets; Single Purpose Nature." Although our management believes that we will realize sufficient proceeds from the foregoing sources to pay all installments of interest when due on the notes and to satisfy the principal amount of the notes in full prior to or at maturity, there can be no assurance that such sources will be sufficient to repay the notes in full. Moreover, management's belief is based on a number of assumptions, believed by management to be reasonable. Should any of such assumptions prove to be inaccurate, it could have a material adverse effect on our ability to pay the notes in accordance with their terms. We intend to use at least 90% of the gross proceeds from the sale of notes to purchase or acquire vehicles or lease contracts. We expect that substantially all lease contracts and vehicles will be acquired in transactions originated by Transition Leasing. None of the offering proceeds will be used to pay interest on the notes. Any cash proceeds from existing lease contracts in excess of interest payments and payments of allowed expenses will be reinvested in the purchase of additional vehicles and the entering into of related lease contracts prior to the sinking fund trigger date, thereby causing the total amount of funds invested in the lease contracts to exceed the amount of the proceeds from the sale of notes. We believe that by purchasing and acquiring lease contracts that meet the lease contract criteria, the total future installments required to be paid under the lease contracts should be greater than the outstanding principal of the notes. All of the vehicles and lease contracts purchased or acquired with proceeds from the sale of the notes or with the collection proceeds from previously purchased or acquired lease contracts will serve as collateral for the notes. We believe that the amount of the collateral for the notes will increase until the sinking fund trigger date. As a result of our reinvestment of the net collection proceeds from existing lease contracts, after deduction for payments of interest and allowed expenses, in additional lease contracts, we believe that the ratio of the total unpaid installments of the lease contracts securing the notes to the aggregate principal of the outstanding notes will generally increase until the sinking fund trigger date. The foregoing paragraph contains forward-looking information that is based on a number of assumptions and these assumptions include certain risks and uncertainties. A principal risk is that we have had no operations to date, and Transition Leasing, our parent, which is responsible for the acquisition and servicing of our lease contracts, has limited operating history to date upon which to base these -38- 43 assumptions. Other risks and uncertainties are set forth under the caption "RISK FACTORS" elsewhere in this Prospectus. A variation in any single assumption could materially alter our ability to cover the allowed expenses and pay all principal and interest due on the notes. There is no assurance that these assumptions, including, without limitation, the expected implicit interest rate of 18% per annum with respect to the lease contracts, will be achieved. Accordingly, our ability to cover the allowed expenses and pay all principal and interest on the notes may differ materially from this forward-looking information. ADDITIONAL INDENTURE PROVISIONS The following material describes certain provisions of the Indenture. Certain provisions of the Indenture are also described under "DESCRIPTION OF THE NOTES" and "COLLATERAL FOR THE NOTES." The descriptions are not complete. We strongly recommend that you review the Indenture. See, "WHERE YOU CAN GET MORE INFORMATION." MODIFICATION OF INDENTURE With the consent of the holders of at least a majority of the aggregate principal amount of the outstanding notes, the Trustee can agree with us to amend or supplement the Indenture or the notes, except as provided below. We will mail notice of any such amendment of the Indenture or the notes to all holders of the notes promptly after the effectiveness thereof. Without the consent of the holder of each outstanding note affected, however, no amendment to the Indenture or supplemental Indenture will, among other things: - reduce the amount of notes whose holders must consent to an amendment, supplement or waiver; - reduce the rate of or extend the time for payment of interest on any note; - reduce or extend the maturity of the principal of any note; - permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture or terminate the lien of the Indenture on any property at any time subject thereto or deprive the holder of any note of the collateral afforded by the lien of the Indenture; or - make any note payable in money other than that stated in the note. Without the consent of the holders of at least 75% of the aggregate principal amount of the outstanding notes, no supplemental Indenture may increase the amount of fees payable to Transition Leasing. For the purpose of consents of noteholders, the term "outstanding" excludes notes which we hold or which are held by our affiliates. (Indenture, Section 1.1.) We may amend or supplement the Indenture or the notes, without obtaining the consent of noteholders, to cure ambiguities or make minor corrections and, among other things, to make any change that does not adversely affect the interests of the noteholders. (Indenture, Section 9.1.) EVENTS OF DEFAULT An event of default with respect to the notes is defined in the Indenture as being: - our failure to make any interest payment on the notes within 30 days after it becomes due; - our failure to pay when due the principal of any notes; - the impairment of the validity or effectiveness of the Indenture or of the security interest granted thereby; -39- 44 - the improper amendment or termination of the Indenture; - the continuance of any of the following events for a period of 30 days after we are delivered notice of such event by the Trustee or after we and the Trustee are delivered notice of such event by the holders of notes representing at least 25% of the aggregate principal amount of the outstanding notes; - the creation of a lien on any of the assets other than the lien of the trust or the Trustee; - the failure of the Indenture to create a valid first priority security interest in assets which are held in the trust; or - our failure to comply with any of our covenants in the Indenture; - Transition Leasing's failure to purchase lease contracts which are in default or which it otherwise is required to purchase from us; - the incorrectness in any material respect of any of our representations or warranties in the Indenture (exclusive of representations and warranties as to individual lease contracts that Transition Leasing is obligated to, and does, repurchase from us) and the failure to cure such circumstances or condition within 30 days after we receive notice thereof from the Trustee or the holders of notes representing at least 25% of the aggregate principal amount of the outstanding notes; and - we enter into bankruptcy, or are put into bankruptcy, or become subject to certain other actions relating to insolvency or other financial incapacity. RIGHTS UPON EVENT OF DEFAULT If an event of default should occur and continue, the Trustee may, or at the direction of the holders of notes representing at least 25% of the principal amount of the notes will, declare the notes due and payable. Upon such declaration, the notes will immediately become due and payable in an amount equal to their remaining principal amount plus accrued interest at such time. Under such circumstances, such declaration may be rescinded by the holders of a majority of the aggregate principal amount of the outstanding notes. (Indenture, Section 6.2.) If, following an event of default, the notes have been declared due and payable, the Trustee may exercise one or more of its remedies including: - the right to retain the assets held as collateral in the trust and apply all amounts received with respect to such assets, first, to payment of its fees and expenses and then, to the payment of the principal of and interest on the notes, ratably with respect to the noteholders (Indenture, Sections 6.3, 6.10 and 6.13); - the right to sell the assets held as collateral in the trust and apply the proceeds, first, to payment of its fees and expenses and then, to the amounts due on the notes (Indenture, Sections 6.3, 6.10 and 6.14); or - the right to cause a transfer of all funds in our operating account directly to the sinking fund account. In the event of a continuing default by Transition Leasing with respect to its obligations under the Servicing Agreement or the Purchasing Agreement, the Trustee will also have the right to direct us to terminate the duties and rights of Transition Leasing under such agreements and to cause Transition Leasing to turn over to the Trustee all records and data pertaining to the lease contracts in its possession. (Indenture, Section 5.10; Servicing Agreement, Section 9; Purchasing Agreement.) The holders of a majority of the aggregate principal amount of the outstanding notes will have the right to direct the time, method and place of conduct of any proceedings for any remedy available to the -40- 45 Trustee to exercise any trust or power conferred on the Trustee. The Trustee may refuse, however, to follow any such direction that conflicts with law or the Indenture, that is unduly prejudicial to the rights of noteholders not joining in such direction or that would subject the Trustee to personal liability. (Indenture, Section 6.5.) The holders of a majority of the aggregate principal amount of the outstanding notes may also waive any default, except a default in respect of a covenant or provision of the Indenture that cannot be modified without the waiver or consent of each holder of notes affected. (Indenture, Section 6.4.) No holder of notes will have the right to pursue any remedy with respect to the Indenture or the notes, unless: - such holder gives to the Trustee written notice of a continuing event of default; - the holders of at least 25% of the aggregate principal amount of the outstanding notes have made a written request to the Trustee to pursue such remedy, and have offered indemnity satisfactory to the Trustee against loss, liability or expense - the Trustee does not comply with the request within sixty (60) days; and - the Trustee has received no contrary direction during such 60-day period from the holders of a majority of the principal amount of the outstanding notes. (Indenture, Section 6.6.) Notwithstanding the foregoing, the Indenture prohibits the Trustee from reselling any portion of the assets held in trust as collateral upon the occurrence of an event of default to us or any of our officers or directors, Transition Leasing or any of its shareholders, officers or directors, or any other of our affiliates. RESTRICTIONS ON BUSINESS ACTIVITIES AND ADDITIONAL INDEBTEDNESS We have made certain covenants in the Indenture that restrict our business activities and prohibit certain transactions. We have agreed, among other things, that, without the consent of the holders of a majority of the aggregate principal amount of the notes, we will not (i) engage in any business or activity other than or in connection with the purchase or other acquisition of vehicles and lease contracts, collection and servicing of the lease contracts, the repossession and resale of the vehicles, the remarketing of vehicles upon termination of the lease contracts and the raising of equity capital, and any other incidental businesses or activities, or (ii) create, incur, assume or in any manner become liable in respect of any indebtedness other than the notes, any allowed expenses and any other amounts incurred in the ordinary course of our business. In addition, we have agreed not to dissolve or liquidate in whole or in part or to merge or to consolidate with any corporation, partnership or entity other than a subsidiary of which we are, directly or indirectly, the sole owner or any affiliate thereof whose business is restricted in the same manner as our business under clause (i) above. (Indenture, Section 5.11.) OTHER JURISDICTIONS We will do business in Texas, primarily, but we also will lease vehicles in Louisiana and such other jurisdictions as Transition Leasing determines to be viable markets for our business plan. We will endeavor to do business in new jurisdictions ourselves, without forming additional subsidiaries, but where circumstances make it advantageous for us to do so, we may choose to form a subsidiary to conduct our operations in a new jurisdiction. For instance, we have chosen to form a new subsidiary to conduct our operations in Louisiana. If we choose to expand our operations to a new jurisdiction or to utilize a subsidiary to do so, under the terms of the Indenture, we must present evidence to the Trustee that our operations, or those of our subsidiary, will comply with the laws in that jurisdiction regarding vehicle leasing and conducting business generally. If we choose to utilize a subsidiary to expand our operations to a new jurisdiction, our subsidiary must execute and deliver to the Trustee an agreement to be bound by the Indenture in exactly the same manner and to the same extent as we are and to make its assets subject to the lien imposed by the Indenture in favor of the Trustee. -41- 46 COMPLIANCE STATEMENTS AND ANNUAL ACCOUNTANTS' REPORTS We and Transition Leasing are required to certify, quarterly, to the Trustee that we have fulfilled our obligations under the Indenture. (Indenture, Section 5.7.) In addition, we and Transition Leasing annually must file with the Trustee a report of a firm of independent public accountants as to their examination of our financial statements and those of Transition Leasing and the documents and records relating to the lease contracts and deliver a certificate with respect to our compliance and that of Transition Leasing, in all material respects, with our respective obligations arising under the Indenture. (Indenture, Section 5.6.) TRUSTEE'S ANNUAL REPORT The Trust Indenture Act requires the Trustee to mail annually to all holders of notes a brief report if any of certain events occur. These events include: - any change in the Trustee's eligibility and qualifications to continue as the Trustee under the Indenture; - any amounts advanced by the Trustee under the Indenture; - the amount, interest rate and maturity date of certain indebtedness, if any, owing by us to the Trustee in our individual capacity; - any change to the property and funds, if any, physically held by the Trustee as such; - any change in or any release, or release and substitution, of property subject to the lien of the Indenture; and - any action taken by it that materially affects the notes and that has not been previously reported. (Indenture, Section 7.6.) SATISFACTION AND DISCHARGE OF THE INDENTURE The Indenture will be discharged, with certain limitations, upon deposit with the Trustee of funds sufficient for the payment or redemption of all of the notes. Our duties to you will cease upon such deposit. (Indenture, Section 8.1.) DUTIES OF TRUSTEE The Trustee is obligated, under the Indenture, to use the same degree of care and skill in the exercise of its rights and powers under the Indenture as a prudent man would exercise or use under the circumstances in his own affairs. Except during an event of default, the Trustee may rely, in the absence of bad faith, on certificates and opinions furnished to it. Generally, the Trustee is not relieved from liability for its own negligence or willful misconduct except that it is not liable (i) if it acted in good faith in accordance with a direction from the holders of not less than a majority in principal amount of the notes, or (ii) for any error in judgment made in good faith and without negligence in ascertaining the pertinent facts. The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (Indenture, Section 7.1.) THE TRUSTEE Trust Management, Inc. will be the Trustee under the Indenture for the notes. We are obligated to pay the fees and expenses of the Trustee relating to the notes. To provide security for our obligation to pay such fees and expenses, the Trustee has a lien on the same assets as secure the notes. The Trustee's lien is prior to that of the notes, prior to the assets in the trust, except as to any money held in trust to pay principal and interest on the notes. (Indenture, Section 7.7.) -42- 47 CERTAIN LEGAL ASPECTS OF THE LEASE CONTRACTS THE LEASES AS TRUE LEASES Under Texas Law, the lease contracts are leases of personal property. Under the Texas Uniform Commercial Code (the "UCC"), a transaction involving the lease of personal property may create either a lease or a security interest. If the transaction creates a lease, the lessor remains the owner of the personal property subject to the lease and the lessee has the right to possess and use the leased property during the term of the lease. The rights and remedies of the lessor and lessee under a true lease of personal property are determined primarily under Article 2A of the UCC (Leases). If the transaction creates a security interest, (a) the transaction is in effect a credit sale under which the lessor has in effect sold the personal property to the lessee on an installment payment basis and holds a security interest in the subject personal property to secure payment of the purchase price, (b) the lessee is the purchaser and owner of the personal property, and (c) the lease payments are in effect payments of the purchase price for the subject personal property. The rights and remedies of the parties to a lease which is actually a sale coupled with a security interest are determined primarily under Article 2 of the UCC (Sales) and Article 9 of the UCC (Secured Transactions). Under Louisiana law, leases of automobiles and motorcycles are leases of movable property. The Louisiana Lease of Movables Act, La. R.S. 9:3301, et. seq. applies to leases of movable property located in Louisiana whether the property is initially located in Louisiana or subsequently moved to Louisiana. The Lease of Movables Act draws a distinction between true leases and financed leases. In a true lease, the lessor, the owner of the property, grants the lessee the enjoyment of the movable property for a certain time at a stipulated price. The rights and remedies of the parties to a true lease of movable property are governed primarily by the Lease of Movables Act. The determination of whether a lease transaction creates a true lease or a sale coupled with a security interest is very important and will determine the respective rights, obligations and duties of the lessor, in this case us, and the customer and will have particular impact on the remedies available upon a default by the customer. The following are some of the significant differences between a true lease and a lease which is in effect a sale coupled with a security interest: - A true lease is exempt from Texas and Louisiana usury laws; a credit sale is not. - A lessor under a true lease generally has a better chance than a secured creditor of obtaining current payments, as well as repossession of the goods, when the lessee is in bankruptcy. - In the case of default, a true lessor has different and often more favorable remedies than those available to a secured creditor. - A security interest, unlike a lease, is subject to priority rules with respect to the claims of competing secured creditors. If a lessor, not contemplating that this transaction will be characterized as creating a security interest, takes no steps to perfect the security interest created in the transaction, a Trustee in bankruptcy or some other third party may claim that the lessor is actually an unperfected secured creditor and may be able to void, or otherwise take priority over, the security interest, leaving the lessor/seller with an unsecured obligation to pay the lease payments. - A transaction that is truly a security interest, and not a lease, may result in exclusion of the leased goods from insurance coverage under some policies. Whether a transaction creates a lease or a security interest depends on the particular terms and facts on which the transaction is based. If the transaction, however labeled, is actually a transaction under which the lessee is acquiring ownership, or the equivalent of ownership, of the leased goods, the transaction is a sale coupled with a security interest. The transaction will be considered a security interest if the lessee's -43- 48 obligation to pay the consideration under the lease (the rent payments) is not subject to termination by the lessee, and one or more of the following factors are also present: - The original lease term is equal to or greater than the remaining economic life of the goods. - The lessee is required to renew the lease for the remaining economic life of the goods or is required to become the owner of the goods. - The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the terms of the lease agreement. - The lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the terms of the lease agreement. Additional consideration is nominal if it is less than the lessee's "reasonably predictable" cost of performing under the lease agreement if the option is not exercised. Additional consideration given for an option to renew or an option to purchase is not nominal if: - When the option to renew the lease is granted, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed. - When the option to become the owner of the goods is granted, the price is stated to be the fair market value of the goods determined at the time the option is to be performed. A transaction does not create a security interest merely because it provides for any of the following: - The "present value" of the consideration to be paid for the right to possession and use of the goods is substantially equal to or greater than the fair market value of goods at the time the lease agreement is made. In this context, present value means the amount, as of a date certain, of one or more sums payable in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties, if that rate is not manifestly unreasonable at the time the transaction is consummated. Otherwise, the discount is determined by a reasonable rate that takes into account the facts and circumstances of each case. - The lessee assumes the risk of loss of the goods or agrees to pay taxes, insurance, filing, recording, or registration fees or service or maintenance costs with respect to the goods. - The lessee has an option to renew the lease or become the owner of the goods. - The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed. - The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed. We believe that the lease contracts create true leases and will be governed by the laws and regulations applicable to the lease of personal property rather than the laws and regulations applicable to credit sales of motor vehicles for the following reasons: - each of our lease contracts will provide for the lease of a vehicle for a term which is considerably shorter than the expected useful life of the vehicle; - the lease payments required under each lease contract are in an aggregate amount less than the payments which would be made if the transaction was in essence a sale of the vehicle; and -44- 49 - at the expiration of the lease term, the customer can either return the vehicle to us with no further payment obligations or purchase the vehicle at a fixed purchase price which, based on our policies, should be equal to or greater than the reasonably predictable fair market value of the vehicle. In documenting and servicing the lease contracts, we will follow the rules and procedures required for true lease transactions. SECURITY INTEREST IN LEASE CONTRACTS To secure payment of the notes, we will grant to the Trustee a security interest in and to each of the lease contracts. Pursuant to the provisions of Article 9 of the UCC governing security interests, a lease is designated as chattel paper. A security interest in chattel paper may be perfected either by taking possession of the lease contract or by the filing of a UCC financing statement with the Secretary of State of the state in which a corporate debtor's principal place of business is located. Our principal place of business is located in the State of Texas and a security interest in one of our lease contracts may be perfected by filing a UCC financing statement with the Secretary of State of the State of Texas. In the event Transition Leasing forms a subsidiary to carry out a vehicle leasing business in one or more others states, appropriate filings will be made in such other states. Upon any purchase of lease contracts by us, the original lease contracts and related title documents for the vehicles will be delivered to the Trustee. Possession of such lease contracts and related title documents will be retained by the Trustee or other financial institution appointed by the Trustee and us to act as custodian and bailee of the lease contracts and related title documents for the benefit of the Trustee and us. Upon its purchase, each lease contract will be physically labeled to indicate the security interest therein of the Trustee. In addition, a UCC financing statement will be filed in the appropriate public office to perfect by filing and give notice of the Trustee's security interest in the lease contracts and all proceeds therefrom. See "COLLATERAL FOR THE NOTES -- The Lease Contracts." SECURITY INTERESTS IN VEHICLES We will own the vehicles subject to the lease contracts. To secure payment of the notes, we will grant to the Trustee a security interest in and to each of the vehicles subject to a lease contract. Perfection of security interests in vehicles is generally governed by the motor vehicle registration laws of the state in which a corporate debtor's principal place of business is located. As stated above, as our principal place of business is located in the State of Texas, a security interest in a vehicle will be perfected according to the requirements of Article 9 of the UCC and the motor vehicle registration laws of the State of Texas. In Texas, a security interest in a motor vehicle is perfected by notation of the secured party's lien on the vehicle's certificate of title. With respect to lease contracts we purchased, the originating entities will sell and assign the lease contracts and the vehicles to us upon purchase of the lease contracts. The originating entities will also provide evidence that proper applications for certificates of title have been made to ensure that we will be named as the owner and the Trustee as the first lienholder on the certificates of title relating to the vehicles. We will deliver possession of the lease contracts (originated or purchased) and related title documents to the Trustee or other financial institution appointed by us and the Trustee to act as custodian and bailee for us and the Trustee. We will supplement the description in the Indenture of the lease contracts and confirm our grant to the Trustee of a security interest in all lease contracts that we purchase. OTHER MATTERS AFFECTING MOTOR VEHICLES AND LEASE CONTRACTS Under the laws of Texas and Louisiana, liens for repairs performed on a motor vehicle and liens for certain unpaid taxes take priority over even a perfected security interest in a vehicle. The Uniform Commercial Code in effect in Texas and Louisiana also grants priority to certain federal tax liens over the lien of a secured party. Certain state and federal laws permit the confiscation of motor vehicles under certain circumstances if used in unlawful activities that may result in the loss of a collateralized party's perfected security interest in the confiscated motor vehicle. Upon our purchase of each lease contract or -45- 50 vehicle, we will receive a warranty from Transition Leasing that the lease contract creates a valid, subsisting and enforceable first priority security interest in the vehicle. However, liens for repairs or taxes or the confiscation of a vehicle could arise or occur at any time during the term of a lease contract. Notice will not necessarily be given to us in the event such a lien arises or confiscation occurs. If a lien customer of ours relocates to another state, under the laws of most states, the perfected security interest in the vehicle would continue for four months after such relocation and thereafter, in most instances, until the customer re-registers the vehicle in such state. Almost all states generally require surrender of a certificate of title to re-register a titled vehicle. Therefore, the Trustee or other appointed custodian must surrender possession, if it holds the certificate of title to such vehicle, before the vehicle owner may effect the re-registration. In addition, we should receive, absent clerical errors or fraud, notice of surrender of the certificate of title because we will be listed as the owner on the face of the title, and the Trustee will be shown as the first lienholder thereon. Accordingly, we should have notice and the opportunity to re-perfect out security interest in the vehicle in the state of relocation. If a customer moves to one of the few states that does not require surrender of a certificate of title for registration of a motor vehicle, re-registration could defeat perfection or loss of the Trustee's security interest in such vehicle. The loss of the Trustee's security interest in a number of vehicles under these circumstances could have a material adverse effect on the collateral for the notes. In the ordinary course of servicing the lease contracts, we will take steps to effect such re-perfection upon receipt of notice of re-registration or other information from the customer as to relocation. Under the Servicing Agreement and the Indenture, we are obligated to maintain the continuous perfection of the security interest represented by each lease contract in the related vehicle. REPOSSESSION Under Texas law, in the event of default by a customer on a lease contract, we, as lessor, have all the remedies of a lessor under Article 2A of the UCC. The UCC remedies of a lessor include the right to repossession by self-help means, unless such means would constitute a breach of the peace. Unless the customer under a lease contract voluntarily surrenders a vehicle, self-help repossession, by an individual independent repossession specialist engaged by Transition Leasing, will be the method usually employed by Transition Leasing when an customer defaults. Self-help repossession is accomplished by retaking possession of the vehicle. If a breach of peace is likely to occur, or if applicable state law so requires, Transition Leasing must obtain a court order from the appropriate state court and repossess the vehicle in accordance with that order. Most of the states in which the Company intends to purchase lease contracts have state laws that would not require Transition Leasing, in the absence of a probable breach of the peace, to obtain a court order before it attempts to repossess a vehicle. Under Louisiana law, in the event of default by a customer on a lease contract, we will have all of the remedies of a lessor under the Louisiana Lease of Movables Act, La. R.S. 9:3301, et. seq. Under that statute, in the event of default by the lessee, the lessor may either recover accelerated rental payments and additional amounts due and outstanding or cancel the lease, recover possession of the leased property and recover additional amounts and liquidated damages provided under the lease agreement. These options are not cumulative in nature, and the lessee may select one remedy or the other, notwithstanding any provision of the lease to the contrary. If the lessee fails or refuses to surrender the leased property to the lessor, the lessor may seek a court order for the lessee to surrender possession of the leased property. In addition, the lessor may file a court action against the lessee to recover amounts then due and owing under the leases as well as liquidated damages as may be provided in the lease agreement. In Louisiana, a lessor is prohibited from attempting to recover possession of the lease property under any form of self-help repossession. However, under limited conditions a lessor has the right to take possession of leased property wherever it may be found. -46- 51 DISPOSAL OF VEHICLES AND DAMAGES AGAINST DEFAULTING CUSTOMERS Under Texas law, upon default by a lessee, the UCC permits the lessor to take possession of the leased goods, either by self-help methods or by judicial process. Upon repossession of leased goods, a lessor may dispose of the leased goods (either by releasing the leased goods or selling the leased goods) and seek recovery of damages from the lessee. Damages of a lessor upon default by a lessee include payment of all unpaid lease payments due and owing on the date of disposition of the leased goods, recovery of the expenses incurred by the lessor in pursuing its remedies against the lessee, and damages for the unpaid installments of rent due under the lease. The damages to which a lessor is entitled for the unpaid installments of rent due under a lease after default by a lessee will be determined by whether the disposition of the leased goods is by releasing or by sale. If the leased goods are re-leased, damages are based on the present value of the remaining lease payments under the lease which is in default, less the present value of lease payments due under the new lease created when the goods are re-leased. If the leased goods are resold, damages will be based on the difference between the sum of estimated value of the leased goods at the expiration of the lease which is in default plus the present value (or other similar adjustment) of the remaining lease payments, on the one hand, and the amount realized upon the sale of the leased goods, on the other. Vehicles we repossess will generally be re-leased to a new lessee or sold by Transition Leasing through wholesale automobile networks or auctions that are attended principally by dealers. Under Louisiana law, in event of default by the lessee under a true lease, the lessor is limited to the following alternate remedies: - it can file an appropriate collection against the lessee to recover accelerated rental payments and additional amounts that are then due and outstanding and that will become due in the future over the full base term of the lease, or - it may cancel the lease, recover possession of the leased property and recover additional amounts and liquidated damages as may be contractually provided under the lease agreement. These remedies are not cumulative in nature. The lessor may not seek to collect accelerated rental payments under the lease and also to cancel the lease and recover possession of the leased equipment. Certain statutory provisions, including federal and state bankruptcy and insolvency laws, may limit or delay our ability to repossess and re-lease or sell a vehicle subject to a lease contract under which the lessee has defaulted or enforce a judgment for the damages to which we are entitled upon repossession and release or sale of the motor vehicle. In the event that damages are not obtained, are not satisfied, are satisfied at a discount or are discharged, in whole or in party, in bankruptcy proceedings, including bankruptcy proceedings under Title 11 United States Code (the Federal bankruptcy law), we may suffer a loss and diminish our ability to repay the notes. CONSUMER PROTECTION LAWS Numerous federal and state consumer protection laws and related regulations impose substantial requirements upon lessors and servicers involved in consumer leases. These laws include, but are not limited to, the Consumer Leasing Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and M, state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code, and other similar laws. These laws require us to provide certain disclosures to prospective lessees, prohibit misleading advertising and protect against discriminating financing or unfair credit practices. The Federal Reserve Board has published final revisions to Regulation M under the Consumer Leasing Act that are applicable to automobile lease contracts. See "THE COMPANY -- Government Regulations." The Equal Credit Opportunity Act prohibits creditors from discriminating against lease applicants on the bases of race, color, sex, age or marital status. Under the Equal Credit Opportunity Act, creditors are required to make certain -47- 52 disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. The Fair Credit Reporting Act requires the Company to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. In addition to the foregoing, state laws impose finance charge ceilings and other restrictions on consumer transactions and require contract disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. In some cases, this liability could affect an assignee's ability to enforce consumer finance contracts such as the lease contracts. The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission, the provisions of which are generally duplicated by the Uniform Consumer Credit Code, other state statutes, or the common law in certain states, is intended to defeat the ability of the transferor of a consumer credit contract (such as the lease contracts), which transferor is the lessor of the goods that gave rise to the transaction, to transfer such contract free of notice of claims by the debtor thereunder. The effect of the Holder-in-Due-Course Rule is to subject the assignee of such a contract to all claims and defenses that the lessee under the contract could assert against the lessor of the goods. Most of the lease contracts will be subject to the requirements of the Holder-In-Due-Course Rule. Accordingly, as holder of the lease contracts, we may be subject to any claims or defenses that the lease customer may assert against us, as lessor. Such claims are limited to a maximum liability equal to the amounts paid by the customer on the lease contract. The customer, however, may also assert the Holder-In-Due-Course Rule to offset remaining amounts due on the lease contract as a defense against any claim we bring against such customer. Several states and the federal government have enacted "lemon laws" and similar statutes containing warranty protections for consumers who purchase or lease new or used motor vehicles. The application of these statutes may give rise to a claim or defense by a consumer against the manufacturer of a purchased vehicle or the dealer from or through whom such consumer purchased or leased such vehicle. We may be required to cancel a lease with a consumer who successfully asserts such a claim or defense, and while we would have a claim against the manufacturer or such dealer, there can be assurance that we will be made whole in every case in which the consumer successfully asserts such rights. Under most state motor vehicle dealer licensing laws, sellers of motor vehicles are required to be licensed to sell motor vehicles at retail sale. Furthermore, federal odometer regulations promulgated under the Motor Vehicle Information and Cost Savings Act require that all sellers of new and 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 an odometer disclosure statement was not provided to the lessee of a vehicle, the lessee may be able to assert a defense against the seller of the vehicle. OTHER LIMITATIONS In addition to the limitations discussed above, numerous other statutory provisions, including federal bankruptcy laws and related state laws, may interfere with or affect the ability of a lessor to realize upon leased goods or collect all damages to which the lessor is entitled upon default by the lessee. For example, in a proceeding under the federal bankruptcy law, a claim for damages may be treated as an unsecured claim and may not be paid in full if the particular bankruptcy proceeding does not result in payment in full of other similar unsecured claims. The federal bankruptcy laws, however, do require the debtor or trustee in a bankruptcy proceeding to perform all obligations of the lessee under the lease (including payment of the installments of rent due under the lease) and to cure any outstanding defaults if the leased goods are to remain in the possession of the debtor or trustee subject to the provisions of the lease. -48- 53 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS SCOPE AND LIMITATIONS The following is a general discussion of certain federal income tax consequences relating to the purchase, ownership, and disposition of the notes by the holders acquiring the notes on their original issuance for cash. The discussion is based upon the current provisions of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), the Treasury regulations promulgated thereunder and judicial or ruling authority as of the date hereof, all of which may be repealed, revoked or modified retroactively in a manner that could adversely affect a holder of the notes. This discussion has been reviewed by, and is the subject of an opinion from, Drenner & Stuart, a professional corporation. The discussion deals only with the notes held as capital assets (generally property held for investments and not for sale to customers in the ordinary course of a trade or business) by holders who or which are (i) citizens or residents of the United States, (ii) domestic corporations, partnerships or other entities or (iii) otherwise subject to U.S. federal income taxation on a net income basis in respect of income or gain from the notes. The discussion does not purport to deal with federal income tax consequences applicable to all categories of investors, some of which may be subject to special rules. Moreover, the Internal Revenue Service may disagree with all or a part of the discussion below. This summary does not address tax consequences of holding notes under state, local or foreign tax laws. No ruling on any of the issues discussed below will be sought from the Internal Revenue Service. Each purchaser should consult with his own tax advisor as to the particular tax consequences to him of purchasing, owning or disposing of the notes, including the effect of state, local or foreign laws. TAX CONSEQUENCES TO NOTEHOLDERS Treatment of the Notes as Indebtedness. We will agree, and you will agree by your purchase of notes, to treat the notes as debt for federal income tax purposes, unless an adverse determination dictates otherwise. If, however, it is determined for tax purposes that the notes represent an equity investment, a substantial portion of the discussion set forth below will be inapplicable and the tax consequences to the holders of the notes will change, possibly with adverse tax consequences. The discussion below assumes the characterization of the notes as debt is correct. We have not received an opinion of counsel with respect to the classification of the notes as debt for federal income tax purposes. Interest Income on the Notes. As a general rule, interest paid or accrued on the notes will be treated as ordinary income to the holders of the notes. If you use the accrual method of accounting for federal income tax purposes, you will be required to include stated interest earned on the notes in ordinary income as it accrues. If you use the cash receipts and disbursements method of accounting for federal income tax purposes, you must include such interest in ordinary income when payments are received (or made available for receipt) by you. Market Discount. The resale of notes may be affected by the market discount provisions of the Internal Revenue Code. These provisions generally provide that if subsequent to the original issuance of the notes you purchase a note at a market discount that exceeds a DE MINIMIS amount, any gain recognized by you upon the sale, redemption at maturity or other disposition of the note will be taxable as ordinary income to the extent of the portion of market discount that accrued on the note while held by you. Market discount will be treated as accruing ratably over the term of such note or, at your election (which election may not be revoked without the consent of the IRS), under a constant yield method. Also, you may elect to include market discount into income as it accrues in which case gain realized on the sale, exchange or retirement of a note will not be treated as ordinary income under the market discount rules. If you so elect (which election may not be revoked without the consent of the IRS), the election will apply to all debt instruments with market discount you acquire on or after the first day of the first taxable year to which such election applies. -49- 54 Market discount is defined generally as the excess, if any, of the stated redemption price of the note at maturity over the basis of the note in your hands immediately after its acquisition. Limitations imposed by the Internal Revenue Code which are intended to match deductions with the taxation of income may defer deductions for interest on indebtedness incurred or continued, or short-sale expenses incurred, to purchase or carry a note with accrued market discount. As noted above, a noteholder may elect to include market discount in gross income on a current basis and, if you so elect, you would be exempt from this rule. The adjusted basis of a note subject to such election will be increased to reflect market discount included in gross income, thereby reducing any gain or increasing any loss on a sale or taxable disposition. Amortization Bond Premium. The resale of notes may be affected by the bond premium rules of the Internal Revenue Code. In general, if you purchase a note at a premium (i.e., an amount in excess of the amount payable upon the maturity thereof), you will be considered to have purchased such note with "amortized bond premium" equal to the amount of such excess. You may elect to deduct the amortizable [amortized] bond premium as it accrues under a constant-yield method over the remaining term of the note. Amortizable bond premium is treated as an offset to interest income rather than as a separate interest deduction. Your tax basis in the note will be reduced by the amount of the amortizable bond premium deduction. Any such election shall apply to all debt instruments (other than instruments the interest on which is excludable from gross income) you held at the beginning of the first taxable year to which the election applies or thereafter acquire and is irrevocable without the consent of the Service. If you do not elect to deduct the bond premiums, the premium will decrease the gain or increase the loss otherwise recognized on the disposition of the note. Sale or Other Disposition. In general, you will recognize gain or loss upon the sale, redemption, retirement or other disposition of a note in an amount equal to the difference between the amount realized on the sale and your adjusted tax basis in the note. Your adjusted tax basis of a note generally will equal your cost for the note, increased by market discount, if any, you previously included in income with respect to the note and decreased by principal payments previously received by you and the amount of bond premium, if any, you previously amortized with respect to the note. Any such gain or loss will be capital gain or loss if the note was held as a capital asset, except for gain representing accrued interest and accrued market discount not previously included in income, and will be long-term capital gain or loss if the note was held for more than one year. Capital losses generally may be used only to offset capital gains. Tax Administration and Reporting. The Trustee will furnish you a statement with each distribution setting forth the amount of such distribution allocable to principal and to interest. Such payment of principal or interest reports will be made annually to the Internal Revenue Service and to holders of record that are not excepted from the reporting requirements regarding such information as may be required with respect to interest with respect to the notes. Backup Withholding. Under certain circumstances, you may be subject to "backup withholding" at a 31% rate. Backup withholding may apply to you if you are a United States person and if you, among other circumstances, fail to furnish your Social Security number or other taxpayer identification number to the Trustee. You should consult your tax advisors for additional information concerning the potential application of backup withholding to payments received by you with respect to a note. CERTAIN FEDERAL INCOME TAX LIABILITIES OF THE COMPANY AND TRANSITION LEASING Transition Leasing will file a consolidated federal income tax return with us. Because of the consolidated filing and the closely-held corporation status of Transition Leasing, additional federal income tax consequences may arise. Certain of these are summarized below. We and Transition Leasing constitute an "affiliated group" and, as such, intend to file consolidated federal income tax returns. As a result, each of us will be severally liable for the federal income tax liability of the affiliated group. We believe that there will be sufficient assets available to timely pay the affiliated group's federal income tax liability as it becomes due and payable. Also, under a tax allocation -50- 55 agreement signed by us and Transition Leasing, Transition Leasing has agreed to pay all federal income tax liability of the affiliated group as it becomes due and payable, although there can be no assurance that Transition Leasing will have the ability to pay such obligations. Under applicable federal tax laws, if Transition Leasing fails to make such payments of tax, the other members of the affiliated group, including us, would be responsible for making such payments. Also, the affiliated group will be subject to the passive loss rules under Section 469 of the Internal Revenue Code. As a result, any portfolio-type income earned by the affiliated group (e.g., interest and dividends) may not be able to be offset by passive losses of the affiliated group. We do not anticipate that either we or Transition Leasing will have significant amounts of portfolio-type income during the period the notes are outstanding. If portfolio-type income is realized, however, federal income tax may be owed with respect to such income even though the affiliated group otherwise has incurred passive losses. In addition, the affiliated group may be subject to the personal holding company rules of the Internal Revenue Code which may, in certain circumstances, impose an additional tax liability on the affiliated group. PLAN OF DISTRIBUTION UNDERWRITING We are offering up to $20,000,000 in aggregate principal amount of the notes. The notes will be sold on a "best efforts" basis by Great Nation Investment Corporation ("Great Nation"), and Great Nation is not obligated to purchase the notes. Great Nation may, but is not obligated to, select and engage participating soliciting broker/dealers that are qualified to offer and sell the notes in one or more states and that are members of the NASD. As of the date of this Prospectus, Great Nation has not engaged any soliciting broker/dealers to participate in the offering. Great Nation anticipates that Great Nation and any broker/dealers engaged to participate in the offering will solicit those investors and customers for whom this investment would be suitable. Great Nation and such other broker/dealer selling notes will be responsible for determining the suitability of the notes as an investment for any given investor. We shall pay to Great Nation in consideration for its services, a sales commission of 6% of the principal amount of notes sold to investors. In addition, we will reimburse Great Nation for certain expenses incurred in connection with its due diligence activities with regard to the offering in an amount not to exceed 2% of the aggregate principal amount of the notes sold. We may terminate our underwriting agreement with Great Nation if the underwriting group is unable to sell at least $750,000 of the notes within 45 days after the date of this prospectus and at least $250,000 of the notes each calendar month after the month in which the 45th day after the date of this prospectus occurs. Great Nation may terminate the underwriting agreement in the event of a material breach of the underwriting agreement by us or if Great Nation reasonably determines that the notes are not marketable. Generally, Great Nation will bear all of its expenses; provided, however, that if Great Nation terminates the underwriting agreement because of a material breach of this Agreement by us, we shall be obligated to pay to Great Nation an amount equal to all of Great Nation's accountable out-of-pocket expenses. We have agreed, with Transition Leasing jointly and severally, to indemnify Great Nation against certain liabilities, including liabilities under applicable securities laws. The underwriting agreement provides that the obligations of Great Nation pursuant to the underwriting agreement are subject to the approval of certain legal matters by Great Nation's counsel and various other conditions. We may contract with other broker/dealers who are members of the National Association of Securities Dealers, Inc. to serve as additional underwriters of this offering. If we do, we expect the terms of our agreements with such other underwriters will not be materially different than our agreement with Great Nation. We will pay Transition Leasing up to 2% of the gross offering proceeds to reimburse Transition Leasing for offering and organizational expenses paid by Transition Leasing on our behalf. No part of -51- 56 these payments will be paid by Transition Leasing to brokers to engage in sales efforts for us (sometimes called "wholesale fees"). SUITABILITY STANDARDS You may invest in our offering only if you meet our minimum suitability standard or the applicable state suitability standard, whichever is more stringent. In order to meet our minimum suitability standard, you must: - have a gross annual income of at least $45,000, and a net worth (exclusive of personal residence, furnishings and automobiles) of at least $45,000, or - have a net worth (exclusive of personal residence, furnishings and automobiles) of at least $150,000, without reference to income and - have a net worth (exclusive of personal residence, furnishings and automobiles) at least ten times the amount of your subscription. You will be required to represent, in writing, that you satisfy the applicable standard. ESCROW Investor funds will be held in a subscription escrow account with Texas Community Bank, N.A., as escrow agent, until a minimum of $250,000 in principal amount of the notes are sold. In the event that the minimum amount of notes is not subscribed before March 31, 2000 (or any earlier termination of the offering), we will terminate this offering and the escrowed funds, plus interest at the rate payable by the escrow agent bank, will be promptly returned to the subscribing investors by the escrow agent. Upon the subscription of the minimum amount of notes, the escrowed funds will be released to us and the interest earned as of the release date will be remitted to the investors who tendered funds into the escrow. Any subsequent subscription funds with respect to the sale of additional notes will be immediately released to us and available for our use upon our request. All subscriptions are subject to our right to reject any subscription in whole or in part. The offering will terminate on December 31, 2000, unless we sooner terminate it (i) upon the failure to achieve the minimum subscription amount, or (ii) upon our determination, in our discretion, for any reason that it should be terminated. Early termination of the offering may result in our selling less than $20,000,000 in aggregate principal amount of the notes and may expose prior purchasers of notes to certain risks. See "RISK FACTORS -- Sale of Small Amount of Notes." We intend to accept in the order received properly completed subscriptions and payments for subscription amounts from qualified investors meeting the applicable suitability standards. We may elect to treat certain subscriptions as accepted for purposes of any monthly limit on subscriptions from certain otherwise qualified investors (for example, IRA's) whose subscription funds are being paid by a Trustee or other institution that has confirmed to us that the funds will be paid. Upon the achievement of the maximum subscription amount ($20,000,000) for the notes, any subsequently received subscriptions will not be accepted by us and will be promptly returned. To allow us to make an orderly investment of all proceeds from the sale of the notes in the purchase of vehicles and the execution of lease contracts, we may limit the dollar amount of subscriptions for notes that we are willing to accept during any month of the offering period. To attempt to minimize the effects of the delay in the purchase of vehicles and acquisition of lease contracts, we will monitor the receipt of subscriptions. EXPERTS Our financial statements included in this Prospectus have been audited by Sprouse & Winn, L.L.P., independent certified public accountants, whose report thereon appears elsewhere herein, and have been so included in reliance upon the report and authority of such firm as experts in auditing and accounting. -52- 57 LEGAL MATTERS Certain matters with respect to the validity and enforceability of the notes have been passed upon for us by Kuperman, Orr, Mouer & Albers, a Professional Corporation, Austin, Texas. Brown McCarroll & Oaks Hartline, a Professional Corporation, has delivered its opinion to us as to certain compliance matters relating to the Texas Motor Vehicle Commission Code discussed under "THE COMPANY -- Government Regulations" and its opinion as to certain matters relative to perfection of the Trustee's security interest in such of our assets as will be located in Texas. King, LeBlanc & Bland, a Louisiana limited liability partnership has delivered to us its opinion as to certain compliance matters relating to the conduct of our operations in Louisiana discussed under "THE COMPANY -- Government Regulations" and its opinion relative to perfection of the Trustee's security interest in such of our assets as will be located in Louisiana. Drenner & Stuart, L.L.P. a Texas limited liability partnership, has also delivered to us its opinion as to the federal income tax matters discussed under "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS." WHERE YOU CAN GET MORE INFORMATION We have filed with the SEC a registration statement on Form SB-2 (including the exhibits, schedules and amendments thereto) under the Securities Act with respect to the shares of common stock to be sold in this offering. As permitted by the SEC's rules and regulations, this prospectus does not contain all the information set forth in the registration statement. For further information regarding our company and the shares of common stock to be sold in this offering, please refer to the registration statement and the contracts, agreements and other documents filed as exhibits to the registration statement. You may read and copy all or any portion of the registration statement or any other information that we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings, including the registration statement, are also available to you on the SEC's website (http://www.sec.gov). As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file periodic reports and other information with the Securities and Exchange Commission. Finally, you may obtain a copy of any of the documents filed as an exhibit to our registration statement, at no cost by writing or calling: Kenneth C. Lowe 8144 Walnut Hill Lane Number 680 Dallas, Texas 75231 (214) 360-9966 -53- 58 TRANSITION AUTO FINANCE III, INC. FINANCIAL STATEMENT AND INDEPENDENT AUDITORS' REPORT NOVEMBER 9, 1999 F-1 59 TRANSITION AUTO FINANCE III, INC. AUSTIN, TEXAS TABLE OF CONTENTS
PAGE ---- INDEPENDENT AUDITORS' REPORT................................ F-3 FINANCIAL STATEMENT Balance Sheet............................................. F-5 Notes to Financial Statement.............................. F-6
F-2 60 To the Board of Directors and Stockholder of Transition Auto Finance III, Inc. Dallas, Texas INDEPENDENT AUDITORS' REPORT We have audited the accompanying balance sheet of Transition Auto Finance III, Inc., a Texas corporation, as of November 8, 1999. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Transition Auto Finance III, Inc. as of November 8, 1999, in conformity with generally accepted accounting principles. SPROUSE & WINN, L.L.P. Austin, Texas November 9, 1999 F-3 61 FINANCIAL STATEMENT F-4 62 TRANSITION AUTO FINANCE III, INC. BALANCE SHEET NOVEMBER 8, 1999 ASSETS CURRENT ASSETS Cash...................................................... $1,000 ------ TOTAL ASSETS................................................ $1,000 ====== LIABILITIES AND STOCKHOLDER'S EQUITY STOCKHOLDER'S EQUITY Common stock $.10 par value: 1,000 shares authorized, issued, and outstanding................................ $ 100 Additional paid-in capital................................ 900 ------ Total Stockholder's Equity........................ 1,000 ------ TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $1,000 ======
See accompanying notes to this financial statement F-5 63 TRANSITION AUTO FINANCE III, INC. NOTES TO FINANCIAL STATEMENT NOVEMBER 8, 1999 NOTE 1: GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL Transition Auto Finance III, Inc. (the Company) is a Texas corporation organized on May 26, 1999. The Company was established to purchase motor vehicles and automobile lease contracts, collecting and servicing automobile lease contracts and remarketing motor vehicles upon termination of their leases. Transition Leasing Management, Inc. (Transition Leasing) owns 100% of the Company's common stock. Through November 8, 1999, the Company has had no activity. The Company has adopted a December 31 year-end. INCOME TAXES The Company is a corporation subject to federal and state income taxes. The Company and its parent intend to file a consolidated tax return. Each company in the consolidated group determines its taxable income or loss, on a separate company basis, and the consolidated tax liability is allocated to each company with taxable income in proportion to the total of the taxable income amounts. Through November 8, 1999, the Company has had no federal taxable income. NOTE 2: NOTES OFFERING The Company is intending to offer (the "Notes Offering") on a "best efforts basis" up to $20,000,000 of 11% Redeemable Secured Notes (the "Notes"). The Notes will have a term of sixty months and will bear interest at a fixed rate of 11%. The Notes will mature on December 31, 2004. The Notes are to be sold through an underwriter. The Company will be required to make monthly payments of interest, paid in arrears, on the outstanding principal balance. The Notes will bear interest from the date of issuance at a fixed rate set at 11% fixed per annum. The underwriter will receive fees totaling 8.0% of the gross offering proceeds of the Notes Offering. The Company will reimburse Transition Leasing for organizational and offering expenses up to a maximum amount equal to 2.0% of the gross offering proceeds. The remainder of the Notes Offering proceeds will be used to acquire automobile lease contracts backed by new automobiles and automobiles with remaining factory warranties or extended service contracts that extend to the termination of their lease contracts (the "Contracts"). The Contracts and the leased vehicles will be the asset-backed security for the Notes. A minimum of $250,000 of Notes must be sold before any funds will be released for use by the Company. The Company intends to enter into a Servicing Agreement with Transition Leasing. Transition Leasing will be entitled to a servicing fee of $20 per month per Contract and a payment of $150 per Contract purchased. Transition Leasing will receive, as a marketing fee, 57.5% of the down payment made by the customers with respect to contracts it originates. The Company intends to enter into an Indenture between the Company and a trust company, as trustee, which will govern collection of the Contract proceeds and repayment of the Notes. F-6 64 - ------------------------------------------------------ - ------------------------------------------------------ TABLE OF CONTENTS
PAGE ---- Summary................................ 1 Risk Factors........................... 2 Capitalization......................... 7 Use of Proceeds........................ 7 Description of the Notes............... 10 Collateral for the Notes............... 13 The Company............................ 20 Security Ownership of Certain Beneficial Owners and Management..... 34 Management............................. 35 Litigation............................. 37 Management's Discussion and Analysis of Plan of Operation.................... 38 Additional Indenture Provisions........ 39 Certain Legal Aspects of the Lease Contracts............................ 43 Certain Federal Income Tax Considerations....................... 49 Plan of Distribution................... 51 Experts................................ 52 Legal Matters.......................... 53 Where You Can Get More Information..... 53 Financial Statements................... F-1
--------------------- You should rely only on the information contained in this Prospectus. We have not authorized anyone to provide you with information different from that contained in this Prospectus. We are not making an offer of notes in any state in which such an offer would be unlawful. --------------------- Until (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ $20,000,000 SECURED NOTES DUE OCTOBER 31, 2004 TRANSITION AUTO FINANCE III, INC. -------------------- PROSPECTUS -------------------- GREAT NATION INVESTMENT CORPORATION , 1999 - ------------------------------------------------------ - ------------------------------------------------------ 65 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Articles of Incorporation provide that, to the fullest extent permitted by Texas law, directors and former directors of the Company shall not be liable to the Company or its shareholders for monetary damages which may have been caused by them acting in their capacity as a director. Texas law does not currently authorize the elimination or limitation of the liability of a director to the extent the director is found liable (i) for any breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith that constitute a breach of duty of the director of the Company or which involve intentional misconduct or a knowing violation of law, (iii) for transactions from which the director received an improper benefit, regardless of whether the benefit resulted from an action taken within the scope of the director's office or (iv) for acts or omissions for which the liability of a director is expressly provided by law. The Company's Articles of Incorporation and its Bylaws grant mandatory indemnification to directors and officers of the Company to the fullest extent authorized under the Texas Business Corporation Act. In general, a Texas corporation may indemnify a director or officer who was or is threatened to be made a named defendant or respondent in a proceeding by virtue of his position in the corporation if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in the case of criminal proceedings, had no reasonable cause to believe his conduct was unlawful. A Texas corporation may indemnify an officer or director in an action brought by or in the right of the corporation only if such director or officer was not found liable to the corporation, unless or only to the extent that a court finds him to be fairly and reasonably entitled to indemnity for such expenses as the court deems proper. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses to be incurred in connection with the issuance and distribution of the Notes covered by this Registration Statement, all of which will be paid by the Company, are as follows: Securities and Exchange Commission Registration Fee......... $ 6,061 NASD Fee.................................................... * Printing and Engraving...................................... * Legal Fees and Expenses..................................... 65,000+ Accounting Fees and Expenses................................ 5,000+ Blue Sky Fees and Expenses.................................. 20,000+ Miscellaneous............................................... 10,000+ TOTAL............................................. *
- --------------- * To be furnished by amendment. + estimates ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Other than the issuance of 1,000 shares of its common stock to Transition Leasing Management, Inc. upon its formation, the Company has not issued any securities. II-1 66 ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Exhibits. The following documents are filed as exhibits to this registration statement:
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1 -- Best Efforts Underwriting Agreement by and between Transition Auto Finance III, Inc., and Great Nation Investment Corporation* 3.1 -- Articles of Incorporation of Transition Auto Finance III, Inc.** 3.2 -- Bylaws of Transition Auto Finance III, Inc.** 4.1 -- Form of Indenture between Transition Auto Finance, Inc., and Trust Management, Inc., as Trustee* 4.2 -- Form of Secured Note Due June 30, 2002 (included in Article Two of Indenture filed as Exhibit 4.1) 5.1 -- Opinion of Kuperman, Orr, Mouer & Albers, a Professional Corporation, regarding validity of Notes* 8.1 -- Opinion of Drenner & Stuart, L.L.P., a limited liability partnership, regarding tax matters** 8.2 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P., re regulatory matters* 8.3 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P., re perfection of security interests* 8.4 -- Opinion of King, LeBlanc and Bland re regulatory matters* 8.5 -- Opinion of King, LeBlanc and Bland re perfection of security interests* 10.1 -- Form of Master Purchasing Agreement between Transition Auto Finance III, Inc. and Transition Leasing Management, Inc.** 10.2 -- Form of Servicing Agreement between Transition Leasing Management, Inc. and Transition Auto Finance III, Inc.** 10.3 -- Proceeds Escrow Agreement* 10.4 -- Form of Broker-Dealer Selling Agreement** 10.5 -- Form of Subscription Agreement* 10.6 -- Form of Tax Sharing Agreement by and between Transition Leasing Management, Inc., Transition Auto Finance, Inc., Transition Auto Finance II, Inc. and Transition Auto Finance III, Inc.** 10.7 -- Form of Custodial Agreement between Transition Auto Finance III, Inc. and Trust Management, Inc.** 24.1 -- Consent of Drenner & Stuart, L.L.P., a limited liability partnership* 24.2 -- Consent of Kuperman, Orr, Mouer & Albers, a Professional Corporation* 24.3 -- Consent of Sprouse & Winn, L.L.P.* 24.4 -- Consent of Brown, Maroney & Oaks Hartline, L.L.P.* 24.5 -- Consent of King, LeBlanc and Bland, L.L.P.* 26.1 -- Form T-1: Statement of eligibility of Trust Management, Inc.**
- --------------- * filed electronically herewith ** previously filed Financial Statement Schedules. None. II-2 67 ITEM 28. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (A) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; II-3 68 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant hereby certifies that it has reasonable grounds to believe that it meets the requirements for filing on Form SB-2 and has authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on December 7, 1999. TRANSITION AUTO FINANCE II, INC. By: /s/ KENNETH C. LOWE ---------------------------------- Kenneth C. Lowe, President and Chief Executive Officer POWER OF ATTORNEY Each individual whose signature appears below hereby designates and appoints Randall Lowe and Ken Lowe, and each of them, as such person's true and lawful attorney-in-fact and agent (the "Attorney-in-Fact") with full power of substitution and re-substitution, for such person and in such person's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as the Attorney-in-Fact deems appropriate and requests to accelerate the effectiveness of this registration statement, and to file each such amendment with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto such Attorney-in-Fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that such Attorney-in-Fact, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ KENNETH C. LOWE Director, President December 7, 1999 - ----------------------------------------------------- (Principal Executive Kenneth C. Lowe Officer) and Chief Financial Officer (Principal Financial and Accounting Officer)
II-4 69 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1 -- Best Efforts Underwriting Agreement by and between Transition Auto Finance III, Inc., and Great Nation Investment Corporation* 3.1 -- Articles of Incorporation of Transition Auto Finance III, Inc.** 3.2 -- Bylaws of Transition Auto Finance III, Inc.** 4.1 -- Form of Indenture between Transition Auto Finance, Inc., and Trust Management, Inc., as Trustee* 4.2 -- Form of Secured Note Due June 30, 2002 (included in Article Two of Indenture filed as Exhibit 4.1) 5.1 -- Opinion of Kuperman, Orr, Mouer & Albers, a Professional Corporation, regarding validity of Notes* 8.1 -- Opinion of Drenner & Stuart, L.L.P., a limited liability partnership, regarding tax matters** 8.2 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P., re regulatory matters* 8.3 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P., re perfection of security interests* 8.4 -- Opinion of King, LeBlanc & Bland re: perfection of security interests* 8.5 -- Opinion of King, LeBlanc & Bland re: regulatory matters* 10.1 -- Form of Master Purchasing Agreement between Transition Auto Finance III, Inc. and Transition Leasing Management, Inc.** 10.2 -- Form of Servicing Agreement between Transition Leasing Management, Inc. and Transition Auto Finance III, Inc.** 10.3 -- Proceeds Escrow Agreement* 10.4 -- Form of Broker-Dealer Selling Agreement** 10.5 -- Form of Subscription Agreement* 10.6 -- Form of Tax Sharing Agreement by and between Transition Leasing Management, Inc., Transition Auto Finance, Inc., Transition Auto Finance II, Inc. and Transition Auto Finance III, Inc.** 10.7 -- Form of Custodial Agreement between Transition Auto Finance III, Inc. and Trust Management, Inc.** 24.1 -- Consent of Drenner & Stuart, L.L.P., a limited liability partnership* 24.2 -- Consent of Kuperman, Orr, Mouer & Albers, a Professional Corporation* 24.3 -- Consent of Sprouse & Winn, L.L.P.* 24.4 -- Consent of Brown, Maroney & Oaks Hartline, L.L.P.* 24.5 -- Consent of King, LeBlanc & Bland* 26.1 -- Form T-1: Statement of eligibility of Trust Management, Inc.**
- --------------- * filed electronically herewith ** previously filed EX-1.1 2 BEST EFFORTS UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 BEST EFFORTS UNDERWRITING AGREEMENT TRANSITION AUTO FINANCE III This UNDERWRITING AGREEMENT made and entered into this ____ day of July, 1999, by and between Transition Auto Finance III, Inc., a Texas corporation, whose address is 5422 Alpha Road, Suite 100, Dallas, Texas 75240, (the "Company"), Transition Leasing Management, Inc., a Texas corporation, ("Transition Leasing"), the parent company of Transition Auto Finance, Inc., and Great Nation Investment Corporation, a Texas corporation, whose address is 5408 A Bell Street, Amarillo, Texas 79109 (the "Underwriter"). RECITALS 1. The Company desires to offer and sell up to $20,000,000 in 11% Redeemable Secured Notes to the public through the Underwriter. 2. The offering and sale will be made pursuant to a registration statement and prospectus hereinafter referred to. 3. The Underwriter is willing to assist the Company in connection with the proposed issuance and sale of these securities on a best efforts basis on the terms and conditions herein contained. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and of the mutual covenants, agreements, undertakings, representations, and warranties herein contained, the Company and the Underwriter agree as follows: I. Representations and Warranties The Company represents and warrants to, and agrees with the Underwriter that: 1. The Company is a corporation duly organized and validly existing as a corporation in good standing under the laws of the State of Texas. 2. The Company shall issue consistent with the terms and conditions of the Registration Statement (defined below) up to $20,000,000.00 in 11% Redeemable Secured Notes ("the Notes"). The Notes shall: (a) Bear interest at the rate of 11% per annum; (b) Pay interest monthly in arrears on the fifteenth (15th) day of the month of each successive calendar month (except as provided in the prospectus); and (c) Pay principal at maturity on August 31, 2004. 3. The Notes will be issued pursuant to the terms and conditions of a Trust Indenture entered into between the Company and Trust Management, Inc. ("Trustee"), as Indenture Trustee. 2 4. There will be delivered to the counsel to the Underwriter, upon request at any time prior to the Delivery Date (defined below), certified copies of the Articles of Incorporation and the bylaws of the Company, together with all amendments, if any, certified copies of whatever resolutions the counsel may request, and copies of all material contracts to which the Company is a party. There will also be made available to the counsel for inspection minutes of all meetings of incorporators, directors and stockholders of the Company from the date of incorporation of the Company to the Delivery Date. 5. The Company has no subsidiaries, except as set forth in the Prospectus (defined below). 6. A Registration Statement on the appropriate form as prescribed by the Securities and Exchange Commission (the "Commission"), together with a related Prospectus with respect to the Notes, has been filed with the Commission under the Securities Act of 1933, as amended, (the "Act"). The Company will use its best efforts to cause the Registration Statement and the Prospectus to become effective as soon as possible after the filing. As used in this Agreement, the term "Registration Statement" refers to and means the Registration Statement and any and all amendments to the Registration Statement, including exhibits and financial statements, when the Registration Statement becomes effective and, in the event of any amendments after the effective date of the Registration Statement, the Registration Statement as so amended; and the term "Prospectus" refers to and means the related Prospectus in final form, and in the event of any amendment or supplement to the Prospectus after the effective date of the Registration Statement, also refers to and means the Prospectus as so amended or supplemented. 7. The Notes shall also be registered or qualified for sale with the state regulatory agencies of any and all states where the Securities shall be offered. 8. All expenses of registration and qualification shall be paid by the Company. 9. Notwithstanding the above, to the extent possible, the Effective Date of the offering shall be at a date mutually agreed to by the Company and the Underwriter, subject to the requirements of applicable law. 10. The purchase price of the Notes shall be in minimum denominations of $1,000.00 and integral multiples thereof with a minimum purchase amount of $5,000.00 (or $2,000.00 for Individual Retirement Accounts). 11. When the Registration Statement becomes effective, it and the accompanying Prospectus will comply in all material respects with the requirements of the Act and with the rules and regulations of the Commission promulgated under the Act; provided, however, the Company makes no representations or warranties as to information contained or omitted from the Registration Statement or the Prospectus in reliance upon written information furnished to the Company by the Underwriter specifically for inclusion in the Registration Statement or the Prospectus. 12. The Company has the requisite corporate power and authority to enter into this Underwriting Agreement. -2- 3 13. The financial statements to be filed with the Registration Statement will reflect all material liabilities of the Company on a consolidated basis, contingent or otherwise, and will include adequate reserves for all federal and state tax liabilities incurred to their respective dates. 14. All of the Notes to be sold under and pursuant to this Agreement, when issued and delivered, will be validly issued and enforceable in accordance with their terms and conditions and free and clear of all claims and encumbrances, except as described in the Indenture. 15. The certified public accountants who will certify to the financial statements to be filed with the Commission as a part of the Registration Statement and to the financial statements incorporated in the Prospectus, and who, as experts, may certify or review other information of a financial or accounting nature contained in the Registration Statement and the Prospectus, will be independent certified public accountants as required by the Act and the rules and regulations promulgated under the Act. 16. The Company will deliver to the Underwriter financial statements as of June 30, 1999. The Company represents that such financial statements will fairly present in all material respects the financial condition of the Company, computed in accordance with generally accepted accounting principles applied on a consistent basis and the rules and regulations of the Commission relating to financial statements. 17. The Company will furnish the Underwriter, at least one day before the filing of the Registration Statement, with the financial statements included in the Registration Statement and prepared in accordance with the rules and regulations of the Commission. Such financial statements will fairly present the position of the Company in all material respects on the dates shown and will reflect all material liabilities of the Company, contingent or otherwise. 18. The certificate or certificates that the Company is required to furnish to the Underwriter pursuant to the provisions of paragraphs 8, 9 and 10 of Article VIII of this Agreement will be true and correct. 19. All of the foregoing representations, warranties and agreements shall survive delivery of, and payment for, all of the securities covered by this Agreement. II. Retention of the Underwriter Based upon the foregoing representations, warranties and agreements, and subject to the terms and conditions herein contained: 1. The Company hereby retains the Underwriter as its agent to sell for its account the Notes. The Underwriter shall use its best efforts as agent, promptly following the receipt of written notice of the effective date of the Registration Statement, to sell the Notes subject to the terms, provisions and conditions set forth below. There is no assurance that any or all of the Notes to be offered by the Company will be sold, and the Underwriter is under no obligation to purchase or take down any of the Notes on its own behalf or on behalf of others. -3- 4 2. Underwriter acknowledges that the Company may limit its acceptance of subscriptions in any manner it deems prudent in order to provide for the timely use of subscriber funds and may reject any subscriptions for any reason, and Underwriter agrees that any such rejection of a subscription obtained by the Underwriter or by the Underwriting Group shall be deemed not to be a sale made by the Underwriter or by the Underwriting Group. Underwriter further acknowledges that (i) all subscription funds will be deposited in escrow and if the minimum amount of Notes is not subscribed on or before _____________ (as defined in the Prospectus), the offering will be terminated and the escrowed funds, plus any interest earned thereon, will be promptly returned to the investors by the escrow agent; (ii) upon the subscription of the minimum amount of the Notes, the escrowed funds will be released to the Company; (iii) any subsequent subscription funds with respect to the sale of additional Notes will be deposited in an account maintained by the Underwriter and be immediately available for use by the Company upon the Company's request; and (iv) all Subscriber's checks shall be made payable to the Underwriter and shall be deposited with the escrow agent in accordance with applicable NASD regulations. Subscriber's funds will be held in escrow and invested in compliance with SEC Rule 15c2-4. Until the minimum amount of Notes is subscribed, all subscriber's checks will be transmitted directly the escrow agent by noon of the next business day after receipt by Underwriter. 3. As its compensation, the Underwriter shall receive a commission of eight percent (8.5%) of the full amount of all Notes sold by the Underwriter (including the Underwriting Group, as hereinafter defined) and for which payment is made to the Company. Such amount is comprised of a 6% sales commission and a 2.5% due diligence fee. 4. The Underwriter may associate with themselves whatever other underwriters they may desire. The Underwriter may offer the Notes through registered securities dealers selected by them and to pay such dealers out of the commissions received by the Underwriter whatever compensation the Underwriter may determine. The Underwriter, such other underwriters and such securities dealers shall be collectively referred to herein as the "Underwriting Group." [The Underwriter acknowledges that the Company retain one or more additional securities dealers who will serve as additional underwriters and that any such other underwriters shall not be considered part of the "Underwriting Group." 5. The Company may terminate this Agreement in the event that the Underwriting Group is unable to sell at least $250,000.00 of the Notes prior to March 31, 2000 and at least $250,000.00 of the Notes in each calendar month after the month in which the Underwriting Group concludes the sale of an aggregate of at least $250,000 of the Notes. 6. Underwriter represents that it is appropriately registered as a broker-dealer with the Commission and in all states in which it conducts or will conduct business in connection with this offering and is a member in good standing of the National Association of Securities Dealers, Inc. Underwriter also agrees not to solicit subscriptions for the Notes that will result in a violation of the securities laws of the United States, or of any state, or any rule or regulation thereunder, or of any rules of the NASD or any securities exchange. 7. Underwriter represents that there is not now pending or threatened against the Underwriter any action or proceeding of which Underwriter has been advised, either in any court of competent jurisdiction, before the Commission or any state securities commission concerning -4- 5 activities as a broker or dealer, nor has the Underwriter been named as a "cause" in any such action or proceeding. 8. In the event any action or proceeding of the type referred to in paragraph 8 above shall be instituted or threatened against the Underwriter at any time, or in the event there shall be filed by or against the Underwriter in any court pursuant to any federal, state, local or municipal statute a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of assets, or the Underwriter makes an assignment for the benefit of creditors, the Company shall have the right to terminate this Agreement. 9. Upon request, the Company will inform the Underwriter as to the states in which the Company has been advised by counsel that the Notes have been qualified for sale under the respective state securities laws, but the Company does not assume any responsibility or obligation as to the Underwriter's right to sell the Notes in any state. Underwriter understands and agrees that under no circumstances will Underwriter engage in any activities hereunder in any jurisdiction (a) in which the Company has not informed the Underwriter that the Notes are qualified for sale under the applicable securities laws, or (b) in which the Underwriter may not lawfully so engage. 10. Underwriter confirms that its commitment to use its best efforts to solicit subscriptions for the Notes will not result in a violation of the securities laws of the United States, including but not limited to the Act or any rule or regulation thereunder, or the securities laws of any state in which the Underwriter will conduct business and the rules and regulations thereunder, or of any rules of any securities exchange to which the Underwriter is subject or of any restriction imposed upon the Underwriter by the NASD or any such exchange or governmental authority and agrees to indemnify the Company, its shareholders, directors, officers, employees or agents for any and all damages, liabilities and costs (including reasonable attorneys' fees and expenses) resulting from the same. 11. Underwriter represents that in connection with the offering: A. Underwriter will comply in all respect with the provisions of this Agreement. B. Underwriter shall use its best efforts to obtain the approval of the NASD pursuant to Rule 2710 of the Conduct Rules of the NASD with respect to the compensation arrangements set forth herein. C. Underwriter will comply with any applicable limitations on the manner of offering as required by the Act, applicable state securities laws, and the NASD. D. Prior to making any sale, Underwriter will have reasonable grounds to believe, after making reasonable inquiry, that each subscriber meets the requirements of the Act, the NASD and applicable state securities laws as to the suitability of the investment for such subscriber. E. Except as otherwise disclosed to the Company, no owner, partner, director or officer of Underwriter has within the last five years been subject to any of the -5- 6 following administrative or judicial actions (by the commission or any state securities commission): 1. Registration Stop Order (Issuance of Securities); 2. Securities related felony conviction; 3. Securities related administrative order; 4. Any administrative order involving fraud or deceit; 5. Securities related injunction; F. Underwriter has no current effective administrative order revoking a securities exemption; and G. Underwriter has not been suspended, censured or expelled by the NASD. Underwriter agrees to indemnify and hold the Company, its shareholders, officers, directors, employees, and agent harmless from any liabilities and costs (including reasonable attorneys' fees and expenses) associated with claims arising or alleged to arise out of a breach of the foregoing representations. 12. Underwriter and any members of the Underwriting Group do hereby undertake to comply with Rules 2730, 2740, 2420 and 2750 of the Conduct Rules of the NASD. Furthermore, any and all Selling Group Agreements or Selected Dealer Agreements shall provide that any member of the Underwriting Group shall agree to comply with said Conduct Rules. III. Further Agreements of the Company The Company agrees, at its expense and without expense to the Underwriter, as follows: 1. To give and to continue to give and supply whatever financial statements and other information that may be required by the Commission or the proper public bodies in the states in which the Notes may be qualified. 2. As soon as the Company is informed, to advise the Underwriter and to confirm the advice in writing: (a) When the Registration Statement becomes effective; (b) When any amendment to the Registration Statement filed subsequent to the effective date of the Registration Statement becomes effective; (c) Of any request of the Commission for amendments to the Registration Statement or the related Prospectus, or for additional information; (d) Of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the initiation of any proceeding for that purpose; -6- 7 (e) Of any material adverse change in its financial position or operating condition and of any development materially affecting the Company or rendering untrue or misleading any material statement in the Registration Statement or the Prospectus. 3. To make every reasonable effort to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement, and, if a stop order is entered at any time, to use its best efforts to obtain withdrawal of the order at the earliest possible moment. 4. To deliver to the Underwriter, without charge, (a) prior to the effective date of the Registration Statement, copies of each preliminary prospectus filed with the Commission bearing in red ink the statement required by the rules of the Commission, (b) on and from time to time after the effective date of the Registration Statement, copies of the Prospectus and of any amended or supplemented Prospectus, and (c) as soon as they are available and from time to time after they are available, copies of each Prospectus prepared for the purpose of permitting compliance with Section 10 of the Act and of any amended or supplemented Prospectus. The number of copies to be delivered in each case shall be the number the Underwriter may reasonably request. 5. To furnish, without cost, to the Underwriter one executed copy of the Registration Statement, including all exhibits and amendments, and a reasonable number of copies of the Registration Statement and amendments. 6. For the period after the effective date of the Registration Statement during which the Prospectus is required by law to be used, but not after the Delivery Date, except in accordance with Article XII hereof, if any change occurs so that the Prospectus includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements in the Prospectus, in the light of the circumstances under which they are made, not misleading, forthwith to prepare and furnish to the Underwriter, without cost, supplements to the Prospectus or an amended Prospectus correcting the untrue statement or supplying the omission. 7. If revision of the Prospectus pursuant to the provisions of Section 10 of the Act becomes necessary, to review the Prospectus, to file copies of the Prospectus with the Commission, and to furnish copies of the revised Prospectus to the Underwriter in whatever reasonable quantity they request. 8. To use its best efforts to cause the Notes to be qualified for sale on terms consistent with those stated in the effective Registration Statement under the Blue Sky laws in whatever states may be agreed upon. 9. Until the Delivery Date hereunder or the earlier termination hereof, except with the approval of the Underwriter, not to: (a) Undertake or authorize any change in its capital structure or authorize or issue or permit any public offering of any shares of capital stock or additional Notes, except as provided in this Agreement; -7- 8 (b) Authorize, create, issue, or sell any funded obligations, notes or other evidences of indebtedness, except in the ordinary course of business and maturing not more than nine months from the date of this Agreement and except as provided in this Agreement; or (c) Consolidate or merge with or into any other corporation or create any mortgage or lien upon any of its properties or assets except in the ordinary course of its business and except as provided in this Agreement. 10. To provide to Underwriter any reasonable additional information or documentation deemed by the Underwriter to be necessary in the performance of the Underwriter's due diligence. 11. To provide Underwriter: (i) at least twenty-four (24) hours prior to dissemination to Noteholders, a facsimile of any letter, notice or other similar communication, provided that the foregoing in no way obligates the Company to await Great Nation approval of such letter, notice or similar communication prior to dissemination, and (ii) from time to time, access to review operations and such other public information concerning the Company as Underwriter may reasonably request. IV. Indemnity Provisions 1. The Company shall indemnify, defend and hold the Underwriter (including any underwriter, dealer or securities dealer associated with the Underwriter), and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act, free and harmless from and against any and all losses, claims, demands, liabilities, and expenses (including reasonable legal or other expense incurred by each Underwriter and controlling person in connection with defending any claims or liabilities, whether or not resulting in any liability to the Underwriter (or to any controlling person), which the Underwriter or controlling person may incur under the Act or at common law or otherwise, but only to the extent that the losses, claims, demands, liabilities, and expenses arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or in the Prospectus, or in any amendment or amendments to the Registration Statement or the Prospectus, or in any application or other papers executed by any underwriter or dealer with the written approval of the Company for filing in any state or states in order to qualify the securities covered by this Agreement under the securities laws of those state (the "Blue Sky Application"), or arise out of or are based upon any omission or alleged omission to state in these documents a material fact required to be stated in them or necessary to make the statements in them not misleading, provided, however, that this indemnity agreement shall not apply to any losses, claims, demands, liabilities, or expenses arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus or in any amendment or amendments to them or in any Blue Sky Application, or arising out of or based upon the omission or alleged omission to state in these documents a material fact required to be stated in them or necessary to make the statements in them not misleading, which statement or omission was made in reliance upon information furnished to the Company by the Underwriter in writing expressly for use in the Registration Statement or the Prospectus or in any amendment or amendments to them, or was made by the Underwriter in a Blue Sky Application not in reliance upon information furnished by the Company. -8- 9 2. The foregoing indemnity of the Company in favor of the Underwriter shall not be deemed to protect the Underwriter against any liability to the Company or its noteholders to which the Underwriter would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of their duties, or by reason of their reckless disregard of their obligations and duties under this Agreement. 3. The Underwriter shall give the Company an opportunity to participate in the defense or preparation of the defense of any action brought against the Underwriter or controlling person of the Underwriter to enforce any claim or liability, and the Company may so participate. The Company's agreement under the foregoing indemnity is expressly conditioned upon notice of any action being sent by the Underwriter or controlling person, as the case may be, to the Company, by letter or facsimile (addressed as provided herein), promptly after the commencement of the action against the Underwriter or controlling person. Such notice must either be accompanied by copies of papers served or filed in connection with the action or by a statement of the nature of the action to the extent known to the Underwriter. Failure to notify the Company within a reasonable time of an action shall relieve the Company of respective liabilities under the foregoing indemnity, but failure to notify the Company shall not relieve the Company from any liability that the Company may have to the Underwriter or controlling person other than on account of the indemnity agreement contained in this Article IV. 4. The Underwriter likewise shall indemnify, defend and hold harmless the Company against any and all losses, claims, expenses, and liabilities to which it may become subject arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus, or in any amendment or amendments to the Registration Statement or the Prospectus, or in any Blue Sky Application, or arising out of or based upon the omission or alleged omission to state in these documents a material fact required to be stated in them or necessary to make the statements in them not misleading, resulting from the use of written information furnished to the Company by the Underwriter expressly for use in the preparation of the Registration Statement or the Prospectus, or in any amendment or amendments to the Registration Statement or the Prospectus, or in any Blue Sky Application. 5. The Company shall give the Underwriter an opportunity to participate in the defense or preparation of the defense of any action brought against the Company to enforce any claim or liability, and the Underwriter shall have the right so to participate. The agreement of the Underwriter under the foregoing indemnity is expressly conditioned upon notice of any action being sent by the Company to the Underwriter, by letter or by facsimile (addressed as provided in this Agreement), promptly after the commencement of the action against the Company. The notice must either be accompanied by copies of papers served or filed in connection with the action or by a statement of the nature of the action to the extent known to the Company. Failure to notify the Underwriter of any action shall relieve the Underwriter of its liability under the foregoing indemnity, but failure to notify the Underwriter shall not relieve the Underwriter from any liability which the Underwriter may have to the Company or its stockholders otherwise than on account of the indemnity agreement contained in this Article IV. 6. The provisions of this Article IV shall not in any way prejudice any right or rights that the Underwriter may have against the Company, or that the Company may have against the Underwriter, under any statute other than the Act, at common law or otherwise. -9- 10 7. The indemnity agreements contained in this Article IV shall survive the Delivery Date and shall inure to the benefit of successors of the Company and successors of the Underwriter, and shall be valid irrespective of any investigation made by or on behalf of the Underwriter or the Company. V. Payment of Expenses The Company shall, at its own expense and without expense to the Underwriter, pay all costs and expenses incident to this Agreement, including, but without limitation, all expenses in connection with the preparation, printing and filing of the Registration Statement and the Prospectus as well as all amendments to them together with all exhibits; pay all filing fees and costs, original issue taxes, trustee's fees, charges, or disbursements connected with the issue and delivery of the Notes; and pay all reasonable expenses incurred in connection with the qualification of the Notes under the securities or blue sky laws of the states previously referred to. VI. Public Offering 1. The Underwriter shall make a public offering on a best efforts basis of the Notes covered hereby as soon after the effective date of the Registration Statement as is advisable in accordance with and as set forth in the Registration Statement. The public offering may be made either in the open market or through securities dealers (acting as principals) selected by the Underwriter, or partly in each manner, as determined by the Underwriter in their sole discretion. The Underwriter may pay these dealers out of the commissions received by the Underwriter for the Notes sold by the dealers whatever compensation the Underwriter and such dealers may determine. VII. Payments on Default If any of the conditions, representations or warranties set forth in Article VIII of this Agreement are not fulfilled in any material respect, or if for any reason the Company fails to comply with the terms of this Agreement in any material respect (other than in connection with a breach of the Agreement by the Underwriter), and if the Underwriter elects to terminate this Agreement pursuant to Article XI hereto, then, in addition to paying the Company's own expenses as provided in Article V hereof, the Company shall reimburse the Underwriter for its actual accountable out-of-pocket expenses. VIII. Conditions Precedent to Underwriter's Obligations The obligations hereunder of the Underwriter are conditioned upon: 1. The approval of counsel for the Underwriter of the form and content of the Registration Statement and the Prospectus, of the organization and present legal status of the Company or Transition Leasing, and of the legality and validity of the Notes to be offered hereunder, which approval shall not be unreasonably withheld. 2. The Company's performance in all material respects of all the obligations required by it to be performed hereunder and the truth, completeness and accuracy of all statements and -10- 11 representations in all material respects contained herein or of any financial statements furnished hereunder. 3. From the date hereof until the Delivery Date, and during the term hereof, no material adverse change occurring in the properties and assets of the Company or Transition Leasing, other than changes occurring in the ordinary course of business. 4. No claim being made or legal action being instituted against the Company or Transition Leasing, which if adversely determined would have a material adverse effect on the financial condition of Transition Leasing and the Company, taken as a whole, and no reasonable basis for a claim or an action of this nature being discovered. 5. The Registration Statement becoming effective no later than August 31, 1999, or whatever later date that may be agreed upon, and no amendment to the Registration Statement being filed to which the Underwriter reasonably have objected after having received reasonable notice; and no stop order suspending the effectiveness of the Registration Statement being issued and no proceedings for that purpose being threatened or instituted. 6. Prior to the Delivery Date, the Company not sustaining any loss on account of fire, flood, accident, or calamity of a character that materially adversely affects its business or property, regardless of whether the loss is insured; no litigation being instituted or threatened against the Company or Transition Leasing of a character required to be disclosed in the Registration Statement that is not disclosed and that shall materially adversely affect the Company, its business or its property; and no substantial adverse change occurring in the operations or financial condition or credit of the Company or Transition Leasing or in any conditions affecting the prospects of the business of the Company. 7. The Company having furnished to the Underwriter on the Delivery Date an opinion or opinions of Kuperman, Orr, Mouer & Albers, counsel to the Company, dated the Delivery Date and stating in effect that: (a) The Company and its parent, Transition Leasing, have been duly incorporated and, on the Delivery Date, are validly existing corporation in good standing under the laws of the State of Texas with an authorized and issued capital stock as set forth in the Registration Statement, and the shares of the Company shown in the Registration Statement to be issued and outstanding have been duly and validly issued and are outstanding; (b) The Company and Transition Leasing are duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration and qualification, except where the failure so to register and qualify does not have material adverse effect on the financial condition of the Company; (c) The Notes conform in all material respects to the description of the Notes contained in the Registration Statement and the Prospectus, subject to the -11- 12 qualifications set forth in those documents, and the holders of the Notes shall be entitled to the rights and preferences set forth in the certificates for the Notes; (d) The Company and Transition Leasing have the requisite corporate power and authority to enter into and perform their respective obligations under the Agreement. The Agreement has been duly authorized, executed and delivered by the Company and Transition Leasing and is a valid and binding agreement of the Company and Transition Leasing and is enforceable against the Company and Transition Leasing in accordance with its terms, subject to the Underwriter obtaining the approval of the National Association of Securities Dealers, Inc. to the compensation and other arrangements set forth therein, except to the extent that the rights to indemnification thereunder may be limited by federal or state securities laws and policies embodied therein, or to the extent that such obligations are subject to or affected or limited by (i) applicable liquidation, conservatorship, bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other laws affecting creditors' rights or in the collection of debtors obligations generally from time to time in effect or (ii) general principles of equity (whether enforceability is considered in a proceeding in equity or at law), including the qualification that the availability of the remedy of specific performance or injunctive relief or other equitable remedies is subject to the discretion of the court before which any such preceding therefor may be brought and including standards of good faith, fair dealing and reasonableness that may be applied by a court to the exercise or certain rights and remedies; (e) The Registration Statement and the Prospectus comply as to form in all material respects with the requirements of the Act and the rules and regulations of the Commission under the Act (except that no opinion need be expressed as to financial statements and financial data). In addition, the opinion shall state, or counsel shall advise the Underwriter by separate letter, that, although such counsel has not passed upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (except as expressly provided herein), from the facts within its actual knowledge, nothing has come to such counsel's attention that would cause counsel to believe that either the Registration Statement or the Prospectus at the time such Registration Statement becomes effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein in order to make the statements stated therein not misleading; and that counsel is familiar with all contracts referred to in the Registration Statement or the Prospectus, such contracts that are required to be filed as exhibits to the Registration Statement have been filed as exhibits to the Registration Statement, the description of such contracts is correct in all material respects, and counsel does not know of any contracts required to be summarized or disclosed or filed that have not been summarized or disclosed or filed; and -12- 13 (f) That counsel has no knowledge or information concerning pending or threatened litigation or any unasserted claims or assessments by any third party, or parties, against the Company or Transition Leasing that is not disclosed in the Registration Statement that are required to be disclosed in the Registration Statement. 8. The Company having furnished to the Underwriter on the Delivery Date a certificate or certificates verified by the President or a Vice President and by the Treasurer of the Company, certifying that: (a) The respective signers of the certificate or certificates have examined the answers to each item of the Registration Statement and the information contained in the Prospectus, and, to the best of their knowledge, information and belief, those answers and that information, as of the effective date of the Registration Statement, were true and correct and did not omit to state any material fact required to be stated or necessary in order to make the statements not misleading; and since the effective date of the Registration Statement no event has occurred that should have been set forth in an amendment to the Registration Statement or in a supplement or amendment to the Prospectus that has not been so set forth in an amendment or supplement; (b) The respective signers of the certificate or certificates do not know of any litigation or proceeding instituted or threatened against the Company of a character required to be disclosed in the Registration Statement that is not disclosed in the Registration Statement; (c) The respective signers of the certificate or certificates do not know of any contract or arrangement that is required to be summarized or disclosed in the Registration Statement or filed as an exhibit to the Registration Statement that has not been summarized or disclosed or filed; (d) To the best of their knowledge, information and belief, the respective signers know of no substantial adverse change in the general affairs of the Company, or in the financial position of the Company during the period from the date of the latest financial statements contained in the Registration Statement to the Delivery Date, except for the changes disclosed or indicated in the Registration Statement; and (e) To the best of their knowledge, information and belief (i) the representations and warranties contained in Article I of this Agreement are true and correct at the Delivery Date; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued prior to the Delivery Date and no proceedings for that purpose, prior to that date, has been initiated or threatened by the Commission; (iii) every reasonable request by the Commission for additional information to be included in the Registration Statement or the Prospectus or otherwise has or will be complied with; (iv) -13- 14 prior to the Delivery Date, the Company has not sustained a loss on account of fire, flood, accident, or calamity of a character that materially adversely affects its property or business. 9. The Company having furnished to the Underwriter copies of the Articles of Incorporation and of each amendment to the Articles of Incorporation, if any, of the Company, which are officially certified by a proper state official; one copy of the bylaws of the Company certified by the Secretary or an Assistant Secretary of the Company as being currently in effect; and a certificate of good standing issued by the proper state official or officials of each state in which the Company transacts business. 10. The Underwriter, on the Delivery Date, having received a certificate or letter from the Company's accountants addressed to the Company, dated not more than three days prior to the Delivery Date, confirming that the accountants are independent certified public accountants within the meaning of the Act, and the rules and regulations of the Commission, and certifying to the effect that the financial statements audited by them and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations of the Commission, and that, in their opinion, on the basis of the representations from certain officials of the Company who have responsibility for financial and accounting matters, nothing has come to their attention that caused them to believe that there was any substantial adverse changes in the capitalization of the Company or the financial position or net worth of the Company, except as disclosed or indicated in the Registration Statement, and decreases in the capital stock and surplus accounts of the Company from that shown in the Registration Statement or the Prospectus. 11. The Company having furnished to the Underwriter whatever certificates, in addition to those specifically mentioned in this Agreement, that the Underwriter may request as to the accuracy, on the Date of Delivery, of the representations and warranties of the Company in this Agreement, as to the performance by the Company of its obligations under this Agreement, and as to the other concurrent or precedent conditions to the obligations of the Underwriter under this Agreement. All of the opinions, letters, evidence, and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in full compliance with the provisions hereof only if they are in form satisfactory to counsel to the Underwriter. In the event of the failure of any of the above conditions in any material respect, the Underwriter may be relieved of any and all obligations hereunder or may waive this right and demand full performance hereunder. IX. Delivery Date The Delivery Date, as referred to in this Agreement, shall be a date agreed upon by the Company and the Underwriter and failing agreement, then the Delivery Date shall be the Effective Date of the offering of the Notes. 1. The representations and warranties in this Agreement shall survive the Delivery Date and shall continue in full force and effect regardless of any investigation made by the party relying upon any representation or warranty. -14- 15 2. This Agreement shall inure to the benefit of, and be binding upon, the Company and the Underwriter (including specifically any dealer that the Underwriter associates with pursuant hereto), and their successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right, remedy or claim under or with respect hereto, or any provisions contained herein. This agreement and all of its conditions and provisions are for the sole and exclusive benefit of the foregoing persons and for the benefit of no other person, except that the warranties, indemnities and agreements of the Company contained herein also shall be for the benefit of any persons, if any, who control the Underwriter within the meaning of Section 15 of the Act, and except that the indemnification by the Underwriter shall be for the benefit of the directors of the Company and the officers of the Company who have signed the Registration Statement. 3. This Agreement sets forth the entire agreement between the parties hereto, and no representation, warranty, understanding, or agreement not specifically set forth herein shall be implied from this Agreement. 4. The proceeds received by the Underwriter from the sale of the Notes shall be remitted to the Trustee(s) not later than noon of the following business day, less the selling commission payable by the Company to the Underwriter. 5. The Underwriter shall comply with all of the rules and regulations of the Commission and the state regulatory agencies where the Notes shall be offered. If at any time during the term of this Agreement, the Underwriter should, for any reason, be disqualified or precluded from offering to the public these Notes, then the Company shall have the option to terminate this Agreement upon three (3) days written notice to the Underwriter, in which event this Agreement shall be void and of no further force and effect, except that the Underwriter shall be entitled to the commissions earned and to their accountable out-of-pocket expenses. 6. This Agreement, unless sooner terminated as herein provided, shall continue until all Notes registered under the Registration Statement are either sold or withdrawn by the Company from registration, whichever event first occurs. X. Underwriter's Right to Terminate Notwithstanding any of the terms and provisions hereof, this Agreement may be terminated by the Underwriter based on a material breach of this Agreement by the Company. Underwriter shall give fifteen (15) days prior written notice to the Company of such breach, and the Company shall have the opportunity to cure such breach. In the event of such termination, the Underwriter shall be entitled to any commissions to which it was entitled as of the date of termination as well as any and all accountable out-of-pocket expenses. In the event that the Underwriter reasonably determines that the Notes are not marketable, notwithstanding its best efforts to sell the Notes, the Underwriter may terminate this Agreement with thirty (30) days prior written notice. -15- 16 XI. Post-Effective Amendments 1. The Company shall prepare and file under the Act any required post-effective amendments to the Registration Statement and related Prospectus or new Registration Statements and new related Prospectuses. 2. If any post-effective amendments or new Registration Statements become effective, the Company shall furnish to the Underwriter opinions by the same counsel and to the same effect as those required by Article VIII of this Agreement, except that such opinions shall relate to the post-effective amendments and new Prospectuses or to the new Registration Statements and new Prospectuses and to the Notes that are being offered. The Company further agrees with respect to these post-effective amendments and new Prospectuses and with respect to these new Registration Statements and new Prospectuses to observe all of the terms and conditions of this Agreement as set forth in Article III, subdivisions 1, 2, 3, 4, 5, 6, and 7 and Article IV. XII. Notice Any notice required or permitted to be given under or pursuant to this Agreement may be given in writing by depositing the notice in the United States mail, postage prepaid, by hand-delivery or by courier, or by facsimile, addressed as follows: To the Underwriter: Great Nation Investment Corporation 5408 Bell Street Amarillo, Texas 79109 FAX - (806) 353-9631 To the Company: Transition Auto Finance III, Inc. 5422 Alpha Road Suite 100 Dallas, Texas 75240 FAX - (972) 404-9934 Attention: Ken Lowe, President To Transition Leasing: Transition Leasing Management, Inc. 5422 Alpha Road Suite 100 Dallas, Texas 75240 FAX - (972) 404-9934 Attention: Ken Lowe, President Copy to: Kuperman, Orr, Mouer & Albers 100 Congress Avenue Suite 1400 Austin, Texas 78701 Attn: Vince Mouer FAX - (512) 322-8143 -16- 17 Notice shall be deemed given to a party hereunder when actually received by such party. XIII. Miscellaneous 1. This Agreement may be modified only by writing signed by the parties hereto. 2. This Agreement shall be governed and construed in accordance with the laws of the State of Texas. 3. This Agreement may be signed in various counterparts, which together shall constitute one and the same instrument. 4. For purposes of any lawsuit or other proceeding in respect to this Agreement, the undersigned hereby submits and consents to the jurisdiction of any court of competent jurisdiction sitting in the State of Texas, Dallas County. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day, month and year first written above. TRANSITION AUTO FINANCE III, INC. By: ------------------------------------ Ken Lowe, Its President GREAT NATION INVESTMENT CORPORATION By: ------------------------------------ Byron Pat Treat, Its President TRANSITION LEASING MANAGEMENT, INC. By: ------------------------------------ Ken Lowe, Its President -17- EX-4.1 3 FORM OF INDENTURE WITH TRUST MANAGEMENT, INC. 1 EXHIBIT 4.1 TRANSITION AUTO FINANCE III, INC. AND TRUST MANAGEMENT, INC., AS TRUSTEE 11% SECURED NOTES DUE OCTOBER 31, 2004 -------------------- INDENTURE -------------------- DATED AS OF , -------------------- ------ 2 CROSS-REFERENCE TABLE
TRUST INDENTURE ACT SECTION INDENTURE SECTION - ------------------------------ -------------------------------- 310 (a) (1) 7.10 (a) (2) 7.10 (a) (3) N/A (a) (4) N/A (a) (5) 7.10 (b) 7.8, 7.10, 11.2 (c) N/A 311 (a) 7.11 (b) 7.11 (c) N/A 312 (a) 2.6 (b) 11.3 (c) 11.3 313 (a) 7.6 (b) 7.6 (c) 11.2 (d) 7.6 314 (a) 5.7, 5.8, 11.2 (b) 5.9 (c) (1) 11.4 (c) (2) 11.4 (c) (3) N/A (d) 5.12 (e) 11.4 (f) N/A 315 (a) 7.1(b) (b) 7.5, 11.2 (c) 7.1(a) (d) 7.1(c) (e) 6.11 316 (a) (1) (A) 6.5 (a) (1) (B) 6.4 (a) (last sentence) 1.1 (Def. of "Outstanding") (b) 6.7 (c) N/A 317 (a) (1) 6.8 (a) (2) 6.9 (b) 5.2 318 (a) 11.1
"N/A" = Not Applicable 3 TABLE OF CONTENTS ARTICLE 1 - DEFINITIONS AND INCORPORATION BY REFERENCE.........................................................2 SECTION 1.1 DEFINITIONS.............................................................................2 SECTION 1.2 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT......................................12 SECTION 1.3 RULES OF CONSTRUCTION..................................................................12 ARTICLE 2 - THE SECURITIES...................................................................................12 SECTION 2.1 FORMS GENERALLY........................................................................12 SECTION 2.2 FORMS OF SECURITY......................................................................13 SECTION 2.3 DENOMINATIONS..........................................................................17 SECTION 2.4 EXECUTION AND AUTHENTICATION...........................................................17 SECTION 2.5 REGISTRAR AND PAYING AGENT.............................................................18 SECTION 2.6 SECURITYHOLDER LISTS...................................................................18 SECTION 2.7 TRANSFER AND EXCHANGE..................................................................18 SECTION 2.8 REPLACEMENT SECURITIES.................................................................18 SECTION 2.9 TEMPORARY SECURITIES...................................................................19 SECTION 2.10 CANCELLATION...........................................................................19 SECTION 2.11 DEFAULTED INTEREST.....................................................................19 SECTION 2.12 PERSONS DEEMED OWNERS..................................................................19 ARTICLE 3 - REDEMPTION........................................................................................20 SECTION 3.1 REDEMPTION AFTER SINKING FUND TRIGGER DATE.............................................20 SECTION 3.2 SECURITIES NOT PREVIOUSLY DELIVERED TO TRUSTEE.........................................20 SECTION 3.3 SELECTION OF SECURITIES TO BE PURCHASED OR REDEEMED....................................20 SECTION 3.4 NOTICE OF REDEMPTION...................................................................20 SECTION 3.5 EFFECT OF NOTICE OF REDEMPTION.........................................................21 SECTION 3.6 DEPOSIT OF REDEMPTION AMOUNT...........................................................21 SECTION 3.7 SECURITIES REDEEMED IN PART............................................................21 ARTICLE 4 - ACCOUNTS, DISBURSEMENTS AND RELEASES..............................................................22 SECTION 4.1 COLLECTION OF MONEYS...................................................................22 SECTION 4.2 SINKING FUND ACCOUNT; OPERATING ACCOUNT; MASTER COLLECTIONS ACCOUNT....................22 SECTION 4.3 PURCHASE OF LEASED VEHICLES AND ELIGIBLE ADDITIONAL CONTRACTS..........................25 SECTION 4.4 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS.....................................26 SECTION 4.5 GENERAL PROVISIONS REGARDING SINKING FUND ACCOUNT......................................28 SECTION 4.6 RELEASES...............................................................................29
i 4 SECTION 4.7 REPORTS BY TRUSTEE.....................................................................30 SECTION 4.8 TRUST ESTATE; CONTRACT DOCUMENTS.......................................................30 ARTICLE 5 - COVENANTS........................................................................................30 SECTION 5.1 PAYMENT OF PRINCIPAL AND INTEREST......................................................30 SECTION 5.2 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST........................................32 SECTION 5.3 PAYMENT OF TAXES AND OTHER CLAIMS......................................................32 SECTION 5.4 MAINTENANCE OF PROPERTIES..............................................................33 SECTION 5.5 LIMITATION ON INVESTMENT ACTIVITIES....................................................33 SECTION 5.6 COMPLIANCE CERTIFICATES................................................................33 SECTION 5.7 REPORTING..............................................................................34 SECTION 5.8 PROTECTION OF TRUST ESTATE.............................................................34 SECTION 5.9 OPINIONS AS TO TRUST ESTATE............................................................35 SECTION 5.10 PERFORMANCE OF OBLIGATIONS; SERVICING AGREEMENT........................................35 SECTION 5.11 NEGATIVE COVENANTS.....................................................................36 SECTION 5.12 SUBSTITUTION OR RELEASE OF COLLATERAL OR WITHDRAWAL OF CASH IN TRUST ESTATE............38 ARTICLE 6 - DEFAULTS AND REMEDIES.............................................................................39 SECTION 6.1 EVENTS OF DEFAULT......................................................................39 SECTION 6.2 ACCELERATION...........................................................................40 SECTION 6.3 REMEDIES...............................................................................41 SECTION 6.4 WAIVER OF PAST DEFAULTS................................................................41 SECTION 6.5 CONTROL BY MAJORITY....................................................................41 SECTION 6.6 LIMITATION ON SUITS....................................................................42 SECTION 6.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT...................................................42 SECTION 6.8 COLLECTION SUIT BY TRUSTEE.............................................................42 SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM.......................................................42 SECTION 6.10 PRIORITIES.............................................................................43 SECTION 6.11 UNDERTAKING FOR COSTS..................................................................43 SECTION 6.12 STAY, EXTENSION OR USURY LAWS..........................................................43 SECTION 6.13 OPTIONAL PRESERVATION OF TRUST ESTATE..................................................44 SECTION 6.14 SALE OF TRUST ESTATE...................................................................44 ARTICLE 7 - TRUSTEE...........................................................................................45 SECTION 7.1 DUTIES OF TRUSTEE......................................................................45 SECTION 7.2 RIGHTS OF TRUSTEE......................................................................47 SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE...........................................................47 SECTION 7.4 TRUSTEE'S DISCLAIMER...................................................................47 SECTION 7.5 NOTICE OF DEFAULTS.....................................................................47 SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS..........................................................48 SECTION 7.7 COMPENSATION AND INDEMNITY.............................................................48 SECTION 7.8 REPLACEMENT OF TRUSTEE.................................................................49
ii 5 SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.......................................................50 SECTION 7.10 ELIGIBILITY; DISQUALIFICATION..........................................................50 SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY......................................50 SECTION 7.12 WITHHOLDING TAXES......................................................................50 ARTICLE 8 - DISCHARGE OF INDENTURE............................................................................50 SECTION 8.1 SATISFACTION AND DISCHARGE OF INDENTURE................................................50 SECTION 8.2 APPLICATION OF TRUST MONEY.............................................................51 SECTION 8.3 REPAYMENT TO COMPANY...................................................................51 ARTICLE 9 - AMENDMENTS, SUPPLEMENTS AND WAIVERS...............................................................52 SECTION 9.1 WITHOUT CONSENT OF HOLDERS.............................................................52 SECTION 9.2 WITH CONSENT OF HOLDERS................................................................52 SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT....................................................53 SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS......................................................53 SECTION 9.5 NOTATION ON OR EXCHANGE OF SECURITIES..................................................53 SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC........................................................53 ARTICLE 10 - MEETINGS OF SECURITYHOLDERS......................................................................54 SECTION 10.1 PURPOSES FOR WHICH MEETINGS MAY BE CALLED.............................................54 SECTION 10.2 MANNER OF CALLING MEETINGS............................................................54 SECTION 10.3 CALL OF MEETINGS BY COMPANY OR SECURITYHOLDERS........................................54 SECTION 10.4 WHO MAY ATTEND AND VOTE AT MEETINGS...................................................55 SECTION 10.5 REGULATIONS MAY BE MADE BY TRUSTEE; CONDUCT OF THE MEETING; VOTING RIGHTS.............55 SECTION 10.6 EXERCISE OF RIGHTS OF TRUSTEE OR SECURITYHOLDERS MAY NOT BE HINDERED OR DELAYED BY CALL OF MEETING..................................................................55 SECTION 10.7 EVIDENCE OF ACTIONS BY SECURITYHOLDERS................................................55 ARTICLE 11 - MISCELLANEOUS....................................................................................56 SECTION 11.1 TRUST INDENTURE ACT CONTROLS..........................................................56 SECTION 11.2 NOTICES...............................................................................56 SECTION 11.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS...........................................57 SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT....................................57 SECTION 11.5 RULES BY PAYING AGENT AND REGISTRAR...................................................57 SECTION 11.6 LEGAL HOLIDAYS........................................................................57 SECTION 11.7 GOVERNING LAW.........................................................................57 SECTION 11.8 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.........................................58 SECTION 11.9 NO RECOURSE AGAINST OTHERS............................................................58 SECTION 11.10 SUCCESSORS............................................................................58
iii 6 SECTION 11.11 DUPLICATE ORIGINALS...................................................................58 ARTICLE 12 - AGREEMENTS OF SERVICER...........................................................................58 SECTION 12.1 GENERAL...............................................................................58 SECTION 12.2 SERVICER ACTING AS CUSTODIAN..........................................................58 SECTION 12.3 REPRESENTATIONS AND WARRANTIES CONCERNING THE SERVICER................................59 SECTION 12.4 CORPORATE EXISTENCE; STATUS AS SERVICER; MERGER.......................................59 SECTION 12.5 PERFORMANCE OF OBLIGATIONS............................................................60 SECTION 12.6 THE SERVICER NOT TO RESIGN; ASSIGNMENT................................................60 SECTION 12.7 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS....................................61 SECTION 12.8 PURCHASE OF CERTAIN CONTRACTS.........................................................62 SECTION 12.9 INDEMNIFICATION.......................................................................63 SECTION 12.10 TERMINATION...........................................................................63 SECTION 12.11 AMENDMENT.............................................................................63 SECTION 12.12 INSPECTION AND AUDIT RIGHTS...........................................................64
iv 7 THIS INDENTURE, dated as of ______________, 1999, is between TRANSITION AUTO FINANCE III, INC., a Texas corporation (the "Company"), having its principal office at 5422 Alpha Road, Suite 100, Dallas, Texas 75240 and TRUST MANAGEMENT, INC., a Texas Trust Company, 210 West Sixth Street, Suite 605, Fort Worth, Texas 76102, as Trustee (the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture and the issuance of its 11% Secured Notes due October 31, 2004 in the maximum aggregate principal amount of $20,000,000 (the "Securities"). All acts necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been accomplished. THEREFORE, for and in consideration of the premises and the purchase or acceptance of the Securities by the Holders (as herein defined) thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: GRANTING CLAUSES The Company hereby Grants to the Trustee, for the exclusive benefit of the Holders of the Securities, all of the Company's right, title and interest in and to (a) all Contracts (as herein defined) hereafter acquired by the Company, together with all related Contract Documents, and all payments or instruments paid on account of such Contracts whenever received, and all other proceeds (cash or non-cash) received in respect of such Contracts, (b) the Servicing Agreements, (c) the Operating Account, (d) the Master Collections Account, (e) the Sinking Fund Account, including all Eligible Investments therein and all income from the investment of funds therein, (f) all Leased Vehicles, together with any repossessed or returned Leased Vehicles (including any Leased Vehicle returned upon termination of its Contract), and (g) all proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or other liquid property, including, without limitation, all Net Liquidation Proceeds and Insurance Proceeds (collectively, the "Trust Estate"). The foregoing Grants are made, however, in trust, to secure the Securities equally and ratably without prejudice, priority or distinction, except as expressly provided in the Indenture, between any Security and any other Securities by reason of difference in time of issuance or otherwise, and to secure (i) the payment of all amounts due on the Securities in accordance with their terms, (ii) the payment of all other sums payable under this Indenture, and (iii) compliance with the provisions of this Indenture, all as provided in this Indenture. 1 8 The Trustee acknowledges the foregoing Grants, accepts the trusts hereunder in accordance with the provisions hereof and agrees to perform the duties herein required to the best of its ability. ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1 DEFINITIONS. "Accounts" means the Sinking Fund Account, the Master Collections Account and the Operating Account established by the Company under the provisions of Section 4.2. "Affiliate" means, as to any Person, any other Person that directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of capital stock, partnership interests, by contract or otherwise), provided that, in any event, any Person that owns directly or indirectly 20% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such other Person for the purposes of this definition; and provided further that no individual shall be an Affiliate of a corporation or partnership solely by reason of his being an officer, director or partner of such entity. "Allowed Expenses" means any amounts due the Trustee under Section 7.7, any Servicing Fees, any fees payable for the transfer of the lien reflected in the Title Documents into and out of the Trustee's name, any fees payable for the transfer of the ownership reflected in the Title Documents into and out of the Company's name, any federal, state and local taxes and assessments incurred by the Company (including corporate franchise taxes), any bank service charges and account fees relating to the Accounts, the Company's pro rata share (based on the relative amounts of funds attributable to the Contracts as compared to the lease Contracts of all other Persons serviced by the Servicer) of the lockbox fees, account fees and bank service charges relating to the Master Collections Account, any legal and accounting fees for reports, certificates and opinions of attorneys and independent accountants required under this Indenture, and any Liquidation Expenses. "Assignment" means the original instrument of assignment of a Contract and all other documents securing such Contract made by the Servicer to the Company (or in the case of any Contract acquired by the Company from another Person, from such other Person to the Company), which is in a form sufficient under the laws of the jurisdiction under which the ownership interest in the Leased Vehicle is governed such that the ownership interest and a first priority security interest in the Leased Vehicle may be transferred to the Company and a second priority security interest in the related Leased Vehicle may be granted in favor of the Trustee to permit the assignee to exercise all rights granted by the Obligor under such Contract and such other documents and all rights available under applicable law to the obligee under such Contract and that may, to the extent 2 9 permitted by the laws of such jurisdiction, be an assignment constituting a part of the form of the Contract itself or a blanket instrument of assignment covering other Contracts as well. "Bankruptcy Law" shall have the meaning provided in Section 6.1. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a Legal Holiday. "Collection Period" means with respect to any Payment Date, the calendar month immediately preceding the Payment Date. "Common Stock" means the common stock issued or issuable by the Company. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person replaces it pursuant to the applicable provisions of this Indenture, and thereafter "Company" means such successor Person. "Company Order" or "Company Request" means a written order or request signed in the name of the Company by its Chairman, President or a Vice President, and by its Treasurer, Assistant Treasurer, Controller, Assistant Controller, Secretary or an Assistant Secretary, and delivered to the Trustee. "Contract" means each lease contract that has been executed by an Obligor and pursuant to which such Obligor leased the Leased Vehicle described therein, agreed to pay the lease payments as therein provided in connection with such lease, and undertook to perform certain other obligations as specified in such contract and that is Granted to the Trustee pursuant to this Indenture as security for the Securities. The term "outstanding Contracts" as of any date means all Contracts other than Liquidated Contracts. "Contract Documents" means with respect to each Contract, (i) the original Contract; (ii) either the original Title Document for the related Leased Vehicle showing the Company as the owner and first lienholder and the Trustee as second lienholder or an official receipt from the responsible state or local government authority showing that an application has been made (and the required fees have been paid) for registration of the Title Documents for such Leased Vehicle in the names of the Company as owner and first lienholder and the Trustee as second lienholder (or such other evidence of ownership of the Leased Vehicle by the Company and perfection of the security interest in the related Leased Vehicle, as determined by the Trustee to be permitted or required to transfer ownership of the Leased Vehicle to the Company and to perfect such security interests under the laws of the applicable jurisdiction, or a guarantee from the dealer conveying such Leased Vehicle that the Title Document for such Leased Vehicle showing the Company as owner and first lienholder and the Trustee as second lienholder has been applied for); (iii) the related Assignment; and (iv) any agreement(s) modifying the Contract (including, without limitation, any extension agreement(s)). 3 10 "Contract Number" means with respect to any Contract included in the Trust Estate, the number assigned to such Contract by the Servicer, which number is set forth in the related Monthly Report. "Contract Unavailability Notice" shall have the following meaning: in the event that the Company determines, in its discretion, that it is unable, for any reason outside its control, to purchase additional Leased Vehicles and Contracts that conform with the purchasing criteria set forth in the Servicing Agreements or in Exhibit A hereto, the Company may elect to provide notice of such determination to the Trustee, such notice to be referred to herein as a "Contract Unavailability Notice." "Corporation" includes corporations, associations, companies and business trusts. "Default" means any event that is, or after notice or passage of time would be, an Event of Default. "Defaulted Contract" means with respect to any Collection Period, a Contract (a) whose Obligor, at the end of such Collection Period is past due with respect to at least one scheduled lease payment, or (b) with respect to which the related Leased Vehicle has been repossessed and, in the case of either (a) or (b), in respect of which Liquidation Proceeds, which, in the Servicer's judgment, would constitute the final amounts recoverable in respect of such Contracts, have not yet been collected as of the end of such Collection Period. "Disbursement Certificate" means an Officers' Certificate of the Company setting forth the individual items of Allowed Expenses to be paid by the Company from funds in the Operating Account, agreeing that such items will be promptly paid with such funds and certifying that such withdrawal of funds and the payment of such Allowed Expenses conforms to the requirements of this Indenture. "Due Date" means as to any lease payment by an Obligor on a Contract, the date upon which such lease payment is due. "Eligible Account" means an account that is either (i) maintained with a depository institution subject to supervision or examination by federal or state authority and having a combined capital and surplus of at least $3,000,000, or (ii) an account or accounts the deposits in which are fully insured by the Federal Deposit Insurance Corporation. "Eligible Additional Contract" means a Contract hereafter acquired by the Company that, as of the date of such acquisition, satisfies the representations and warranties contained in Section 4.4 of this Indenture. "Eligible Investments" means any one or more of the following obligations or securities: (i) United States Obligations; 4 11 (ii) demand and time deposits in, certificates of deposit of, banker's acceptances issued by, or federal funds sold by any depository institution or trust company incorporated under the laws of the United States of America or any State thereof and subject to supervision and examination by federal and/or state banking authorities, so long as such institution or company has a combined capital and surplus of at least $3,000,000; (iii) repurchase obligations with respect to any security described in clause (i) entered into with a depository institution or trust company, acting as principal, whose obligations have the same maturity as that of the repurchase agreement and would be Eligible Investments under clause (ii) above; (iv) securities bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States of America or any state thereof that at the time of such investment has long-term, unsecured debt rated by Standard & Poor's as "AA-" or better; provided, however, that securities issued by any particular corporation will not be Eligible Investments to the extent that investment therein will cause the then outstanding principal amount of securities issued by such corporation and held as part of the Trust Estate to exceed 10% of the aggregate outstanding balances and amounts of all Contracts and Eligible Investments held as part of the Trust Estate; (v) commercial paper given the highest rating by Standard & Poor's at the time of such investment; and (vi) any publicly traded money market mutual fund that is invested in the above-mentioned Eligible Investments. "Event of Default" shall have the meaning provided in Section 6.1. "Full Prepayment" with respect to a Contract means either of the following: (i) payment to the Servicer of 100% of the outstanding lease payments of a Contract plus early termination fees and/or other charges properly payable under the Contract (exclusive of any Contract referred to in clause (ii) or (iii) of the definition of the term "Liquidated Contract"), less any discount of such lease payments to which the Obligor shall be entitled under the terms of such Contract and applicable law by virtue of early payment of any lease payment, or (ii) payment by the Servicer into the Master Collections Account of the purchase price of a Contract in connection with the repurchase by Servicer of the Contract. "Grant" means to mortgage, pledge, assign and grant a security interest in. A Grant of a Contract and the related Contract Documents, the related Leased Vehicle, an Eligible Investment, the Servicing Agreements or any other instrument shall include all rights, powers and options (but none of the obligations, except to the extent required by law) of the Granting party thereunder, including without limitation, the immediate and continuing right to claim, collect, receive and give receipt for payments in respect of the Contract and principal and interest payments in respect of the Eligible Investment, Insurance Proceeds, Liquidation Proceeds, purchase prices and all other moneys payable thereunder and all proceeds thereof, to give and receive notices and other communications, 5 12 to make waivers or other agreements, to exercise all rights and options, to bring suit or other legal proceedings in the name of the Granting party or otherwise, and generally to do and receive anything that the Granting party is or may be entitled to do or receive thereunder or with respect thereto. "Holder," "Securityholder" or "Noteholder" means a Person in whose name a Security is registered on the Registrar's books. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Independent" means with respect to any specified Person, such a Person who (i) is in fact independent, (ii) does not have any direct financial interest or any material indirect financial interest in the Company or in any other obligor upon the Notes or in any Affiliate of the Company or of such other obligor, and (iii) is not connected with the Company or such other obligor as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions. Whenever it is herein provided that any Independent Person's opinion or certificate shall be furnished to the Trustee, such Person shall be appointed by a Company Order in the exercise of reasonable care and such opinion or certificate shall state that the signer is Independent within the meaning hereof. "Insurance Proceeds" means the proceeds paid pursuant to any Physical Damage Insurance Policy and amounts paid by any insurer under any other insurance policy for damage or repair of a Leased Vehicle. "Investment Company Act" means the Investment Company Act of 1940 (15 U.S.C. 90a-1 et seq.), as amended. "Leased Vehicle" means, as to any Contract, the automobile (which may be a passenger car, minivan, sport/utility vehicle or light truck) or Harley Davidson motorcycle that constitutes the subject of such Contract. "Legal Holiday" shall have the meaning provided in Section 11.6 of this Indenture. "Liquidated Contract" means a Contract that (i) has been the subject of a Full Prepayment, (ii) was a Defaulted Contract and with respect to which Liquidation Proceeds that, in the Servicer's judgment, constitute the final amounts recoverable in respect of such Contract have been realized and deposited in the Master Collections Account, or (iii) has been paid in full on or after its Maturity Date. "Liquidation Expenses" means the reasonable out-of-pocket expenses incurred by the Servicer in connection with the liquidation of any Contract (including the attempted liquidation of a Contract that is brought current and is no longer in default during such attempted liquidation) and the sale of any property acquired in respect thereof, which expenses are not recoverable under any insurance policy. 6 13 "Liquidation Proceeds" means the amounts received by the Servicer (before reimbursement for Liquidation Expenses) in connection with the liquidation of any Defaulted Contract and the sale of any property acquired in respect thereof, whether through receipt of Insurance Proceeds, repossession, sale or otherwise. "Master Collections Account" means the lockbox account established and maintained by the Servicer. "Master Purchasing Agreement" means the agreement between the Company and Transition Leasing Management, Inc. pursuant to which Transition Leasing (i) will acquire on behalf of the Company vehicles that are to become Leased Vehicles and prepare and execute Contracts on the Company's behalf with Obligors, and (ii) will prepare and execute on behalf of the Company the necessary documents by which the Company may acquire existing Contracts from Transition Auto Finance II, Inc. "Maturity Date" means with respect to any Contract, the date on which the last scheduled lease payment of such Contract shall be due and payable (after giving effect to all prepayments received prior to the date of determination). "Monthly Report" means an Officer's Certificate of the Company relating to interest payments on the Notes required to be delivered to the Trustee under this Indenture. The Monthly Report shall be substantially in the form of Exhibit B attached hereto, as amended from time to time, and shall have attached or included all lists, data and information required to be attached or included hereunder. "NASDAQ" means the National Association of Securities Dealers Automated Quotation System. "Net Capitalized Cost," with respect to a Leased Vehicle, means an amount equal to 120% of the actual purchase price of the vehicle, less the amount of the Lessee's down payment. "Net Liquidation Proceeds" means the amount derived by subtracting from the Liquidation Proceeds of a Contract the related Liquidation Expenses. "Note Register" means the register for the Securities maintained by the Registrar pursuant to Section 2.5. "Obligor" means each Person who is indebted under a Contract or who has acquired the Leased Vehicle subject to a Contract. "Offering Amount" shall mean the $20,000,000 in aggregate principal amount of 11% Secured Notes due October 31, 2004 that may be issued under this Indenture. "Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer, the Secretary or the Controller of any Person. 7 14 "Officers' Certificate" when used with respect to any Person, means a certificate signed by the Chairman of the Board, President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of such Person, or any other officer of such Person customarily performing functions similar to those performed by any of the above designated officers. "Operating Account" means the commercial bank account created and maintained by the Company and denominated as such pursuant to Section 4.2. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Outstanding" means, with respect to the Securities, as of the date of determination, all the Securities theretofore authenticated and delivered under this Indenture except: (i) the Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) the Securities or portions thereof for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent in trust for the Holders of such Securities; provided that, if such Securities or portions thereof are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Securities in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture unless proof satisfactory to the Trustee is presented that any such Securities are held by a holder in due course; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any Affiliates of the Company shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities with respect to which the Trustee has received written notice of such ownership or otherwise has actual knowledge of such ownership shall be so disregarded. Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. "Overdue Interest Rate" means the lesser of (i) an interest rate of 18% per annum, or (ii) the highest lawful rate of interest. "Paying Agent" means the Trustee or any other Person that meets the eligibility standards for the Trustee specified in Section 7.10 and is authorized by the Company to pay the principal or any interest that may become payable on any Securities on behalf of the Company. 8 15 "Payment Date" with respect to any Security, means the (i) fifteenth day of each calendar month (unless such day is a Legal Holiday, in which event the next succeeding Business Day) commencing with the second calendar month following the month in which the Security is issued, and (ii) the Stated Maturity. "Payment Date Statement" shall have the meaning provided in Section 5.1. "Person" means any individual, corporation, partnership, joint venture, joint adventure, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Physical Damage Insurance Policy" means with respect to a Leased Vehicle, any policy of physical damage, comprehensive or collision insurance covering the Leased Vehicle pursuant to which the Servicer may obtain recoveries for loss or damage to the Leased Vehicle. "Purchase Date" means the date on which the Company remits funds from the Operating Account to pay the purchase price for a Leased Vehicle or for an Eligible Additional Contract. "Purchased Contracts Certificate" means the Officer's Certificate of the Company and the Servicer required to be delivered to the Trustee in connection with the purchase of any Eligible Additional Contracts and designated as such pursuant to Section 4.3. "Record Date" for the interest payable on any Payment Date means the first Business Day of the month in which such Payment Date occurs. "Redemption Date" means any Payment Date which is subsequent to the November 30, 2000 and which is designated by the Company as the date upon which the Company will redeem some or all of the Securities. "Redemption Price" means with respect to any Security to be redeemed, 100% of the unpaid principal amount of such Security together with accrued and unpaid interest on the unpaid principal amount thereof to the applicable Redemption Date. "Registrar" means the registrar for the Securities appointed by the Company pursuant to Section 2.5 hereof, and any successor registrar appointed by the Company hereunder. "Registrar of Titles" means the agency, department or office having the responsibility for maintaining records of titles to motor vehicles and issuing documents evidencing such titles in the jurisdiction in which a particular Leased Vehicle is registered. "Responsible Officer" when used with respect to the Trustee means the Chairman or Vice Chairman of the Board of Directors or Trustees, the Chairman or Vice Chairman of the Executive Committee of the Board of Directors or Trustees, the President, any Vice President, any Assistant Trust Officer, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, or any other officer of the Trustee customarily performing functions similar to those performed by any of 9 16 the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Sale" has the meaning set forth in Section 6.14. "Schedule of Contracts" means the list of Contracts attached hereto as Schedule A, as such list may be supplemented from time to time hereafter pursuant to Section 4.3, as being Granted to the Trustee as part of the Trust Estate, which list or lists shall set forth, with respect to each Contract, the Contract Number, the aggregate unpaid lease payments as of the date acquired by the Company and as of the date of origination, the name of the Obligor, the Maturity Date, the name of the originating person, and the vehicle identification number for the Leased Vehicle, and the date on which the Contract was originated. "SEC" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. "Securities" or "Notes" means the 11% Secured Notes due August 31, 2004, that are issued under this Indenture, as amended from time to time. "Securities Act of 1933" means the Securities Act of 1933, as amended. "Securities Exchange Act of 1934" means the Securities Exchange Act of 1934, as amended. "Servicer" means Transition Leasing Management, Inc., as servicer under the Servicing Agreement, and its permitted successors and assigns, including any successor servicer appointed pursuant to Section 5.10. "Servicer Report Date" means the 10th day (or the Business Day next following such day if such day is not a Business Day) of each month during the existence of this Indenture. "Servicing Agreements" means the Master Purchasing Agreement and the Servicing Agreement, each dated as of ______________, 1999, between the Company and the Servicer, providing, among other things, for the purchasing of Leased Vehicles and Contracts and the collecting and servicing of the Contracts, as said agreements may be amended or supplemented from time to time as permitted hereby and thereby. Such term shall also include any servicing agreement entered into with a successor servicer pursuant to Section 5.10 and any separate servicing agreement for the servicing of Contracts. "Servicing Fees" means the compensation payable by the Company to the Servicer under the Servicing Agreement. 10 17 "Servicing Officer" means any officer of the Servicer involved in, or responsible for, the administration and servicing of the Contracts whose name appears on a list of servicing officers furnished to the Company and the Trustee by the Servicer, as such list may be amended or supplemented from time to time. "Sinking Fund Account" means the trust account established and maintained by the Company and designated as such pursuant to Section 4.2. "Sinking Fund Trigger Date" means the earlier to occur of October 31, 2002 or the receipt by the Trustee of a Contract Unavailability Notice. "Special Record Date" means the date determined pursuant to Section 2.11. "Stated Maturity" means October 31, 2004. "Subsidiary" means, with respect to the Company, any corporation, partnership, joint venture or joint adventure whether now existing or hereafter organized or acquired: (i) in the case of a corporation, of which a majority of the securities having ordinary voting power for the election of directors or other governing body of such corporation (other than securities having such power only by reason of the happening of a contingency) are at the time owned by the Company or one of more other Subsidiaries of the Company, or (ii) in the case of a partnership, joint venture or joint adventure, in which the Company is a general partner or joint venturer or joint adventurer. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code 77aaa-77bbbb), as amended from time to time. "Title Document" means, with respect to any Leased Vehicle, the certificate of title for, or other evidence of ownership of, such Leased Vehicle issued by the Registrar of Titles in the jurisdiction in which such Leased Vehicle is registered. "Trust Estate" shall have the meaning provided in the Granting Clauses of this Indenture. "Trustee" means the party named as such in this Indenture until a successor replaces it, and thereafter means the successor. "Trust Officer" means any Responsible Officer assigned by the Trustee to administer its corporate trust matters. "UCC" means the Uniform Commercial Code as in effect in the relevant jurisdiction. "United States Obligations" means direct obligations of the United States of America or any agency or instrumentality of the United States of America, or other obligations the principal of and interest on which are unconditionally guaranteed or insured by the United States of America. 11 18 SECTION 1.2 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in and made a part of this Indenture. If this Indenture is qualified under the TIA, any provision that is required by the TIA to be incorporated herein shall be so incorporated and shall supersede any conflicting provision hereof. The following TIA terms have the following meanings in this Indenture: "Commission" means the SEC. "indenture securities" means the Securities. "indenture securityholder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company (or any other obligor on the Securities). All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings so assigned to them. SECTION 1.3 RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles as of the date of this Indenture; (3) "or" is not exclusive; and (4) words in the singular include the plural, and in the plural include the singular. ARTICLE 2 THE SECURITIES SECTION 2.1 FORMS GENERALLY. The Securities and the Trustee's certificate of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other 12 19 variations as are required by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange on which the Securities may be listed, or as may consistently herewith be determined by the officers executing such Securities, as evidenced by their execution thereof. Any portion of the text of any Security may be set forth on the reverse thereof, in which case the following reference to the portion of the text appearing on the reverse of the Securities shall be inserted on the face of the Securities, immediately prior to the paragraph stating that the certificate of authentication on the Security must be executed by manual signature of the Trustee as a condition to the validity of such Security: "Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which provisions shall for all purposes have the same effect as if set forth at this place." The definitive Securities shall be printed, lithographed or engraved or produced by any commercially reasonable manner, all as determined by the officers executing such Securities, as evidenced by their execution thereof. SECTION 2.2 FORM OF SECURITY. (a) The form of Security is as follows: TRANSITION AUTO FINANCE III, INC. 11% SECURED PROMISSORY NOTE DUE OCTOBER 31, 2004 No. _________ CUSIP NO. _______ $__________ Transition Auto Finance III, Inc., a corporation duly organized and existing under the laws of the State of Texas (herein referred to as the "Company"), for value received, hereby promises to pay to _____________________ or registered assigns, the principal sum of ____________________________ dollars on October 31, 2004 (the "Stated Maturity" of such principal), and to pay interest (computed on the basis of a 360-day year consisting of 12 months of 30 days each) on the unpaid portion of said principal sum outstanding from time to time from the date of issue, until the principal amount of this Note is paid in full at the rate of 11% per annum, which interest shall be due and payable on the fifteenth day of each calendar month (for such interest accruing during the preceding month or months) commencing with the second calendar month after the issuance hereof and upon the Stated Maturity (each a "Payment Date"). The principal of and interest on this Note are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments made by the Company with respect to this Note shall be applied first to interest due and payable on this Note as provided above and then to the unpaid principal of this Note. Any installment of interest that is not paid when and as due shall bear interest at the Overdue Interest Rate from the date due to the date of payment thereof, but only to the extent payment of such interest shall be lawful and enforceable. This Note represents a general obligation of the Company. 13 20 This Note is one of a duly authorized issue of Notes of the Company, designated as its 11% Secured Notes Due October 31, 2004 (herein called the "Notes"), all issued and to be issued under the Indenture dated as of _______________, 1999 (herein called the "Indenture"), between the Company and Trust Management, Inc. (the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights thereunder of the Company, the Trustee and the Holders of the Notes, and the terms upon which the Notes are, and are to be, authenticated and delivered. All terms used in this Note that are capitalized, if not defined herein, are defined in the Indenture and shall have the meanings assigned to them in the Indenture. Payment of the outstanding principal of and accrued interest on this Note at the Stated Maturity or of the Redemption Price payable on any Redemption Date as of which this Note has been called for redemption shall be made upon presentation of this Note to the Paying Agent appointed by the Company for such purpose. Payments of all installments of interest due and payable on any Payment Date (other than the Stated Maturity) shall be made by check mailed to the Person whose name appears as the Holder of this Note on the Note Register as of the first business day of the month in which such Payment Date occurs (the "Record Date") without requiring that this Note be submitted for notation of payment. Checks returned undelivered will be held for payment to the Person entitled thereto, subject to the terms of the Indenture, at the office or agency in the United States of America designated by the Company for such purpose pursuant to the Indenture. The payment of principal and accrued interest on the Notes, when due, is secured by the Trust Estate, which consists of, among other things, a first priority security interest in specific motor vehicle lease Contracts, the Leased Vehicles described therein and the funds in the Sinking Fund Account. If an Event of Default shall occur and be continuing with respect to the Notes, the Notes, and all principal and unpaid accrued interest, may be declared due and payable in the manner and with the effect provided in the Indenture. The Company and each surety, endorser, guarantor, and other party, if any, now or hereafter liable for payment of any sums of money payable on this Note, jointly and severally, waive presentment and demand for payment, notice of intent to accelerate and notice of acceleration, protest and notice of protest and nonpayment, and diligence in collecting or bringing suit against any party hereon, and agree that their liability on this Note shall not be affected by any renewal or extension in time of payment hereof, by any indulgence, or by any release, modification, or substitution of any security for the payment of this Note, and hereby consent to any and all extensions, renewals, replacements, waivers, releases, or exchanges affecting this Note and the taking, release, modification, or substitution of any security, with or without notice and before or after maturity. The Notes are redeemable at the option of the Company on any Payment Date following the Sinking Fund Trigger Date, in whole or in part, at 100% of the unpaid principal amount thereof, together with accrued and unpaid interest thereon to the Redemption Date; provided, however, that the Paying Agent shall be required to redeem the Notes at such time only to the extent that the Company has theretofore deposited with the Paying Agent money sufficient to effect such redemption. At least 10 but not more than 60 days prior to the Redemption Date, the Company is required to mail a notice of redemption by first class mall to the registered owner of this Note specifying the Redemption Date, the Redemption Price, the name and address of the Paying Agent, that this Note must be delivered to the Paying Agent and that interest on this Note ceases to accrue on and after the Redemption Date. If provision is made for the redemption and payment of this Note in accordance with the Indenture, this Note shall thereupon cease to bear interest from and after the Redemption Date. 14 21 As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note may be registered on the Note Register of the Company, upon surrender of this Note for registration of transfer at the office or agency designated by the Company pursuant to the Indenture, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. Prior to the due presentment for registration of transfer of this Note, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note is overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Notes under the Indenture at any time by the Company with the consent of the Holders of Notes representing more than 50% of the principal amount of all Notes at the time outstanding. The Indenture also contains provisions permitting the Holders of Notes representing specified percentages of the principal amount of the Notes at the time outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. The Indenture also permits the Trustee to amend or waive certain terms and conditions set forth in the Indenture without the consent of Holders of the Note issued thereunder. The term "Company" as used in this Note includes any successor to the Company under the Indenture. The Notes are issuable only in registered form in denominations as provided in the Indenture and subject to certain limitations therein set forth. The Notes are exchangeable for a like aggregate principal amount of a different authorized denomination, as requested by the Holder surrendering same. This Note and the Indenture shall be construed in accordance with, and governed by, the laws of the State of Texas applicable to agreements made and to be performed therein. The Indenture and this Note are hereby expressly limited so that in no contingency or event, whether by reason of acceleration of the maturity of this Note or otherwise, shall the amount paid, or agreed to be paid by the Company for the use, forbearance, or detention of the money loaned under this Note or otherwise or for the payment or performance of any covenant or obligation contained herein or the Indenture or in any other document evidencing, securing or pertaining hereto, exceed the maximum amount permissible under applicable law, as now or as hereafter amended. If 15 22 from any circumstances whatsoever fulfillment of any provision hereof or any of such other documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity, and if from any such circumstances the registered owner of this Note shall ever receive interest or anything that might be deemed interest under applicable law that should exceed the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal of this Note and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of this Note such excess shall be refunded to the Company. All sums paid or agreed to be paid to the registered owner of this Note for the use, forbearance or detention of the indebtedness of the Company to the registered owner of this Note shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the actual rate of interest on account of such indebtedness is uniform, or does not exceed the maximum rate permitted by applicable law as now or hereafter amended, throughout the term thereof. The terms and provisions of this paragraph shall control and supersede every other provision of this Note and the Indenture. The Company hereby waives, to the extent permitted by applicable law, all of its rights or protections afforded by any applicable usury or interest limitation law. No reference herein to the Indenture and no provision of this Note or of the Indenture shall impair or affect the right of the registered owner of this Note to receive payment of principal and interest on this Note, on or after the respective due dates, or the right of the Trustee to bring suit for the enforcement of any such payment on or after such respective dates, without the consent of the registered owner. Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, Transition Auto Finance III, Inc. has caused this instrument to be duly executed under its corporate seal. Dated: ___________________________ TRANSITION AUTO FINANCE III, INC. By: --------------------------------------- (Authorized Officer) [SEAL] Attest: - ------------------------------ (Authorized Officer) 16 23 (b) The form of the Trustee's certificate of authentication is as follows: This is one of the Notes referred to in the within-mentioned Indenture. TRUST MANAGEMENT, INC. as Trustee, Paying Agent and Registrar By: ----------------------------------- Authorized Signatory SECTION 2.3 DENOMINATIONS. The Securities shall be issuable only as registered securities in authorized denominations with a minimum denomination of $1,000 and larger denominations of integral multiples of $1,000 (in each case expressed in terms of the principal amount thereof on the date of issuance). SECTION 2.4 EXECUTION AND AUTHENTICATION. (a) The Securities shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President of the Company and attested to by an Officer of the Company other than an Officer who has executed the Securities. The signature of any such Persons on the Securities may be manual or facsimile. (b) Securities bearing the manual or facsimile signatures of individuals who were at any time the Officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to be such prior to the authentication and delivery of such Securities. (c) A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security on behalf of the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. (d) The Trustee shall authenticate Securities from time to time for original issue in the aggregate Offering Amount upon a Company Order; provided, however, the Trustee shall not be required to so authenticate more often than once a week. The aggregate principal amount of Securities outstanding at any time may not exceed that amount except as provided in Section 2.8. (e) Notwithstanding anything contained herein to the contrary, each of the Notes issued hereunder, with the consent of the Company and Trustee, may be issued in book entry form as an uncertificated security in accordance with the provisions of Article 8 of the Uniform Commercial Code as adopted in the state of organization of the Company. 17 24 SECTION 2.5 REGISTRAR AND PAYING AGENT. (a) The Company shall appoint a registrar for the Securities (the "Registrar") who shall maintain or cause to be maintained an office or agency where Securities may be presented for registration or transfer or for exchange. The Registrar shall keep a register of the Securities and of their transfer and exchange (the "Note Register"). The Company may have one or more co-registrars. (b) Subject to the provisions of Section 5.2, the Company may designate one or more Paying Agents (the "Paying Agents") who shall maintain or cause to be maintained an office within the United States of America, at which the Securities may be presented or surrendered for payment or at which the Paying Agent may make payments of accrued interest on the Securities on behalf of the Company with funds withdrawn from the Sinking Fund Account. (c) The Company shall notify the Trustee of the name and address of any such Registrar or Paying Agent and may appoint successors thereof. (d) The Company initially appoints the Trustee as Registrar and as Paying Agent. SECTION 2.6 SECURITYHOLDER LISTS. The Trustee shall preserve a list of the names and addresses of Securityholders in as current a form as is reasonably practicable. If the Trustee is not the Registrar, the Company shall cause the Registrar to furnish to the Trustee five Business Days before each Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. SECTION 2.7 TRANSFER AND EXCHANGE. Where a Security is presented to the Company or the Registrar with a request to register a transfer of Securities, the Company shall cause the Registrar to register the transfer as requested if the requirements for a transfer pursuant to the Uniform Commercial Code, as enacted in the State of Texas, are met. Where Securities are presented to the Company or the Registrar with a request to exchange them for an equal principal amount of Securities of other denominations, the Company shall cause the Registrar to make the exchange as requested if the same requirements are met. To permit transfers and exchanges, the Trustee shall authenticate Securities upon Company Request or upon request of the Registrar. The Company may charge a reasonable fee to the Holder for any transfer or exchange other than an exchange pursuant to Section 2.9, 3.7 or 9.5. SECTION 2.8 REPLACEMENT SECURITIES. If the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements for the issuance of replacements securities pursuant to the Uniform Commercial Code, as enacted in the State of Texas, are met. An indemnity bond must be sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent and the 18 25 Registrar from any loss that any of them may suffer if a Security is replaced. The Company may charge for its expenses in replacing a Security. SECTION 2.9 TEMPORARY SECURITIES. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. SECTION 2.10 CANCELLATION. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar, the Paying Agent and the Company shall forward to the Trustee any Securities surrendered to them for transfer, exchange, payment or cancellation and shall dispose of cancelled Securities as the Company directs in accordance with applicable law. The Company may not issue new Securities to replace Securities it has paid or delivered to the Trustee for cancellation. SECTION 2.11 DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest and, to the extent permitted by law, interest on defaulted interest at the Overdue Interest Rate to the persons who are Securityholders of record as of a subsequent date designated as a "Special Record Date" for such payment. The Trustee shall establish the Special Record Date if and when funds for the payment of such interest have been received by the Paying Agent from the Company. At least 15 days before the subsequent Special Record Date, the Trustee shall mail to each Securityholder a notice that states the subsequent Special Record Date, the payment date for the defaulted interest, and the amount of defaulted interest (plus any permitted interest thereon) to be paid. SECTION 2.12 PERSONS DEEMED OWNERS. Prior to the due presentment for registration of transfer of any Security, the Company, the Trustee, the Paying Agent, the Registrar and any agent of the Company or of the Trustee may treat the Person whose name and Security is registered on the Note Register as the owner of such Security for the purpose of receiving payments of the principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee, nor any agent of the Company shall be affected by notice to the contrary. 19 26 ARTICLE 3 REDEMPTION SECTION 3.1 REDEMPTION AFTER SINKING FUND TRIGGER DATE. At any time on any Payment Date on or after November 30, 2000, the Securities may be redeemed, in whole or in part, at the option of the Company at the Redemption Price for such Securities. If the Company elects to redeem the Securities, it shall, not later than 45 days prior to the Payment Date selected for redemption, deliver notice of such election to the Trustee, together with a Company Order directing the Trustee to effect such redemption. SECTION 3.2 SECURITIES NOT PREVIOUSLY DELIVERED TO TRUSTEE. If the Company wishes to credit Securities it has not previously delivered to the Trustee for cancellation against the principal amount of Securities to be redeemed, it shall so notify the Trustee and it shall deliver the Securities duly endorsed with the notice. SECTION 3.3 SELECTION OF SECURITIES TO BE PURCHASED OR REDEEMED. If less than all of the Securities are to be called for redemption, the particular Securities to be redeemed shall be selected by the Trustee by lot or by such other method as the Trustee deems appropriate. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Security selected for partial redemption, the principal amount thereof to be redeemed. Securities and portions of Securities selected shall be in amounts of $1,000 or whole multiples of $1,000; except that if all of the Securities of a Holder are to be redeemed, the entire outstanding amount of Securities held by such Holder, even if not a multiple of $1,000, shall be purchased or redeemed. Except as provided in the preceding sentence, provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. SECTION 3.4 NOTICE OF REDEMPTION. (a) At least 10 days but not more than 60 days before the Redemption Date, the Company shall mall a notice of redemption by first-class mail to each Holder of Securities, with a copy thereof to Trustee. (b) The notice shall identify the Securities to be redeemed by CUSIP No. and shall state: (i) the Redemption Date; (ii) the Redemption Price; 20 27 (iii) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the redemption date upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Security; (iv) the name and address of the Paying Agent; (v) that the Securities must be delivered to Paying Agent at the address stated in the notice for the Holder to receive the Redemption Price; and (vi) that interest on the Securities ceases to accrue on and after the Redemption Date. (c) At the Company's request, the Trustee shall give notice of redemption in the Company's name and at the Company's expense. Failure to give notice of redemption, or any defect therein, to any Holder of any Security shall not impair or affect the validity of the redemption of any Security. SECTION 3.5 EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption under Section 3.4 has been given, the Securities called for redemption must be redeemed on the designated Redemption Date. Upon surrender to the Paying Agent, such Securities shall be paid at the Redemption Price. A notice of redemption under Section 3.4 may not be conditional. Unless the Company shall default in the payment of the Redemption Price, no interest shall accrue on the Securities for any period after the Redemption Date. SECTION 3.6 DEPOSIT OF REDEMPTION AMOUNT. Prior to the Redemption Date, the Company shall deposit with the Paying Agent money sufficient to pay the Redemption Price on Securities on that date. Such moneys shall be segregated by the Paying Agent for the purpose of application to such redemption on the Redemption Date. If such deposit shall be made, the amount payable on the Securities shall be limited to the Redemption Price therefore, without any premium or penalty, and no interest shall accrue on such Redemption Price for any period after the Redemption Date. If any Security called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the provisions of this Section 3.6, interest shall be paid on the unpaid principal from the Redemption Date until such principal is paid, and, to the extent lawful, on any interest not paid on such unpaid principal, in each case at the rate provided in the Securities. SECTION 3.7 SECURITIES REDEEMED IN PART. Upon surrender of a Security that is redeemed in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the 21 28 Company a new Security equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4 ACCOUNTS, DISBURSEMENTS AND RELEASES SECTION 4.1 COLLECTION OF MONEYS. Except as otherwise expressly provided herein, the Trustee may demand payment or delivery of, and may receive and collect, directly and without intervention or assistance of any fiscal agent or other intermediary, all money and other property payable to or receivable by the Trustee pursuant to this Indenture. The Trustee shall hold all such money and property received by it as part of the Trust Estate, and shall apply it as provided in this Indenture. Except as otherwise expressly provided in this Indenture, if any default occurs in the making of any payment or performance under the Servicing Agreements, the Trustee may, and upon the request of the Holders of Securities representing more than 50% of the principal amount of the Outstanding Securities shall, take such action as may be appropriate to enforce such payment or performance including the institution and prosecution of appropriate judicial proceedings. Any such action shall be without prejudice to any right to claim a Default or Event of Default under this Indenture and to proceed thereafter as provided in Article 7. SECTION 4.2 SINKING FUND ACCOUNT; OPERATING ACCOUNT; MASTER COLLECTIONS ACCOUNT. (a) Prior to the initial authentication and delivery of any Securities, the Company shall open, at one or more depository institutions (which may be the Trustee) (the "Custodians"), a trust account denominated "Sinking Fund Account--Trust Management, Inc., as trustee in respect of the 11% Redeemable Secured Notes Due October 31, 2004," (the "Sinking Fund Account"). The Sinking Fund Account shall be an Eligible Account. Deposits to and withdrawals from the Sinking Fund Account shall be made solely in accordance herewith, and the funds in the Sinking Fund Account shall not be commingled with any other moneys, except as expressly provided for herein. The Company shall also open a commercial bank account in its own name for use in holding the Company's funds and in paying the Company's expenditures (the "Operating Account"). The Sinking Fund Account, the Master Collections Account and the Operating Account are sometimes collectively referred to as the "Accounts" or individually as an "Account." The Company shall give the Trustee at least five Business Days' written notice of any change in the location of any Operating Account and any related account identification information. (b) The Company shall direct or cause to be directed all Obligors to remit all collections and payments on the Contracts directly to the Master Collections Account maintained by the Servicer. The Company agrees to provide or cause to be provided payment books or will mail or cause to be mailed monthly statements to all Obligors with remittance instructions directing all payments to be remitted directly to the Master Collections Account. The Company agrees that all cash, money orders, checks, notes, drafts and other items that it otherwise receives and that are 22 29 attributable to the Contracts shall be promptly deposited into the Master Collections Account. The Company shall likewise deposit or cause to be deposited in the Master Collections Account within two Business Days of receipt all Net Liquidation Proceeds and Insurance Proceeds (net of any portion thereof applied to the repair of any Leased Vehicle, released to an Obligor in accordance with the normal servicing procedures of the Servicer). The Company shall cause the Servicer to transfer to the Operating Account, at least weekly and more frequently if deemed reasonable by the Company under the circumstances, all funds (except any minimum sum necessary to avoid bank service charges) in the Master Collections Account that are attributable to the Contracts. (c) The Company shall cause the Servicer to maintain detailed accounting books and records adequate to determine the respective share of the funds (including all income earned thereon as determined by any allocation method deemed reasonable by the Servicer) deposited or contained in the Master Collections Account attributable to each motor vehicle lease contract, including the Contracts, owned by the Company or serviced by the Servicer. (d) The Company agrees that it shall not withdraw any funds in the Operating Account except for an investment, transfer or payment of such funds in accordance with the provisions of this Section 4.2 and Section 4.3. (e) The Company may invest the funds in the Operating Account but only in Eligible Investments that mature on or prior to the Business Day next preceding the next Payment Date following the making of such investment. (f) So long as the Securities have not been declared due and payable pursuant to Section 6.2 and subject to the receipt by the Trustee of any required certificates, the Company shall have the right to cause the funds in the Operating Account to be withdrawn or applied, to the extent necessary and in the amounts required, for the following purposes in the following order of priority: FIRST to the transfer to the Sinking Fund Account of the amount that, together with any amounts held in the Sinking Fund Account, is sufficient for the payment, PRO RATA, of all interest due on the Outstanding Securities on each Payment Date; SECOND, to the payment to the Trustee of any unpaid amount due the Trustee pursuant to Section 7.7; THIRD, to the payment of any other unpaid Allowed Expenses, except that during the continuance of an Event of Default, no such payments of unpaid Allowed Expenses shall be made (except for payments of amounts due to the Trustee under Section 7.7); FOURTH, after the Sinking Fund Trigger Date or during the continuance of an Event of Default, to the transfer to the Sinking Fund Account for the PRO RATA payment of amounts owing on the Notes when due; and FIFTH except during the continuance of an Event of Default, until the Sinking Fund Trigger Date, to the purchase of Eligible Additional Contracts in accordance with Section 4.3. 23 30 All of the foregoing applications of funds in the Operating Account that have higher priority must be fully satisfied before any of the foregoing applications having lower priority may be satisfied with such funds. (g) On or prior to the Business Day next preceding each Payment Date occurring prior to the Sinking Fund Trigger Date, the Company shall cause to be transferred from the Operating Account to the Sinking Fund Account an amount that, together with any funds then held in the Sinking Fund Account, is sufficient to pay the accrued interest due on the Outstanding Notes on such Payment Date. After the Sinking Fund Trigger Date, upon the written request of a Trust Officer from time to time or as otherwise determined by the Company but in any event not less often than the Business Day next preceding each Payment Date, the Company shall cause to be transferred from the Operating Account to the Sinking Fund Account the funds in the Operating Account (except any minimum balance necessary to avoid bank service charges), less any Allowed Expenses for which funds have not been previously withdrawn from the Operating Account. (h) During the continuance of an Event of Default, upon the written request of a Trust Officer from time to time but in any event not less often than the Business Day next preceding each Payment Date, the Company shall cause to be transferred from the Operating Account to the Sinking Fund Account all of the funds in the Operating Account, less any amounts due the Trustee under Section 7.7. (i) If the funds in the Operating Account exceed $250,000 for a period of 60 consecutive days or longer, the Company shall promptly transfer from the Operating Account to the Sinking Fund Account that portion of such funds exceeding $250,000 at the end of such 60 day period. This provision shall not apply to any proceeds from the sale of the Notes by the Company if the Company elects to deposit such proceeds in the Operating Account, and for this purpose, any proceeds from the sale of Notes shall be deemed to be the first funds used by the Company for the purchase of Eligible Additional Contracts. (j) Upon the Sinking Fund Trigger Date, the Company shall deposit in the Sinking Fund Account any remaining net proceeds from the sale of the Securities that have not been used for the purchase of Contracts. (k) All payments of principal or accrued interest with respect to the Securities shall be made from amounts held in the Sinking Fund Account. All payments to be made from time to time to the holders of Securities out of funds in the Sinking Fund Account pursuant to this Indenture shall be made by the Trustee as the Paying Agent appointed by the Company, subject to Section 5.2. All moneys deposited from time to time in the Sinking Fund Account, and all investments made with such moneys, shall be held by the Trustee as part of the Trust Estate as herein provided. No amounts contained in the Sinking Fund Account shall be paid over to or at the direction of the Company, except as provided in a Payment Date Statement delivered by the Company, that is in compliance with provisions of Section 5.1 or as otherwise provided by the provisions of this Indenture. (l) So long as no Event of Default shall have occurred and be continuing, any funds in the Sinking Fund Account shall be invested and reinvested by the Trustee at the Company's direction 24 31 in one or more Eligible Investments. All income or other gain from investment of moneys deposited in the Sinking Fund Account shall be deposited therein immediately upon receipt, and any loss resulting from such investment shall be charged to such Account. (m) Notwithstanding any other provision of this Indenture, the Company may elect, in its sole discretion, to deposit the proceeds from the sale of Notes into the Operating Account. In that event, the Company may, without the consent of the Trustee or any Noteholder, withdraw from the Operating Account the funds necessary to pay the offering expenses incurred in connection with the sale of the Notes, but not to exceed the limits set forth in the Company's final prospectus filed with the SEC pursuant to which the Securities are offered and sold on behalf of the Company. SECTION 4.3 PURCHASE OF LEASED VEHICLES AND ELIGIBLE ADDITIONAL CONTRACTS. (a) Leased Vehicles and Eligible Additional Contracts shall be originated by the Servicer (or its contractors) for purchase by the Company pursuant to the terms of the Servicing Agreements and this Indenture. In carrying out its purchase obligations, the Servicer shall use its customary and usual procedures in evaluating the purchase of motor vehicles and motor vehicle lease Contracts and, to the extent more exacting, the procedures used by the Servicer in respect to such motor vehicles and Contracts purchased by it for its own account. The Company and the Servicer shall agree from time to time as to which Leased Vehicles and Eligible Additional Contracts are to be purchased by the Company through Servicer. The purchase prices for any such purchases shall be payable from the funds in the Operating Account, notwithstanding the provisions of Section 5.12. On or prior to each Servicer Report Date, the Company shall deliver to the Trustee (or any duly appointed custodian for the Contract Documents) the Contract Documents relating to such Contracts, with the Contracts containing the notice required by Section 4.3(e). Also, on or prior to each Servicer Report Date, the Company shall deliver to the Trustee a supplemental Schedule A to this Indenture, reflecting all Contracts acquired by or for the Company during the report period. If no Contracts were acquired during the report period, it will not be necessary to file a supplemental Schedule A for that period. (b) Servicer agrees that any motor vehicle lease Contracts originated by it that satisfy the criteria established in Section 4.4 of this Indenture will be offered for sale to the Company, to the extent that the Company has sufficient funds to purchase such Contracts, subject only to the right of Transition Auto Finance II, Inc., an affiliate of the Company, to acquire vehicles with proceeds from repossession of its leased vehicles or prepayments of its lease contracts. (c) The purchase price payable by the Company for each Leased Vehicle originated by the Servicer on the Company's behalf shall equal the original purchase price of the Leased Vehicle, plus a fee to the Servicer equal to $150 per purchased Contract, less 42.5% of the Obligor's down payment to the Company. 25 32 (d) Servicer and the Company may amend the purchasing criteria set forth in the Servicing Agreements with the exception of the purchasing criteria set forth on Exhibit A to this Indenture, for which the prior written consent of the Trustee or the Holders of 50% of the aggregate principal amount of the Outstanding Securities must be obtained. (e) Each Eligible Additional Contract purchased by the Company pursuant to this Section 4.3 shall be marked on its face with the following notice: "NOTICE: THIS MOTOR VEHICLE LEASE CONTRACT HAS BEEN SOLD TO TRANSITION AUTO FINANCE III, INC., AND IS SUBJECT TO A PERFECTED SECURITY INTEREST OF TRUST MANAGEMENT, INC., AS TRUSTEE, UNDER AN INDENTURE DATED AS OF ______________, 1999 BETWEEN TRANSITION AUTO FINANCE III, INC. AND SAID TRUSTEE." A UCC-l financing statement properly describing each Eligible Additional Contract and naming the Trustee as secured party shall be duly filed in the appropriate filing office to perfect the Trustee's security interest in such Contract. (f) Without the prior consent of the Trustee, neither the Servicer nor the Company shall make any payments or withdrawals from funds in the Operating Account for the purchase of any Contracts (i) following the Sinking Fund Trigger Date, or (ii) during the continuance of an Event of Default. (g) Subject to, and in accordance with, the terms and conditions of the attached Exhibit D, funds in the Operating Account may be used, and will be available, to purchase Leased Vehicles and Eligible Additional Contracts in the name and for the account of a Subsidiary of the Company to the same extent, and subject to the same terms and conditions, on which funds in the Operating Account are available to the Company to purchase Leased Vehicles and Eligible Additional Contracts. (h) Funds in the Operating Account may be used, and will be available, to purchase Leased Vehicles and Eligible Additional Contracts in connection with the business and operations of the Company or any Subsidiary of the Company conducted in any jurisdiction in which the Company or a Subsidiary of the Company is authorized to operate and conduct business in accordance with the terms and conditions set forth on the attached Exhibit D. SECTION 4.4 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS. With respect to each Contract, the Company covenants and agrees that, effective as of the Purchase Date for such Contract, the following representations and warranties shall be true and shall be reaffirmed by delivery of the Purchased Contracts Certificate signed by the Servicer: (a) Each Contract conforms with all applicable Federal, state and local laws, regulations and official rulings. (b) Each Contract (i) shall have been originated in the United States of America and shall cover a Leased Vehicle purchased from a dealer in the retail sale of the Leased Vehicle in the ordinary course of such dealer's business, shall have been fully and properly executed by the parties thereto and the full and complete title to such Leased Vehicle shall have been validly assigned by such dealer to the Company in accordance with its terms, (ii) shall have created or shall create ownership of the Leased Vehicle in the name of the Company and a valid, subsisting and enforceable first priority security interest in favor of the Trustee in the Leased Vehicle, (iii) shall contain customary and enforceable provisions such that the rights and remedies of the holder thereof shall be adequate for realization 26 33 against the collateral of the benefits of the Leased Vehicle, (iv) shall provide for, in the event that such Contract is prepaid, a prepayment that fully satisfies all required payments pursuant to the Contract, (v) meets in all material respects all purchasing criteria set forth on Exhibit A attached hereto, and (vi) shall not be a Defaulted Contract. (c) (i) The Title Document for the related Leased Vehicle shows (or if a new or replacement Title Document is applied for with respect to such Leased Vehicle, the official receipt from the responsible state or local governmental authority indicating that an application has been made and that the Title Document, when issued, will show) the Servicer or the Company as the owner of the Leased Vehicle and the Trustee as the holder of a first priority security interest in such Leased Vehicle, (ii) within 30 days after the Purchase Date for the Contract relating to the Leased Vehicle, the Title Document for such Leased Vehicle will show the Company as owner of the Leased Vehicle and the Trustee as the holder of a first priority security interest in such Leased Vehicle, and (iii) the Company, upon delivery of the Assignment, will have a valid and enforceable ownership interest in the Leased Vehicle and the Trustee will have a first priority security interest in the Leased Vehicle. (d) Each Contract and the lease of the Leased Vehicle shall have complied at the time it was originated or made in all material respects with all requirements of applicable federal, state, and local laws, and regulations thereunder, including, without limitation, usury laws, the Federal Truth-In-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Federal Reserve Board's Regulations B, M and Z, and state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code, and other consumer laws and equal credit opportunity and disclosure laws. (e) Each Contract shall represent the genuine, legal, valid and binding payment obligation in writing of the Obligor, enforceable by the holder thereof in accordance with its terms subject to the effects of bankruptcy, insolvency, reorganization or other similar laws affecting the enforceability of creditors' rights generally. (f) No provision of a Contract shall have been waived, amended or modified, except as disclosed in writing by Servicer. (g) No right of rescission, setoff, counterclaims or defense shall have been asserted or threatened with respect to any Contract. (h) The Assignment constitutes an enforceable sale and transfer of the Leased Vehicle and the Contract from the Person from whom they are purchased to the Company and it is the intention of the Servicer that the beneficial interest in and title to the Leased Vehicles and the Contracts not be part of Servicer's estate in the event of the filing of a bankruptcy petition by or against Servicer under bankruptcy law. (i) Immediately prior to the Assignment herein contemplated, the Person from whom such Leased Vehicle or Contract is purchased by the Company had good and 27 34 marketable title to each Leased Vehicle or Contract free and clear of all liens, encumbrances, security interests, and rights of others and, immediately upon the transfer thereof pursuant to the Assignment, the Company shall have good and marketable title to each Leased Vehicle and Contract, free and clear of all liens, encumbrances, security interests and rights of others. (j) No Contract shall have been originated in, or shall be subject to the laws of, any jurisdiction under which the sale, transfer and assignment of such Contract to the Company or the Trustee would be unlawful, void or voidable. SECTION 4.5 GENERAL PROVISIONS REGARDING SINKING FUND ACCOUNT. (a) The Company shall not direct the Trustee to make any investment of any funds in the Sinking Fund Account or to sell any investment held in the Sinking Fund Account except under the following terms and conditions: (i) (A) each such investment shall be made in the name of the Trustee (in its capacity as such) or its nominee (or, if applicable law provides for perfection of pledges of an investment not evidenced by a certificate or other instrument through registration of such pledge on books maintained by or on behalf of such issuer of such investment, such pledge may be so registered), (B)any instrument evidencing such investment shall be delivered directly to the Trustee or its agent; and (ii) the proceeds of each such sale of an investment shall be remitted by the purchaser thereof directly to the Trustee for deposit into the Sinking Fund Account. (b) If any amounts are needed for disbursement from the Sinking Fund Account and sufficient uninvested funds are not available to make such disbursement, in the absence of a Company Order for the liquidation of the investments in an amount sufficient to provide the required funds, the Trustee may cause to be sold or otherwise converted to cash a sufficient amount of the investments in the Sinking Fund Account. (c) The Trustee shall not in any way be held liable by reason of any insufficiency in the Sinking Fund Account resulting from any loss on any Eligible Investment included therein except that the Trustee shall remain liable on Eligible Investments that are obligations of the Trustee in its commercial capacity. (d) All investments of funds in the Sinking Fund Account and all sales of Eligible Investments held in the Sinking Fund Account shall, except as otherwise expressly provided in this Indenture, be made by the Trustee in accordance with a Company Order. Such Company Order may specify actions (including, without limitation, that such funds not be invested, in which case such funds shall remain deposited in the Sinking Fund Account) or may be a general, standing order authorizing the Trustee to act on written instructions of specified personnel or agents of the Company. In order to insure that the Trustee can invest funds in the Sinking Fund Account or sell any investment in the Sinking Fund Account, the Company Order with respect thereto must be received by the Trustee no later than 9:00 a.m. on the date specified in the Company Order for effecting such transaction. 28 35 (e) In the event that: (i) the Company shall have failed to give investment directions to the Trustee by 9:00 a.m. Dallas, Texas time on any Business Day authorizing the Trustee to invest the funds then in the Sinking Funds Account, (ii) a Default or Event of Default shall have occurred and be continuing but the Securities shall not have been declared due and payable pursuant to Section 6.2, or if the Securities shall have been declared due and payable following an Event of Default, amounts collected or receivable from the related Trust Estate are being applied in accordance with Section 6.13, or (iii) an Event of Default shall have occurred and be continuing, the Securities shall have been declared due and payable pursuant to Section 6.2, and amounts collected or receivable from the related Trust Estate are being applied in accordance with Section 6.10, the Trustee shall invest and reinvest the funds then in the Sinking Fund Account to the fullest extent practicable in Eligible Investments. All investments made pursuant to clause (i) above shall mature on the next Business Day following the date of such investment, all such investments made pursuant to clause (ii) above shall mature no later than the next Payment Date, and all investments made pursuant to clause (iii) above shall mature no later than the first date following the date of such investment on which the Trustee proposes to make a distribution to Noteholders pursuant to Section 6.10. SECTION 4.6 RELEASES. (a) The lien of this Indenture shall be released from a Liquidated Contract (including any related Contract Documents and Leased Vehicle), notwithstanding the provisions of Section 5.12, if: (i) in the event that such Liquidated Contract has been paid in full, the Trustee receives the certificate of a Servicing Officer identifying such Contract and certifying that such Contract has been fully paid and all proceeds received in respect of such Contract have been deposited in the Master Collections Account; (ii) in the event that such Liquidated Contract is required to be purchased by the Servicer pursuant to the Servicing Agreements, the Trustee receives a certificate of a Servicing Officer (A) identifying the Contract to be released, (B) requesting the release thereof, and (C) certifying that the correct repurchase price therefor has been deposited in the Master Collections Account; and (iii) in the event that such Liquidated Contract is a "Liquidated Contract" by virtue of clause (ii) of the definition thereof, the Trustee receives the certificate of a Servicing Officer to the effect that such Contract is a Defaulted Contract that became a Liquidated Contract during the related Collection Period, and there has been deposited in the Master 29 36 Collections Account any related Net Liquidation Proceeds that, in the Servicer's judgment, constitute the final amounts recoverable in respect of such Contract. (b) Each certificate of a Servicing Officer required by subsection (a) above, shall contain a statement to the effect that the release of the Liquidated Contract from the lien for this Indenture will not impair the security under this Indenture in contravention of its provisions, after taking into account the amounts deposited in the Master Collections Account on the account of such Liquidated Contract. SECTION 4.7 REPORTS BY TRUSTEE. The Trustee shall report and account to the Company in writing (using such form as the Trustee shall choose in its sole discretion) with respect to the Sinking Fund Account and the identity of the investments included therein, on a monthly basis and more frequently as the Company may from time to time reasonably request, including accounting of deposits into and payments from the Sinking Fund Account. SECTION 4.8 TRUST ESTATE; CONTRACT DOCUMENTS. (a) Subject to the payment of its fees and expenses the Trustee may, and when required by the provisions of this Indenture shall, execute instruments to release property from the lien of this Indenture, or convey the Trustee's interest in the same, in a manner and under circumstances that are not inconsistent with the provisions of this Indenture. No party relying upon an instrument executed by the Trustee as provided in this Article 4 shall be bound to ascertain the Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any moneys. (b) In order to facilitate the servicing of the Contracts by the Servicer, the Trustee hereby acknowledges that the Servicer is authorized in the name and on behalf of the Company, to execute instruments of satisfaction or cancellation, or of partial or full release or discharge, and other comparable instruments with respect to the Contracts and with respect to the Leased Vehicles. (c) Upon Company Order, the Trustee shall, at such time as there are no Securities Outstanding, release and transfer, without recourse, all of the Trust Estate that secured the Securities (other than any cash held for the payment of the Securities pursuant to Sections 4.2(b) or 8.2). ARTICLE 5 COVENANTS SECTION 5.1 PAYMENT OF PRINCIPAL AND INTEREST. (a) Interest payable on any Security shall be paid to the Person in whose name such Security (or one or more predecessor Securities) is registered at the close of business on the Record 30 37 Date for such Payment Date by check mailed to such Person's address as it appears in the Note Register on such Record Date, except for the final payment of principal of a Security, which shall be payable only upon presentation and surrender as provided in subsection (b) of this Section 5.1. Checks for interest shall be mailed without requiring that such Security be submitted for notation of payment. Checks returned undelivered will be held by the Paying Agent for payment to the Person entitled thereto, subject to the terms of Section 5.2. Payments made on any Payment Date shall be binding upon all future Holders of such Securities and of any Securities issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, whether or not noted thereon. (b) Each installment of interest on the Securities is payable as specified in the form of Security set forth in Section 2.2. Any installment of interest that is not paid when and as due shall bear interest at the Overdue Interest Rate from the date due to the date of payment thereof, but only to the extent payment of such interest shall be lawful and enforceable. The principal of each Security shall be payable at the Stated Maturity thereof unless such Security becomes due and payable at an earlier date by declaration of acceleration, call for redemption or otherwise. The final payment of principal of each Security (or the Redemption Price thereof of the Securities called for redemption) shall be payable upon presentation and surrender thereof on or after its Stated Maturity to the Paying Agent. The Trustee upon Company Order shall notify the Person in whose name a Security is registered at the Record Date for the Payment Date next preceding the Payment Date on which the Company expects that the final payment of principal and interest on such Security will be paid. Such notice shall be mailed no earlier than the sixtieth (60th) day, and no later than the twentieth (20th) day, prior to such Payment Date and shall specify that such final payment will be payable only upon presentation and surrender of such Securities and shall specify the name and address of the Paying Agent where such Securities may be presented and surrendered for payment of such installment. Notices in connection with redemptions of Securities shall be mailed to Securityholders as provided in Section 3.2. (c) All computations of interest due with respect to any Securities shall be based on a 360-day year consisting of 12 months of 30 days each and on the amount of principal outstanding on the Securities from time to time. (d) On each Servicer Report Date, the Company shall transmit to the Trustee the Monthly Report (a "Payment Date Statement"), which shall set forth, with respect to the next succeeding Payment Date, the amount of interest payable on such Payment Date on each Outstanding Security. On the last Servicer Report Date prior to the Stated Maturity, the Company shall transmit to the Trustee a final Payment Date Statement setting forth, with respect to the Stated Maturity, the amount of accrued interest and principal payable on the Stated Maturity on each Outstanding Security. Each Payment Date Statement shall state that the computations of interest were made in conformity with the requirements of this Indenture. Notwithstanding the foregoing, the Trustee may rely on its own calculations for purposes of paying interest on the Securities. (e) The Company at any time may terminate its obligation to pay an installment of interest if it deposits with the Trustee, or the Trustee holds in the Sinking Fund Account as of the 31 38 related Payment Date, money sufficient to pay the installment when due. The Company shall designate the installment. (f) Subject to the foregoing provisions of this Section 5.1, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to unpaid principal and interest, if any, that were carried by such other Security. SECTION 5.2 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST. (a) Whenever the Company shall have a Paying Agent other than the Trustee, it will, by Company Order delivered on or before the Business Day next preceding each Payment Date, direct the Trustee to deposit with such Paying Agent on or before such Payment Date a sum sufficient to pay the amounts then becoming due, and the Trustee shall, to the extent it has received such amount from the Company, deposit such amount with the Paying Agent as directed. Such sum shall be held in trust for the benefit of the Persons entitled to such payments. (b) The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent, in acting as Paying Agent, will: (i) hold all sums held by it for the payment of amounts due with respect to the Securities in trust for the benefit of the persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided and pay such sums to such Persons as herein provided; (ii) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment required to be made with respect to the Securities; and (iii) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. (c) For the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, the Company may at any time direct by Company Order any Paying Agent to pay to the Trustee all sums held in trust by such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. SECTION 5.3 PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged before the same shall become delinquent (1) all taxes, assessments and governmental charges levied or imposed upon the Company or the Leased Vehicles, and (2) all lawful claims for labor, materials and supplies that, if 32 39 unpaid, might by law become a lien upon the property of the Company; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings; and provided further, that the Company shall not be required to cause to be paid or discharged any such tax, assessment, charge or claim if the Company's Board of Directors shall determine such payment is not advantageous to the conduct of the business of the Company and that the failure so to pay or discharge is not disadvantageous in any material respect to the Holders. SECTION 5.4 MAINTENANCE OF PROPERTIES. The Company will cause all properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and will cause to be made all necessary repairs, renewals, replacements, betterment and improvements thereof, all as in the judgment of the Company may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Company's Board of Directors, desirable in the conduct of the business of the Company and not disadvantageous in any material respect to the Holders. SECTION 5.5 LIMITATION ON INVESTMENT ACTIVITIES. The Company will not register as, or conduct its business or take any action that shall cause it to become, or to be deemed to be, an "investment Company" as defined under the provisions of the Investment Company Act. SECTION 5.6 COMPLIANCE CERTIFICATES. (a) Commencing with the fiscal year ending December 31, 1999, the Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company a certificate of a firm of independent accountants with respect to the compliance by the Company and the Servicer, in all material respects, with their respective obligations arising under this Indenture. If such accountant knows of such a default, the certificate shall describe the default. (b) Commencing with the fiscal quarter ending December 31, 1999, on or before 45 days after the end of each fiscal quarter of the Company, the Company shall deliver an Officers' Certificate to the Trustee to the effect that a review of the activities of the Company during the Company's preceding fiscal quarter has been made under the supervision of the officers executing such Officers' Certificate with a view to determining whether during such period the Company and the Servicer have performed and observed all of their obligations under this Indenture, and either (A) stating that to the best of their knowledge no Default by the Company or the Servicer under this Indenture has occurred and is continuing, or (B) if such a Default has occurred and is continuing, specifying such Default and the nature and status thereof. 33 40 (c) The Company will deliver to the Trustee an Officers' Certificate stating whether or not the signee knows of any default by the Company in performing its covenants under this Indenture within 15 days of a written request by the Trustee. The Company will perform, execute, acknowledge and deliver, all such further acts, instruments, and assurances as may reasonably be requested by the Trustee. The certificates required under this Section 5.6 need not comply with Section 11.4. (d) The Company will deliver to the Trustee within 15 days after the occurrence thereof written notice of any Default. SECTION 5.7 REPORTING. (a) Commencing with the fiscal year ending December 31, 1999, the Company shall file with the Trustee copies of any annual reports and other information, documents, and statements (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that the Company may be required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, within 15 days after it files them with the SEC. The Company also shall comply with the other provisions of TIA Section 314(a). (b) Until the Company has a class of equity securities registered under the Securities Exchange Act of 1934, the Company will prepare, for the first three quarters of each fiscal year, commencing with the fiscal quarter ending December 31, 1999, summary reports containing unaudited cash basis financial statements of the Company. In addition, the Company will prepare, for each fiscal year, an annual report containing complete audited financial statements of the Company including, but not limited to, a balance sheet, a statement of income and shareholders' equity, a statement of changes in financial position and all appropriate notes. The annual financial statements will be prepared in accordance with generally accepted accounting principles consistently applied, except for changes with which the Company's independent public accountants concur. Quarterly statements may be subject to year-end adjustments. The Company will cause a copy of the respective quarterly or annual report to be mailed to the Trustee and to each of the Holders of the Securities within 45 days after the close of each of the first three quarters of each fiscal year and within 120 days after the close of each fiscal year, at such Holder's address appearing on the Note Register. SECTION 5.8 PROTECTION OF TRUST ESTATE. The Company will from time to time execute and deliver all such supplements and amendments hereto and all such financing statements, continuation statements, instruments of further assurance, and other instruments, and will take such other action as is necessary or advisable to: (i) grant more effectively all or any portion of the Trust Estate, (ii) maintain or preserve the lien of this Indenture or carry out more effectively the purposes hereof, 34 41 (iii) perfect, publish notice of, or protect the validity of, any Grant made or to be made by this Indenture, (iv) enforce any of the Contract Documents, or (v) preserve and defend title to the Trust Estate and the rights of the Trustee and the Securityholders in such Trust Estate against the claims of all persons and parties. SECTION 5.9 OPINIONS AS TO TRUST ESTATE. (a) Upon the initial Company Order to the Trustee for the authentication of Notes under this Indenture, the Company shall deliver to the Trustee an Opinion of Counsel (i) that this Indenture, together with the filing referred to in the next sentence, creates as security for the Notes a security interest in the Contracts, and identifiable cash proceeds thereof in the Operating Account and the Sinking Fund Account; (ii) that a financing statement with respect to the Contracts has been filed with the Texas Secretary of State pursuant to the Texas Uniform Commercial Code, as amended, or with the appropriate government official of the state(s) in which title(s) to the Leased Vehicle(s) may be registered; (iii) that the security interest in the Trust Estate has been perfected and is a valid first priority security interest; and (iv) that no other filings in any jurisdiction or any other actions are necessary to perfect the security interest of the Trustee in the Trust Estate, as constituted as of the date of such opinion, as against any third parties. (b) On or before December 15, in each calendar year commencing with 1999, the Company shall furnish to the Trustee an Opinion of Counsel either stating that, in the opinion of such counsel, such action has been taken with respect to the recording, filing, re-recording and re-filing of this Indenture, any indentures supplemental hereto and any other requisite documents and with respect to the execution and filing of any financing statements and continuation statements as is necessary to maintain the lien and security interest created by this Indenture and reciting the details of such action or stating that in the opinion of such counsel no such action is necessary to maintain such lien and security interest. Such Opinion of Counsel shall also describe the recording, filing, re-recording and re-filing of this Indenture, any indentures supplemental hereto and any other requisite documents and the execution and filing of any financing statements and continuation statements that will, in the opinion of such counsel, be required to maintain the lien and security interest of this Indenture until December 15 in the following calendar year. In rendering such opinion, such counsel may rely upon an Officers' Certificate of the Servicer as to the filing of any financing statements and to the effect that no further assignment of the related Contract or satisfaction and discharge thereof has been recorded and that the original financing statements so filed have not been discharged. SECTION 5.10 PERFORMANCE OF OBLIGATIONS; Servicing Agreements. (a) The Company will punctually perform and observe all of its obligations and agreements contained in the Servicing Agreements. 35 42 (b) The Company will not take any action or permit any action to be taken by others that would release any Person from any of such Person's covenants or obligations under any of the Contract Documents or under any instrument included in the Trust Estate, or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any of the Contract Documents or any such instrument, except as expressly provided in this Indenture, the Servicing Agreements or such Contract Documents or other instrument. (c) If the Company shall have knowledge of the occurrence of a default by the Servicer of any of its material obligations under the Servicing Agreements, the Company shall promptly notify the Trustee thereof, and shall specify in such notice the action, if any, the Company is taking in respect of such default. If such default arises from the failure of the Servicer to perform any of its obligations under the Servicing Agreements with respect to the Contracts, the Company may remedy such failure. So long as any such default under the Servicing Agreements shall be continuing, the Trustee may, and upon the direction of the Holders of Securities representing more than 25% of the aggregate principal amount of the Outstanding Securities the Trustee shall, direct the Company to, and the Company shall, terminate all of the rights and powers of the Servicer under the Servicing Agreements. Unless directed or permitted by the Trustee or the Holders of Securities representing not less than 50% of the aggregate principal amount of the Outstanding Securities, the Company may not waive any such default under the Servicing Agreements or terminate the rights and powers of the Servicer under the Servicing Agreements. (d) Upon any termination of the Servicer's rights and powers, all rights, powers, duties, obligations and responsibilities of the Servicer with respect to the related Contracts (except for any obligations of the Servicer to indemnify the Company) shall vest in and be assumed by the Company, or any servicing agent that the Company may designate, and the Company or its servicing agent shall be the successor in all respects to the Servicer in its capacity as servicer with respect to such Contracts under the Servicing Agreements (except for any obligations of the Servicer to indemnify the Company). The Company may resign as the Servicer by giving written notice of such resignation to the Trustee and in such event will be released from such duties and obligations, such release not to be effective until the date a new servicer enters into a servicing agreement with the Company as provided below and has been approved in writing by the Trustee. Any successor servicer shall enter into a servicing agreement with the Company substantially similar to the Servicing Agreement. The Company may make such arrangements for the compensation of such successor servicer as it and such successor servicer shall agree, provided that such compensation of the successor servicer shall not be in excess of that payable to the Servicer under the Servicing Agreements, unless the Servicer or the Company agrees to pay such additional compensation. SECTION 5.11 NEGATIVE COVENANTS. The Company will not: (i) sell, transfer, exchange or otherwise dispose of any of the Trust Estate except as expressly permitted by this Indenture; 36 43 (ii) obtain or carry insurance relating to the Contracts separate from that required by the Servicing Agreement, unless the Trustee shall be named therein as a loss payee; (iii) claim any credit on, or take any deduction from, the principal of or interest payable in respect to the Securities by reason of the payment of any taxes levied or assessed upon any part of the Trust Estate; (iv) engage in any business or activity other than in connection with the purchase, collection and servicing of lease Contracts or consumer obligations secured by motor vehicles, the repossession and resale of motor vehicles and the raising of capital, both debt and equity, and any other incidental businesses or activities, without the consent of the Holders of a majority of the aggregate principal amount of the Securities then outstanding; (v) without the consent of the Holders of a majority of the aggregate principal amount of the Securities then outstanding, create, incur, assume or in any manner become liable in respect of any indebtedness other than the Securities, any indebtedness incurred for the purpose of the purchase of lease Contracts or consumer obligations relating to or secured by motor vehicles (including any related borrowing and transactional costs), any Allowed Expenses and any other amounts incurred in the ordinary course of the Company's business; (vi) dissolve or liquidate in whole or in part; (vii) merge or consolidate with any corporation, partnership or other entity other than another direct or indirect wholly-owned Subsidiary of an Affiliate of the Company or the Servicer; any such merger or consolidation with another Subsidiary of the Servicer shall be subject to the following conditions: (1) the surviving or resulting entity shall be a corporation organized under the laws of the United States or any state thereof whose business and activities shall be limited as set forth in paragraph (iv) above; (2) the surviving or resulting corporation (if other than the Company) shall expressly assume by an indenture supplemental hereto all of the Company's obligations hereunder; (3) the surviving or resulting corporation shall have the same fiscal year as the Company; and (4) immediately after consummation of the merger or consolidation no Event of Default or Default shall exist with respect to the Securities; (viii) (to the extent that it may lawfully so covenant and to the extent that such covenant is lawfully enforceable) institute any bankruptcy, insolvency or receivership proceedings with respect to itself or its properties; 37 44 (ix) (1) permit the validity or effectiveness of this Indenture to be impaired, or permit the lien of this Indenture to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations under this Indenture, except as may be expressly permitted hereby, (2) permit any lien, charge, security interest, mortgage or other encumbrance (other than the lien of this Indenture) to be created on or extend to or otherwise arise upon or burden the Trust Estate or any part thereof or any interest therein or the proceeds thereof, or (3) permit the lien of this Indenture not to constitute a valid first priority security interest in the Trust Estate; or (x) originate or acquire any Contract with an Obligor located in any jurisdiction unless at the time of such origination or acquisition of such Contract by the Company or the Servicer, both the Company and the Servicer shall have obtained all licenses, permits and governmental approvals, if any (1) necessary to comply with the laws of such jurisdiction with respect to their respective operations and businesses, (2) necessary to perform their respective obligations as contemplated by the Indenture and the Servicing Agreements with respect to such Contract, (3) necessary to maintain the enforce ability of such Contract and the security interest in the related Leased Vehicle and to prevent such Contract or any portion thereof from becoming void or voidable by the Obligor or any other person, and (4) if such Contract has been assigned to the Company, necessary for such assignment to be a lawful and binding assignment on the assignor and the Obligor. (xi) enter into any transaction with the Servicer, or any Affiliate of the Servicer on terms less favorable to the Company than could be obtained from an independent third party in an arms-length transaction. SECTION 5.12 SUBSTITUTION OR RELEASE OF COLLATERAL OR WITHDRAWAL OF CASH IN TRUST ESTATE. (a) The Company shall furnish to the Trustee an Officer's Certificate stating the fair value of any property or securities the deposit of which with the Trustee is to be the basis for the withdrawal or release of any cash, property or securities constituting a part of the Trust Estate. If the fair value to the Company of any such securities and all other such securities made the basis for the withdrawal or release of any cash, property or securities constituting part of the Trust Estate since the commencement of the then current calendar year, as set forth in the Officer's Certificates with respect thereto, is 10% or more of the aggregate principal amount of the Notes at that time Outstanding, and if the fair value of such securities so delivered is at least $25,000 and one percent of the aggregate principal amount of the Notes at that time outstanding, the Company shall furnish a certificate of an Independent appraiser or financial expert as to the fair value of the securities so delivered. If the property so delivered has been used or operated by a Person other than the Company, within six months prior to the date of acquisition by the Company, in a business similar to that in which it has been or is to be used or operated by the Company, and if the fair value to the Company of such property is not less than $25,000 and not less than one percent of the aggregate principal amount of the Notes at that time Outstanding, the Company shall furnish an opinion of an Independent engineer, appraiser or other expert covering the fair value to the Company of the property so subjected to the lien of the Indenture. 38 45 (b) The Company shall furnish to the Trustee an Officer's Certificate as to the fair value of any property or securities to be released from the lien of this Indenture and stating that in the opinion of the signer the proposed release will not impair the security under this Indenture in contravention of its provisions. If the fair value of such property or securities and of all other property or securities released since the commencement of the then current calendar year, as set forth in such Officer's Certificates required by the preceding sentence, is 10% or more of the aggregate principal amount of the Notes at the time Outstanding and if the fair value of the property or securities proposed to be released is at least $25,000 and one percent of the aggregate principal amount of the Notes at the time Outstanding, the Company shall furnish an opinion of an Independent engineer, appraiser or other expert with respect to the same subject matter required to be set forth in such Officer's Certificate. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.1 EVENTS OF DEFAULT. An "Event of Default" occurs if: (1) the Company defaults in the payment of interest on any Security when the same becomes due and payable and the default continues for a period of 30 days; (2) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at the Stated Maturity, upon redemption or otherwise; (3) the Company falls to comply with any of its other agreements in the Securities or this Indenture (other than a covenant or warranty, a default in the observance of which is elsewhere in this section specifically dealt with) and the default continues for a period of 30 days alter receipt by the Company of written notice of such default from the Trustee specifying such default and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder or after receipt by the Company and the Trustee of such notice from the Holders of not less than 25% in aggregate principal amount of the Securities then Outstanding; (4) if any representation or warranty of the Company made in this Indenture or in any certificate or other writing delivered pursuant hereto or in connection herewith shall prove to be incorrect m any material respect as of the time when the same shall have been made and, within 30 days after receipt by the Company of written notice from the Trustee specifying such inaccuracy and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder or after receipt by the Company and the Trustee of such notice from the Holders of Securities representing at least 25 % of the aggregate principal amount of the Outstanding Securities, the circumstance or condition in respect of which such representation or warranty was incorrect shall not have been eliminated or otherwise cured; 39 46 (5) if (i) the validity or effectiveness of this Indenture or any Grant under this Indenture shall be impaired, or this Indenture shall be amended, hypothecated, subordinated, terminated or discharged, or any Person shall be released from any covenants or obligations under this Indenture or the Servicing Agreements, in each case except as may be expressly permitted hereby and thereby, (ii) any lien, charge, security interest, mortgage or other encumbrance (exclusive of any mechanic's lien on any Leased Vehicle) shall be created on or extend to or otherwise arise upon or burden the Trust Estate or any part thereof or any interest therein or the proceeds thereof, or (iii) this Indenture shall not constitute a valid first priority security interest in the Trust Estate, and if any of the foregoing Defaults shall continue for a period of 30 days after receipt by the Company of written notice from the Trustee specifying such Default and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder or after receipt by the Company and the Trustee of such notice from the Holders of Securities representing at least 25 % of the aggregate principal amount of the Outstanding Securities; or (6) the Company, pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official of it or for all or substantially all of its property; or (D) makes a general assignment for the benefit of its creditors; or (7) a court of competent jurisdiction enters an order or decree, which remains unstayed and in effect for 60 days, under any Bankruptcy Law against the Company: (A) for relief in an involuntary case; (B) appointing a receiver, trustee, assignee, liquidator or similar official for all or substantially all of its property; or (C) ordering its liquidation. The term "Bankruptcy Law" means title 11, U.S. Code, or any similar Federal or State law for the relief of debtors. SECTION 6.2 ACCELERATION. If an Event of Default occurs and is continuing, the Trustee may, or at the direction of the Holders of at least 25 % in principal amount of the Securities shall, by notice to the Company, declare the principal amount of all the Securities together with accrued interest thereon to be due and 40 47 payable immediately, and upon any such declaration such principal and accrued and unpaid interest shall become immediately due and payable, notwithstanding anything contained in this Indenture or the Securities to the contrary. The Holders of a majority in principal amount of the Outstanding Securities may, by written notice to the Trustee, rescind an acceleration and its consequences if all existing Events of Default have been cured or waived, all expenses relating to the Default have been paid and if the rescission would not conflict with any judgment or decree. SECTION 6.3 REMEDIES. (a) If an Event of Default shall have occurred and be continuing, the Trustee may, subject to Section 6.2, do one or more of the following: (i) make demand and institute judicial proceedings in equity or law for the collection of all amounts then payable on the Securities, or under this Indenture, whether by declaration or otherwise, enforce all judgments obtained, and collect from the Company the Trust Estate securing the Securities and moneys adjudged due; (ii) subject to Section 6.14, sell the Trust Estate securing the Securities or any portion thereof or rights or interest therein, at one or more public or private Sales called and conducted in any manner permitted by law; (iii) institute judicial proceedings in equity or at law from time to time for the complete or partial foreclosure of this Indenture with respect to the Trust Estate; and (iv) exercise any remedies of a secured party under the UCC and take any other appropriate action to protect and enforce the rights and remedies of the Trustee or the Holders of the Securities hereunder. (b) The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceedings. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or an acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.4 WAIVER OF PAST DEFAULTS. Subject to Section 9.2, the Holders of a majority in principal amount of the Outstanding Securities may, by written notice to the Trustee, waive an existing Default and its consequences. When a Default is waived in accordance herewith, it is cured and shall stop continuing. SECTION 6.5 CONTROL BY MAJORITY. The Holders of a majority in aggregate principal amount of the Outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that is unduly prejudicial to the rights of Securityholders not joining in such direction, or that would involve the Trustee in personal liability. 41 48 SECTION 6.6 LIMITATION ON SUITS. (a) A Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless: (i) the Holder gives to the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of the Outstanding Securities make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity and the Event of Default has not been waived; and (v) the Trustee has received no contrary direction from the Holders of a majority in principal amount of the Outstanding Securities during such 60-day period. (b) A Securityholder may not use this Indenture to prejudice the rights Of another Securityholder or to obtain a preference or priority over another securityholder. SECTION 6.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal and interest on the Security, on or after the respective due dates, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. SECTION 6.8 COLLECTION SUIT BY TRUSTEE. If an Event of Default in payment of interest or principal specified in Section 6.1(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid. SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM. (a) The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property. (b) Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, 42 49 adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10 PRIORITIES. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: FIRST to the Trustee for the amounts due under Section 7.7; SECOND, to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; THIRD, to the Servicer for any unpaid Allowed Expenses owed to or incurred by it with respect to the Contracts; and FOURTH, to the Company. The Trustee shall fix a Special Record Date and payment date pursuant to Section 2.11 hereof for any payment to Securityholders under this Section 6.10. SECTION 6.11 UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by Holders of more than 10% in principal amount of the Outstanding Securities. SECTION 6.12 STAY, EXTENSION OR USURY LAWS. The Company agrees (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefits or advantage of any stay or extension law or any usury or other law, wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the principal of and/or interest on the Securities as contemplated herein, or which may affect the covenants or performance of this Indenture, and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and agrees that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of any such power as though no such law has been enacted. 43 50 SECTION 6.13 OPTIONAL PRESERVATION OF TRUST ESTATE. (a) If the Securities have been declared due and payable following an Event of Default and such declaration and its consequences have not been rescinded and annulled, the Trustee may, in its sole discretion, refrain from selling the Trust Estate and may apply all amounts received with respect to such Trust Estate to the payment of the principal of and interest on the Securities as and when such principal and interest would have become due pursuant to the terms hereof and of the Securities if there had not been a declaration of acceleration of the maturity of the Securities, provided that: (i) the Trustee shall have determined that the amounts receivable with respect to such Trust Estate are sufficient to provide the funds required to pay the principal of and interest on the Securities as and when such principal and interest would have become due pursuant to the terms hereof and of the Securities if there had not been a declaration of acceleration of the maturity of the Securities; and (ii) the Securityholders shall not have directed the Trustee in accordance with Section 6.5 (subject, however, to Section 6.14(b)) to sell the Trust Estate securing the Securities. (b) the Trustee may, but need not, obtain and rely upon an opinion of an independent investment banking firm as to the feasibility of any action proposed to be taken in accordance with Section 6.13(a) and as to the sufficiency of the amounts receivable with respect to the Trust Estate to make the required payments of principal of and interest on the Securities, which opinion shall be conclusive evidence as to such feasibility or sufficiency. (c) If the conditions of Section 6.13(a) are not satisfied after the Securities have been declared due and payable following an Event of Default or the Trustee does not determine to take the action specified in Section 6.13(a), then all amounts collected by the Trustee with respect to the Securities pursuant to this Article 6 or otherwise shall be applied in accordance with Section 6.10. (d) Notwithstanding anything in this Indenture to the contrary, if the Securities have been declared due and payable, then Trustee may, in its sole discretion, retain the Trust Estate without compliance with this Section 6.13 and apply all amounts received with respect to the Trust Estate to the payment of principal and interest on the Securities as and when such principal and interest would have become due pursuant to the terms hereof and of the Securities if there had not been a declaration of acceleration of the maturity of the Securities. SECTION 6.14 SALE OF TRUST ESTATE. (a) The power to effect any sale (a "Sale") of any portion of the Trust Estate pursuant to Section 6.3 shall not be exhausted by any one or more Sales as to any portion of such Trust Estate remaining unsold, but shall continue unimpaired until the entire such Trust Estate shall have been sold or all amounts payable on the Securities secured thereby and under this Indenture with respect thereto shall have been paid. The Trustee may from time to time postpone any Sale by public 44 51 announcement made at the time and place of such Sale. The Trustee hereby expressly waives its rights to any amount fixed by law as compensation for any Sale. (b) (i) Without the consent or direction to the contrary by the Holders of a majority in principal amount of the Securities then Outstanding, the Trustee shall not sell or otherwise dispose of the Trust Estate following an Event of Default for an amount less than the sum of (x) the amount of fees and expenses of such sale that are reimbursable to the Trustee and (y) the entire amount that would be distributable to the Holders of the Securities, in full payment thereof in accordance with Section 6.10, and (ii) without the consent of or direction to the contrary by the Holders of a majority in principal amount of the Securities then Outstanding, at any public Sale at which no other Person bids an amount equal to or greater than the amount described in clause (y) above, the Trustee shall bid an amount at least equal to $1.00 more than the highest other bid. (c) The Trustee may bid for and acquire any portion of the Trust Estate in connection with a public Sale thereof. The Securities need not be produced in order to complete any such sale. The Trustee may, subject to this Indenture, hold, lease, operate, manage or otherwise deal with any property so acquired in any manner permitted by law. (d) The Trustee shall execute and deliver an appropriate instrument of conveyance transferring its interest in any portion of the Trust Estate in connection with a Sale thereof. In addition, the Trustee is hereby irrevocably appointed the agent and attorney-in-fact of the Company to transfer and convey its interest in any portion of the Trust Estate in connection with a Sale thereof (including changing the designation of the secured party on any certificate of title or financing statements), and to take all action necessary to effect such Sale. No purchaser or transferee at such a Sale shall be bound to ascertain the Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any moneys. (e) Notwithstanding anything in this Indenture to the contrary, if an Event of Default specified in Section 6.1(1) or (2) is the Event of Default, or one of the Events of Default, on the basis of which the Securities have been declared due and payable, then the Trustee may, in its sole discretion, sell the Trust Estate without compliance with this Section 6.14. ARTICLE 7 TRUSTEE SECTION 7.1 DUTIES OF TRUSTEE. (a) For so long as any Notes remain outstanding, the Trustee shall: (i) maintain the custodianship of the documentation delivered to it evidencing title or perfected security interest in the Company's assets; 45 52 (ii) verify all funds deposited in the trust account for the benefit of the Securityholders and use its best efforts to verify all payments called for under the terms of this Indenture; (iii) verify the delivery of all reports and other instruments required pursuant to the terms of this Indenture and the Securities Exchange Act of 1934; (iv) examine all reports or other instruments furnished to the Trustee pursuant to the terms of this Indenture and determine, based on the information provided, whether there is a violation of any of the terms and conditions set forth in this Indenture; (b) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (c) Except during the continuance of an Event of Default: (i) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others. (ii) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee. (d) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, breach of this Indenture or its own willful misconduct, except that: (i) This paragraph does not limit the effect of paragraph (c) of this Section. (ii) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (iii) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it from the Holders of not less than a majority in principal amount of the Notes at the time Outstanding. (e) The Trustee shall not be liable for any action or omission taken or not taken by the Servicer of any kind or nature. (f) The Trustee may refuse to perform any duty or exercise any right or power unless it receives written indemnity and security satisfactory to it against any loss, liability or expense and no provision of this Indenture or any other document shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it; provided, however, that in the event that the Trustee determines that there has been an Event of Default, the Trustee shall not be entitled to such indemnification and security other than that provided in this Indenture as a condition to 46 53 providing notice of such default to the Securityholders in accordance with the terms of this Indenture and to taking appropriate remedial action. (g) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (h) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraph (b), (c), (d) and (e) of this Section. SECTION 7.2 RIGHTS OF TRUSTEE. (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records, and premises of the Company, personally or by agent or attorney, to the extent reasonably required by such inquiry or investigation. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Certificate or Opinion. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers. (e) The Trustee may consult with counsel of its selection and the advice of such counsel or any opinion of counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (f) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Trust Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the principal corporate trust office of the Trustee, and such notice references the Securities and this Indenture. SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliate with the same rights it would have if it were not the Trustee. Any Paying Agent, Registrar or Co-registrar may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.4 TRUSTEE'S DISCLAIMER. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities. It shall not be accountable for the Company's use of the proceeds from the Securities and shall not be responsible for any statement in the Securities, other than its certificate of authentication, or in any prospectus used in the sale of the Securities, other than statements provided in writing by the Trustee for use in such prospectus. SECTION 7.5 NOTICE OF DEFAULTS. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder notice of the Default within 90 days after it obtains actual knowledge of the 47 54 Default. Except in the case of a Default in payment on any Security, the Trustee may withhold the notice if and so long as the board of directors, the executive committee or a trust committee of the directors and/or responsible officers of the Trustee in good faith determines that withholding notice is in the interests of Securityholders. SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS. (a) Within 60 days after each December 31 beginning with December 31, 1999, the Trustee shall, to the extent required by TIA Section 313(a), mail to each Securityholder a brief report dated as of such December 31 that complies with TIA Section 313(a). The Trustee also shall also, to the extent required by TIA Section 313(b), comply with TIA Section 313(b)(l) and (2). (b) If this Indenture is qualified with the SEC under the TIA, a copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each national securities exchange on which the Securities are listed. The Company shall notify the Trustee if and when the Securities are listed on any national securities exchange (as defined in the Securities Exchange Act of 1934) or quoted on NASDAQ. (c) Within 60 days after each December 31 beginning with December 31, 1999, the Trustee shall mail to each Securityholder a brief report which indicates whether the Trustee has fulfilled its obligations under this Indenture and whether there have been any known uncured defaults under this Indenture. SECTION 7.7 COMPENSATION AND INDEMNITY. (a) The Company shall pay to the Trustee from time to time as compensation for its services the amounts set forth on the Trustee's Fee Schedule attached hereto as Exhibit C, as may be agreed upon from time to time by the Trustee and the Company. In addition, the Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses may include the reasonable compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify and hold harmless the Trustee and its successors and their respective officers, directors, employees, agents and attorneys against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, reasonable attorneys' fees) that may be imposed on, incurred by or asserted against Trustee or its successors, or their respective officers, directors, employees, agents and attorneys, in connection with the performance of its duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through the Trustee's negligence or bad faith, other than to the extent that such negligence or bad faith is excused pursuant to Sections 7.1 and 7.2. 48 55 (b) To secure the Company's payment of these obligations, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on the Securities. Such obligations shall survive the satisfaction and discharge of this Indenture. (c) When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(7) or (8), the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. (d) The provisions of this Section 7.7 shall survive the satisfaction and discharge or other termination of this Indenture. SECTION 7.8 REPLACEMENT OF TRUSTEE. (a) The Trustee may resign at any time upon 30 days prior written notice to the Company. The Holders of a majority in principal amount of the Outstanding Securities may remove the Trustee at any time upon 30 days prior written notice to the removed Trustee and may appoint a successor Trustee with the Company's consent. The Company shall remove the Trustee if: (i) The Trustee falls to comply with Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent; or (iii) a receiver or other public officer takes charge of the Trustee or its property. (b) If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. The resignation or removal of the Trustee shall not be effective until a successor Trustee has been appointed and has assumed the responsibilities of Trustee hereunder. (c) A successor Trustee shall deliver a written acceptance of this appointment to the retiring Trustee and to the Company. Immediately thereafter, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee. Upon delivery of such written acceptance, the resignation or removal of the retiring Trustee shall become effective and the retiring Trustee shall cease to be Trustee hereunder and shall be discharged from any responsibility or obligations for actions taken by any successor Trustee. The successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Securityholder. (d) If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. (e) If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 49 56 SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust assets to, another Person or if the Trustee consolidates with, merges or converts into, or transfers a substantial portion of its corporate trust assets to a Person that is wholly-owned by the Trustee or by the Trustee's parent (of which the Trustee is a wholly-owned subsidiary), the resulting, surviving or transferee Person without any further act shall be the successor Trustee. SECTION 7.10 ELIGIBILITY; DISQUALIFICATION. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1) and (5). The Trustee shall have a combined capital and surplus of at least $1,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b). SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. SECTION 7.12 WITHHOLDING TAXES. Whenever it is acting as a Paying Agent for the Securities, the Trustee shall comply with all requirements of the Internal Revenue Code of 1986, as amended (or any successor or amendatory statutes), and all regulations thereunder, with respect to the withholding from any payments made on such Securities of any withholding taxes imposed thereon and with respect to any reporting requirements in connection therewith. ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.1 SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall cease to be of further effect, except as to surviving rights of transfer or exchange of Securities herein expressly provided for, and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than Securities that have been destroyed, lost or stolen and that have been replaced or paid as provided in Section 2.8) have been delivered to the Trustee for cancellation; or 50 57 (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, the principal at Stated Maturity of such Securities, or the applicable Redemption Price with respect thereto upon redemption. (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company under Sections 7.7 and 8.3 shall survive. SECTION 8.2 APPLICATION OF TRUST MONEY. All money deposited with the Trustee pursuant to Section 8.1 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent as the Trustee shall be directed by Company Order, to the Persons entitled thereto of the principal at Stated Maturity, or the Redemption Price, or the Securities for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. SECTION 8.3 REPAYMENT TO COMPANY. The Trustee and the Paying Agent shall promptly pay to the Company upon request any money or securities held by them at any time in excess of the amounts needed to pay and discharge the Securities in full. The Trustee and the Paying Agent shall pay to the Company upon request any money or securities held by them for the payment of principal or interest that remains unclaimed for two years. After such payment to the Company, Securityholders entitled to such funds must look to the Company for the payment of such unclaimed principal or interest. 51 58 ARTICLE 9 AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.1 WITHOUT CONSENT OF HOLDERS. (a) The Company and the Trustee may amend or supplement this Indenture or the Securities without notice to or consent of any Securityholder: (i) to cure any ambiguity, defect or inconsistency in this Indenture or the Securities; (ii) to effect a merger or consolidation in conformance with Section 5.11(vii); (iii) to provide for uncertificated Securities in addition to or in place of certificated Securities; (iv) to make any change that does not materially adversely affect the rights of any Securityholder; or (v) to modify or add to the provisions of this Indenture to the extent necessary to qualify it under the TIA or under any similar federal statute hereafter enacted. (b) The Trustee may waive compliance by the Company with any provision of this Indenture or the Securities without notice to or consent of any Securityholder if the waiver does not adversely affect the rights of any Securityholder, provided that the Indenture or the Securities reflect the terms of such waiver. SECTION 9.2 WITH CONSENT OF HOLDERS. (a) The Company and the Trustee may amend or supplement this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority in principal amount of the Securities. The Holders of a majority in principal amount of the Securities may waive compliance by the Company with any provision of this Indenture or the Securities without notice to any Securityholder. However, without the consent of each Securityholder affected, an amendment, supplement or waiver, including a waiver pursuant to Section 6.4, may not: (i) reduce the amount of Securities whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the rate of or extend the time for payment of interest on any Security; (iii) reduce the principal of or extend the Stated Maturity of any Security; 52 59 (iv) permit the creation of any lien ranking prior to or on a parity with the lien of this Indenture with respect to any part of a Trust Estate or terminate the lien of this Indenture on any property at any time subject hereto or deprive the Holder of any Note of the security afforded by the lien of this Indenture; or (v) make any Security payable in money other than that stated in the Security. (b) After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing the amendment. SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to or supplement of this Indenture or the Securities shall comply with the TIA as then in effect so long as this Indenture shall then be qualified under the TIA. SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS. (a) A consent to an amendment, supplement or waiver by a Holder of a Security shall bind the holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of a Security. The Trustee must receive the notice of revocation before the date the amendment, supplement or waiver becomes effective. (b) After an amendment, supplement or waiver becomes effective, it shall bind every Securityholder unless it makes a change described in clause (ii), (iii), (iv) or (v) of Section 9.2(a). In that case the amendment, supplement or waiver shall bind each Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security. SECTION 9.5 NOTATION ON OR EXCHANGE OF SECURITIES. If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security concerning the change terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue, and the Trustee shall authenticate, a new Security that reflects the changed terms. SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amendment, supplement or waiver authorized pursuant to this Article if the amendment, supplement or waiver does not adversely affect the rights of the Trustee or Securityholders. If it does, the Trustee may but need not sign it. The Company may not sign an amendment or supplement until such amendment or supplement is approved by the Chairman of the Board, President or any Vice President of the Company or any other officer of the Company customarily performing functions similar to those performed by any of the above designated officers, 53 60 and such approval shall evidence the Company's determination that such amendment, supplement or waiver does not adversely affect the rights of the Securityholders. ARTICLE 10 MEETINGS OF SECURITYHOLDERS SECTION 10.1 PURPOSES FOR WHICH MEETINGS MAY BE CALLED. A meeting of Securityholders may be called for the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any direction to the Trustee, or to waive or to consent to the waiving of any default hereunder and its consequences; (b) to remove the Trustee, or appoint a successor Trustee or apply to a court for a successor Trustee; (c) to consent to the execution of a supplemental indenture; or (d) to take any other action (i) authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities under this Indenture, or authorized or permitted by law, or (ii) which the Trustee deems necessary or appropriate in connection with the administration of the Indenture. SECTION 10.2 MANNER OF CALLING MEETINGS. (a) The Trustee may call a meeting of Securityholders to take any action specified in Section 10.1. Notice setting forth the time and place of, and the action proposed to be taken at, such meeting shall be mailed by the Trustee to the Company and to the Holders of the Securities not less than ten or more than 60 days prior to the date fixed for the meeting. (b) Any meeting shall be valid without notice if the Holders of all Securities are present in person or by proxy, or if notice is waived before or alter the meeting by the Holders of all Securities outstanding, and if the Company and the Trustee are either present or have, before or after the meeting, waived notice. SECTION 10.3 CALL OF MEETINGS BY COMPANY OR SECURITYHOLDERS. In case at any time the Company or the Holders of not less than 50% in aggregate principal amount of the Securities then outstanding shall have requested in writing that the Trustee call a meeting of Securityholders to take any action specified in Section 10.1, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or the Holders of Securities in the amount above specified may determine the time and place for such meeting and may call such meeting by mailing notice thereof. 54 61 SECTION 10.4 WHO MAY ATTEND AND VOTE AT MEETINGS. To be entitled to vote at any meetings of Securityholders, a person shall (a) be a Holder of one or more Securities, or (b) be a person appointed by an instrument in writing as proxy for the Holder of Securities. The only persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and the Company and their counsel. SECTION 10.5 REGULATIONS MAY BE MADE BY TRUSTEE; CONDUCT OF THE MEETING; VOTING RIGHTS. (a) The Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, to prove the holding of Securities, the appointment of proxies, and other evidence of the right to vote, to fix a record date and to provide for such other matters concerning the conduct of the meeting as it shall deem appropriate. (b) At any meeting each Securityholder or proxy shall be entitled to one vote for each $1,000 principal amount of Securities held by him; provided, however, that the Company shall not be entitled to vote any Securities held of record by it. At any meeting of Securityholders, the presence of persons holding or representing any number of Securities shall be sufficient for a quorum. SECTION 10.6 EXERCISE OF RIGHTS OF TRUSTEE OR SECURITYHOLDERS MAY NOT BE HINDERED OR DELAYED BY CALL OF MEETING. Nothing in this Article shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Securityholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any rights conferred upon or reserved to the Trustee or to the Securityholders or by the Securities. SECTION 10.7 EVIDENCE OF ACTIONS BY SECURITYHOLDERS. Whenever the Holders of a specified percentage in aggregate principal amount of the Securities may take any action, the fact that the holders of such percentage have acted may be evidenced by (a) instruments of similar tenor executed by securityholders in person or by attorney or written proxy, or (b) the Holders of Securities voting in favor thereof at any meeting of Securityholders called and held in accordance with the provisions of this Article 10, or (c) by a combination thereof. The Trustee may require proof of any matter concerning the execution of any instrument by a Securityholder or his attorney or proxy as it shall deem necessary. 55 62 ARTICLE 11 MISCELLANEOUS SECTION 11.1 TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed on any Person by Sections 310 through 317, inclusive, of the TIA, the duties imposed under such Sections shall control. SECTION 11.2 NOTICES. (a) Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows: if to the Company: Transition Auto Finance III, Inc. 5422 Alpha Road, Suite 100 Dallas, Texas 75240 Attn: Ken Lowe, President if to the Trustee: Trust Management, Inc. 210 West Sixth Street, Suite 605 Fort Worth, Texas 76102 Attn: Robert C. Finley, President if to the Servicer: Transition Leasing Management, Inc. 5422 Alpha Road, Suite 100 Dallas, Texas 75240 Attn: Ken Lowe, President (b) The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. (c) Any notice or communication mailed to a Securityholder shall be mailed first class, postage prepaid to him at his address as it appears on the Note Register of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed. If the Company mails a notice or communication to Securityholders, it shall mail a copy to the Trustee at the same time. (d) Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. 56 63 SECTION 11.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. (a) Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (i) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (ii) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. (b) Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include (i) a statement that the person making such certificate or opinion has read such covenant or condition; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 11.5 RULES BY PAYING AGENT AND REGISTRAR. The Paying Agent or Registrar may make reasonable rules for its functions. SECTION 11.6 LEGAL HOLIDAYS. A "Legal Holiday" is a Saturday, a Sunday, or a day on which banking institutions are not required to be open in the State of Texas. If a Payment Date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday. SECTION 11.7 GOVERNING LAW. The laws of the State of Texas shall govern this Indenture and the Securities. 57 64 SECTION 11.8 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or an Affiliate of the Company. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 11.9 NO RECOURSE AGAINST OTHERS. No recourse may be taken, directly or indirectly, against any incorporator, subscriber to the capital stock, stockholder, officer, director, agent or employee of the Company or the Servicer or of any predecessor or successor of the Company or the Servicer with respect to the obligations of the Company or the Servicer with respect to the Securities or under this Indenture or any certificate or other writing delivered in connection herewith or therewith, and all such liability is waived and released by the Trustee and all Securityholders. SECTION 11.10 SUCCESSORS. All agreements of the Company and the Servicer in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 11.11 DUPLICATE ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. ARTICLE 12 AGREEMENTS OF SERVICER SECTION 12.1 GENERAL. The Servicer agrees that all covenants, representations and warranties made by the Servicer in the Servicing Agreements with respect to the Contracts shall also be for the benefit of the Trustee and the Holders. SECTION 12.2 SERVICER ACTING AS CUSTODIAN. The Servicer acknowledges that any collections or proceeds from the Contracts in the Master Collections Account, or otherwise in the possession or control of the Servicer, are the Company's property. In holding such proceeds and collections, the Servicer agrees to act as custodian and bailee of the Company and the Additional Lender, if any, at all times. 58 65 SECTION 12.3 REPRESENTATIONS AND WARRANTIES CONCERNING THE SERVICER. The Servicer represents and warrants to the Company and the Trustee as follows: (a) The Servicer (i) has been duly organized and is validly existing and in good standing as a corporation organized and existing under the laws of the State of Texas, (ii) has qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of its properties or the nature of its activities makes such qualification necessary, and (iii) has full power, authority and legal right to own its property, to carry on its business as presently conducted, and to enter into and perform its obligations under this Indenture. (b) The execution and delivery by the Servicer of this Indenture are within the corporate power of the Servicer and have been duly authorized by all necessary corporate action on the part of the Servicer. Neither the execution and delivery of this Indenture, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof, will conflict with or result in a breach of, or constitute a default under, any of the provisions of any law, governmental rule, regulation, judgment, decree or order binding on the Servicer or its properties or the charter or bylaws of the Servicer, or any of the provisions of any indenture, mortgage, contract or other instrument to which the Servicer is a party or by which it is bound or result in the creation or imposition of any lien, charge or encumbrance upon any of its property pursuant to the terms of any such indenture, mortgage, contract or other instrument. (c) The Servicer is not required to obtain the consent of any other party or consent, license, approval or authorization of, or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity or enforceability of this Indenture. (d) This Indenture has been duly executed and delivered by the Servicer and the provisions of Article Twelve hereof constitute legal, valid and binding covenants enforceable against the Servicer in accordance with their terms (subject to applicable bankruptcy and insolvency laws and other similar laws affecting the enforcement of creditors' rights generally). (e) There are no actions, suits or proceedings pending or, to the knowledge of the Servicer, threatened against or affecting the Servicer, before or by any court, administrative agency, arbitrator or governmental body with respect to any of the transactions contemplated by the Servicing Agreements or this Indenture. SECTION 12.4 CORPORATE EXISTENCE; STATUS AS SERVICER; MERGER. (a) The Servicer shall keep in full effect its existence, rights and franchises as a corporation under the laws of the State of Texas, and will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be 59 66 necessary to protect the validity and enforceability of the Contract Documents, this Indenture and the Servicing Agreements. (b) The Servicer shall not consolidate with or merge into any other corporation or convey, transfer or lease substantially all of its assets as an entirety to any person unless the corporation formed by such consolidation or into which the Servicer has merged or the person which acquires by conveyance, transfer or lease substantially all the assets of the Servicer as an entirety is an entity organized and existing under the laws of the United States or any state or the District of Columbia and executes and delivers to the Company and the Trustee an agreement in form and substance reasonably satisfactory to the Company and the Trustee, which contains an assumption by such successor entity of the due and punctual performance and observance of each covenant and condition to be performed or observed by the Servicer under this Indenture and the Servicing Agreements. SECTION 12.5 PERFORMANCE OF OBLIGATIONS. (a) The Servicer shall punctually perform and observe all of its obligations and agreements contained in this Indenture and the Servicing Agreements. (b) The Servicer shall not take any action, or permit any action to be taken by others, which would excuse any person from any of its covenants or obligations under any of the Contract Documents, or which would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any of the Contract Documents or any such instrument, except as expressly provided herein and therein. SECTION 12.6 THE SERVICER NOT TO RESIGN; ASSIGNMENT. (a) The Servicer shall not resign from the duties and obligations hereby imposed on it unless, by reason of change in applicable legal requirements, the continued performance by the Servicer of its duties under this Indenture would cause it to be in violation of such legal requirements in a manner which would result in a material adverse effect on the Servicer or its financial condition. No such resignation shall become effective unless and until a new industry qualified servicer acceptable to the Company is willing to service the Contracts and enters into a servicing agreement with the Company in form and substance substantially similar to the Servicing Agreement and assumes, pursuant to a written instrument reasonably satisfactory to the Trustee, the obligations and duties of the Servicer arising under this Indenture. No such resignation shall affect the obligation of the Servicer to repurchase any Contract pursuant to Section 12.9. (b) The Servicer may not assign this Indenture or the Servicing Agreement or any of its rights, powers, duties or obligations hereunder, provided that the Servicer may assign this Indenture and the Servicing Agreement in connection with a consolidation, merger, conveyance, transfer or lease made in compliance with Section 12.5 (b), and provided further that the Servicer may contract with industry qualified third parties for the performance of its duties under the Servicing Agreements and this Indenture, except that any such contract shall not relieve the Servicer from liability for its obligations under the Servicing Agreements and this Indenture. (c) For a period of 90 days after the occurrence of any Subsidiary Payment Default (as hereinafter defined), the Trustee shall have the right to remove the Servicer and terminate the Servicing Agreement upon delivery of written notice of removal and termination to the Servicer. As used in this Section 12.7(c), the term "Subsidiary Payment Default" shall mean any default in the payment of principal and interest on any other Asset-Backed Securities (as hereinafter defined) issued (i) by an entity owned or controlled by Transition Leasing or any affiliate of Transition Leasing and formed for the purpose of issuing Asset-Backed Securities, (ii) in connection with the same business plan as that of the Company and (iii) in connection with a business plan utilizing Transition Leasing as servicer. As used in this Section 12.7(c), the term "Asset-Backed Securities" means securities that provide a stated rate of return to holders of such securities and that are primarily paid, as to both return of investment and return on investment, by the cash flow from the collateral securing such payment obligations. 60 67 SECTION 12.7 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS. With respect to each Contract, the Servicer represents and warrants to the Company, effective as of the date each such Contract is executed by the Company, as follows: (a) All of the representations and warranties with respect to the Servicer set forth in Section 12.4 continue to be true and correct; (b) In acting with respect to each Contract, Servicer shall comply in all material respects with, all applicable Federal, state and local laws, regulations and official rulings; (c) Each Contract (i) shall have been originated in the United States of America by the Servicer in the ordinary course of an automobile dealer's business, shall have been fully and properly executed by the parties thereto, (ii) shall contain customary and enforceable provisions such that the rights and remedies of the holder thereof shall be adequate for realization against the Contract lessee for the benefits of the Contract, (iii) shall have met, at the time of its execution, in all material respects all purchasing criteria set forth on EXHIBIT A attached hereto and in the Servicing Agreements, and (iv) shall not be a Defaulted Contract. (d) (i) The Title Document for the related Leased Vehicle shows (or if a new or replacement Title Document is applied for with respect to such Leased Vehicle, the official receipt from the responsible state or local governmental authority indicating that an application has been made and that the Title Document, when issued, will show) the Company as the owner of the Leased Vehicle and the Trustee, on behalf of the Trust, as the holder of a first priority security interest in such Leased Vehicle, (ii) within 120 days after the Purchase Date for the Contract relating to the Leased Vehicle, the Title Document for such Leased Vehicle will show the Company as the owner of the Leased Vehicle and the Trustee, on behalf of the Trust, as the holder of a first priority security interest in such leased Vehicle, and (iii) the Company, upon execution of the Contract, will own the Leased Vehicle and the Trustee, on behalf of the Trust, delivery of the Assignment, will have a valid and enforceable security interest in the Leased Vehicle. (e) Each Contract and the sale or lease of each Leased Vehicle shall have complied at the time it was originated in all material respects with all requirements of applicable federal, state, and local laws, and regulations thereunder, including without limitation, usury laws, the Federal Truth-In-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Federal Reserve Board's Regulations B and Z, and state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code, and other consumer laws and equal credit opportunity and disclosure laws. (f) Each Contract shall represent the genuine, legal, valid, and binding payment obligation in writing of the Obligor, enforceable by the holder thereof in accordance with its 61 68 terms subject to the effect of bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditor's rights generally. (g) No provision of a Contract shall have been waived, amended or modified, except as disclosed in writing by Servicer. (h) No right of rescission, set off, counterclaim, or defense shall have been asserted or threatened with respect to any Contracts. (i) It is the intention of the Servicer that the beneficial interest in and title to the Contracts not be part of Servicer's estate in the event of the filing of a bankruptcy petition by or against Servicer under bankruptcy law. (j) No Contract shall have been originated in, or shall be subject to the laws of, any jurisdiction under which the execution of such Contract would be unlawful, void, or voidable. SECTION 12.8 PURCHASE OF CERTAIN CONTRACTS. (a) The representations and warranties of the Servicer set forth in Section 12.7 with respect to each Contract shall survive delivery of the Contract Documents to the Company and shall continue so long as such Contract remains outstanding. Upon discovery by the Company, the Servicer or the Trustee that any of such representations or warranties was incorrect as of the time made or that any of the Contract Documents relating to any such Contract has not been properly executed by the Obligor or the Servicer or contains a material defect or has not been received by the Company, the party making such discovery shall give prompt notice to the Trustee (other than in cases where the Trustee has given notice thereof) and to the other party (or parties in cases where the Trustee has given notice thereof). If any such defect, incorrectness or omission materially and adversely affects the interest of the Holders in and to the related Contracts, the Servicer shall, within 90 days after discovery thereof or receipt of notice thereof, cure the defect or eliminate or otherwise cure the circumstances or condition in respect of which the representation or warranty was incorrect as of the time made. If the Servicer is unable to do so, it shall purchase such Contract from the Company through a deposit into the Master Collections Account no later than the end of the calendar month after which such 90-day period expired of an amount equal to the product of (x) the Price/Payments Ratio multiplied by (y) the aggregate unpaid installments on the Contract. Upon any such purchase, the Company shall execute and deliver such instruments of transfer or assignment, in each case without recourse, as shall be necessary to vest in the Servicer any Contract purchased hereunder. (b) It is understood that, without limiting the meaning of the term "materially and adversely affects", the interest of the Holders shall be deemed materially and adversely affected if (i) the Company, the Trustee or any of such Holders are put under any obligation to pay any other Person any sum of money as a result of a defect or misrepresentation described in subsection (a) above, or (ii) the Trustee or the Majority Holders, acting reasonably, determine, by written notice 62 69 to the Company, that such defect or misrepresentation materially and adversely affects the interests of the Holders in and to a Contract. (c) At the time of any purchase by the Servicer of any Contract, pursuant to the provisions of subparagraph (a) above or otherwise, the Servicer shall certify to the Trustee in writing that (i) such purchase is not for the purpose of recognizing gains or decreasing losses resulting from market value changes in the Company's portfolio of Contracts and Leased Vehicles (ii) such purchase is at the price determined by the following formula: the purchase price paid by the Company for the Contract (and the Leased Vehicle related thereto), less the amount of any lease payments received by the Company after the acquisition of the Contract. SECTION 12.9 INDEMNIFICATION. Servicer hereby indemnifies and holds harmless Trustee and its successors and their respective officers, directors, employees, agents and attorneys against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Trustee or its successors, or their respective officers, directors, employees, agents or attorneys, due to (i) any breach by Servicer of its representations, warranties or covenants provided for in the Servicing Agreements or this Indenture, or (ii) any action or inaction of Servicer, or through Servicer, in any way relating to, or arising out of, the Servicing Agreements or this Indenture, any and all transfers or assignments of the Contracts, or any of the transactions contemplated herein or therein or the creation or collection or enforcement of any of the Contracts. Servicer, however, does not assume the risk of uncollectibility and does not indemnify Trustee and/or its successors, or their officers, directors, employees, agents or attorneys, against the uncollectibility of all or any part of the Contracts as against the Obligor thereof, except for uncollectibility resulting from a breach by Servicer of any warranty, representation or covenant contained herein. The indemnities contained in this Section shall survive any termination of this Indenture or the Servicing Agreements. SECTION 12.10 TERMINATION. The respective duties and obligations of the Servicer under this Article Twelve shall terminate upon the earlier of (i) the satisfaction and discharge of this Indenture pursuant to Article Eight, or (ii) the latest to occur of (A) the final payment or other liquidation of the last Outstanding Contract owned by the Company, and (B) the disposition of all property acquired upon repossession or comparable conversion of any Leased Vehicle securing a Contract. SECTION 12.11 AMENDMENT. (a) The provisions of this Article Twelve may be amended from time to time by the Company, the Servicer and the Trustee, without the consent of any Holder, provided that such action shall not adversely affect in any material respect the interests of any Holder. (b) The provisions of this Article Twelve may also be amended from time to time by the Company, the Servicer and the Trustee, with the consent of the Majority Holders for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this 63 70 Article, provided, however, that no such amendment shall, without consent of each Holder, (i) alter the priorities with which any allocation of funds shall be made under this Article; (ii) deprive any such Holder of the benefit of this Indenture; or (iii) modify this Section. (c) Promptly after the execution of any amendment pursuant to Section 12.12(b), the Company shall cause to be sent to each Holder a notice setting forth in general terms the substance of such amendment. Any failure to do so shall not affect the validity of such amendment. (d) It shall not be necessary, in any consent of Holders under this Section, to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consents and of evidencing the authorization of the execution thereof by Holders shall be subject to such reasonable regulations as the Trustee may prescribe. (e) Any amendment or modification effected contrary to the provisions of this Section shall be void. SECTION 12.12 INSPECTION AND AUDIT RIGHTS. The Servicer agrees that, upon reasonable prior notice, it will permit any representative of the Trustee, during the Servicer's normal business hours, to examine all of the books of account, records, reports and other papers of the Servicer relating to the Contracts, to make copies and extracts therefrom, to cause such books to be audited by independent accountants selected by the Trustee, and to discuss the affairs, finances and accounts relating to the Contracts with the Servicer's officers, employees and independent accountants (and by this provision the Servicer hereby authorizes said accountants to discuss with such representatives such affairs, finances and accounts), all at such reasonable times and as often as may be reasonably requested. Any expense incident to the reasonable exercise by the Trustee of any right under this Section shall be borne by the Trustee and reimbursed to it by the Company under Section 7.7. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, as of the date and year first above written. TRUST MANAGEMENT, INC., Attest: AS TRUSTEE By: - -------------------------------- -------------------------------- Title: Title: -------------------------- ----------------------------- 64 71 Attest: TRANSITION AUTO FINANCE III, INC. By: - -------------------------------- -------------------------------- Secretary Ken Lowe, President The undersigned Transition Leasing Management, Inc. joins in this Indenture for the sole purpose of evidencing its agreement to the covenants, representations and warranties pertaining to it that are set forth in Article Twelve of this Indenture and not for the purpose of guaranteeing or otherwise covenanting to pay the Notes or perform any of the Company's obligations hereunder. Attest: Transition Leasing Management, Inc. By: - -------------------------------- -------------------------------- Secretary Ken Lowe, President STATE OF TEXAS Section Section COUNTY OF DALLAS Section BEFORE ME, the undersigned authority, on this day personally appeared Ken Lowe, President of Transition Auto Finance III, Inc., a Texas corporation, known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated and as the act and deed of said corporation. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of __________, 1998. [SEAL] --------------------------------------------------- Notary Public in and for the State of Texas --------------------------------------------------- Notary Public Printed or Typed Name My Commission Expires: ----------------------------- 65 72 STATE OF TEXAS Section Section COUNTY OF TARRANT Section BEFORE ME, the undersigned authority, on this day personally appeared ____________ _____________________, ____________________ of Trust Management, Inc., known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that he or she executed the same for the purposes and consideration therein expressed, in the capacity therein stated and as the act and deed of said trust company. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of ___________, 1998. [SEAL] --------------------------------------------------- Notary Public in and for the State of Texas --------------------------------------------------- Notary Public Printed or Typed Name My Commission Expires: ----------------------------- 66 73 EXHIBIT A LEASED VEHICLE AND CONTRACT PURCHASE CRITERIA TRANSITION AUTO FINANCE III, INC. The following purchasing criteria shall govern all purchases of Leased Vehicles and Eligible Additional Contracts by Transition Auto Finance III, Inc. (the "Company") and by Transition Leasing Management, Inc. (the "Buyer") acting on behalf of the Company, and no Leased Vehicle or Contract shall be purchased that does not meet such criteria in all material respects. I. VEHICLE CRITERIA a. No vehicle that is to become a Leased Vehicle may be purchased by the Buyer if the vehicle is more than four model years old. No Contract may be acquired by the Buyer if the Contract is secured by a Leased Vehicle that, at the time of lease, was more than four model years old. b. The purchase price payable by the Buyer for each vehicle that is to become a Leased Vehicle (and thus to become subject to a Contract) shall never exceed that amount that the Dealer shall have received by bank draft upon the delivery of the Leased Vehicle. c. No motorcycle shall be purchased if the purchase price payable for such motorcycle would cause the aggregate purchase price paid for all motorcycles which are Leased Vehicles to exceed 10% of the net offering proceeds of the Company's offering of 11% Secured Notes. II. DOWN PAYMENT RATIO Obligors on all Contracts must have made a down payment in cash and/or net trade-in allowance of not less than 15% of the actual price paid by draft to the selling automobile or motorcycle Dealer for the related Leased Vehicle; provided, however, that the down payment for any Leased Vehicle which is more than three model years old shall equal at least 20% of the actual purchase price. EXHIBIT A - Page 1 74 III. CONTRACT TERMS A. Each Contract must have an original term of 48 months or less. B. Each Contract shall be in the form of industry-standard consumer automobile lease Contracts. IV. CREDIT CRITERIA A. With respect to each Obligor on each Contract, the Buyer shall perform all credit checks and reviews that are standard for the motor vehicle lease industry and shall supply the verification information to the Company at the time of acquisition of each Contract. B. In addition to the credit checks and reviews set forth in paragraph IV.A. above, each Obligor must satisfy the following criteria: 1. Verifiable home telephone number in Obligor's residence; 2. Residence: (a) Evidence of purchase, lease or rental agreement in Obligor's name; (b) Stability - Review length of time at last two addresses, as well as time in area; 3. Employment: At least one year with last two employers; 4. Obligor has verifiable income (check stub, W-2, 1099, tax return, or bank statements); 5. Ratio of Obligor's net disposable income to gross generally should exceed 60%; 6. References: (a) Five relatives; (b) Five personal. 7. Valid Texas driver's license; 8. If a previous bankruptcy, must have been discharged, or if open, need letter of permission from bankruptcy trustee. 9. Certain exceptions for first-time buyers permitted. EXHIBIT A - Page 2 75 EXHIBIT B MONTHLY REPORT CERTIFICATE For Month: _______________, ________ (the "Collection Period") (year) Company: Transition Auto Finance III, Inc. Servicer: Transition Leasing Management, Inc. Indenture: Dated as of __________________, 1999 Trustee: Trust Management, Inc. I. INTEREST PAYMENTS ON NOTES (INDENTURE SECTION 5.1) A. EXHIBIT I hereto sets forth a listing of the interest and any principal payable to each Noteholder on the next Payment Date. The Company certifies that computation of interest has been made in conformance with the Indenture. All capitalized terms used herein and not otherwise herein defined shall have the same meaning as set forth in the Indenture. Company and Servicer certify that, to the best of their knowledge, the foregoing and attached information is true and correct. Dated: ____________________, ________. TRANSITION LEASING MANAGEMENT, INC. By: ----------------------------------------- Printed Name: ------------------------------- Title: -------------------------------------- TRANSITION AUTO FINANCE III, INC. By: ----------------------------------------- Printed Name: ------------------------------- Title: -------------------------------------- EXHIBIT B - Page 1 76 EXHIBITS DESCRIPTION -------- ----------- I Noteholder Interest Report EXHIBIT B - Page 2 77 EXHIBIT C TRUSTEE'S FEE SCHEDULE TRANSITION AUTO FINANCE III, INC. 11% SECURED NOTES DUE OCTOBER 31, 2004 Acceptance Fee (payable upon execution of the indenture) $12,000 Annual Administration Fee (billed) $15,000 Paying Agent/Registrar Services $5.00 (per year per note) Interest Checks $1.00 each Annual Collateral Custodial Services $5.00 (per year per Vehicle) Custodial Acceptance/release $5.00 each All out-of-pocket expenses such as long distance telephone, stationery, insurance, courier, attorney or accountant expense, etc., will be billed at cost to the Company. The Trustee understands that the closing of the Note issuance will be completed in Fort Worth and there will not be any travel expenses charged to the Company. These fees do not include servicing responsibilities should the Trustee be involved due to a removal of the Servicer. The Trustee would present servicing fees at that time. These fees do not include arbitrage accounting or excess yield calculations, if required. If the common trust funds of Trustee are utilized, there will be 0.5% annual fee deducted from the account. If Trustee's duties are modified to any great extent, Trustee reserves the right to re-evaluate its fees. Extraordinary services will be charged according to time and scope of services. EXHIBIT C - Page 1 78 SCHEDULE A SCHEDULE OF CONTRACTS OWNED BY TRANSITION AUTO FINANCE III, INC. SCHEDULE A - Page 1 79 EXHIBIT D OPERATIONS THROUGH SUBSIDIARIES AND IN OTHER JURISDICTIONS For purposes of obtaining and using funds in the Operating Account, the Company may operate through one or more Subsidiaries of the Company or in different jurisdictions on and subject to the terms and conditions of this Exhibit D. 1. ADDITIONAL DEFINITIONS. In addition to the terms defined in Article I of this Indenture, the following terms, as used in this Exhibit D and as incorporated into the Indenture in accordance with this Exhibit D, shall have the respective meanings set forth below: "Allowed Payments" means payments made by, or on behalf of, the Company or a Participating Subsidiary from funds in the Operating Account to purchase Leased Vehicles and Eligible Additional Contracts and to pay Allowed Expenses. "Funding Provisions" means the agreements, covenants, representations, conditions, terms and provisions set forth and contained in (i) Sections 4.3, 4.4 and 4.5 of Article 4 of this Indenture, and (iv) Sections 5.3, 5.4, 5.5, 5.8, 5.10 and 5.11 of Article 5 of this Indenture. "Leasing Business" means the business of collecting and servicing lease contracts or consumer obligations secured by motor vehicles, and repossessing and reselling motor vehicles subject to any such lease contracts or consumer obligations, and any other incidental businesses or activities, subject to the terms, conditions, restrictions and requirements imposed under this Indenture with respect to conducting and carrying out any such business. "Lessor" means either the Company or a Participating Subsidiary, or both, as the context may require. "Particpating Subsidiary" means a Subsidiary of the Company which has been authorized and approved under this Exhibit D to use funds in the Operating Account to purchase Leased Vehicles and Eligible Additional Contracts in the name and for the account of the subject Subsidiary. "Subsidiary Agreement" means a Subsidiary Agreement substantially in the form set forth on Schedule D-1 attached to, and for all purposes made a part of, this Exhibit D. 2. OPERATIONS THROUGH SUBSIDIARIES A. Subject to the terms and conditions of this Exhibit D, the Company may designate any Subsidiary of the Company to (i) be a Participating Subsidiary under this Indenture, (ii) engage in the Leasing Business, and (iii) obtain funds from the Operating Account for Allowed Payments on and subject to the same terms and conditions under which the Company may withdraw or apply funds from the Operating Account for Allowed Payments. A Subsidiary engaged in the Leasing Business which is designated by the Company pursuant to the preceding sentence will become and be a Particpating Subsidiary entitled to all 80 benefits and rights of a Participating Subsidiary under this Exhibit D and the Funding Provisions upon satisfaction of the following terms and conditions: (i) The subject Subsidiary (A) shall have been duly and validly formed and organized and shall be in existence; (B) shall be engaged in the Leasing Business as its principal business; and (C) shall have obtained all licenses, permits and governmental approvals, if any (1) necessary to comply with the laws of each jurisdiction in which it carries out and conducts its Leasing Business, (2) necessary to perform its obligations as a Permitted Subsidiary under this Indenture and the Servicing Agreement with respect to its Leasing Business and each Contract originated or acquired by such Participating Subsidiary in connection with its Leasing Business, (3) necessary to maintain the enforceability of each Contract originated or acquired by such Participating Subsidiary in connection with its Leasing Business and the security interest granted under this Indenture and the applicable Subsidiary Agreement in the related Leased Vehicle and to prevent each such Contract or any portion thereof from becoming void or voidable by the Obligor or any other person, and (4), if any Contract has been assigned to the subject Subsidiary incident to its Leasing Business, necessary for such assignment to be a lawful and binding assignment on the assignor and the Obligor. (ii) The subject Subsiary shall have executed and delivered to the Trustee a Subsidiary Agreement. (ii) The Trustee shall have received satisfactory assurances that the subject Subsidiary has complied with the requirements set forth in this Paragraph 2.A. B. Upon satisfaction of the conditions set forth in Paragraph 2.A. above to qualify a Subsidiary of the Company as a Participating Subsidiary, the subject Subsidiary shall be a Participating Subsidiary under this Indenture and shall be entitled to receive, exercise and enjoy all rights, benefits, privileges and powers provided and available to a Participating Subsidiary under this Exhibit D and the Funding Provisions for the purchase of Leased Vehicles and Contracts, the operation of the Leasing Business, and the use of funds in the Operating Account for Allowed Payments; provided, however, that the Particpating Subsidiary shall be bound by, and subject to, all agreements, covenants, representations, conditions, terms and provisions binding on, imposed on, or applicable to the Company under the Funding provisions. From and after the qualification of a Subsidiary of the Company as a Participating Subsidiary, (i) all references in the Funding Provisions to the term "the Company" shall mean and refer to (A) the Company when applying the Funding Provisions to the Company, (B) a Participating Subsidiary when applying the Funding Provisions to a Participating Subsidiary, and (C) either or both the Company and each Participating Subsidiary when applying the Funding Provisions to the Company and each Participating Subsidiary; and (ii) the Participating Subsidiary Trust Estate defined under, and subject to the Grant made in, the Subsidiary Agreement signed by the subject Subsidiary shall be a part of the Trust Estate for all purposes and all references in the Indenture to the term "Trust Estate" shall mean and include all of the Trust Estate defined and subject to the Grant made in the Indenture and each and every Participating Subsidiary Trust Estate defined in and subject to the Grant made in each and every Subsidiary Agreement executed by a Subsidiary and delivered to the Trustee. C. In the event, and to the extent, that the Company conducts Leasing Business through one or more Participating Subsidiaries, funds from the Operating Account will be available to make Approved Payments in connection with the Leasing Business conducted by any and all Participating Subsidiaries on the same terms and conditions under which funds in the Operating Account are available to the Company for such purposes. In applying the Funding Provisions to a Participating Subsidiary seeking to use or withdraw funds 2 81 from the Operating Account for an Allowed Payment, all references in the Funding Provisions to the Company shall mean and refer to the subject Participating Subsidiary. 3. OPERATIONS IN OTHER JURISDICTIONS A. The Company and each Participating Subsidiary may conduct and engage in the Leasing Business in any jurisdiction and withdraw or apply funds from the Operating Account to purchase Eligible Additional Contracts and to pay Allowed Expenses in connection with its Leasing Business activities in the subject jurisdiction upon satisfaction of the following: (i) The Company or the subject Participating Subsidiary, as the case may be, shall have satisfied and complied with all conditions and requirements imposed under this Indenture with respect to operating, conducting and carrying out its Leasing Business. (ii) The Company or the subject Participating Subsidiary, as the case may be, shall have obtained all licenses, permits and governmental approvals, if any (A) necessary to comply with the laws of the subject jurisdiction with respect to operating, conducting and carrying out its Leasing Business in such jurisdiction, (B) necessary to perform its obligations as contemplated by this Indenture and the Servicing Agreement with respect to operating, conducting and carrying out its Leasing Business in such jurisdiction, (C) necessary to maintain the enforceability of each Contract, and the security interest in the related Leased Vehicle, which is purchased, originated or otherwise formed in connection with its Leasing Business in the subject jurisdiction and to prevent each such Contract or any portion thereof from becoming void or voidable by the Obligor or any other person, and (D), as to each Contract that is assigned to the Company in connection with its Leasing Business in the subject jurisdiction, necessary for such assignment to be a lawful and binding assignment on the assignor and the Obligor. (iii) The Trustee shall have received satisfactory assurances that the subject Subsidiary has complied with the requirements set forth in this Paragraph 3. B. Upon satisfying the requirements set forth in Paragraph 3.A. above with respect to engaging in the Leasing Business in a jurisdiction, the Company or the subject Participating Subsidiary, as the case may be, may conduct and engage in, and carry on, the Leasing Business in the subject jurisdiction and to withdraw or apply funds from the Operating Account to purchase Eligible Additional Contracts purchased, originated or otherwise formed in connection with its Leasing Business in the subject jurisdiction, and to pay Allowed Expenses in connection with its Leasing Business activities in the subject jurisdiction. As of the date of this Indenture, (i) the Company has satisfied the requirements imposed under Paragraph 3.A. above to conduct and engage in, and carry on, the Leasing Business in the State of Texas and to withdraw or apply funds from the Operating Account to purchase Eligible Additional Contracts purchased, originated or otherwise formed in connection with its Leasing Business in the State of Texas. 4. EVENTS OF DEFAULT AND REMEDIES. From and after the qualification of a Subsidiary of the Company as a Participating Subsidiary, (i) all references in clauses (3), (4), (6) and (7) of Section 6.1 in Article 6 of the Indenture to the term "the Company" shall mean and refer to, and include, the Company or any Participating Subsidiary, and (ii) all references in Sections 6.3, 6.8, 6.9, and 6.12 in Article 6 of the Indenture shall mean and refer to, and include, the Company and /or each Participating Subsidiary. 3 82 5. CONTROLLING PROVISIONS In the event of any conflict or inconsistency between the terms and provisions of this Exhibit D and any of the other terms and provisions of the Indenture, the terms and provisions of this Exhibit D shall supercede and govern any such other terms and provisions. 4 83 SCHEDULE D-1 SUBSIDIARY AGREEMENT This Subsidiary Agreement (this "Agreement") is made and entered into as of the day of ________________, _______________ by _____________________________ (the "Participating Subsidiary"), and TRANSITION AUTO FINANCE III, INC., a Texas corporation (the "Company"), in favor of TRUST MANAGEMENT, INC., a Texas Trust Company, with offices at 210 West Sixth Street, Suite 605, Fort Worth, Texas 76102, as Trustee (the "Trustee"), as follows: RECITALS: A. Transition Auto Finance III, Inc. (the "Company") has duly authorized the execution and delivery of that certain Indenture dated ______________, 1999 (hereinafter called the "Indenture") by and between Trustee and the Company, and the issuance of the Company's 11% Secured Notes Due October 31, 2004 in the maximum aggregate principal amount of $20,000,000.00 (the "Securities"). B. Under the provisions of Section 4.3 (g) and Exhibit D of the Indenture, a Subsidiary of the Company, upon satisfaction of the conditions set forth in Exhibit D of the Indenture, may (i) become a Participating Subsidiary under the Indenture, (ii) engage in the Leasing Business, and (iii)obtain funds from the Operating Account for Allowed Payments on and subject to the same terms and conditions under which the Company may withdraw or apply funds from the Operating Account for Allowed Payments. C. This Agreement is executed and delivered as a Subsidiary Agreement made pursuant to the Indenture in order to qualify the undersigned as a Participating Subsidiary under the Indenture. ACKNOWLEDGMENT, RATIFICATION AND AGREEMENT: NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by the Participating Subsidiary, the Participating Subsidiary and the Company acknowledge, confirm, reaffirm and agree as follows: 1. ASSUMPTION OF OBLIGATIONS. 1.1 Indenture Obligations. Subject to the terms and conditions of this Agreement, the Participating Subsidiary hereby assumes and agrees to perform, satisfy, comply with and observe all covenants, conditions, obligations, responsibilities, requirements, agreements and duties (the "Leasing Business Obligations") binding on, imposed on or otherwise applicable to a Participating Subsidiary under Exhibit D of the Indenture, including, without limitation, all Funding Provisions binding on, imposed on otherwise applicable to a Participating Subsidiary under Exhibit D of the Indenture. From and after the effective date of this Agreement, (a) the Leasing Business Obligations shall be the valid and binding covenants, conditions, obligations, responsibilities, requirements, agreements and duties of the Participating Subsidiary; and (b) the Participating Subsidiary shall be entitled to exercise and realize upon all rights, powers, benefits, privileges and entitlements of a Participating Subsidiary under, and as set forth in, the Indenture. 1.2 Other Obligations. Subject to the terms and conditions of this Agreement, the Participating Subsidiary hereby assumes and agrees to perform, satisfy, comply 5 84 with and observe all covenants, conditions, obligations, responsibilities, requirements, agreements and duties (the "Operating Obligations")binding on, imposed on otherwise applicable to the Company pursuant to that ceratin Master Purchasing Agreement by and between the Company and Servicer dated __________, (the "Purchasing Agreement") and that ceratin Servicing Agreement by and between the Company and Servicer dated __________, (the "Servicing Agreement"). The Servicer executes this Agreement for the sole purpose of evidencing its agreement that its obligations under the Purchasing Agreement and Servicing Agreement are owed to the Participating Subsidiary to the same extent as the Company and if the Servicer will fulfill its obligations under the Purchasing Agreement and Servicing Agreement through one or more subsidiaries of the Servicer, each such subsidiary will execute this Agreement for the sole purpose of evidencing its agreement that its obligations under the Purchasing Agreement and Servicing Agreement are owed to the Participating Subsidiary to the same extent as the Company. From and after the effective date of this Agreement, (a) the Operating Obligations shall be the valid and binding covenants, conditions, obligations, responsibilities, requirements, agreements and duties of the Participating Subsidiary; and (b) the Participating Subsidiary shall be entitled to exercise and realize upon all rights, powers, benefits, privileges and entitlements of the Company under, and as set forth in, the Purchasing Agreement and Servicing Agreement. 2. GRANT OF PARTICIPATING SUBSIDIARY TRUST ESTATE. The Participating Subsidiary by the execution and delivery of this Agreement in accordance with Section 4.3(g) and Exhibit D of the Indenture, Grants to the Trustee, for the exclusive benefit of the Holders of the Securities, all of the subject Participating Subsidiary's right, title and interest in and to (a) all Contracts (as herein defined) hereafter acquired by the Participating Subsidiary, together with all related Contract Documents, and all payments or instruments paid on account of such Contracts whenever received, and all other proceeds (cash or non-cash) received in respect of such Contracts, (b) the Servicing Agreement, (c) the Operating Account, (d) the Sinking Fund Account, including all Eligible Investments therein and all income from the investment of funds therein, (e) the Master Collection Account, (f) all Leased Vehicles, together with any repossessed or returned Leased Vehicles (including any Leased Vehicle returned upon termination of its Contract), and (g) all proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or other liquid property, including, without limitation, all Net Liquidation Proceeds and Insurance Proceeds (collectively, the "Participating Subsidiary Trust Estate"). The foregoing Grants are made, however, in trust, to secure the Securities equally and ratably without prejudice, priority or distinction, except as expressly provided in the Indenture, between any Security and any other Securities by reason of difference in time of issuance or otherwise, and to secure (i) the payment of all amounts due on the Securities in accordance with their terms, (ii) the payment of all other sums payable under this Indenture, and (iii) compliance with the provisions of this Indenture, all as provided in this Indenture. All liens, security interests, assignments, rights and powers in and to the Participating Subsidiary Trust Estate granted and created by the Participating Subsidiary in accordance with the Indenture for the exclusive benefit of the Holders of the Securities are acknowledged, ratified, confirmed and restated by the Participating Subsidiary as valid and subsisting liens, security interests, assignments, rights and powers. The Participating Subsidiary acknowledges, confirms and agrees that, with respect to the Participating Subsidiary Trust Estate and the Participating Company, the Trustee shall have the same rights and remedies are as provided and available under the Indenture to the Trustee with respect to the Trust Estate 6 85 and the Company, including, but not limited to, the rights and remedies set forth in clauses (3), (4), (6) and (7) of Section 6.1 in Article 6 of the Indenture, and in Sections 6.3, 6.8, 6.9, and 6.12 in Article 6 of the Indenture. In applying the provisions of the Indenture identified in the preceding sentence to the Participating Subsidiary and/or the Participating Subsidiary Trust Estate, all references to the Company shall mean and refer to, and include, the Participating Subsidiary. 3. REPRESENTATIONS AND WARRANTIES. The Participating Subsidiary represents and warrants to Trustee that: (a) The Participating Subsidiary is a ___________________ duly formed and validly existing under the laws of the State of _______________and has full power and authority to consummate the transactions contemplated by this Agreement. This Agreement and all other instruments referred to or mentioned in this Agreement to which the Participating Subsidiary is a party do not violate any provisions of the organization and governing documents of the Participating Subsidiary, or, to the best of the Participating Subsidiary's knowledge, any agreement, contract, law, or regulation to which the Participating Subsidiary is subject, and do not require the consent or approval of any regulatory authority or governmental body of the United States of America or any state thereof. (b) The Participating Subsidiary is engaged in the Leasing Business as its principal business. (c) The Participating Subsidiary has obtained all licenses, permits and governmental approvals, if any, (1) necessary to comply with the laws of each jurisdiction in which it carries out and conducts its Leasing Business, (2) necessary to perform its obligations as a Permitted Subsidiary under the Indenture and the Servicing Agreement with respect to its Leasing Business and each Contract originated or acquired by the Participating Subsidiary in connection with its Leasing Business, (3) necessary to maintain the enforceability of each Contract originated or acquired by the Participating Subsidiary in connection with its Leasing Business and the liens, security interests, assignments, rights and powers granted under or pursuant to this Agreement and the Indenture in the related Leased Vehicle and to prevent each such Contract or any portion thereof from becoming void or voidable by the Obligor or any other person, and (4) if any Contract has been assigned to the Participating Subsidiary incident to its Leasing Business, necessary for such assignment to be a lawful and binding assignment on the assignor and the Obligor. 4. DEFINED TERMS. Unless otherwise expressly provided in this Agreement, words and terms defined in the Indenture are used in this Agreement as defined in the Indenture. 5. NO RELEASE. By execution of this Agreement, the Company and the Participating Subsidiary confirm and agree that the Trustee has not released and does not intend to release (a) the Company from any of its obligations on and under the Indenture, the Servicing Agreement, or any other agreement or instrument executed by the Company in connection with the Indenture, or (b) any liens, security interest, assignments, rights and powers in and to the Trust Estate, or any portion thereof, which are granted, created or otherwise extended under or pursuant to the Indenture by the Company or any other Participating Subsidiary. 6. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas and the laws of the United States of America applicable to transactions within the State of Texas. 7. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which for all purposes shall be deemed to be an original and all of which shall constitute one and the same agreement. The signature of each party to this Agreement is not required to appear on each counterpart of this Agreement provided that each of the parties to this Agreement has executed at least one counterpart of 7 86 this Agreement. In making proof of this Agreement, no party to this Agreement shall be required to produce or account for each original counterpart of this Agreement. 8. BINDING EFFECT. This Agreement shall inure to the benefit of the Trustee, the Company, the Participating Subsidiary and their respective successors and assigns. IN WITNESS WHEREOF, this Agreement is executed as of the day and year first above written. THE COMPANY: THE PARTICIPATING SUBSIDIARY: TRANSITION AUTO FINANCE III, INC., ----------------------------------- a Texas corporation By: By: ------------------------------------ -------------------------------- Printed Name: Printed Name: -------------------------- ---------------------- Title: Title: --------------------------------- ----------------------------- The Servicer executes this Agreement solely for the purpose of evidencing its agreement pursuant to Section 1.2 above and has caused each of its subsidiaries described in the last sentence of Section 1.2 to execute this agreement below. 8 EX-5.1 4 OPINION/CONSENT OF KUPERMAN, ORR, MOUER & ALBERS 1 EXHIBIT 5.1 September 23, 1999 Transition Auto Finance III, Inc. Transition Leasing Management, Inc. 5422 Alpha Road Suite 100 Dallas, Texas 75240 Re: Registration Statement on Form SB-2 Ladies and Gentlemen: We have examined the Registration Statement on Form SB-2 (File No. 333-79831) originally filed by Transition Auto Finance III, Inc. (the "Company") with the Securities and Exchange Commission (the "Commission") on June 11, 1999, as thereafter amended or supplemented (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of (the "Notes"). The Notes are to be sold by the Underwriters on the Company's behalf as described in the Registration Statement for resale to the public. As your counsel in connection with this transaction, we have examined the proceedings taken and are familiar with the proceedings proposed to be taken by you in connection with the sale and issuance of the Notes. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Notes and upon completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of the various states where required, the Notes, when issued and sold in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be legally issued and binding obligations of the Company, enforceable in accordance with their terms, subject to (a) bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium and other similar laws relating to or affecting creditors' rights or remedies generally, and (b) general equitable principles (whether considered in a proceeding in equity or at law). We consent to the use of this opinion as an exhibit to said Registration Statement, and further consent to the use of our name wherever appearing in said Registration Statement, including the prospectus constituting a part thereof, and in any amendment or supplement thereto. Very truly yours, KUPERMAN, ORR, MOUER & ALBERS A Professional Corporation EX-8.2 5 OPINION OF BROWN MARONEY & OAKS HARTLINE, L.L.P. 1 EXHIBIT 8.2 [BROWN MCCARROLL & OAKS HARTLINE, L.L.P. LETTERHEAD] September 23, 1999 Transition Leasing Management, Inc. 5422 Alpha Road Suite 100 Dallas, Texas 75240 Attention: Mr. Ken Lowe, Chief Financial Officer and Secretary Re: Transition Auto Finance III, Inc.; Public Offering of Asset-Backed Fixed Rate Notes Ladies and Gentlemen: This firm has served as special counsel to Transition Leasing Management, Inc. ("Transition Leasing"), a Texas corporation, and its wholly-owned subsidiary, Transition Auto Finance III, Inc. (the "Company"), in connection with the Company's registration on Form SB-2 (the "Registration Statement") of up to $20,000,000 of its 11% Secured Notes (the "Notes") pursuant to the Securities Act of 1933, as amended, and certain state securities laws, including the Texas Securities Act. In connection with this registration, you have requested our opinion with respect to the compliance of the Company's intended automobile and motorcycle leasing transactions and activities as set forth in the Prospectus (as hereinafter defined), including its relationships with its parent in connection therewith, with the Texas Motor Vehicle Commission Code, Art. 4413(36), Vernon's Texas Civil Statutes (the "Act"), and the regulations (the "Regulations") promulgated under the provisions of the Act by the Motor Vehicle Board of the Texas Department of Transportation (the "Motor Vehicle Commission"). A. DOCUMENTS EXAMINED. For purposes of rendering the opinions expressed in his opinion letter, this firm has reviewed, examined, considered and relied upon the following: 2 September 23, 1999 Page 2 1. The Prospectus contained in the Registration Statement (the "Prospectus"); 2. a Certificate (the "Certificate") of an officer of Transition Leasing and the Company certifying as to the description of the Company's intended method of operation; and 3. such other documents and instruments and other matters of fact and law that this firm had considered necessary or appropriate for the expression of the opinions contained in this opinion letter. B. OPINION. Based solely upon our examination and consideration of the foregoing documents and reliance thereon, and subject to the comments, assumptions, limitations, qualifications and exceptions set forth in SECTION C, we are of the opinion that: 1. The Company's intended automobile and motorcycle leasing transactions and activities as set forth in the Prospectus, including its relationships with Transition Leasing, are not in violation of the Act or the Regulations. In rendering the opinions expressed in this opinion letter, we note particularly that, as described in the Prospectus and the Certificate, (i) the Company has obtained a lessor license from the Commission in accordance with the requirements of the Act and the Regulations, (ii) Transition Leasing has obtained a lease facilitator license from the Commission in accordance with the requirements of the Act and the Regulations, (iii) the Company intends to appoint Transition Leasing as its lease facilitator under the Act; (iv) neither the Company nor Transition Leasing will receive or accept any fees from a dealer with respect to automobile leases; (v) the Company will not pay any fees to any person or entity to solicit or procure automobile or motorcycle leases, except for fees paid to Transition Leasing, its lease facilitator; (vi) the Company's lease contracts will disclose on the face of the contracts that fees are or will be paid to Transition Leasing for the solicitation or procurement of automobile or motorcycle leases, and (vii) the Company and Transition Leasing have complied with the requirements of the Act and the Regulations regarding conducting business as a lessor or lease facilitator, as the case may be, from an established and permanent place of business. 2. You have raised a question as to whether the affiliated nature of the relationship between Transition Leasing, its proposed lease facilitator, and the Company violates the Act. In responding to this question, we note that, despite the numerous requirements and prohibitions placed on licensed lessors and licensed lease facilitators by the Act and the Regulations, neither the Act nor the Regulations contain any prohibitions against a licensed lessor and a licensed lease facilitator being related or affiliated through direct or indirect ownership or control, or common ownership or control. Based on our reading of the Act and the Regulations and our discussions with the staff of the Texas Motor Vehicle Board of the Texas Department of Transportation, we believe that neither the Act nor the Regulations prohibit a licensed lessor from appointing its parent as its licensed lease facilitator and paying fees to its parent to procure automobile leases as a licensed lease facilitator as long the subject licensed lessor and its parent/licensed lease facilitator satisfy and comply with the requirements of the Act and the Regulations relating to appointment by a licensed lessor of 3 September 23, 1999 Page 3 a licensed lease facilitator and the payment of fees by a licensed lessor to its parent/licensed lease facilitator to procure automobile or motorcycle leases. C. COMMENTS, ASSUMPTIONS, LIMITATIONS, QUALIFICATIONS AND EXCEPTIONS. The opinions expressed in SECTION B above are based upon and subject to, the further comments, assumptions, limitations, qualifications and exceptions set forth below: 1. In rendering the opinions set forth in SECTION B above, this firm has assumed that all of the statements made in the documents reviewed by the firm are true, correct and complete, and that none of such documents contain an untrue statement of a material fact or omits a fact necessary to make the statements made not misleading. 2. This firm has made no independent investigation as to the accuracy or completeness of any representation, warranty, data or other information, written or oral, made or furnished to us, or reviewed by us, in rendering the opinions expressed in SECTION B above. 3. Although this firm has acted as special counsel to Transition Leasing and to the Company in connection with this matter, the firm's engagement by Transition Leasing and the Company is limited to this matter. Consequently, there may exist matters of a factual or legal nature involving Transition Leasing or the Company in connection with which this firm has not been consulted and has not represented Transition Leasing or the Company. 4. This opinion letter is limited to the matters stated in this opinion letter and no opinions may be implied or inferred beyond the matters expressly stated in this opinion letter. 5. The opinions expressed in SECTION B above are as of the date of this opinion letter, and this firm assumes no obligations to update or supplement such opinions to reflect any facts or circumstances that may hereafter come to its attention or any changes in law that may hereafter occur. We hereby consent to the filing of his opinion letter as an exhibit to the Company's Registration Statement on Form SB-2 (the "Registration Statement") and to the use of our name under the caption "Legal Matters" in the Prospectus forming part of the Registration Statement. In giving such consent, we do not admit that we come within the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. 4 September 23, 1999 Page 4 This opinion letter is being delivered to the Company and Transition Leasing for use in connection with the Registration Statement and may not be relied upon by them, the underwriters of the offering pursuant to the Registration Statement and the purchasers of the Notes. This opinion may not be relied upon in any manner by any other person other than as expressly provided in his opinion letter. Except with our prior written consent or as otherwise expressly provided in his opinion letter, the opinions in this opinion letter expressed are not to be used, circulated, quoted or otherwise referred to, in whole or in part, in connection with any transaction other than that contemplated by the Registration Statement, or by or to any other person. Very truly yours, BROWN McCARROLL & OAKS HARTLINE, L. L. P. By: -------------------------------------- EX-8.3 6 OPINION OF BROWN MARONEY & OAKS HARTLINE, L.L.P. 1 EXHIBIT 8.3 [BROWN MCCARROLL & OAKS HARTLINE, L.L.P. LETTERHEAD] ____________, 1999 Trust Management, Inc. 210 West Sixth Street Suite 605 Fort Worth, Texas 76102 Attention: Mr. Robert Finley Re: Transition Auto Finance III, Inc.; Public Offering of Asset-Backed Fixed Rate Notes Ladies and Gentlemen: This firm has served as special counsel to Transition Leasing Management, Inc. ("Transition Leasing"), a Texas corporation, and its wholly-owned subsidiary, Transition Auto Finance III Inc. (the "Company"), in connection with the Company's registration on Form SB-2 (the "Registration Statement") of up to $20,000,000 of its 11% Secured Notes (the "Notes") pursuant to the Securities Act of 1933, as amended, and certain state securities laws, including the Texas Securities Act. In connection with this registration, the Indenture dated ____________, 1999 (the "Indenture") between the Company and Trust Management, Inc. (the "Trustee") requires that an opinion with respect to certain matters relating to the security interests securing the Notes granted under the Indenture be delivered to you as Trustee under the Indenture. Except as otherwise expressly provided in this opinion letter, capitalized terms defined in the Indenture are used in this opinion letter as defined in the Indenture. A. DOCUMENTS EXAMINED. For purposes of rendering this opinion letter, this firm has examined, considered and relied upon the following: 2 Trust Management, Inc. _________ ___, 1999 Page 2 1. The Prospectus contained in the Registration Statement (the "Prospectus") with respect to the Offering; 2. The Indenture which has been signed by the Company; 3. The Pledge and Assignment of Deposit Accounts (the "Deposit Accounts Assignment") executed by the Company and the Trustee pledging and granting a security interest and lien in and to the Operating Account, the Sinking Fund Account, and the Master Collection Account. 4. A Certificate (the "Certificate") of an officer of Transition Leasing and the Company certifying as to the description of the Company's intended method of operation; 5. The UCC-1 financing statement (the "Financing Statement") signed by the Company, naming the Trustee as the Secured Party and describing the properties, assets and items included in the Trust Estate in the description of the type or items of property covered by such financing statement, filed with the Office of the Secretary of State of Texas as document number ___________________; and 6. Such other documents and instruments and other matters of fact and law that this firm had considered necessary or appropriate for the expression of the opinions contained herein. B. THE TRUST ESTATE. A security interest securing the Notes is granted under the Indenture in and to the Trust Estate. The Trust Estate includes the following properties, assets and items: (a) all Contracts acquired by the Company, together with all related Contract Documents, and all payments or instruments paid on account of such Contracts whenever received, and all other proceeds (cash or non-cash) received in respect of such Contracts, (b) the Servicing Agreement, (c) the Operating Account, (d) the Sinking Fund Account, including all Eligible Investments therein and all income from the investment of funds therein, (e) the Master Collection Account, (f) all Leased Vehicles, together with any repossessed or returned Leased Vehicles (including any Leased Vehicle returned upon termination of its Contract), and (g) all proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or other liquid property, including, without limitation, all Net Liquidation Proceeds and Insurance Proceeds. Section C will provide for the perfection of the security interests granted under the Indenture and the Deposit Accounts Assignment in and to the properties, assets and items in the Company Trust Estate which are owned or acquired, or arise out of, the Leasing Business conducted and operated by the Company in the State of Texas, and (b), except as to any money or instruments which are not in the possession of the Trustee, no filings in any jurisdiction, other than the filing described in paragraph 2 of this SECTION C, or any actions other than the actions which have been taken and are described in paragraph 2 of this SECTION C, will be necessary to perfect the security interests of the Trustee granted by the Company under Indenture and the Deposit Accounts Assignment in the Company Trust Estate, as constituted as of the date of this opinion letter, as against any third parties. C. OPINION. Based solely upon our examination and consideration of, and reliance on, the documents, instruments and other matters listed and described in SECTION A above, and subject to the comments, assumptions, limitations, qualifications and exceptions set forth in SECTION D, we are of the opinion that: 1. Under Section 9.203(a) and (b) of the Texas Uniform Commercial Code (the "Texas UCC"), a security interest (a) attaches when it becomes enforceable against the debtor with respect to the collateral, and (b) becomes enforceable against a debtor when the debtor has signed a security agreement which contains a description of the collateral, value has been given, and the debtor has rights in the collateral. The Indenture and the Deposit Accounts Assignment taken together are a security agreement which contains a description of the collateral. As a result of the execution of the Indenture and the Deposit Accounts Assignment by the Company and the Trustee, value has been given for purposes of Sections 1.201(44) and 9.203(a) of the UCC. The security interests granted under the Indenture and the Deposit 3 Trust Management, Inc. ____________ ___, 1999 Page 3 Account Assignment will attach to the Trust Estate as and when the Company acquires rights in the Trust Estate. 2. Under applicable Texas law, (a) filing financing statements with the Secretary of State of Texas are, or may be, necessary to perfect the security interests or liens granted by the Company under the Indenture in the Contracts, the Servicing Agreement, any investments of funds in the Operating Account, the Sinking Fund Account, or the Master Collection Account other than investments in money or instruments and the proceeds of the items described in this clause (a); but (b) are not necessary, and may not be effective, to perfect the security interests or liens granted under the Indenture in the portion of the Trust Estate consisting of the Leased Vehicles, the Operating Account (except as provided in clause (a) above), the Sinking Fund Account (except as provided in clause (a) above) and the Master Collection Account (except as provided in clause (a) above). The following procedures have been followed in order to perfect the security interests granted under the Indenture and the Deposit Accounts Assignment in and to each of the below described and identified types or items of collateral included in the Trust Estate: (a) The Financing Statement has been filed in the office of the Secretary of State of Texas pursuant to the Texas UCC. (b) The Leased Vehicles owned or acquired by the Company in connection with its Leasing Business conducted and operated in the State of Texas will be motor vehicles (automobiles, motorcycles, and trucks) subject to Chapter 501 of the Texas Transportation Code. Section 9.304(c) of the UCC provides that filing a financing statement is not necessary or effective to perfect a security interest in property subject to Chapter 501 of the Texas Transportation Code. Pursuant to Sections 501.021 and 501.111 of the Texas Transportation Code, a person may perfect a security interest in a motor vehicle that is the subject of a first or subsequent sale (as will be the case for the Leased Vehicles) only by recording the security interest on the certificate of title for the subject motor vehicle, as provided in Chapter 501 of the Texas Transportation Code. Based on the provisions of the Indenture, the security interest granted under the Indenture in and to each Leased Vehicle owned or acquired by the Company in connection with its Leasing Business conducted and operated in the State of Texas will be perfected by recording the security interest on the certificate of title issued by the Texas Department of Transportation for the subject Leased Vehicle. The security interest granted under the Indenture in and to each repossessed or returned Leased Vehicle owned or acquired by the Company in connection with its Leasing Business conducted and operated in the State of Texas will be perfected by recording the security interest on the certificate of title issued by the Texas Department of Transportation. Pursuant to the Indenture and the Custodial Agreement, the Trustee will have and maintain actual possession of the certificate of title for each Leased Vehicle owned or acquired by the Company in connection with its Leasing Business conducted and operated in the State of Texas. (c) The Contracts arising out of the Leasing Business conducted and operated in the State of Texas will be leases of automobiles, motorcycles and trucks owned by the Company. Article 9.105(a)(2) of the Texas UCC defines leases like the Contracts as "chattel paper." Section 9.304(a) of the Texas UCC provides that a security interest in chattel paper may be perfected by filing a financing statement, and Section 9.305 of the Texas UCC provides that a security interest in chattel paper may also be perfected by the secured party taking possession of the chattel paper. The Financing Statement filed in the office of the Secretary of State of Texas includes the Contracts arising out of the Leasing Business conducted and operated in the State of Texas in the description of the type or items of property covered by the Financing Statement. Pursuant to the provisions of the Indenture, the Trustee will maintain 4 Trust Management, Inc. _______ ___, 1999 Page 4 actual possession of the Contracts pursuant to the Indenture and the Custodial Agreement. (d) The Servicing Agreement is a contractual agreement and is considered a "general intangible" under Section 9.106 of the Texas UCC. Security interests in general intangibles are perfected by filing in the office of the Secretary of State of Texas a financing statement signed by the debtor and including the general intangibles in the description of the collateral. The Financing Statement filed in the office of the Secretary of State of Texas includes the Servicing Agreement in the description of the type or items of property covered by the Financing Statement. (e) The Operating Account, the Sinking Fund Account and the Master Collection Account are deposit accounts, and pledges of such accounts are not subject to the provisions of Article 9 of the Texas UCC as provided in Section 9.104(12) of the Texas UCC, except as provided with respect to proceeds (Section 9.306) and priorities in proceeds (Section 9.312). Perfection of a pledge of these deposit bank accounts is made pursuant to Texas common law rules covering the pledge of personal property. Pledges are made by the pledgor executing a pledge and assignment agreement in favor of the pledgee and are perfected by the pledgor notifying the depositary bank in writing of the pledge. The Operating Account, the Sinking Fund Account and the Master Collection Account will be established at Texas Community Bank. The Company and the Trustee have executed a Pledge and Assignment of Deposit Accounts providing for a pledge to the Trustee of, and the grant of a security interest and lien in and to, the Operating Account, the Sinking Fund Account and the Master Collection Account. Texas Community Bank has been notified of this pledge and assignment, has acknowledged this pledge and assignment in writing. The perfection of security interests with respect to investments of funds within the Operating Account, the Sinking Fund Account and the Master Collection Account in instruments, documents, chattel paper, and investment property will be subject to applicable provisions of the Texas UCC governing purification security interest in such collateral. (f) The proceeds of the items included in the Company Trust Estate which are described in subparagraphs (a), (b), (c) and (d) of this Paragraph 1 that are subject to perfection by filing under the Texas UCC are subject to the provisions of Section 9.306 of the Texas UCC, and the Trustee's security interest and lien in such proceeds will be perfected by perfection of the underlying property as noted above, subject to Section 9.306 of the governing perfection of operating interests in the collateral Texas UCC. 3. Under Section 9.303(a) of the Texas UCC, a security interest is perfected when it has attached and when all the applicable steps required for perfection have been taken. Subject to the satisfaction of the requirements described in paragraph 1 of this SECTION C regarding the attachment of the security interests granted under the Indenture and the Deposit Accounts Assignment in and to the Company Trust Estate, (a) except as to any money or instruments which are not in the possession of the Trustee, the filings and actions described in paragraph 2 of this Section C will provide for the perfection of the security interests granted under the Indenture and the Deposit Accounts Assignment in and to the properties, assets and items in the Company Trust Estate which are owned or acquired, or arise out of, the Leasing Business conducted and operated by the Company in the State of Texas (b) except as to any money or instruments which are note in the possession of the Trustee, no filings in any jurisdiction, other than the filing described in paragraph 2 of this SECTION C, or any actions other than the actions which have been taken and are described in paragraph 2 of this 5 Trust Management, Inc. __________ ___, 1999 Page 5 SECTION C, will be necessary to perfect the security interests of the Trustee granted under the Indenture and the Deposit Accounts Assignment in the Company Trust Estate, as constituted as of the date of this opinion letter, as against any third parties. D. COMMENTS, ASSUMPTIONS, LIMITATIONS, QUALIFICATIONS AND EXCEPTIONS. The opinions expressed in SECTION C above are based upon and subject to, the following comments, assumptions (with respect to which we have no knowledge to the contrary), limitations, qualifications and exceptions: 1. We have assumed the authenticity and completeness of all documents, certificates and records submitted to us as originals, the conformity to the original instruments of all documents, certificates and records submitted to us as copies, the authenticity and completeness of the originals of such latter instruments and the correctness of all statements of fact, including, without limitation, all representations and warranties, contained in the Agreement and all other documents, certificates or records that we have examined. Additionally, we have assumed that the Trustee is authorized and empowered to execute the Indenture and the Deposit Accounts Assignment and to enter into the transactions contemplated by the Indenture and the Deposit Accounts Assignment. We have assumed the existence, good standing, power and authority of each party (other than the Company) to the documents submitted to us. Except with respect to the Company, we have assumed the due authorization, execution and delivery of all such documents by the other respective parties thereto, and the authority and legal capacity of all persons executing such documents on behalf of such other parties, and that such documents are legal, valid and binding agreements of and enforceable against such other parties in accordance with their respective terms. 2. We have assumed that all certifications, representations and warranties of the Company set forth in the Indenture and the Deposit Accounts Assignment are true and correct, and have relied on these certifications, representations and warranties in rendering the opinions expressed in this opinion letter. 3. Except with respect to the Company, we have assumed that each of the respective parties to the Indenture and the Deposit Accounts Assignment and all other agreements, instruments and documents described in SECTION A above which we have reviewed (collectively, the "Reviewed Documents") have performed, complied with, or otherwise satisfied, their respective obligations with respect to the transactions evidenced and contemplated by the Reviewed Documents. 4. We have assumed that none of the Reviewed Documents contains any untrue statement of fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and none of the parties to any of the Reviewed Documents has made or taken any false, fraudulent, misleading or deceptive statements or actions, or has otherwise, by act or omission, done or permitted to be done, anything false, fraudulent, misleading or deceptive in connection with the execution and delivery of the Reviewed Documents or the consummation of the transactions evidenced and contemplated by the Reviewed Documents. 6 Trust Management, Inc. _________ ___, 1999 Page 6 5. In rendering the opinions set forth above, (a) we have undertaken no detailed or complete investigation of the books, records and affairs of the Company, (b) we have acted solely on the basis of the matters on which we have been engaged by the Company and on representations made to us by the Company, and (c) we have relied upon our review of the records of the Secretary of State of Texas, our inquiry with representatives of the Company, and the certifications, representations and warranties of the Company set forth in the Agreement and have made no review or search of the records of any state or federal court in which any proceedings may be pending for the termination, dissolution or annulment of the Company. To the best of our knowledge, there are no such proceedings pending in any state or federal court. This firm has made no independent investigation as to the accuracy or completeness of any representation, warranty, data or other information, written or oral, made or furnished to us. 6. This firm's engagement by Transition Leasing and the Company is limited to acting as special counsel to Transition Leasing and to the Company in connection with this matter. Consequently, there may exist matters of a factual or legal nature involving Transition Leasing or the Company in connection with which this firm has not been consulted and has not represented Transition Leasing or the Company. 7. The opinions expressed in this opinion letter are limited to the federal laws of the United States of America and the laws of the State of Texas. This opinion letter is strictly limited to the matters expressly stated in this opinion letter and no other or more extensive opinion is to be inferred or may be implied beyond the matters expressly stated in this opinion letter. This opinion letter is limited to the matters stated in this opinion letter and no opinions may be implied or inferred beyond the matters expressly stated in this opinion letter. No opinion is expressed as to the attachment or perfection of any security interest granted in any Participating Subsidiary Trust Estate or in any of the Company Trust Estate which is not owned or acquired in connection with, or does not otherwise arise out of, the Leasing Business conducted and operated by the Company in the State of Texas. 8. The opinions expressed in this opinion letter are made as of the date of this opinion letter, and this firm assumes no obligations to update or supplement such opinions to reflect any facts or circumstances that may hereafter come to its attention or any changes in law that may hereafter occur. 9. This opinion letter is being delivered to the Trustee for the sole use and benefit of the Trustee in connection with the Indenture and may be relied upon by the Trustee, the Trustee's legal counsel and the Noteholders. This opinion letter may not be relied upon in any manner by any other person other than as explicitly provided in this opinion letter. Except with our prior written consent or as otherwise expressly provided in this opinion letter, the opinions expressed in this opinion letter are not to be used, circulated, quoted or otherwise referred to, in whole or in part, in connection with any transaction other than that contemplated by the Indenture, or by or to any other person. Very truly yours, BROWN McCARROLL & OAKS HARTLINE, L. L. P. By: -------------------------------------- EX-8.4 7 OPINION OF KING, LEBLANC & BLAND, L.L.P. 1 EXHIBIT 8.4 [KING, LEBLANC & BLAND, L.L.P. LETTERHEAD] November ____, 1999 Trust Management, Inc. 210 West Sixth Street Suite 605 Fort Worth, Texas 76102 Attention: Mr. Robert Finley Re: Transition Auto Finance III, Inc.; Public Offering of Asset-Backed Fixed Rate Notes Ladies and Gentlemen: This firm has served as special counsel to Transition Leasing Management, Inc. ("Transition Leasing"), a Texas corporation, its wholly-owned subsidiary, Transition Auto Finance III Inc. ("TAF III"), a Texas corporation, and Transition Auto Finance III of LA, L.L.C. ("TAF III LA"), a Louisiana limited liability company whose sole member is TAF III (TAF III and TAF III LA are collectively referred to as the "Company") in connection with the TAF III's registration on Form SB-2 (the "Registration Statement") of up to $20,000,000 of its 11% Secured Notes (the "Notes") pursuant to the Securities Act of 1933, as amended, and certain state securities laws. In connection with this registration, the Indenture dated __________, 1999 (the "Indenture") between the Company and Trust Management, Inc. (the "Trustee") requires that an opinion with respect to certain matters relating to the security interests securing the Notes granted under the Indenture be delivered to you as Trustee under the Indenture. Except as otherwise expressly provided in this opinion letter, capitalized terms defined in the Indenture are used in this opinion letter as defined in the Indenture. A. DOCUMENTS EXAMINED. For purposes of rendering this opinion letter, this firm has examined, considered and relied upon the following: 1. The Prospectus contained in the Registration Statement (the "Prospectus") with respect to the Offering; 2. The Indenture which has been signed by the Company; 3. A Certificate (the "Certificate") of an officer of Transition Leasing and the Company certifying as to the description of the Company's intended method of operation; 2 Trust Management, Inc. November __, 1999 Page 2 4. Such other documents and instruments and other matters of fact and law that this firm considered necessary or appropriate for the expression of the opinions contained herein. B. THE TRUST ESTATE. A security interest securing the Notes is granted under the Indenture in and to the Trust Estate. The Trust Estate consists of the following properties, assets and items: (a) all Contracts acquired by the Company, together with all related Contract Documents, and all payments or instruments paid on account of such Contracts whenever received, and all other proceeds (cash or non-cash) received in respect of such Contracts, (b) the Servicing Agreement, (c) the Operating Account, (d) the Sinking Fund Account, including all Eligible Investments therein and all income from the investment of funds therein, (e) the Master Collection Account, (f) all Leased Vehicles, together with any repossessed or returned Leased Vehicles (including any Leased Vehicle returned upon termination of its Contract), and (g) all proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or other liquid property, including, without limitation, all Net Liquidation Proceeds and Insurance Proceeds. C. OPINION. Based solely upon our examination and consideration of, and reliance on, the documents, instruments and other matters listed and described in SECTION A above, and subject to the comments, assumptions, limitations, qualifications and exceptions set forth herein, we are of the opinion that: 1. Under Section 9-203(1) and (2) of the Louisiana Uniform Commercial Code (the "UCC"), a security interest (a) attaches when it becomes enforceable against the debtor with respect to the collateral, and (b) becomes enforceable against a debtor when the debtor has signed a security agreement which contains a description of the collateral, value has been given, and the debtor has rights in the collateral. The Indenture is a security agreement which contains a description of the collateral. As a result of the execution of the Indenture by the Company and the Trustee, value has been given for purposes of Sections 1-201(44) and 9-203(1)(b) of the UCC. The security interests granted under the Indenture will attach to the Trust Estate as and when the Company acquires rights in the Trust Estate. 2. The following procedures must be followed in order to perfect the security interests granted under the Indenture in and to each of the respective types or items of collateral included in the Trust Estate: (a) A UCC-1 financing statement (the "Financing Statement") signed by the Company, naming the Trustee as the Secured Party and describing the properties, assets and items included in the Trust Estate in the description of 3 Trust Management, Inc. November __, 1999 Page 3 the type or items of property covered by the Financing Statement must be filed in the office of the recorder of mortgages of Orleans Parish, Louisiana or in the office of the clerk of court of any other parish in Louisiana. (b) The Leased Vehicles will be titled motor vehicles (automobiles, motorcycles, and trucks) subject to La. R.S. 32:701, et. seq. Pursuant to Section 9-302(1) of the UCC, a financing statement must be filed to perfect a security interest in a titled motor vehicle. Section 9-402(c) of the UCC requires that the financing statement state the vehicle's year of manufacture, make, model, body style, and manufacturer's serial or other identification number. Section 9-401(1)(a) of the UCC, requires that when the collateral is a titled motor vehicle not held as inventory for sale or lease, the financing statement must be filed with the Department of Public Safety and Corrections, Office of Motor Vehicles. Pursuant to the Indenture and the Custodial Agreement, the Trustee will have and maintain actual possession of the certificate of title for each Leased Vehicle. (c) The Contracts will be leases of automobiles, motorcycles and trucks owned by the Company. Section 9-105(1)(b) of the UCC defines leases like the Contracts as "chattel paper." Section 9-304(1) of the UCC provides that a security interest in chattel paper may be perfected by filing a financing statement, and Section 9-305(1) of the UCC provides that a security interest in chattel paper may also be perfected by the secured party taking possession of the chattel paper. The Financing Statement to be filed in accordance with paragraph 2(a) of this SECTION C must include the Contracts in the description of the type or items of property covered by the Financing Statement. Pursuant to the provisions of the Indenture, the Trustee will maintain actual possession of the Contracts pursuant to the Indenture and the Custodial Agreement. (d) The Servicing Agreement is a contractual agreement and is considered a "general intangible" under Section 9-106 of the UCC. Security interests in general intangibles are perfected by filing in the office of the recorder of mortgages of Orleans Parish, Louisiana or the office of the clerk of court of any other parish in Louisiana, a financing statement signed by the debtor and including the general intangibles in the description of the collateral. The Financing Statement to be filed in accordance with paragraph 2(a) of this SECTION C must include the Servicing Agreement in the description of the type or items of property covered by the Financing Statement. (e) The Operating Account, the Sinking Fund Account and the Master Collection Account are deposit accounts. Under Section 9-103(7) of the UCC, the law (including the conflict of law rules) of the jurisdiction in which the depository 4 Trust Management, Inc. November __, 1999 Page 4 of a deposit account is located governs the perfection and effect of perfection or nonperfection of a security interest in a deposit account. The Operating Account, the Sinking Fund Account and the Master Collection Account will be established at Texas Community Bank located in Texas. The law (including the conflict of law rules) of Texas governs the perfection and effect of perfection or nonperfection of a security interest in these deposit accounts, and we express no opinion as to Texas law. (f) The proceeds of the items included in the Trust Estate which are described in subparagraphs (b), (c), (d) and (e) of this Paragraph 2 that are subject to perfection by filing under the UCC are subject to the provisions of Section 9-306 of the UCC, and the Trustee's security interest and lien in such proceeds will be perfected if the interest in the underlying collateral was perfected, subject to Section 9-306 of the UCC. 3. Under Section 9-303(1) of the UCC, a security interest is perfected when it has attached and when all the applicable steps required for perfection have been taken. Subject to the satisfaction of the requirements described in paragraph 1 of this SECTION C regarding the attachment of the security interests granted under the Indenture in and to the Trust Estate, (a) the filings and actions described in paragraph 2 of this Section C will provide for the perfection of the security interests granted under the Indenture in and to the Trust Estate, and (b) except as may be required under Texas law to perfect the Trustee's security interest in the Accounts held at Texas Community Bank located in Texas, as to which requirements we express no opinion, no filings in any jurisdiction, other than the filing described in paragraph 2 of this SECTION C, or any actions other than the actions described in paragraph 2 of this SECTION C, will be necessary to perfect the security interests of the Trustee granted under the Indenture in the Trust Estate, as constituted as of the date of this opinion letter, as against any third parties. D. COMMENTS, ASSUMPTIONS, LIMITATIONS, QUALIFICATIONS AND EXCEPTIONS. The opinions expressed in SECTION C above are based upon and subject to, the following comments, assumptions (with respect to which we have no knowledge to the contrary), limitations, qualifications and exceptions: 1. We have assumed the authenticity and completeness of all documents, certificates and records submitted to us as originals, the conformity to the original instruments of all documents, certificates and records submitted to us as copies, the authenticity and completeness of the originals of such latter instruments and the correctness of all statements of fact, including, without limitation, all representations and warranties, contained in all documents, certificates or records that we have examined. 5 Trust Management, Inc. November __, 1999 Page 5 Additionally, we have assumed that the Trustee is authorized and empowered to execute the Indenture and to enter into the transactions contemplated by the Indenture. We have assumed the existence, good standing, power and authority of each party to the documents submitted to us. We have assumed the due authorization, execution and delivery of all such documents by all parties thereto, and the authority and legal capacity of all persons executing such documents on behalf of such parties, and that such documents are legal, valid and binding agreements of and enforceable against such parties in accordance with their respective terms. 2. We have assumed that all certifications, representations and warranties of the Company set forth in the Indenture are true and correct, and have relied on these certifications, representations and warranties in rendering the opinions expressed in this opinion letter. 3. We have assumed that each of the parties to the Indenture and all other agreements, instruments and documents described in SECTION A above which we have reviewed (collectively, the "Reviewed Documents") will perform, comply with, or otherwise satisfy, their respective obligations with respect to the transactions evidenced and contemplated by the Reviewed Documents. 4. We have assumed that none of the Reviewed Documents contains any untrue statement of fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and none of the parties to any of the Reviewed Documents has made or taken any false, fraudulent, misleading or deceptive statements or actions, or has otherwise, by act or omission, done or permitted to be done, anything false, fraudulent, misleading or deceptive in connection with the execution and delivery of the Reviewed Documents or the consummation of the transactions evidenced and contemplated by the Reviewed Documents. 5. In rendering the opinions set forth above, (a) we have undertaken no detailed or complete investigation of the books, records and affairs of the Company, (b) we have acted solely on the basis of the matters on which we have been engaged by the Company and on representations made to us by the Company, and (c) we have relied upon our inquiry with representatives of the Company and the certifications, representations and warranties of the Company set forth in the Reviewed Documents and have made no review or search of the records of any state or federal court in which any proceedings may be pending for the termination, dissolution or annulment of the Company. This firm has made no independent investigation as to the accuracy or completeness of any representation, warranty, data or other information, written or oral, made or furnished to us. 6 Trust Management, Inc. November __, 1999 Page 6 6. This firm's engagement by Transition Leasing and the Company is limited to acting as special counsel to Transition Leasing and to the Company in connection with this matter. Consequently, there may exist matters of a factual or legal nature involving Transition Leasing or the Company in connection with which this firm has not been consulted and has not represented Transition Leasing or the Company. 7. We express no opinion as to: (a) The enforceability of provisions which purport to (1) restrict transfer of title to (or any further security interest or lien on) the properties, assets and items comprising the Trust Estate (except to the extent that the breach of a covenant prohibiting such restrictions would constitute an Event of Default); (2) restrict access to legal or equitable remedies; (3) affect jurisdiction or venue, or (4) waive any rights or notices which cannot be waived under applicable law; (b) The enforceability of (1) provisions relating to self help, subrogation or similar rights, delay or omission of enforcement of rights or remedies, waiver of defenses or remedies, marshaling of assets or severability; or (2) the designation of Texas law as governing the Operative Documents; (c) The value, ownership, status of title to or accuracy of any description of any of the properties, assets and items comprising the Trust Estate; (d) Securities or Blue Sky laws. (e) State or local tax laws. 8. The validity and enforceability of the Reviewed Documents may be limited by bankruptcy, insolvency, reorganization, moratorium, liquidation, probate, conservatorship and other laws (including court decisions) now or hereafter in effect and affecting the rights of creditors generally and by general principles of equity (regardless of whether such validity and enforceability is considered in a proceeding at law or in equity). We express no opinion as to whether a court would grant specific performance or any other equitable remedy. 9. The opinions expressed in this opinion letter are limited to the laws of the State of Louisiana. This opinion letter is strictly limited to the matters expressly stated in this opinion letter and no other or more extensive opinion is to be inferred or may be implied beyond the matters expressly stated in this opinion letter. This opinion letter is limited to the matters stated in this opinion letter and no opinions may be implied or inferred beyond the matters expressly stated in this opinion letter. 7 Trust Management, Inc. November __, 1999 Page 7 10. The opinions expressed in this opinion letter are made as of the date of this opinion letter, and this firm assumes no obligations to update or supplement such opinions to reflect any facts or circumstances that may hereafter come to its attention or any changes in law that may hereafter occur. 11. This opinion letter is being delivered to the Trustee for the sole use and benefit of the Trustee in connection with the Indenture and may be relied upon by the Trustee, the Trustee's legal counsel and the Noteholders. This opinion letter may not be relied upon in any manner by any person other than as expressly provided in this opinion letter. Except with our prior written consent or as otherwise expressly provided in this opinion letter, the opinions expressed in this opinion letter are not to be used, circulated, quoted or otherwise referred to, in whole or in part, in connection with any transaction other than that contemplated by the Indenture, or by or to any other person. Very truly yours, KING, LEBLANC & BLAND, L.L.P. EX-8.5 8 OPINION OF KING, LEBLANC & BLAND, L.L.P. 1 EXHIBIT 8.5 [KING, LEBLANC & BLAND, L.L.P. LETTERHEAD] November ___, 1999 Transition Leasing Management, Inc. 5422 Alpha Road Suite 100 Dallas, Texas 75240 Attention: Mr. Ken Lowe, Chief Financial Officer and Secretary Re: Transition Auto Finance III, Inc.; Public Offering of Asset-Backed Fixed Rate Notes Ladies and Gentlemen: This firm has served as special counsel to Transition Leasing Management, Inc. ("Transition Leasing"), a Texas corporation, its wholly-owned subsidiary, Transition Auto Finance III, Inc. ("TAF III"), and Transition Auto Finance III LA, L.L.C. (the "Company"), a Louisiana limited liability company of which TAF III is the sole member, in connection with the TAF III's registration on Form SB-2 (the "Registration Statement") of up to $20,000,000 of its 11% Secured Notes (the "Notes") pursuant to the Securities Act of 1933, as amended, and certain state securities laws, including the Texas Securities Act. In connection with this registration, you have requested our opinion with respect to the compliance of the Company's intended automobile and motorcycle leasing transactions and activities to be conducted in Louisiana as set forth in the Prospectus (as hereinafter defined), with Chapter 6 of Title 32 of the Louisiana Revised Statutes of 1950, as amended, La. R.S. 32:1251, et seq., and Chapter 4-B of Title 32 of the Louisiana Revised Statutes of 1950, as amended, La. R.S. 32:771, et seq., (collectively, the "Acts"), and the regulations (the "Regulations") promulgated under the provisions of the Acts by the Louisiana Motor Vehicle Commission and the Louisiana Used Motor Vehicle and Parts Commission. A. DOCUMENTS EXAMINED. For purposes of rendering the opinions expressed in this opinion letter, this firm has reviewed, examined, considered and relied upon the following: 1. The Prospectus contained in the Registration Statement (the "Prospectus") 2. a Certificate (the "Certificate") of an officer of Transition Leasing and the Company certifying as to the description of the Company's intended method of operation; and 2 Transition Leasing Management, Inc. November ___, 1999 Page 2 3. such other documents and instruments and other matters of fact and law that this firm had considered necessary or appropriate for the expression of the opinions contained in this opinion letter. B. OPINION. Based solely upon our examination and consideration of the foregoing documents and reliance thereon, and subject to the comments, assumptions, limitations, qualifications and exceptions set forth herein, we are of the opinion that: 1. The leasing of automobiles, trucks and motorcycles (collectively, "motor vehicles") in Louisiana is subject to regulation pursuant to the provisions of the Acts and the Regulations. The Acts and the Regulations apply to any firm or corporation not excluded from the Acts engaged in the motor vehicle leasing business, and also apply to a subsidiary of such corporation. The Acts and Regulations require lessors of automobiles and trucks to obtain a license from the Louisiana Motor Vehicle Commission, and lessors of motorcycles to obtain a license from the Louisiana Used Motor Vehicle and Parts Commission. 2. In order to obtain a license from the Louisiana Motor Vehicle Commission, a lessor of automobiles and trucks must submit an application in a form prescribed by the Louisiana Motor Vehicle Commission which includes information as to the applicant's financial standing, business integrity, whether the applicant has an established place of business and is primarily engaged in the pursuit, avocation, or business for which the license is applied, the particular qualifications and requirements pertaining to licenses for lessors, whether the applicant is able to properly conduct a business for which a license or licenses is applied and other information consistent with Louisiana Motor Vehicle Commission's policy of safeguarding the public interest and public welfare. In determining the qualifications and eligibility of an applicant for a license to lease automobiles and trucks, the Louisiana Motor Vehicle Commission will base its determination upon the following factors: (a) the ability of the applicant to establish an adequate place of business, have a permanently affixed sign in front of the establishment, have a usable telephone at the place of business, the number of which must be listed on the application for the license and in a local directory accessible to the public; (b) the applicant's ability to furnish and cause to be kept in force the minimum liability insurance coverage on all vehicles offered for lease, or used in any other capacity in demonstrating or utilizing the streets and roadways in accordance with the financial responsibility laws of Louisiana, and garage liability insurance; and (c) the applicant's business integrity, based upon the applicant's experience in a same or similar businesses, its business history, and whether the applicant will devote full or 3 Transition Leasing Management, Inc. November ___, 1999 Page 3 part time to the business. Before any license to lease automobiles or trucks is issued, the applicant must post a good and sufficient surety bond, executed by the applicant as principal and by a surety company qualified to do business in Louisiana as surety in the sum of $10,000.00 3. In order to obtain a license from the Louisiana Used Motor Vehicle and Parts Commission, a lessor of motorcycles must submit an application in a form prescribed by the Louisiana Used Motor Vehicle and Parts Commission, which requires that information relating to the following eligibility factors be provided by the applicant: (a) the applicant's financial standing; (b) the applicant's business integrity; (c) whether the applicant has an established place of business and is engaged in the pursuit, avocation, or business for which the license is applied for; (d) whether the applicant is able to conduct the business for which the license is applied for, and (e) such other information as consistent with Louisiana Used Motor Vehicle and Parts Commission's policy of safeguarding the public interest and public welfare. Before any license to lease motorcycles is issued, the applicant must post a good and sufficient surety bond, executed by the applicant as principal and by a surety company qualified to do business in Louisiana as surety in the sum of $10,000.00 4. It is our understanding and assumption that motor vehicle leasing operations in Louisiana will be conducted solely by the Company. Based on this understanding and assumption, if the Company meets the requirements set forth in paragraphs 1-3 of this SECTION B, the intended motor vehicle leasing transactions and activities to be conducted as set forth in the Prospectus will comply with the Acts and the Regulations. C. COMMENTS, ASSUMPTIONS, LIMITATIONS, QUALIFICATIONS AND EXCEPTIONS. The opinions expressed in SECTION B above are based upon and subject to, the further comments, assumptions, limitations, qualifications and exceptions set forth below: 1. In rendering the opinions set forth in SECTION B above, this firm has assumed that all of the statements made in the documents reviewed by the firm are true, correct and complete, and that none of such documents contain an untrue statement of a material fact or omits a fact necessary to make the statements made not misleading. 2. This firm has made no independent investigation as to the accuracy or completeness of any representation, warranty, data or other information, written or oral, made or furnished to us, or reviewed by us, in rendering the opinions expressed in SECTION B above. 4 Transition Leasing Management, Inc. November ___, 1999 Page 4 3. Although this firm has acted as special counsel to Transition Leasing, TAF III and to the Company in connection with this matter, the firm's engagement by Transition Leasing, TAF III and the Company is limited to this matter. Consequently, there may exist matters of a factual or legal nature involving Transition Leasing, TAF III or the Company in connection with which this firm has not been consulted and has not represented Transition Leasing or the Company. 4. The opinions expressed in this opinion letter are limited to the laws of the State of Louisiana. This opinion letter is strictly limited to the matters expressly stated in this opinion letter and no other or more extensive opinion is to be inferred or may be implied beyond the matters expressly stated in this opinion letter. This opinion letter is limited to the matters stated in this opinion letter and no opinions may be implied or inferred beyond the matters expressly stated in this opinion letter. 5. The opinions expressed in SECTION B above are as of the date of this opinion letter, and this firm assumes no obligations to update or supplement such opinions to reflect any facts or circumstances that may hereafter come to its attention or any changes in law that may hereafter occur. We hereby consent to the filing of his opinion letter as an exhibit to the Company's Registration Statement on Form SB-2 (the "Registration Statement") and to the use of our name under the caption "Legal Matters" in the Prospectus forming part of the Registration Statement. In giving such consent, we do not admit that we come within the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. This opinion letter is being delivered to the Company and Transition Leasing for their sole use and benefit in connection with the Registration Statement and may be relied upon by them, the underwriters of the offering pursuant to the Registration Statement and the purchasers of the Notes. This opinion letter may not be relied upon in any manner by any other person other than as expressly provided in this opinion letter. Except with our prior written consent or as otherwise expressly provided in his opinion letter, the opinions in this opinion letter expressed are not to be used, circulated, quoted or otherwise referred to, in whole or in part, in connection with any transaction other than that contemplated by the Registration Statement, or by or to any other person. Very truly yours, KING, LEBLANC & BLAND, L. L. P. By: EX-10.3 9 PROCEEDS EXCROW AGREEMENT 1 EXHIBIT 10.3 PROCEEDS ESCROW AGREEMENT Agreement entered on the ___ day of July, 1999 by and among Transition Auto Finance III, Inc. ("Issuer"), Great Nation Investment Corporation ("Dealer"), and Texas Community Bank, a National Association, as defined by Section 3(a)(6) of the Securities and Exchange Act of 1934, (the "Escrow Agent"). WHEREAS, with the assistance of Dealer, the Issuer proposes to offer and sell up to $20,000,000 aggregate principal amount of its Secured Notes (the "Notes") to be issued under a Trust Indenture between the Issuer and Trust Management Inc. Trustee (the "Trustee"). NOW, THEREFORE, the parties hereto hereby agree as follows: 1. The Escrow Agent agrees to act as escrow agent in connection with the offering and sale of Notes and, as such, to establish an appropriate account and to receive the proceeds from the sale of the Notes for deposit therein until the earlier of the termination of this Agreement or the termination of the offering and sale of the Notes (the "Termination Date"). 2. Checks or other items for the payment of all or a part of the purchase price of the Notes (all such items together with all proceeds thereof, the "Escrowed Property") shall be payable to Escrow Agent, or endorsed by the Dealer or Issuer to Texas Community Bank and delivered daily to Escrow Agent. The Escrow Agent will credit the proceeds to an escrow cash account (the "Escrow Account") to be held by it under the terms of this Agreement subject to Rule 15c2-4 under the Securities Act of 1934. All subscribers' checks or other items for the payment of the purchase price of Notes shall be transmitted by Dealer to the Escrow Agent by noon of the next business day upon receipt by Dealer. 3. The Escrowed Property, together with all interest earned thereon, shall be held by the Escrow Agent until the earlier of (a) the time that the Escrow Agent has received proceeds from the sale of the Notes in the aggregate principal amount of $250,000, or more, or (b) the date of ______________, 1999 at which time the escrow will terminate. 4. Upon termination of the escrow, the Escrow Agent shall release the Escrowed Property, together with all interest earned thereon to be distributed to either (a) the Issuer, or such other party or parties, as required to carry out the purpose of the Note offering if the minimum amount of the Notes have been sold within the required time period described above, or (b) the subscribers if the minimum amount of Notes have not been sold within such period. 5. If at any time to the completion of this escrow said Escrow Agent is advised by the appropriate securities or state agency that the registration to sell said notes has been revoked, said Escrow Agent shall thereupon return all funds and the interest earned thereon to the respective subscribers. 6. Escrow Agent shall deposit all funds received in insured accounts such that each Investor that deposits funds is insured to the maximum amount allowed under FDIC regulations, irrespective of the aggregate amount of funds received from all Investors. The Escrow Agent shall invest such collected funds deposited in the Escrow Account in short term investments to the extent permitted by the Texas Banking Commission, provided however, that any such funds held subject to any minimum escrow contingency shall be invested subject to Rule 15c2-4. The Escrow Agent shall in 2 no event be liable for any loss resulting from any change in interest rates applicable to funds so invested. Interest on funds invested pursuant to this Section shall accrue from the date of investment of such funds until such funds are released from escrow pursuant to paragraph 4. 7. The Escrow Agent's and Dealer's obligations and duties in connections herewith are confined to those specifically enumerated in this Agreement. The Escrow Agent and Dealer shall not be in any manner liable or responsible for the sufficiency, correctness, genuineness or validity of any instruments received by or deposited with them or with reference to the form of execution thereof, or the identity, authority, or rights of any person executing, delivering, or depositing same, and neither the Escrow Agent nor the Dealer shall be liable for any loss that may occur by reason of forgery, false representation or the exercise of their discretion in any particular manner or for any other reason, except for their own gross negligence or willful misconduct. 8. Escrow Agent shall receive compensation for its services as set forth in the separate schedule of fees as made a part hereof by reference. 9. The Escrow Agent may act pursuant to the written advice of counsel with respect to any matter relating to this Escrow Agreement and shall not be liable for any action taken or omitted in accordance with such advice. 10. The Escrow Agent (and any other successor escrow agent) may at any time resign as such by delivering all of the Escrowed Property to the successor escrow agent jointly designated by the other parties hereto in writing, or to any court of competent jurisdiction, whereupon the Escrow Agent shall be discharged of and from any and all further obligations arising in connection with this Escrow Agreement. The resignation of the Escrow Agent will take effect on the earlier of (a) the appointment of a successor (including a court of competent jurisdiction), or (b) the day which is thirty (30) days after the date of delivery of its written notice of resignation to the other parties hereto. If at that time the Escrow Agent has not received a designation of a successor escrow agent, the Escrow Agent's sole responsibility after that time shall be to safekeep the Escrowed Property until receipt of a designation of successor escrow agent or a written disposition instruction by the Issuer and Dealer or a final order of a court of competent jurisdiction. 11. If any controversy arises between the parties hereto or with any third person, the Escrow Agent shall not be required to determine the same or to take any action but may await the settlement of any such controversy by final appropriate legal proceeding, or otherwise as the Escrow Agent may require, or the Escrow Agent may, in its discretion, institute such appropriate interpleader or other proceedings in connection therewith as it may deem proper, notwithstanding anything in this Agreement to the contrary. In any such event, the Escrow Agent shall not be liable for interest or damages to the Issuer or subscribers. In the event Escrow Agent should institute, or be named as a party in, any legal proceedings to determine the lawful owner of the Escrowed Property, Escrow Agent shall be entitled to recover from the contending parties to said legal proceedings, reasonable attorney's fees and expenses which shall be incurred by Escrow Agent in said proceedings. 12. This Escrow Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors and assigns, heirs, administrators, and representatives -2- 3 and shall not be enforceable by or inure to the benefit of any third party except as provided in Section 10 with respect to a resignation by the Escrow Agent. No party may assign any of its rights or obligations under this Escrow Agreement without the written consent of the other parties. This Escrow Agreement shall be construed in accordance with and governed by the laws of the State of Texas with regard to conflict of law principals. 13. This Escrow Agreement may only be modified in writing by all of the parties hereto, and no waiver hereunder shall be effective unless in writing signed by the party to be charged. IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the day and year first above written. DEALER: GREAT NATION INVESTMENT CORPORATION By: ---------------------------------------- Date: -------------------------------------- Attest: ----------------------- ISSUER: TRANSITION AUTO FINANCE III, INC. By: ---------------------------------------- Date: -------------------------------------- Attest: ----------------------- ESCROW AGENT: TEXAS COMMUNITY BANK, A National Association By: ---------------------------------------- Date: -------------------------------------- Attest: ----------------------- -3- EX-10.5 10 FORM OF SUBSCRIPTION AGREEMENT 1 EXHIBIT 10.5 TRANSITION AUTO FINANCE II, INC. SUBSCRIPTION $20,000,000 - 11% SECURED NOTES DUE AUGUST 31, 2004 AGREEMENT - ------------------------------------------------------------------------------------------------------------------------------------ BY COMPLETING AND EXECUTING THIS PAGE, THE INVESTOR HEREBY (i) ACKNOWLEDGES READING AND UNDERSTANDING THE MATERIAL ON THE REVERSE SIDE, AND (ii) REPRESENTS, WARRANTS, ACKNOWLEDGES AND AGREES TO ALL PROVISIONS SET FORTH BELOW AND ON THE REVERSE SIDE. - ------------------------------------------------------------------------------------------------------------------------------------ Investment Amount: $ 4. SPECIAL PAYMENT DIRECTIONS: Complete this section to ----------------------------------------- direct payment checks and Form 1099s to an address other than the residence address given in 2 above. (Note: If the 1. INVESTOR TYPE - (Check One) investment is made through an IRA, trustee or clearing (REFER TO THE SIGNATURE REQUIREMENTS IN SUBSCRIPTION broker, payments must go to custodian, trustee or clearing INSTRUCTIONS ON REVERSE SIDE) broker unless other authorization is attached hereto): [] Individual [] IRA ------------------------------------------------------------- [] Joint Tenant with right of [] Custodian, Uniform Gift Name survivorship to Minors [] Trust [] Pension or Profit ------------------------------------------------------------- [] Corporation [] Keogh Plan Address [] General Partnership [] Other -------------------- ------------------------------------------------------------- City & State Zip Code ------------------------------------------------------------- 2. INVESTOR DATA - (Please Print) Account No. (for payment to a designated account) - ----------------------------------------------------------------- Name of Investor 5. INVESTOR SUITABILITY: (Read Carefully and Initial) My income and net worth meet both the minimum required suitability standards as stated in the Prospectus, and (if - ----------------------------------------------------------------- applicable) the higher suitability standards applying to my Social Security or Tax ID# state of residence. (By signing, fiduciaries signing for beneficiaries represent that the beneficiaries meet the applicable suitability standards.) IRA Investors must - ----------------------------------------------------------------- initial, not the IRA Trustee. 2nd Investor Name Investor's Initials 2nd Investor's Initials --- --- - ----------------------------------------------------------------- 2nd Investor Social Security # 6. SIGNATURES - Signature must be identical to name of RESIDENT ADDRESS OF INVESTOR: investor. Unless the investor's registered representative signs on behalf of the investor, the investor must sign - ----------------------------------------------------------------- below. Investment advisors may not sign on behalf of the Street (Please do not use a P.O. Box) investor. - ----------------------------------------------------------------- ------------------------------------------------------------- City & State Zip Code Signature of Investor Date - ----------------------------------------------------------------- ------------------------------------------------------------- Home Phone Business Phone Print Name ------------------------------------------------------------- 3. SPECIAL REGISTRATION DIRECTIONS - Please complete this section Signature of Second Investor Date if the Note should be registered in the name of an IRA, trustee or clearing broker (for the benefit of the investor's account). An ------------------------------------------------------------- authorized representative of the custodian, trustee or clearing Print Name broker must execute to evidence consent (see instruction 1 on reverse hereof). ------------------------------------------------------------- Registered Representative's Signature (if signing on behalf of investor) - ----------------------------------------------------------------- Name of Custodian, Trustee or Clearing Brokerage Firm 7. REGISTERED REPRESENTATIVE STATEMENT - I, the Registered Representative for the foregoing investor, hereby represent - ----------------------------------------------------------------- that: Address (1) I have reasonable grounds to believe, on the basis of information obtained from the investor concerning his age, - ----------------------------------------------------------------- educational level, knowledge of investment, investment City & State Zip Code objectives, other investments, financial situation, needs and any other information known by me that (a) the investor is or will be in a financial position appropriate to enable - ----------------------------------------------------------------- him to realize to a significant extent the merits and risks Tax ID # Business Phone described in the Prospectus, (b) the investor has a fair market net worth sufficient to sustain the risks inherent in this investment, including loss of investment and lack - ----------------------------------------------------------------- of liquidity, (c) the investor satisfies both the minimum Signature of Authorized Representative of Custodian, Trustee or required suitability standards stated in the Prospectus and Clearing Brokerage Firm (if applicable) the higher suitability standards for the investor's state of residence, and (d) this investment is otherwise suitable for the investor; - ----------------------------------------------------------------- Name and Title of Authorized Representative (2) I will maintain on file documents indicating that a Prospectus has been delivered to the investor and disclosing the basis upon which the determination of suitability was - ----------------------------------------------------------------- reached and have, prior to execution of this Subscription Agreement, informed the investor of all pertinent facts relating to the liquidity and marketability of the Notes during the term of the investment; and (3) If I am signing in 6 above on behalf of the investor, information regarding the investor set forth above and the representations, warranties, acknowledgments, and agreements of the investor on the reverse side hereof are FOR USE OF TRANSITION AUTO FINANCE III, INC. true and complete and are binding upon the investor. Amount: $ Acceptance Date: ---------------- ------------------ ------------------------------------------------------------- Registered Representative's Signature Date Investor #: Investor State: ------------------ ------------------- ------------------------------------------------------------- Print Name Phone ------------------------------------------------------------- Broker/Dealer Firm Name ------------------------------------------------------------- Address ------------------------------------------------------------- City & State Zip Code
2 SUBSCRIPTION AGREEMENT The investor(s) signatory hereto ("Subscriber") represents, warrants, acknowledges and agrees as follows: 1. Subscriber hereby subscribes for the principal amount of 11% Secured Notes (the "Note") issued by Transition Auto Finance III, Inc. ("Issuer"), as specified on the reverse side hereof, encloses and hereby tenders the amount set forth on the reverse side hereof as full payment for the Note for which he is subscribing, and hereby agrees, subject to the Issuer's acceptance of his subscription, to become a Noteholder in an amount equal to the amount tendered. Subscriber agrees that he may not revoke, cancel, terminate or withdraw his subscription or his Subscription Agreement without the prior written consent of the Issuer, and acknowledges that the Issuer may reject his subscription for any reason whatsoever. The minimum investment is $5,000 (or $2,000 for individual Retirement Accounts). 2. Subscriber hereby acknowledges receipt of a copy of the current Prospectus for Transition Auto Finance III, Inc. 11% Secured Notes Due June 30, 2002 ("Prospectus") and understands that the Note being acquired will be governed by the terms of the Indenture referenced in such Prospectus and such other documents as may be referenced therein. Subscriber further understands and agrees that, following Issuer's acceptance of his subscription, he shall receive a Note that shall evidence his status as a Noteholder of Issuer, such Note to be in the form specified in the Indenture. The information set forth on the signature page hereof is true and accurate and Subscriber has proper authority to execute this Subscription Agreement and make this Investment. 3. Subscriber hereby represents that this purchase is made for the Subscriber's own account and not with a view toward distribution. Subscriber understands that it is not anticipated that an active market will ever develop for the Note, and that accordingly it may be impossible for Subscriber to liquidate his investment in the Note, even in the event of an emergency. Any transfer of the Note must comply with the requirements of the Prospectus, the Note and with any additional requirements imposed by laws or by any governmental authorities. 4. Subscriber hereby acknowledges that the Escrow Agent's sole role in the offering described in the Prospectus is that of escrow agent, and that the Escrow Agent has not reviewed the Prospectus and makes no representations whatsoever as to the nature of such offering or the compliance of such offering with any applicable state or federal laws, rules or regulations. Subscriber also understands that the Issuer (and not the Escrow Agent) will make all computations regarding the amount of interest (if any) that will be paid to such Subscriber with respect to his subscription payment. 5. TAX REPRESENTATIONS: Under penalties of perjury, Subscriber hereby certifies that (i) the number shown on this form and on the accompanying IRS Work W-9 is Subscriber's correct taxpayer identification number, and (ii) that Subscriber is not subject to backup withholding because (A) Subscriber has not been notified that Subscriber is subject to backup withholding as a result of a failure to report all interest or dividends or (B) the Internal Revenue Service has notified Subscriber that Subscriber is no longer subject to backup withholding. Under penalties of perjury, unless express written disclosure to the contrary is delivered to the Issuer together with this form, Subscriber certifies that Subscriber is not a non-resident alien individual, a foreign partnership, a foreign corporation, or a foreign estate or trust, which would be a foreign person within the meaning of Section 1441, 1146 and 7701(a) of the Internal Revenue Code of 1986, as amended, and that Subscriber will notify the Issuer before a change in Subscriber's foreign status. - -------------------------------------------------------------------------------- SUBSCRIPTION INSTRUCTIONS 1. Complete all applicable items and sign and date this Subscription Agreement in the places indicated. Subscribers should use full names (not initials). If you have previously subscribed for a Note in this offering and wish to subscribe for an additional Note, please complete the entire Subscription for the new Note. NO SUBSCRIPTION AGREEMENT WILL BE PROCESSED UNLESS FULLY COMPLETED AND ACCOMPANIED BY THE APPROPRIATE PAYMENT. Parts 3 and 4 need not be completed unless the investor wishes to provide special payment delivery instructions (Part 4) or to register his Note in the name of an IRA, trustee or clearing brokerage firm. A separate IRS Form W-9 must be completed, executed and submitted by the custodian, trustee or clearing brokerage firm. 2. Make your subscription check payable to "Great Nation Investment Corporation" for the amount entered under "Amount Enclosed" in the Subscription Agreement. Mail or deliver your signed Subscription Agreement and your check to your Registered Representative. 3. Registered Representatives: Please forward signed Subscription Agreements and checks to Great Nation Investment Corporation, 5408 A Bell Street, Amarillo, Texas 79109, Attention: Mr. Pat Treat. The following signature and other documentation requirements have been established for the following forms of ownership of the Notes: JOINT TENANTS AND TENANTS IN COMMON: The signatures of all joint tenants and tenants in common investors are required unless a separate document, signed by all parties and designating one a the agent of the other(s) for purposes of signing the Subscription Agreement, accompanies the Subscription Agreement. CORPORATION: The signature(s) of an officer(s) authorized to sign on behalf of the Corporation is (are) required. PARTNERSHIP: Specify whether the Subscriber is a general or limited partnership. If it is a general partnership, the signatures of all partners are required. If it is a limited partnership, the signatures of all general partners are required. TRUST: The Subscription Agreement must be signed by the trustee. UNIFORM GIFTS TO MINORS ACT: The required signature is that of the custodian, not of the parent (unless the parent has been designated as the custodian). Only one child is permitted in each investment under the Uniform Gifts to Minors Act. Different requirements may apply in your state. Please consult your attorney for information regarding these requirements. If you have any questions regarding these requirements, please call TRANSITION AUTO FINANCE III, INC., AT 972-404-0042. EX-24.1 11 CONSENT OF DRENNER & STUART LLP 1 EXHIBIT 24.1 CONSENT OF COUNSEL Drenner & Stuart, L.L.P., a limited liability partnership, hereby consents to the use of its name under the heading "Legal Matters" in the Prospectus constituting a part of the Form SB-2 Registration Statement filed by Transition Auto Finance III, Inc. ("TAF-III") for the registration of $20,000,000 in aggregate principal amount of 11% Secured Promissory Notes to be issued by TAF-III. /s/ Drenner & Stuart, L.L.P. ---------------------------------- Drenner & Stuart, L.L.P. December 7, 1999 EX-24.2 12 CONSENT OF KUPERMAN, ORR, MOUER & ALBERS 1 EXHIBIT 24.2 CONSENT OF COUNSEL Kuperman, Orr, Mouer & Albers, P.C., a professional corporation, hereby consents to the use of its name under the heading "Legal Matters" in the Prospectus constituting a part of the Form SB-2 Registration Statement filed by Transition Auto Finance III, Inc. ("TAF-III") for the registration of $20,000,000 in aggregate principal amount of 11% Secured Promissory Notes to be issued by TAF-III. /s/ Kuperman, Orr, Mouer & Albers, P.C. ---------------------------------------- Kuperman, Orr, Mouer & Albers, P.C. December 7, 1999 EX-24.3 13 CONSENT OF SPROUSE & WINN LLP 1 EXHIBIT 24.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use in this Registration Statement on Form SB-2 of our report included herein dated November 9, 1999 relating to the financial statements of Transition Auto Finance III, Inc., and to our firm being named under the caption "Experts" in the Prospectus. Sprouse & Winn, L.L.P. Austin, Texas November 9, 1999 EX-24.4 14 CONSENT OF BROWN, MARONEY & OAKS HARTLINE LLP 1 EXHIBIT 24.4 CONSENT OF COUNSEL Brown McCarroll & Oaks Hartline, L.L.P. a Texas limited liability partnership, hereby consents to the use of its name under the heading "Legal Matters" in the Prospectus constituting a part of the Form SB-2 Registration Statement filed by Transition Auto Finance III, Inc. ("TAF-III") for the registration of $20,000,000 in aggregate principal amount of 11% Secured Promissory Notes to be issued by TAF-III. Brown McCarroll & Oaks Hartline, L.L.P. /s/ Stephen A. Mitchell ----------------------- By: Stephen A. Mitchell November 26, 1999 EX-24.5 15 CONSENT OF KING, LEBLANC & BLAND, L.L.P. 1 EXHIBIT 24.5 CONSENT OF COUNSEL King, LeBlanc & Bland, L.L.P., hereby consents to the use of its name under the heading "Legal Matters" in the Prospectus constituting a part of the Form SB-2 Registration Statement filed by Transition Auto Finance III, Inc. ("TAF-III") for the registration of $20,000,000 in aggregate principal amount of 11% Secured Promissory Notes to be issued by TAF-III. King, LeBlanc & Bland, L.L.P. /s/ Henry A. King ----------------------------------- By: Henry A. King December 7, 1999 -----END PRIVACY-ENHANCED MESSAGE-----