<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1997
REGISTRATION STATEMENT NO. 333-38575
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADVANTA BUSINESS SERVICES CORP.
(SPONSOR OF THE SECURITIES DESCRIBED HEREIN)
DELAWARE 1020 LAUREL OAK ROAD 23-2333786
(JURISDICTION) VOORHEES, NEW JERSEY 08043 (I.R.S. EMPLOYER
IDENTIFICATION NO.)
COPY TO:
COLE B. SILVER, ESQ.
ADVANTA BUSINESS SERVICES CORP.
1020 LAUREL OAK ROAD
VOORHEES, NEW JERSEY 08043
609-782-7300
(NAME, ADDRESS AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
CHRIS DIANGELO, ESQ.
DEWEY BALLANTINE, LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.[ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.[x]
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 number of the earlier
effective registration statement for the same offering.[ ]
If this Form is filed as a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, please check the following box and list
the Securities Act registration number 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. [ ]
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CALCULATION OF REGISTRATION FEE
===============================================================================================================================
PROPOSED MAXIMUM PROPOSED
AMOUNT AGGREGATE PRICE MAXIMUM AMOUNT OF
TO BE PER UNIT(1) AGGREGATE REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------------------------------------------
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Advanta Equipment Receivables
Asset-Backed Notes $1,000,000 100% $1,000,000 $303.03
Advanta Equipment Receivables
Asset-Backed Certificates $ 0 NA NA $ 0
===============================================================================================================================
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(1) Estimated solely for the purpose of calculating the registration fee.
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.
<PAGE> 2
CROSS REFERENCE SHEET
TO FORM S-3
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CAPTION OR LOCATION
ITEM AND CAPTION IN FORM S-3 IN PROSPECTUS
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1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . Forepart of Registration Statement;
Outside Front Cover Page**
2. Inside Front and Outside Back Cover Page of
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . Inside Front Cover Page**; Outside
Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . Summary of Prospectus**; Special
Considerations
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . . . . . . *
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
7. Selling Security Holders . . . . . . . . . . . . . . . . . . . . *
8. Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . Methods of Distribution**
9. Description of Securities to be Registered . . . . . . . . . . . Outside Front Cover Page**;
Summary of Prospectus**;
Description of the Securities**;
Federal Income Tax
Consequences**
10. Interests of Named Experts and Counsel . . . . . . . . . . . . . *
11. Material Changes . . . . . . . . . . . . . . . . . . . . . . . . *
12. Incorporation of Certain Information by Reference . . . . . . . Inside Front Cover Page**;
Incorporation of Certain
Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities . . . . . . . . See page II-3
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* Not applicable or answer is negative.
** To be completed from time to time by Prospectus Supplement.
<PAGE> 3
PROSPECTUS
ADVANTA EQUIPMENT RECEIVABLES
ASSET-BACKED NOTES AND ASSET-BACKED CERTIFICATES ISSUABLE IN SERIES
ADVANTA BUSINESS SERVICES CORP.,
SPONSOR
This Prospectus describes certain Advanta Equipment Receivables
Asset-Backed Notes (the "Notes") and Advanta Equipment Receivables Asset-Backed
Certificates (the "Certificates" and, together with the Notes, the "Securities")
that may be sold from time to time in one or more series, in amounts, at prices
and on terms to be determined at the time of sale and to be set forth in a
supplement to this Prospectus (each, a "Prospectus Supplement"). Each series of
Securities may include one or more classes of Notes and one or more classes of
Certificates, which will be issued either by the Advanta Business Services
Corp., as Sponsor (the "Sponsor"), a special-purpose finance subsidiary of the
Sponsor Co. ("Transferor"), or by a trust to be formed, or caused to be formed,
by the Sponsor for the purpose of issuing one or more series of such Securities
(each, a "Trust"). The Trust issuing Securities as described in this Prospectus
and the related Prospectus Supplement shall be referred to herein as the
"Issuer."
Each class of Securities of any series will either evidence beneficial
ownership in a segregated pool of assets (each, a "Trust Estate") (such
Securities, "Certificates") or will represent indebtedness of the Issuer secured
by the related Trust Estate (such Securities, "Notes"), as described herein and
in the related Prospectus Supplement. Each Trust Estate may consist of any
combination of leases (including but not limited to, finance leases, true leases
and full payout leases), loan contracts and promissory notes financing the
purchase or lease of a variety of commercial assets, commercial products or
personal property used exclusively for commercial purposes (such leases, loan
contracts and promissory notes are referred to herein as the "Contracts"). Each
Trust Estate may also include a security interest in the underlying commercial
assets, commercial products or personal property relating thereto (the
"Underlying Collateral"), together with the proceeds thereof (together with the
Contracts, the "Receivables"). If and to the extent specified in the related
Prospectus Supplement, credit enhancement with respect to a Trust Estate or any
class of Securities may include any one or more of the following: a financial
guaranty insurance policy (a "Policy") issued by an insurer specified in the
related Prospectus Supplement, a reserve account, letters of credit, credit or
liquidity facilities, third party payments or other support, cash deposits or
other arrangements. In addition to or in lieu of the foregoing, credit
enhancement may be provided by means of subordination, cross-support among the
Receivables or over-collateralization. See "Description of the Trust Agreement
- -- Credit and Cash Flow Enhancement." The assets in the Trust Estate for a
series will have been originated or acquired by the Sponsor from one or more
affiliates of the Sponsor or from one or more entities which are unaffiliated
with the Sponsor (any entity from which the Sponsor acquires Receivables being,
an "Originator"). Each Originator will be an entity, including various
manufacturers or dealers of the Underlying Collateral (each, a "Vendor"),
generally in the business of originating or acquiring Receivables. The Sponsor
will cause each Trust to acquire the Receivables from the Sponsor and/or the
related Originator(s) on or prior to the date of issuance of the related
Securities, as described herein and in the related Prospectus Supplement. The
Receivables included in a Trust Estate will be serviced by Advanta Business
Services Corp. as the Servicer (the "Servicer") described in the related
Prospectus Supplement.
Each series of Securities will include one or more classes (each, a
"Class"). A series may include one or more Classes of Securities entitled to
principal distributions, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no principal distributions. The rights of one or more Classes of Securities of
any series may be senior or subordinate to the rights of one or more of the
other Classes of Securities. A series may include two or more Classes of
Securities which differ as to the timing, sequential order, priority of payment,
interest rate or amount of distributions of principal or interest or both.
Information regarding each Class of Securities of a series, together with
certain characteristics of the related assets in the Trust Estate, will be set
forth in the related Prospectus Supplement. The rate of payment in respect of
principal of the Securities of any Class will depend on the priority of payment
of such a Class and the rate and timing of payments (including prepayments,
defaults, liquidations or repurchases) on the related Receivables. A rate of
payment lower or higher than that anticipated may affect the weighted average
life of each Class of Securities in the manner described herein and in the
related Prospectus Supplement. See "Description of the Securities."
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER
"MATERIAL RISKS" SET FORTH ON PAGE ___HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT.
THE NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF THE ISSUER ONLY
AND DO NOT REPRESENT INTERESTS OF THE SPONSOR, ANY TRANSFEROR, ANY SERVICER, ANY
ORIGINATOR OR ANY OF THEIR RESPECTIVE AFFILIATES. THE CERTIFICATES OF A GIVEN
SERIES REPRESENT BENEFICIAL INTERESTS IN THE RELATED TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE SPONSOR, ANY TRANSFEROR, ANY
SERVICER, ANY ORIGINATOR OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE
SECURITIES NOR THE UNDERLYING RECEIVABLES WILL BE GUARANTEED OR INSURED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, ANY TRANSFEROR, ANY
SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES,
EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT. SEE ALSO "RISK
FACTORS. "
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement. Prior
to issuance, there will have been no market for the Securities
<PAGE> 4
of any series, and there can be no assurance that a secondary market for the
Securities will develop, or if it does develop, that it will continue.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. NO SECURITIES DESCRIBED
HEREIN MAY BE OFFERED IN A TRANSACTION NOT EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("THE SECURITIES ACT") EXCEPT BY DELIVERY OF
THIS PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT.
The date of this Prospectus is December 24, 1997
2
<PAGE> 5
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Securities to be
offered hereunder, among other things, will set forth with respect to such
series of Securities: (i) a description of the Class or Classes of such
Securities, (ii) the rate of interest, the "Pass-Through Rate" or "Interest
Rate" or other applicable rate (or the manner of determining such rate) and
authorized denominations of such Class of such Securities; (iii) certain
information concerning the related Receivables in the Trust Estate and insurance
polices, cash accounts, letters of credit, financial guaranty insurance
policies, third party guarantees or other forms of credit enhancement, if any,
relating to one or more pools or all or part of the related Securities; (iv) the
specified interest, if any, of each Class of Securities in, and the manner and
priority of, distributions from, the Trust Estate; (v) information as to the
nature and extent of subordination with respect to each series of Securities, if
any; (vi) the payment dates to Securityholders; (vii) information regarding the
Servicer(s) for the related Receivables in the Trust Estate; (viii) the
circumstances, if any, under which each Trust Estate may be subject to early
termination; (ix) information regarding tax considerations; and (x) additional
information with respect to the method of distribution of such Securities.
AVAILABLE INFORMATION
The Sponsor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, referred to herein as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered pursuant to this Prospectus. For further information,
reference is made to the Registration Statement which may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at 500 West Madison, 14th Floor, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby, nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Sponsor with respect to the
Registration Statement, either on its own behalf or on behalf of a Transferor or
a Trust, relating to any series of Securities referred to in the accompanying
Prospectus Supplement, with the Commission pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), after the date of this Prospectus and prior to the termination of any
offering of the Securities issued by the Issuer, shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such documents. Any statement contained herein or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein (or in the accompanying Prospectus
Supplement) or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or replaces such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
3
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REPORTS TO SECURITYHOLDERS
Unaudited periodic and annual reports concerning any Security and the
related Trust Estate will be provided to the Securityholders. See "Description
of the Securities -- Reports to Securityholders." If the Securities of a series
are to be issued in book-entry form, such reports will be provided to the
Securityholder of record and beneficial owners of such Securities will have to
rely on the procedures described herein under "Description of Securities -
Book-Entry Registration."
The Sponsor will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to: Advanta Business Services
Corp., 1020 Laurel Oak Road, Voorhees, New Jersey, 08043-7228, Telephone
Number: 609-782-7300, Attention: Treasury.
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
PROSPECTUS SUPPLEMENT........................................................3
AVAILABLE INFORMATION........................................................3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................3
REPORTS TO SECURITYHOLDERS...................................................4
SUMMARY OF TERMS.............................................................5
MATERIAL RISKS..............................................................14
THE TRUST ESTATES...........................................................17
ADVANTA BUSINESS SERVICES CORP. UNDERWRITING, ORIGINATING AND SERVICING
PRACTICES...............................................................18
THE ISSUERS.................................................................20
THE RECEIVABLES.............................................................21
POOL FACTORS................................................................21
USE OF PROCEEDS.............................................................21
THE TRUSTEE.................................................................22
DESCRIPTION OF THE SECURITIES...............................................22
DESCRIPTION OF THE TRUST DOCUMENTS..........................................27
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES....................................33
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................35
STATE AND LOCAL TAXATION....................................................47
ERISA CONSIDERATIONS........................................................47
METHODS OF DISTRIBUTION.....................................................47
LEGAL OPINIONS..............................................................48
FINANCIAL INFORMATION.......................................................48
ADDITIONAL INFORMATION......................................................48
INDEX OF TERMS..............................................................49
</TABLE>
4
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used in the summary
are defined elsewhere in the Prospectus on the pages indicated in the "Index of
Terms, which appears beginning on page 49 hereof."
Issuer.................... With respect to each series of Securities,
either the Sponsor, one or more
special-purpose finance subsidiaries of the
Sponsor (which may be organized and
established by the Sponsor with respect to
one or more Trust Estates) (each such
special-purpose finance subsidiary, a
"Transferor") or a trust formed, or caused
to be formed, by the Sponsor or by one or
more Transferors (each, a "Trust"). For
purposes of this Prospectus (unless the
context otherwise requires) the term
"Sponsor" includes the term "Transferor".
The Sponsor, Transferor or the Trust
issuing Securities pursuant to this
Prospectus and the related Prospectus
Supplement shall be referred to herein as
the "Issuer" with respect to the related
Securities. See "The Issuers."
Each series of Securities will be issued
pursuant to either (i) a pooling and
servicing agreement (each, a "Pooling
Agreement") to be entered into between the
Sponsor and/or the related Transferor(s),
the Servicer and the Trustee named therein
and in the related Prospectus Supplement,
(ii) a trust or depository agreement (each,
a "Trust Agreement") to be entered into
between the Sponsor and/or the related
Transferor(s), the Trustee named therein
and in the related Prospectus Supplement
and certain other parties as specified
therein and in the related Prospectus
Supplement, or (iii) with respect to
Securities which represent Notes, an
indenture or depository agreement (each, an
"Indenture") between the Issuer and the
Indenture Trustee named in such Indenture
and in the related Prospectus Supplement.
If a Trust is formed pursuant to a Trust
Agreement, a sale and servicing agreement
(the "Sale and Servicing Agreement") will
be entered into between the Sponsor, the
Transferor and such Trust.
The Sponsor does not expect to cause any of
the Securities offered hereby to be listed
for trading on any securities to be quoted
in the automated system of any registered
securities association. As a result, the
secondary market for the Securities may be
relatively illiquid, compared to other
fixed-income securities which are so listed
or quoted.
Material Risks............ Since the Securities will represent
non-recourse, asset-backed securities not
secured by the general credit of any
entity, an investment in the Securities
may present certain material risk. See
"Material Risks" herein, and any "Material
Risks" caption in the related Prospectus
Supplement.
Sponsor................... Advanta Business Services Corp. will cause
the issuance of each series of Securities
(Advanta Business Services Corp., in such
capacity, the "Sponsor"). The Sponsor is a
wholly-owned subsidiary of Advanta Leasing
Holding Corp., which in turn is a
wholly-owned subsidiary of Advanta Corp., a
publicly-traded corporation, the stock of
which is traded on the NASDAQ.
Servicer.................. Advanta Business Services Corp. will act as
Servicer for each Trust Estate. The Servicer
will service the assets comprising each
Trust Estate and administer each Trust
Estate pursuant to the related Servicing
Agreement. The Servicer may subcontract all
or any portion of its obligations as
Servicer under each Servicing Agreement to
qualified subservicers (each, a
"Sub-Servicer") but the Servicer will not be
relieved thereby of its liability with
respect thereto. See "Servicing of the Trust
Property."
Trustee................... The Trustee for each Trust Estate will be
specified in the related Prospectus
Supplement. In addition, a Trust may
separately enter into an Indenture and may
issue Notes pursuant to such Indenture; in
any such case the Trust and the Indenture
will be administered by separate,
independent trustees as required by the
rules and regulations under the Trust
Indenture Act of 1939, as amended, and the
Investment Company
5
<PAGE> 8
Act of 1940, as amended.
Indenture Trustee ........ With respect to any series of Securities
which include one or more classes of Notes,
the Indenture Trustee will be specified in
the related Prospectus Supplement.
The Securities ........... Each Class of Securities of any series will
either evidence beneficial ownership in a
segregated pool of assets (each, a "Trust
Estate") (such Securities, "Certificates")
or will represent indebtedness of the Issuer
secured by the Trust Estate (such
Securities, "Notes"), as described herein
and in the related Prospectus Supplement.
Each Trust Estate may consist of any
combination of leases (including, but not
limited to, finance leases, true leases, and
full payout leases), loan contracts and
promissory notes (such leases, loan
contracts and promissory notes are referred
to herein as the "Contracts"), which in all
cases will be secured by commercial assets,
commercial products or personal property
used primarily for commercial purposes,
which will primarily consist of
"small-ticket" office equipment items for
businesses, such as computers, copy
machines, facsimile machines, telephones,
alarm systems, and similar items (the
"Underlying Collateral"). Each Trust Estate
also may include a security interest in the
Underlying Collateral relating thereto,
together with the proceeds thereof (together
with the Contracts, the "Receivables"). The
Contracts are either "instruments", "chattel
paper" (each as defined in the Uniform
Commercial Code) or would be "chattel paper"
but for a technical definitional matter, but
in any event are not treated materially
differently from "chattel paper" for
purposes of title transfer, security
interests or remedies on default.
Each series of Securities issued as
Certificates will include one or more
classes of Certificates which will be issued
pursuant to the related Trust Documents.
Each series of Securities issued as Notes
which include one or more classes of Notes,
such Notes will be issued pursuant to an
Indenture.
If and to the extent specified in the
related Prospectus Supplement, credit
enhancement with respect to a Trust Estate
or any class of Securities may include any
one or more of the following: a financial
guaranty insurance policy (a "Policy")
issued by an insurer specified in the
related Prospectus Supplement, a reserve
account, letters of credit, credit or
liquidity facilities, third party payments
or other support, cash deposits or other
arrangements. In addition to or in lieu of
the foregoing, credit enhancement may be
provided by means of subordination,
cross-support among the assets in Trust
Estates or over-collateralization. The
Sponsor will cause each Trust to acquire the
assets in the Trust Estate from the related
Originator(s) on or prior to the date of
issuance of the related Securities, as
described herein and in the related
Prospectus Supplement, or prior to the
expiration of any related Pre-Funding
Period.
The assets comprising each Trust Estate will
be described in the related Trust Documents
and the related Prospectus Supplement and
will be serviced by the Servicer pursuant to
such Trust Documents. The selection criteria
for each Trust Estate will require
diversification among users, geographic
areas, and type of equipment; maximum levels
of delinquent Receivables (as of the related
Closing Date), maximum balances and renewing
terms, and will require that the Receivables
will not have been adversely selected from
the Sponsor's overall portfolio.
In the case of any individual Trust Estate,
the contractual arrangements relating to the
establishment of a Trust, if any, the
servicing of the related assets and the
issuance of the related Securities may be
6
<PAGE> 9
contained in a single agreement, or in
several agreements which combine certain
aspects of the Pooling Agreement, the Trust
Agreement, the Sale and Servicing Agreement
and the Indenture described above (for
example, a pooling and servicing agreement,
a master financing agreement, or a servicing
and collateral management agreement). For
purposes of this Prospectus, the term "Trust
Documents" as used with respect to a Trust
Estate means, collectively, and except as
otherwise described in the related
Prospectus Supplement, any and all
agreements relating to the establishment of
a Trust, if any, the servicing of the
related Receivables and the issuance of the
related Securities, including, without
limitation, Pooling Agreements, Trust
Agreements and Indentures. The term
"Trustee" means any and all persons acting
as a trustee pursuant to a Trust Document
and the term "Indenture Trustee" means any
and all persons acting as a trustee pursuant
to an Indenture. A Prospectus Supplement
relating to an owner trust that issues debt
securities will refer to the Trustee as the
"Owner Trustee" in order to distinguish the
Owner Trustee and the Indenture Trustee for
such series of Securities.
Securities Will Be Non-Recourse.
The Securities will not be obligations,
either recourse or non-recourse (except for
certain non-recourse debt described under
"Certain Federal Income Tax
Considerations"), of the Sponsor, the
related Transferor, the related Servicer,
any related Sub-Servicer, the related
Originator(s) or any person other than the
related Issuer. The Notes of a given series
represent obligations of the Issuer, and the
Certificates of a given series represent
beneficial interests in the related Trust
Estate only and do not represent interests
in or obligations of the Sponsor, the
related Transferor, the related Servicer,
any related Sub-Servicer, the related
Originator(s) or any of their respective
affiliates. In the case of Securities that
represent beneficial ownership interest in
the related Trust Estate, such Securities
will represent the beneficial ownership
interests in such Trust Estate and the sole
source of payment will be the assets of such
Trust Estate. In the case of Securities that
represent debt issued by the related Issuer,
such Securities will be secured by assets in
the related Trust Estate. Notwithstanding
the foregoing, and as to be described in the
related Prospectus Supplement, certain types
of credit enhancement, such as a letter of
credit, financial guaranty insurance policy
or reserve fund may constitute a full
recourse obligation of the issuer of such
credit enhancement.
General Nature of the Securities as Investments.
All of the Securities offered pursuant to
this Prospectus and the related Prospectus
Supplement will be rated in one of the four
highest rating categories by one or more
Rating Agencies (as defined herein).
Additionally, all of the Securities offered
pursuant to this Prospectus and the related
Prospectus Supplement will be of the
fixed-income type ("Fixed Income
Securities"). Fixed Income Securities will
generally be styled as debt instruments,
having a principal balance and a specified
interest rate ("Interest Rate"). Fixed
Income Securities may either represent
beneficial ownership interests in the
related Trust Estate or debt secured by
certain assets, including the related
Receivables of the related Issuer.
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<PAGE> 10
Each series or Class of Fixed Income
Securities offered pursuant to this
Prospectus may have a different Interest
Rate, which may be a fixed or adjustable
Interest Rate. The related Prospectus
Supplement will specify the Interest Rate
for each series or Class of Fixed Income
Securities described therein, or the initial
Interest Rate and the method for determining
subsequent changes to the Interest Rate.
A series may include one or more Classes of
Fixed Income Securities ("Strip Securities")
entitled (i) to principal distributions,
with disproportionate, nominal or no
interest distributions, or (ii) to interest
distributions, with disproportionate,
nominal or no principal distributions. In
addition, a series of Securities may include
two or more Classes of Fixed Income
Securities that differ as to timing,
sequential order, priority of payment,
Interest Rate or amount of distribution of
principal or interest or both, or as to
which distributions of principal or interest
or both on any Class may be made upon the
occurrence of specified events, in
accordance with a schedule or formula, or on
the basis of collections from designated
portions of the related assets constituting
the Trust Estate. Any such series may
include one or more Classes of Fixed Income
Securities ("Accrual Securities"), as to
which certain accrued interest will not be
distributed but rather will be added to the
principal balance (or nominal balance, in
the case of Accrual Securities which are
also Strip Securities) thereof on each
Payment Date, as hereinafter defined, or in
the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series may include one or more
other Classes of Fixed Income Securities
(collectively, the "Senior Securities") that
are senior to one or more other Classes of
Fixed Income Securities (collectively, the
"Subordinate Securities") in respect of
certain distributions of principal and
interest and allocations of losses on
Receivables.
In addition, certain Classes of Senior (or
Subordinate) Securities may be senior to
other Classes of Senior (or Subordinate)
Securities in respect of such distributions
or losses.
General Payment Terms of Securities.
As provided in the related Trust Document
and as described in the related Prospectus
Supplement, the holders of the Securities
("Securityholders") will be entitled to
receive payments on their Securities on
specified dates (each, a "Payment Date").
Payment Dates with respect to Fixed Income
Securities will occur monthly, quarterly or
semi-annually, as described in the related
Prospectus Supplement.
The related Prospectus Supplement will
describe a date (the "Record Date")
preceding such Payment Date, as of which the
Trustee or the Indenture Trustee or its
paying agent will fix the identity of the
Securityholders for the purpose of receiving
payments on the next succeeding Payment
Date. As described in the related Prospectus
Supplement, the Payment Date will be a
specified day of each month, commonly the
fifteenth or twenty-fifth day of each month
(or, in the case of quarterly-pay
Securities, the fifteenth or twenty-fifth
day of every third month; and in the case of
semi-annual pay Securities, the
8
<PAGE> 11
fifteenth or twenty-fifth day of every sixth
month) and the Record Date will be the close
of business as of the last day of the
calendar month that precedes the calendar
month in which such Payment Date occurs.
Each Trust Document will describe a period
(each, a "Monthly Period") preceding each
Payment Date (for example, in the case of
monthly-pay Securities, the calendar month
preceding the month in which a Payment Date
occurs). As more fully described in the
related Prospectus Supplement, collections
received on or with respect to the related
Receivables constituting a Trust Estate
during a Monthly Period will be required to
be remitted by the Servicer to the related
Trustee or Indenture Trustee prior to the
related Payment Date and will be used to
fund payments to Securityholders on such
Payment Date. As may be described in the
related Prospectus Supplement, the related
Trust Document may provide that all or a
portion of the payments collected on or with
respect to the related Trust Property may be
applied by the related Trustee or Indenture
Trustee to the acquisition of additional
Receivables during a specified period
(rather than be used to fund payments of
principal to Securityholders during such
period), with the result that the related
Securities will possess an interest-only
period, also commonly referred to as a
revolving period, which will be followed by
an amortization period. Any such interest
only or revolving period may, upon the
occurrence of certain events to be described
in the related Prospectus Supplement,
terminate prior to the end of the specified
period and result in the earlier than
expected amortization of the related
Securities.
In addition, as may be described in the
related Prospectus Supplement, the related
Trust Document may provide that all or a
portion of collected payments may be
retained by the Trustee or Indenture Trustee
(and held in certain temporary investments,
including Receivables) for a specified
period prior to being used to fund payments
of principal and/or interest to
Securityholders.
Such retention and temporary investment by
the Trustee or Indenture Trustee of such
collected payments may be required by the
related Trust Document for the purpose of
(a) slowing the amortization rate of the
related Securities relative to the payment
schedule of the related Receivables, or (b)
attempting to match the amortization rate of
the related Securities to an amortization
schedule established at the time such
Securities are issued. Any such feature
applicable to any Securities may terminate
upon the occurrence of events to be
described in the related Prospectus
Supplement, resulting in distributions to
the specified Securityholders and an
acceleration of the amortization of such
Securities.
As more fully specified in the related
Prospectus Supplement, neither the
Securities nor the underlying Receivables
will be guaranteed or insured by any
governmental agency or instrumentality or
the Sponsor, any Transferor, the related
Servicer or any related Sub-Servicer, the
related Originator, any Trustee, any
Indenture Trustee or any of their
affiliates.
No Investment Companies......... Neither the Sponsor, any Transferor, any
Issuer nor any Trust will register as an
"investment company" under the Investment
Company
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<PAGE> 12
Act of 1940, as amended (the "Investment
Company Act").
Cross-Collateralization ........ As described in the related Trust Document
and the related Prospectus Supplement, the
source of payment for Securities of each
series will be the assets of the related
Trust Estate only.
However, as may be described in the related
Prospectus Supplement, a series or class of
Securities may include the right to receive
moneys from a common pool of credit
enhancement which may be available for more
than one series of Securities, such as a
master reserve account, master insurance
policy or a master collateral pool
consisting of similar Receivables.
Notwithstanding the foregoing, and as
described in the related Prospectus
Supplement, no payment received on any
Receivable held by any Trust Estate may be
applied to the payment of Securities issued
by any other Trust Estate (except to the
limited extent that certain collections in
excess of the amounts needed to pay the
related Securities may be deposited in a
common master reserve account or an
overcollateralization account that provides
credit enhancement for more than one series
of Securities issued pursuant to the related
Trust Document).
Trust Estate................. As specified in the related Prospectus
Supplement, each Trust Estate will consist
of the related Contracts, and a security
interest in the Underlying Collateral
related thereto. If and to the extent
specified in the related Prospectus
Supplement, credit enhancement with respect
to a Trust Estate or any class of Securities
may include any one or more of the
following: a Policy issued by an insurer
specified in the related Prospectus
Supplement, a reserve account, letters of
credit, credit or liquidity facilities,
repurchase obligations, third party payments
or other support, cash deposits or other
arrangements. In addition to or in lieu of
the foregoing, credit enhancement may be
provided by means of subordination,
cross-support among the Receivables or
over-collateralization. See "Description of
the Trust Document -- Credit and Cash Flow
Enhancement." The Contracts are obligations
for the lease or purchase of commercial
property, commercial assets or personal
property used primarily for commercial
purposes, or evidence borrowings used to
acquire such Underlying Collateral and
entitling the payee thereunder to a stream
of payments thereon from the party obligated
thereunder (the "Obligor").
The Receivables comprising a Trust Estate
will be originated by the Sponsor or
purchased by the Sponsor pursuant to an
agreement with the seller of such
Receivables (each, a "Receivables Transfer
Agreement").
The Sponsor will transfer such Receivables
to the related Issuer pursuant to a Trust
Document and, in the case of Notes, the
Issuer will pledge its right, title and
interest in and to such Receivables to an
Indenture Trustee on behalf of
Securityholders pursuant to an Indenture.
The Receivables transferred to an Issuer
and, in the case of Notes, pledged to an
Indenture Trustee shall have a Contract
Balance (as defined below) specified in the
related Prospectus Supplement. The rights
and benefits of the Sponsor or Transferor
under the related Receivables Transfer
Agreement will be assigned to the related
Trustee on behalf of the related
Securityholders.
The "Contract Balance" of a Contract as of
the date of determination is the outstanding
principal balance with respect to such
Contract or, in the case of a Contract which
is in the form of a lease, the present
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<PAGE> 13
value of the remaining scheduled rental
payments due thereunder discounted at a rate
specified in the related Prospectus
Supplement and the related Trust Documents,
in each case as of such date.
In addition, if so specified in the related
Prospectus Supplement, the Trust Estate will
include monies on deposit in a Pre-Funding
Account (the "Pre-Funding Account") to be
established with the Trustee, which will be
used to acquire Additional Receivables from
time to time during the "Pre-Funding Period"
as specified in the related Prospectus
Supplement.
If and to the extent provided in the related
Prospectus Supplement, the Sponsor will be
obligated (subject only to the availability
thereof) to transfer to the related Issuer
(and in the case of Notes, the related
Issuer will pledge to an Indenture Trustee
on behalf of Securityholders), additional
Receivables (the "Additional Receivables")
from time to time during any Pre-Funding
Period specified in the related Prospectus
Supplement.
Pre-Funding Account............. If so specified in the related Prospectus
Supplement, a portion of the issuance
proceeds of the Securities of a particular
series (such amount, (the "Pre-Funded
Amount") will be deposited in an account
(the "Pre-Funding Account") to be
established with the Trustee, which will be
used to acquire additional Receivables from
time to time during time period specified in
the related Prospectus Supplement. Prior to
the investment of the Pre-Funded Amount will
be invested in one or more Eligible
Investments. An "Eligible Investment" is any
of the following, in each case as determined
at the time of the investment or contractual
commitment to invest therein (to the extent
such investments would not require
registration of the Trust as an investment
company pursuant to the Investment Company
Act): (a) negotiable instruments or
securities represented by instruments in
bearer or registered or book-entry from
which evidence: (i) obligations which have
the benefit of the full faith and credit of
the United States of America, including
depository receipts issued by a bank as
custodian with respect to any such
instrument or security held by the custodian
for the benefit of the holder of such
depository receipt, (ii) demand deposits or
time deposits in, or bankers' acceptances
issued by, any depositary 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 or state banking or
depositary institution authorities; provided
that at the time of the Trustee's investment
or contractual commitment to invest therein,
the certificates of deposit or short-term
deposits (if any) or long-term unsecured
debt obligations (other than such
obligations whose rating is based on
collateral or on the credit of a Person
other than such institution or trust
company) of such depositary institution or
trust company has a credit rating in highest
rating category from each Rating Agency,
(iii) certificates of deposit having a
rating in the highest rating category by the
Rating Agencies, or (iv) investments in
money market funds which are (or which are
composed of instruments or other investments
which are) rated in the highest rating
category by the Rating Agencies; (b) demand
deposits in the name of the Trustee in any
depositary institution or trust company
referred to in clause (a)(ii) above; (c)
commercial paper (having original or
remaining maturities of no more than 270
days) having a credit rating in the highest
rating category by the Rating Agencies; (d)
Eurodollar time deposits that are
obligations of institutions whose time
deposits carry a credit rating in the
highest rating category by the Rating
Agencies; (e) repurchase agreements
involving any Eligible Investment described
in any clauses (a)(i), (a)(iii) or (d)
above, so long as the other party to
repurchase agreement has its long-term
unsecured debt obligations rated in the
highest rating category by the Rating
Agencies; and (f) any other investment with
respect to which the Rating Agencies rating
such Securities indicate will not result in
the reduction or withdrawal of its
then-existing rating of the Securities. Any
Eligible Investment must mature no later
than the Business Day prior to the next
Payment Date.
During any Pre-Funding Period, the related
Issuer will be obligated (subject only to
the availability thereof) to acquire from
the Sponsor and pledge to the Trustee, on
behalf of Securityholders, additional
Receivables from time to time during such
Pre-Funding Period. Such additional
Receivables are required to satisfy certain
as eligibility criteria more fully set forth
in the related Prospectus Supplement of
which eligibility criteria will be
consistent with the eligibility criteria of
the Receivables included in the Trust Estate
as of the issuance date, subject to such
exceptions as are expressly stated in such
Prospectus Supplement.
Although to specific parameters of the
Pre-Funding Account with respect to any
issuance of Securities will be specified in
the related Prospectus Supplement, it is
anticipated that: (a) the Pre-Funding Period
will not exceed 120 days from the related
Closing Date, (b) that the additional
Receivables to be acquired during the
Pre-Funding Period will be subject to the
same representations and warranties as the
Receivables included in the related Trust
Estate on the Closing Date (although
additional criteria may also be required to
be satisfied, as described in the related
Prospectus Supplement) and (c) that the
Pre-Funded Amount will not exceed 25% of the
principal amount of the Securities issued
pursuant to a particular offering.
Registration of Securities...... Securities may be represented by global
securities registered in the name of Cede &
Co. ("Cede"), as nominee of The Depository
Trust Company ("DTC"), or another nominee.
In such case, Securityholders will not be
entitled to receive definitive securities
representing such Securityholders'
interests, except in certain circumstances
described in the related Prospectus
Supplement. See "Description of the
Securities -- Book Entry Registration"
herein.
Credit and Cash Flow
Enhancement ................... If and to the extent specified in the
related Prospectus Supplement, credit
enhancement with respect to a Trust Estate
or any class of Securities may include any
one or more of the following: a Policy
issued by an insurer specified in the
related Prospectus Supplement (a "Security
Insurer"), a reserve account, letters of
credit, credit or liquidity facilities,
third party payments or other support, cash
deposits or other arrangements. In addition
to or in lieu of the foregoing, credit
enhancement may be provided by means of
subordination, cross-support among the
Receivables, or over-collateralization. Any
form of credit enhancement will have certain
limitations and exclusions from coverage
thereunder, which will be described in the
related Prospectus Supplement. See
"Description of the Trust Documents --
Credit and Cash Flow Enhancement."
Receivables Transfer
Agreement....................... As more fully described in the related
Prospectus Supplement, the Sponsor will be
obligated to acquire from the related Trust
Estate any Receivable transferred pursuant
to a Trust Document or pledged pursuant to
an Indenture if the interest of the
Securityholders therein is materially
adversely affected by a breach of any
representation or warranty made by the
Sponsor with respect to such Receivable,
which breach has not been cured. In
addition, if so specified in the related
Prospectus Supplement, the Sponsor may from
time to time reacquire certain Receivables
or substitute other Receivables for
Receivables held by a Trust Estate, subject
to specified conditions set forth in the
related Trust Document and Receivables
Transfer Agreement.
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Servicer's Compensation......... The Servicer shall be entitled to receive a
fee for servicing the Contracts of each
Trust Estate equal to a specified percentage
of the value of the assets held in the
related Trust Estate, as set forth in the
related Prospectus Supplement. See
"Description of the Trust Documents --
Servicing Compensation" herein and in the
related Prospectus Supplement.
Certain Legal Aspects
of the Contracts................ With respect to the transfer of the
Contracts to the related Trust pursuant to a
Trust Document or the pledge of the related
Issuer's right, title and interest in and to
such Contracts on behalf of Securityholders
pursuant to an Indenture, the Sponsor will
warrant, in each case, that such transfer is
either a valid transfer and assignment of
the Contracts to the Trust or the grant of a
security interest in the Contracts. Each
Prospectus Supplement will specify what
actions will be taken by which parties as
will be required to perfect either the
Issuer's or the Securityholders' security
interest in the Contracts. The Sponsor may
also warrant that, if the transfer or pledge
to the Trust or to the Securityholders is
deemed to be a grant to the Trust or to the
Securityholders of a security interest in
the Contracts, then the related Issuer or
the Securityholders will have a first
priority perfected security interest
therein, except for certain liens which have
priority over previously perfected security
interests by operation of law, and, with
certain exceptions, in the proceeds thereof.
Similar representations and warranties, as
described in the related Prospectus
Supplement, may also be made by the Sponsor
with respect to the Underlying Collateral.
Optional Termination............ The related Servicer, the Sponsor, or, if
specified in the related Prospectus
Supplement, certain other entities may, at
their respective options, effect early
retirement of a series of Securities under
the circumstances and in the manner set
forth herein under "Description of The Trust
Documents - Termination" and in the related
Prospectus Supplement. Such termination may
occur either at a date certain (e.g., thirty
months following the issuance date) or at
such time as the Pool Factor has declared to
a specific level, which will generally not
exceed 10%. The specific date and/or Pool
Factor level at which such termination may
occur with respect to a series of Securities
will be set forth in the related Prospectus
Supplement.
Mandatory Termination........... The Trustee or the Indenture Trustee, the
related Servicer or certain other entities
specified in the related Prospectus
Supplement may be required to effect early
retirement of all or any portion of a series
of Securities by soliciting competitive bids
for the purchase of the related Trust Estate
or otherwise, under other circumstances and
in the manner specified in "The Trust
Document - Termination; Retirement of
Securities" and in the related Prospectus
Supplement.
Material Tax Consequences....... Securities of each series offered hereby
will, for federal income tax purposes,
constitute either (i) interests in a Trust
treated as a grantor trust and not as an
association which is taxable as a
corporation under applicable provisions of
the Code ("Grantor Trust Securities"), (ii)
debt issued by a Trust ("Debt Securities"),
(iii) interests in a Trust which is treated
as a partnership ("Partnership Interests")
or (iv) interests issued by a Financial
Asset Securitization Investment Trust
("FASIT"). Each series of Securities will,
in the opinion of Federal Tax Counsel, be
eligible to be treated by the related
Securityholders as debt instruments for
federal income tax purposes.
In connection with each issuance of
Securities, Dewey Ballantine, LLP (such
firm, "Federal Tax Counsel") will deliver
its opinion with respect to the federal
income tax consequences of an investment in
such Securities.
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<PAGE> 15
Investors are advised to consult their tax
advisors and to review "Certain Federal and
State Income Tax Consequences" in the
related Prospectus Supplement.
ERISA Considerations............ The Prospectus Supplement for each series of
Securities will summarize, subject to the
limitations discussed therein,
considerations under the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), relevant to the purchase of such
Securities by employee benefit plans and
individual retirement accounts. See "ERISA
Considerations" in the related Prospectus
Supplement.
Ratings......................... Each Class of Securities offered pursuant to
this Prospectus and the related Prospectus
Supplement will be rated in one of the four
highest rating categories by one or more
"national statistical rating organizations",
as defined in the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and
commonly referred to as "Rating Agencies".
Such ratings will address, in the opinion
of the Rating Agencies, the likelihood that
the related Issuer will be able to make
normal payment of all amounts due on the
related Securities in accordance with their
terms. Such ratings will neither address any
prepayment or yield considerations
applicable to any Securities nor constitute
a recommendation to buy, sell or hold any
Securities.
The ratings expected to be received with
respect to any Securities will be set forth
in the related Prospectus Supplement.
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<PAGE> 16
MATERIAL RISKS
Prospective Securityholders should consider, among other things, the
following factors in connection with the purchase of the Securities. The risks
described below, together with any additional risks discussed in the "Material
Risks" Section of the related Prospectus Supplement, constitute all material
risk of an investment in the Securities of which a potential investor should be
aware.
LIMITED LIQUIDITY MAY RESULT IN A SECURITYHOLDER BEING UNABLE TO
LIQUIDATE ITS INVESTMENT. There can be no assurance that a secondary market for
the Securities of any series or Class will develop or, if it does develop, that
it will provide Securityholders with liquidity of investment or that it will
continue for the life of such Securities. The Prospectus Supplement for any
series of Securities may indicate that an underwriter specified therein intends
to establish and maintain a secondary market in such Securities; however, no
underwriter will be obligated to do so. The Sponsor does not expect to cause any
of the Securities offered hereby to be listed for trading on any securities to
be quoted in the automated system of any registered securities association. As a
result, the secondary market for the Securities may be relatively illiquid,
compared to other fixed-income securities which are so listed or quoted.
THE SPONSOR WILL GENERALLY HAVE POSSESSION OF THE CONTRACTS, EXPOSING
SECURITYHOLDERS TO THE RISK THAT THEY MAY LOSE THEIR INTERESTS IN THE CONTRACTS.
In connection with the issuance of any series of Securities, the Sponsor will
warrant in a Trust Document that the transfer of the Contracts to the Issuer is
a valid assignment, transfer and conveyance of the Contracts to such Trust and
if the Trust pledges the Contract to an Indenture Trustee, that the Indenture
Trustee on behalf of the Securityholders will have a valid security interest in
such Contracts. The related Trust Document will provide that the Servicer will
retain possession of the related Contracts. The related Prospectus Supplement
may describe specific trigger events that will require delivery of such
contracts to the Trustee or the Indenture Trustee. If the Sponsor, the Servicer,
the Trustee, an Originator or other third party, while in possession of the
Contracts, sells or pledges and delivers such Contracts to another party, in
violation of the Receivables Transfer Agreement or the Trust Documents, there is
a risk that such other party could acquire an interest in such Contracts having
a priority over the Issuer's interest. Furthermore, if the Sponsor, the
Servicer, an Originator or a third party, while in possession of the Contracts,
is rendered insolvent, such event of insolvency may result in competing claims
to ownership or security interests in the Contracts. Such an attempt, even if
unsuccessful, could result in delays in payments on the Securities. If
successful, such attempt could result in losses to the Securityholders or an
acceleration of the repayment of the Securities. The related Originator(s) and
the Sponsor will make certain representations and warranties with respect to the
ownership of the Contracts. The Sponsor and/or the related Originator will be
obligated to acquire any Contract from the related Trust Estate if there is a
breach of such representations and warranties that materially adversely affects
the interests of the Sponsor, the Trust or the Indenture Trustee on behalf of
the Securityholders in such Contract and such breach has not been cured.
SECURITY INTEREST IN THE UNDERLYING COLLATERAL MAY NOT BE PERFECTED IN
CERTAIN CASES, DIMINISHING THE VALUE OF SUCH UNDERLYING COLLATERAL. The Sponsor
and/or the related Originator may have underwriting guidelines with respect to
their programs which do not require that UCC financing statements be filed with
respect to particular items of Underlying Collateral with a value below a
certain level, such as $25,000. In such instances, the related Issuer will have
a security interest in such item of Underlying Collateral, although such
security interest will not be perfected. The Sponsor and/or the related
Originator will also contribute all of its right, title and interest in and to
the related Underlying Collateral to the related Issuer. Each Receivables
Transfer Agreement shall require the Sponsor and/or the Originator to make
certain representations and warranties with respect to the transfer of title and
perfection and priority of a security interest in such Underlying Collateral.
The related Issuer may pledge all of its right, title and interest in and to
such Underlying Collateral to the Indenture Trustee. The manner in which the
Issuer's or the Indenture Trustee's security interest in the Underlying
Collateral will be perfected will vary based on the type of assets constituting
the Underlying Collateral in the related Trust Estate. For example, a security
interest in certain assets comprising the Underlying Collateral may only be
perfected in accordance with the provisions of the Uniform Commercial Code while
a security interest in certain assets comprising the Underlying Collateral may
only be perfected in accordance with Federal law or state certificate of title
statutes.
As specified herein and related Prospectus Supplement, because of the
considerable time and expense involved in assigning individual UCC financing
statements with respect to a Trust Estate (since a Trust Estate may contain tens
of thousands of contracts), neither the Originators nor the Sponsor will, as the
case may be (x) file, or necessarily will be required to file, UCC financing
statements identifying such Underlying Collateral transferred and pledged in
favor of the related Trust and Indenture Trustee on behalf of the
Securityholders, (y) make a notation of the lien of the related Trust or
Indenture Trustee on behalf of the Securityholders on, or take possession of,
the certificate of title with respect to such Underlying Collateral, or (z) make
a notation of the lien of the related Trust or Indenture Trustee on behalf of
the Securityholders on the appropriate Federal registry in respect of such
Underlying Collateral. In the absence of such filings, notation or possession
any security interest in such Underlying Collateral may not be perfected in
favor of the related Trust or Indenture Trustee. As a result, the related
Indenture Trustee or Trust Estate could lose priority of its security interest
in such Underlying Collateral. Neither the Originators nor the Sponsor will have
any obligation to reacquire collateral as to which such
14
<PAGE> 17
aforementioned occurrence results in the loss of lien priority after the date
such Trust Estate receives an interest in such property unless otherwise
described in the related Prospectus Supplement. See "Certain Legal Aspects of
the Receivables."
RECOVERIES ON RECEIVABLES MAY BE LIMITED, DIMINISHING THE VALUE OF THE
RELATED UNDERLYING COLLATERAL, WHICH MAY RESULT IN THE RELATED ISSUER RECEIVING
SUBSTANTIALLY LESS THAN THE FACE AMOUNT OF THE RELATED CONTRACT. Unless specific
limitations are described in the related Prospectus Supplement with respect to
specific Contracts, all Contracts will provide that the obligations of the
Obligors thereunder are absolute and unconditional, regardless of any defense,
set-off or abatement which the Obligors may have against the related Originator
or any other person or entity whatsoever. The Originators will warrant that no
claims or defenses have been asserted or threatened with respect to the
Contracts and that all requirements of applicable law with respect to the
Contracts have been satisfied.
In the event that the Sponsor, the Trustee or the Indenture Trustee
must rely on repossession and disposition of the property to recover scheduled
payments due on defaulted Contracts, the Issuer may not realize the full amount
due on a Contract (or may not realize the full amount on a timely basis). Other
factors that may affect the ability of the Issuer to realize the full amount due
on a Contract include whether financing statements to perfect the security
interest in the property had been filed, depreciation, obsolescence, damage or
loss of any item property, and the application of Federal and state bankruptcy
and insolvency laws. As a result, the Securityholders may be subject to delays
in receiving payments and suffer loss of their investment in the Securities.
CERTAIN PROVISIONS OF THE UCC MAY FURTHER DIMINISH RECOVERIES. Certain
states have adopted a version of Article 2A of the Uniform Commercial Code
("Article 2A"). Article 2A purports to codify many provisions of existing common
law. Although there is little precedent regarding how Article 2A will be
interpreted, it may, among other things, limit enforceability of any
"unconscionable" lease or "unconscionable" provision in a lease, provide a
lessee with remedies, including the right to cancel the lease contract, for
certain lessor breaches or defaults, and may add to or modify the terms of
"consumer leases" and leases where the lessee is a "merchant lessee". Article
2A, moreover, recognizes typical commercial lease "hell or high water" rental
payment clauses (i.e., a clause which obligates the lessee to make payments
regardless of the condition of the related item of equipment and any right of
set-off) and validates reasonable liquidated damages provisions in the event of
lessor or lessee defaults. Article 2A also recognizes the concept of freedom of
contract and permits the parties in a commercial context a wide degree of
latitude to vary provisions of the law.
CONTRACTS RELATED TO SOFTWARE AND SERVICES MAY, AS A PRACTICAL MATTER,
BE UNSECURED AND THUS HAVE NO RECOVERY VALUE. Certain Contracts, as described in
the related Prospectus Supplement, may relate to software and services that are
not owned by the related Originator and in which no related interest will be
transferred to the Issuer. Accordingly, if any such Contract becomes a defaulted
Contract, the Issuer will not realize any proceeds from the related software and
services from which to satisfy any unpaid payments under such Contracts.
ALTHOUGH THE TRANSACTIONS WILL BE STRUCTURED SO AS TO MINIMIZE THE
RISKS ASSOCIATED WITH THE SPONSOR'S BANKRUPTCY, SUCH SAFEGUARDS MAY NOT
ELIMINATE ALL RISKS. The Sponsor will take steps in structuring the transactions
contemplated hereby that are intended to ensure that the voluntary or
involuntary application for relief by the related Originator or the Sponsor (the
Originators and the Sponsors, collectively for these purposes, "Debtors") under
the United States Bankruptcy Code or similar applicable state laws ("Insolvency
Laws") will not result in the assets of the related Trust Estate becoming
property of the estate of a Debtor within the meaning of such Insolvency Laws.
Such steps will generally involve the creation by the Sponsor of a Transferor
as a separate, limited-purpose subsidiary pursuant to articles of incorporation
containing certain limitations (including restrictions on the nature of such
Transferor's business and a restriction on such Transferor's ability to commence
a voluntary case or proceeding under any Insolvency Law without the prior
unanimous affirmative vote of all its directors). However, there can be no
assurance that the activities of any Transferor would not result in a court's
concluding that the assets and liabilities of such Transferor should be
consolidated with those of the Sponsor in a proceeding under any Insolvency Law.
Each Receivables Transfer Agreement and each Trust Document will
generally require that the Sponsor contribute the related Receivables to a
Transferor, which will then either issue the related Securities or transfer the
Receivables to a Trust which will issue the related Securities. In the case of
Notes, the Issuer will pledge such Receivables to the Indenture Trustee on
behalf of the Securityholders.
The Sponsor believes that the transfer of the Receivables by an
Originator to the Sponsor should be treated as a valid assignment, transfer and
conveyance of such Receivables. However, in the event of an insolvency of such
Originator, a court, among other remedies, could attempt to recharacterize the
transfer of the Receivables by such Originator to the Sponsor as a borrowing by
the Originator from the Sponsor or the related Securityholders, secured by a
pledge of such Receivables. Such an attempt, even if unsuccessful, could result
in delays in payments on the Securities. If such an attempt were successful, a
court, among other remedies, could elect to accelerate payment of the Securities
and liquidate the Receivables, with the Securityholders entitled to the then
outstanding principal amount thereof and interest thereon at the applicable
Security Interest Rate to the date of payment. Thus, the Securityholders could
lose the right to future payments of interest and might incur reinvestment
losses. As more fully described in the related Prospectus Supplement, in the
event the related Issuer is rendered insolvent, the Trustee for a Trust, in
accordance with the related Trust Document, will promptly sell, dispose of or
otherwise liquidate the related Receivables in a commercially reasonable manner
on commercially reasonable terms. The proceeds from any such sale, disposition
or liquidation of such Receivables will be treated as collections on such
Receivables. If the proceeds from the liquidation of the Receivables and any
amount available from any credit enhancement, if any, are not sufficient to pay
Securities of the related series in full, the amount of principal returned to
such Securityholders will be reduced and such Securityholders will incur a
loss.
Obligors may be entitled to assert against the related Originator, the
Sponsor, or Issuer, claims and defenses which they have against the Originator
or the Sponsor with respect to the Receivables. The Originator(s) and the
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Sponsor will warrant that no such claims or defenses have been asserted or
threatened with respect to the Receivables and that all requirements of
applicable law with respect to the Receivables have been satisfied.
DELINQUENCIES MAY VARY OVER TIME, AND ANY INCREASE IN DELINQUENCIES MAY
RESULT IN AN UNANTICIPATED LEVEL OF LOSS. There can be no assurance that the
historical levels of delinquencies and losses experienced by the related
Originator on its portfolio will be indicative of the performance of the
Contracts included in any Trust Estate or that such levels will continue in the
future. Delinquencies and losses could increase significantly for various
reasons, including changes in the federal income tax laws, changes in the local,
regional or national economies or due to other events.
PROVISIONS APPLICABLE TO A SERIES WILL HAVE ADVERSE CONSEQUENCES FOR
THE SUBORDINATE CLASSES. To the extent specified in the related Prospectus
Supplement, distributions of interest and principal on one Class of Securities
of a series may be subordinated in priority of payment to interest and principal
due on other Classes of Securities of a related series. Moreover, no Issuer will
have, nor is it permitted or expected to have, any significant assets or sources
of funds other than the related Receivables and, to the extent provided in the
related Prospectus Supplement, a Pre-Funding Account, any related reserve
account and any other credit enhancement.
NEITHER THE SPONSOR NOR THE RELATED ISSUER WILL BE CORPORATELY LIABLE
ON THE SECURITIES, AND THE ONLY SOURCE OF REPAYMENT WILL BE THE RELATED TRUST
ESTATE. The Securities represent non-recourse obligations solely of the related
Issuer, and will not represent a recourse obligation to other assets of the
related Originator(s), the Servicer, or, related Sub-Servicer or of the Sponsor.
No Securities of any series will be insured or guaranteed by any Originator, the
Sponsor, any Transferor, the Servicer, the applicable Trustee or the Indenture
Trustee. Consequently, holders of the Securities of any series must rely for
repayment solely upon payments on the Receivables and, if and to the extent
available, amounts on deposit in the Pre-Funding Account, if any, the reserve
account, if any, and any other credit enhancement, all as specified in the
related Prospectus Supplement.
The Sponsor does not expect to cause any of the Securities offered
hereby to be listed for trading on any securities to be quoted in the automated
system of any registered securities association. As a result, the secondary
market for the Securities may be relatively illiquid, compared to other
fixed-income securities which are so listed or quoted.
BOOK-ENTRY REGISTRATION MAY FURTHER REDUCE LIQUIDITY, AND MAY LEAD TO
PAYMENT DELAYS. The Securities may be issued in "book-entry" form, which means
that investors will not receive physical certificates evidencing their
Securities, but rather will have such Securities credited to their accounts
maintained with an intermediary, such as a broker-dealer. Issuance of the
Securities in book-entry form may reduce the liquidity of such Securities in
the secondary trading market since investors may be unwilling to purchase
Securities for which they cannot obtain definitive physical securities
representing such Securityholders' interests, except in certain circumstances
described in the related Prospectus Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct Participants" or "Indirect Participants") or certain banks, the
ability of a Securityholder to pledge a Security to persons or entities that do
not participate in the DTC system, or otherwise to take actions in respect to
such Securities, may be limited due to lack of a physical security representing
the Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Indenture Trustee to DTC and, in such
case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter may be required to credit them to the accounts of
the applicable class of Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities -- Book Entry
Registration."
SECURITY RATING MAY BE HIGHLY DEPENDENT ON THE RATINGS OF AN EXTERNAL
CREDIT ENHANCER. The rating of Securities credit enhanced by a letter of credit,
financial guaranty insurance policy, reserve fund, credit or liquidity
facilities, cash deposits or other forms of credit enhancement (collectively
"Credit Enhancement") will depend primarily on the creditworthiness of the
issuer of such external Credit Enhancement device (a "Credit Enhancer"). Any
reduction in the rating assigned to the related Credit Enhancer regarding its
obligations pursuant to any such Credit Enhancement below the rating initially
given to the Securities would likely result in a reduction in the rating of the
Securities.
THE RATE OF PAYMENTS ON THE SECURITIES IS UNPREDICTABLE, AND MAY BE
VOLATILE; IF THE ACTUAL PAYMENT RATE DEVIATES FROM AN INVESTOR'S EXPECTATIONS,
SUCH INVESTOR'S YIELD MAY BE SUBSTANTIALLY REDUCED. Because the rate of payment
of principal on the Securities will depend, among other things, on the rate of
payment on the related Contracts, the rate of payment of principal on the
Securities cannot be predicted. Payments on the Contracts will include scheduled
payments as well as partial and full prepayments (to the extent not replaced
with substitute Contracts), payments upon the liquidation of defaulted
Contracts, payments upon acquisitions by the related Originator, the related
Servicer or the Sponsor of Contracts from the related Trust Estate on account
of a breach of certain representations and warranties in the related Trust
Document, payments upon an optional acquisition by the related Originator, the
related Servicer or the Sponsor of Contracts from the related Trust Estate (any
such voluntary or involuntary prepayment or other early payment of a Contract, a
"Prepayment"), and residual payments. The rate of early terminations of
Contracts due to Prepayments and defaults may be influenced by a variety of
economic and other factors, including, among others, obsolescence, then current
economic conditions and tax considerations. The risk of reinvesting
distributions of the principal of the
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Securities will be borne by the Securityholders. The yield to maturity on Strip
Securities or Securities purchased at premiums or discounts to par will be
extremely sensitive to the rate of Prepayments on the related Receivables. In
addition, the yield to maturity on certain other types of classes of Securities,
including Strip Securities, Accrual Securities or certain other Classes in a
series including more than one Class of Securities, may be relatively more
sensitive to the rate of prepayment of the related Contracts than other Classes
of Securities.
The rate of Prepayments of Contracts cannot be predicted and is influenced
by a wide variety of economic, social, and other factors, including prevailing
interest rates, the availability of alternate financing and local and regional
economic conditions. Therefore, no assurance can be given as to the level of
Prepayments that a Trust Estate will experience.
Securityholders should consider, in the case of Securities purchased at a
discount, the risk that a slower than anticipated rate of Prepayments on the
Receivables could result in an actual yield that is less than the anticipated
yield and, in the case of any Securities purchased at a premium, the risk that a
faster than anticipated rate of Prepayments on the Receivables could result in
an actual yield that is less than the anticipated yield.
THE TRUST ESTATES
The property of each Trust Estate will include, as specified in the
related Prospectus Supplement, (i) a pool of Receivables, (ii) all moneys
(including accrued interest) due thereunder on or after the applicable cut-off
date set forth in the related Trust Documents (the related "Cut-Off Date"),
(iii) such amounts as from time to time may be held in one or more accounts
established and maintained by the Servicer or the Trustee pursuant to the
related Trust Document, as described below and in the related Prospectus
Supplement, (iv) the security interests, if any, in the Underlying Collateral
relating to such pool of Receivables, (v) the right to proceeds from claims on
physical damage policies, if any, covering such Underlying Collateral or the
related Obligors, as the case may be, (vi) the proceeds of any repossessed
collateral related to such pool of Receivables, (vii) the rights of the Sponsor
under the related Receivables Transfer Agreement and (viii) interest earned on
certain short-term investments held by such Trust Estate, unless the related
Prospectus Supplement specifies that such earnings may be paid to the related
Servicer or Originator(s). In addition, to the extent specified in the related
Prospectus Supplement, some combination of Credit Enhancement may be issued to
or held by the Trustee or Indenture Trustee on behalf of the related Trust
Estate for the benefit of the holders of one or more classes of Securities.
If so specified in the related Prospectus Supplement, a portion of the issuance
proceeds of the Securities of a particular series (such amount, (the "Pre-Funded
Amount") will be deposited in an account (the "Pre-Funding Account") to be
established with the Trustee, which will be used to acquire additional
Receivables from time to time during time period specified in the related
Prospectus Supplement. Prior to the investment of the Pre-Funded Amount will be
invested in one or more Eligible Investments. An "Eligible Investment" is any of
the following, in each case as determined at the time of the investment or
contractual commitment to invest therein (to the extend such investments would
not required registration of the Trust as an investment company pursuant to the
Investment Company Act): (a) negotiable instruments or securities represented by
instruments in bearer or registered or book-entry from which evidence: (i)
obligations which have the benefit of the full faith and credit of the United
States of America, including depository receipts issued by a bank as custodian
with respect to any such instrument or security held by the custodian for the
benefit of the holder of such depository receipt, (ii) demand deposits or time
deposits in, or bankers' acceptances issued 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 or state
banking or depositary institution authorities; provided that at the time of the
Trustee's investment or contractual commitment to invest therein, the
certificates of deposit or short-term deposits (if any) or long-term unsecured
debt obligations (other than such obligations whose rating is based on
collateral or on the credit of a Person other than such institution or trust
company) of such depositary institution or trust company has a credit rating in
highest rating category from each Rating Agency, (iii) certificates of deposit
having a rating in the highest rating category by the Rating Agencies, or (iv)
investments in money market funds which are (or which are composed of
instruments or other investments which are) rated in the highest rating category
by the Rating Agencies; (b) demand deposits in the name of the Trustee in any
depositary institution or trust company referred to in clause (a)(ii) above; (c)
commercial paper (having original or remaining maturities of no more than 270
days) having a credit rating in the highest rating category by the Rating
Agencies; (d) Eurodollar time deposits that are obligations of institutions
whose time deposits carry a credit rating in the highest rating category by the
Rating Agencies; (e) repurchase agreements involving any Eligible Investment
described in any clauses (a)(i), or (a)(iii) or (d) above, so long as the other
party to repurchase agreement has its long-term unsecured debt obligations rated
in the highest rating category by the Rating Agencies; and (f) any other
investment with respect to which the Rating Agencies rating such Securities
indicate with not result in the reduction or withdrawal of its then-existing
rating of the Securities. Any Eligible Investment must mature no later than the
Business Day prior to the next Payment Date.
During any Pre-Funding Period, the related Issuer will be obligated
(subject only to the availability thereof) to acquire from the Sponsor a Trustee
on behalf of Securityholders, additional Receivables from time to time during
such Pre-Funding Period. Such additional Receivables be required to satisfy
certain eligibility criteria more fully set forth in the related Prospectus
Supplement which eligibility criteria will be consistent with the eligibility
criteria of the Receivables included in the Trust Estate as of the issuance date
subject to such exceptions as are expressly stated in such Prospectus
Supplement.
Although to specific parameters of the Pre-Funding Account with respect to
any issuance of Securities will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
120 days from the related Closing Date, (b) that the additional Receivables to
be acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Receivables included in the related Trust
Estate on the Closing Date (although additional criteria may also be required to
be satisfied, as described in the related Prospectus Supplement) and (c) that
the Pre-Funded Amount will not exceed 25% of the principal amount of the
Securities issued pursuant to a particular offering.
The Receivables comprising a Trust Estate will, as specifically described
in the related Prospectus Supplement, be either (i) originated by the Sponsor,
(ii) originated by the related Originator and acquired by the Sponsor pursuant
to a Receivables Transfer Agreement, (iii) originated by various Vendors and
acquired by the Sponsor or (iv) acquired by the Sponsor from other owners of
Receivables. The underwriting criteria applicable to the Receivables included in
any Trust Estate will be described in all material respects in the related
Prospectus Supplement.
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The Contracts are either "instruments", "chattel paper" (each as defined
in the Uniform Commercial Code) or would be "chattel paper" but for a technical
definitional matter, but in any event are not treated materially differently
from "chattel paper" for purposes of title transfer, security interests or
remedies on default.
The commercial products sold, leased under or financed by the Contracts
and expected to comprise the Underlying Collateral of a Trust Estate consists
primarily of commercial property used for a variety of business purposes and
commercial enterprises. The Underlying Collateral included in each Trust Estate
will be limited to personal property for use by the related Obligor in the
ordinary course of business.
With respect to each series of Securities, on or prior to the Closing Date
on which the Securities are delivered to Securityholders, the Sponsor will form
a Trust Estate by either (i) transferring the related Receivables into a Trust
pursuant to a Receivables Transfer Agreement or a pooling and servicing
agreement between the Sponsor and the Trustee or (ii) transferring the related
Receivables by entering into a Sale and Servicing Agreement with an Issuer
formed pursuant to a Trust Agreement with the Owner Trustee and the Transferor
specified in the related Prospectus Supplement. If the Receivables are
transferred to an Issuer pursuant to Sale and Servicing Agreement, such Issuer
will enter into an Indenture with an Indenture Trustee, relating to the issuance
of such Securities, secured by the related Receivables.
ADVANTA BUSINESS SERVICES CORP. UNDERWRITING, ORIGINATING AND SERVICING
PRACTICES
GENERAL:
Advanta Business Services Corp. ("ABS") is a wholly-owned subsidiary of
Advanta Leasing Holding Corp., a Delaware corporation ("ALHC"). ALHC is a
wholly-owned subsidiary of Advanta Corp. (a publicly-traded company based in
Spring House, PA and is listed on the NASDAQ as ADVNA and ADVNB). ABS's
primary business is convenience lending which consists of originating and
servicing primarily commercial leases and loans (the "Contracts") to
businesses and business owners in the United States. Advanta Business
Services Corp. is headquartered at 1020 Laurel Oak Road, Voorhees, NJ
08043-7228 and its phone number is (609) 782-7300.
ABS leases and finances a wide variety of small-ticket equipment,
including, but not limited to, office equipment, telecommunications equipment,
automotive repair equipment, surveillance equipment, and furniture, to
businesses and business owners throughout the United States. ABS underwrites and
services its equipment leasing and financing business from its headquarters in
Voorhees, New Jersey.
CONTRACT ORIGINATION:
ABS originates Contracts primarily through its sales and marketing
programs at its New Jersey headquarters. Transactions are originated as a result
of ABS's relationships with its various brokers and vendors. From time to time,
vendors who are familiar with the ABS's leasing and financing services as a
result of previous transactions may recommend prospective customers make a
credit application to ABS for financing. Other transactions may be submitted to
ABS as a result of a more formal program between ABS and a vendor where the
vendor's marketing representatives may offer prospective customers financing at
pre-arranged rates, based upon the vendor's equipment, and certain terms and
conditions approved by ABS.
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In a majority of these vendor programs, ABS owns the equipment subject to
each contract and bills and collects payments directly with the obligor. For
some select vendor programs, ABS will bill and collect payments using a
non-descriptive name, so that the obligor does not recognize ABS as a party to
the transaction. Under this program, once a contract becomes 60-90 days past
due, ABS is then immediately identified to the obligor. Vendors may choose to
originate the contracts on ABS's standard contract documentation or they may use
their own internally generated contract documentation which is reviewed and
approved by ABS's legal staff. In instances where ABS does not own the
equipment, they will, under certain circumstances, obtain a perfected security
interest in the equipment.
On occasion, ABS will purchase contracts or other financing transactions
which were originated by unaffiliated lessors/lenders; provided, however, that
the creditworthiness and origination procedures of such originator meet the
approval of ABS; and provided further, that ABS approves the creditworthiness of
the obligor and all of the related documentation in such transaction.
Another program through which ABS originates contracts is through the use
of brokers. In a typical broker transaction, ABS originates contracts referred
to it by a given broker and pays the broker a referral fee. Contracts originated
under this program are reviewed in a manner consistent with ABS's then existing
credit polices and procedures. Contracts may also be purchased by ABS on a bulk
or portfolio basis. These contracts may be originated by a variety of
Originators under several different underwriting guidelines. When reviewing
potential bulk or portfolio acquisitions, the existing Originator's contracts
will be reviewed by the ABS credit staff. Using predetermined guidelines, an
acceptance or rejection decision will be made. For each potential bulk or
portfolio purchase, ABS has the ability to accept or reject individual
contracts.
RESIDUAL VALUES:
ABS has realized residual values which, on average, exceeded the booked
residual values in respect of such contracts. For contracts in which there is a
pre-determined buy-out price, the buy-out price is the residual value recorded
on ABS's books. In the event the equipment is returned, ABS utilizes the
services of its vendors and brokers and also participates in an active secondary
market for the sale of this returned, used equipment.
ABS'S CREDIT REVIEW:
As part of its credit underwriting process, ABS performs a thorough credit
review of all prospective obligors, the creditworthiness of the vendor, and the
value of the equipment.
Typically, the credit review process begins when the prospective obligor
completes a credit application. The completed credit application is entered into
the company's computerized processing system. A standardized credit scoring
model is employed and decisioning is based on several criteria which may include
verification of a Credit Bureau Report for the principal(s) of the company,
verification of a Dun & Bradstreet listing for the company, and a review of the
total exposure for all Contracts currently outstanding with ABS, which may not
exceed a certain dollar limit. Credit applications can be automatically approved
and/or rejected based on the dollar amount of the application and a credit score
falling within a certain range in the model. For those credit applications not
falling within a specified dollar amount and/or credit score, the decision is
then based on an analysis by the credit staff. Authority to make credit
decisions is based on seniority and lending experience.
From time to time, the company purchases lease portfolios originated by a
third party. While these leases are not run through the credit scoring model, an
in depth due diligence process that includes most of the elements in the scoring
model process does take place. It is ABS's current policy to evaluate all such
leases in the portfolios that have been acquired using this due diligence
process.
In general, the applicant's credit history plays a larger role in the
credit decision than do gross monthly income requirements, debt to income
ratios, and loan to value ratios. In fact, financial statements containing
income data is only obtained for those applicants requesting credit extensions
(or having total exposure to ABS) of $50,000 or greater. When financial
statements are provided, a minimum debt coverage ratio is preferred.
In general, transactions in excess of $500,000 must be approved by the
senior management of ABS. The company also maintains a senior credit committee
that provides a forum for making credit decisions on transactions which exceed
the authority of individual or paired credit approvers either in size or
complexity. The senior credit committee also identifies strategic issues and the
credit policies and procedures throughout the company.
In addition, the credit department has a staff dedicated to perform
reviews of potential new vendors and brokers to ensure compliance with the
company's overall credit policies and procedures. In reviewing new relationships
with vendors and brokers, ABS considers, among other things, length of time in
business, bank, credit and trade references, Dun & Bradstreet reports, and
credit bureau reports on all of the officers.
The company introduced a formalized credit scoring program throughout the
2nd, 3rd, and 4th quarters of 1996. This credit scoring model, developed by CRMA
(CRMA is now owned by Fair Isaac) consists of a matrix of several key attributes
from the applicant's credit bureau report as well as key attributes from the
applicant's Dun and Bradstreet report. In general, certain minimum FICO scores
and D&B Commercial scores must be met by the applicant and the applicant must
not have any major derogatory credit information in their file. As of January
1st, 1997, almost all of the credit applications submitted to the company were
processed the scoring model.
COLLECTION/SERVICING:
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Collection activities with respect to delinquent contracts are performed
by ABS's servicing staff in Voorhees, New Jersey. Each contract has a provision
for assessing late charges in the event that an obligor fails to make a payment
on the contract on the related due date. Telephone contact is normally initiated
when an account is one to fifteen days past due. All collection activity is
entered into the computerized collection system. Activity notes are input
directly into the collection system in order for company personnel to monitor
the status of the account and take any necessary actions. Collectors have
available at their computer terminals the latest status and collection history
on each account.
If a payment has not been received by the 11th day after the due date, the
system automatically generates a computerized late notice which is sent directly
to the obligor. If a payment has not been received by the 31st day after the due
date, a default letter is sent out to the obligor. If a payment has not been
received by the 61st day after the due date, a demand letter is sent out
directly to the obligor. Telephone contact is continued throughout the
delinquency period. If the transaction continues to be delinquent, ABS may
exercise any remedies available to it under the terms of the contract, including
termination, acceleration and/or repossession. Each contract is evaluated on the
merits of the individual situation, with the equipment value being considered as
well as the current financial strength of the obligor. If collection activities
do not rectify the account, ABS typically charges off the account at 121 days
past due.
At the time of charge-off the account is turned over to ABS's in-house
litigation department. In general, a decision is made to either pursue the
obligor and /or personal guarantor through litigation or send to a third-party
collection agency to enforce the original terms of the contract. Prior to
litigation, the legal recovery department will attempt to obtain resolution of
the account. The litigation decision is dependent on a review of the account
including credit bureau reports, obligor payment history, and/or Dun &
Bradstreet reports. In cases where the obligor has filed for bankruptcy, the
ABS legal recovery department follows up with the debtor to determine whether
it intends to assume or reject the contract. In addition, the department pursues
the non-bankrupt debtors while reviewing the fair market value of the
equipment, the remaining balance of the contract, and the credit of the
non-bankrupt obligors. If the Bankruptcy area cannot settle with the
non-bankrupt obligors, the file may be passed to the litigators for suit. In
many cases, although the obligor has filed for bankruptcy protection from their
creditors, they continue to make regular payments on their contract to ABS.
THE ISSUERS
With respect to each series of Securities, the Issuer shall be either the
Sponsor, one or more special-purpose finance subsidiaries of the Sponsor (which
may be organized and established by the Sponsor with respect to one or more
Trust Estates) (each such special-purpose finance subsidiary, a "Transferor") or
a trust formed by the Sponsor or by one or more Transferors (each, a "Trust").
For purposes of this Prospectus, the term "Sponsor" includes the term
"Transferor". The Trust issuing Securities pursuant to this Prospectus and the
related Prospectus Supplement shall be referred to herein as the "Issuer" with
respect to the related Securities.
Upon the issuance of the Securities of a given series, the proceeds from
such issuance will be used by the Issuer to acquire the related Receivables from
the Sponsor or the related Transferor. The Servicer will service the related
Receivables pursuant to the applicable Trust Document, and will be compensated
for acting as the Servicer. To facilitate servicing and to minimize
administrative burden and expense, the Servicer may be appointed custodian for
the related Receivables by each Trustee, Indenture Trustee and the Sponsor, as
set forth in the related Prospectus Supplement.
If the protection provided to the Securityholders of a given class by the
subordination of another Class of Securities of such series and by the
availability of the funds in a reserve account, if any, or any other Credit
Enhancement for such series is insufficient, the Securityholders must rely
solely on the payments from the related Contracts, and the proceeds from the
sale of the property which secures or is leased under the defaulted Contracts
for repayment of the related security. In such event, certain factors may affect
such Issuer's ability to realize on the collateral securing such Contracts, and
thus may reduce the proceeds to be distributed to the Securityholders of such
series.
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THE RECEIVABLES
RECEIVABLES POOLS
Information with respect to the Receivables in each Trust Estate will be
set forth in the related Prospectus Supplement, including the distribution of
such Receivables by type, payment frequency and outstanding principal balance as
of the applicable Cut-off Date. No Trust Estate shall be comprised of a pool of
Receivables of which pool consists of 20% or more of delinquent Receivables. The
commercial products sold, leased under or financed by the Contracts expected to
be included in a Trust Estate consist primarily of commercial property used for
a variety of business purposes and commercial enterprises.
DELINQUENCIES, REPOSSESSIONS, AND NET LOSSES
Certain information relating to the Sponsor's delinquency, repossession and
net loss experience with respect to contracts it has originated or acquired will
be set forth in each Prospectus Supplement. This information may include, among
other things, the experience with respect to all contracts in the Sponsor's
portfolio during certain specified periods, including Contracts which may not
meet the criteria for selection as a Receivable for any particular Trust Estate.
There can be no assurance that the delinquency, repossession and net loss
experience on any Trust Estate will be comparable to the Sponsor's prior
experience.
MATURITY AND PREPAYMENT CONSIDERATIONS
As more fully described in the related Prospectus Supplement, if a Contract
permits a Prepayment, such payment, together with accelerated payments resulting
from defaults, will shorten the weighted average life of the related pool of
Receivables and the weighted average life of the related Securities. The rate of
Prepayments on the Receivables may be influenced by a variety of economic,
financial and other factors. In addition, under certain circumstances, the
Sponsor or the related Originator will be obligated to acquire Receivables from
the related Trust Estate pursuant to the applicable Trust Document or
Receivables Transfer Agreement as a result of breaches of representations and
warranties. Any reinvestment risks resulting from a faster or slower
amortization of the related Securities which results from Prepayments will be
borne entirely by the related Securityholders.
The related Prospectus Supplement will set forth certain additional
information with respect to the maturity and prepayment considerations
applicable to a particular pool of Receivables and the related series of
Securities, together with a description of any applicable prepayment penalties.
POOL FACTORS
The "Pool Factor" for each Class of Securities will be a seven-digit
decimal, which the Servicer will compute prior to each distribution with respect
to such Class of Securities, indicating the remaining outstanding principal
balance of such Class of Securities as of the applicable Payment Date, as a
fraction of the initial outstanding principal balance of such Class of
Securities. Each Pool Factor will be initially 1.0000000, and thereafter will
decline to reflect reductions in the outstanding principal balance of the
applicable Class of Securities. A Securityholder's portion of the aggregate
outstanding principal balance of the related Class of Securities is the product
of (i) the original aggregate purchase price of such Securityholder's Securities
and (ii) the applicable Pool Factor.
As more specifically described in the related Prospectus Supplement with
respect to each series of Securities, the related Securityholders of record will
receive reports on or about each Payment Date concerning the payments received
on the Receivables, the Pool Balance (as such term is defined in the related
Prospectus Supplement, the "Pool Balance"), each Pool Factor and various other
items of information. In addition, Securityholders of record during any calendar
year will be furnished information for tax reporting purposes not later than the
latest date permitted by law.
USE OF PROCEEDS
The proceeds from the sale of the Securities of a given series will be
applied by the Sponsor to the acquisition of the related Receivables from the
related Originator. The Sponsor expects that it will make additional
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sales of securities similar to the Securities from time to time, but the timing
and amount of any such additional offering will be dependent upon a number of
factors, including the volume of Contracts acquired by the Sponsor, prevailing
interest rates, availability of funds and general market conditions.
THE TRUSTEE
The Trustee for each series of Securities will be specified in the related
Prospectus Supplement. The Trustee's liability in connection with the issuance
and sale of the related Securities is limited solely to the express obligations
of such Trustee set forth in the related Trust Document.
With respect to each series of Securities, no resignation or removal of
the Trustee and no appointment of a successor Trustee shall become effective
until the acceptance of appointment by the successor Trustee. The Trustee may
resign for cause at any time by giving written notice thereof to the Servicer
(if the related Trust is structured as a grantor trust) or to the related
Transferor (if the related Trust is structured as an owner trust) and by mailing
notice of resignation by first-class mail, postage prepaid, to the
Securityholders of such series at their addresses appearing on the Security
Register. The Trustee may be removed at any time by written notice of the
holders of Securities evidencing more than 50% of the voting rights with respect
to such series, delivered to the Trustee and the Servicer (if the related Trust
is structured as a grantor trust) or to the related Transferor (if the related
Trust is structured as an owner trust), unless an alternate method is described
in the related Prospectus Supplement. If the Trustee shall resign, be removed,
or become incapable of acting, or if a vacancy shall occur in the office of
Trustee for any cause, the Servicer (if the related Trust is structured as a
grantor trust) or to the related Transferor (if the related Trust is structured
as an owner trust) shall promptly appoint a successor Trustee. If no successor
Trustee shall have been so appointed by the Servicer (if the related Trust is
structured as a grantor trust) or to the related Transferor (if the related
Trust is structured as an owner trust) or the Securityholders, or if no
successor Trustee shall have accepted appointment within 30 days after any such
resignation or removal, existence of incapability, or occurrence of such
vacancy, the Trustee or any Securityholder may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or, in
certain instances, two or more series of Securities) will be issued pursuant to
a Trust Document or a supplement thereto. The following summaries (together
with additional summaries under "The Trust Document" below) describe all
material terms and provisions relating to the Securities common to each Trust
Document. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Trust Documents for the related Securities and the related Prospectus
Supplement.
All of the Securities offered pursuant to this Prospectus and the related
Prospectus Supplement will be rated in one of the four highest rating categories
by one or more Rating Agencies.
The Securities will generally be styled as debt instruments, having a
principal balance and a specified Interest Rate. The Securities may either
represent beneficial ownership interests in the related Receivables held by the
related Trust or debt secured by certain assets of the related Issuer.
Each series or Class of Securities offered pursuant to this Prospectus may
have a different Interest Rate, which may be a fixed or adjustable interest
rate. The related Prospectus Supplement will specify the Interest Rate for each
series or Class of Securities described therein, or the initial interest rate
and the method for determining subsequent changes to the Interest Rate.
A series may include one or more Classes of Strip Securities entitled (i)
to principal distributions, with disproportionate, nominal or no interest
distributions, or (ii) to interest distributions, with disproportionate, nominal
or no principal distributions. In addition, a series of Securities may include
two or more Classes of Securities that differ as to timing, sequential order,
priority of payment, Interest Rate or amount of distribution of principal or
interest or both, or as to which distributions of principal or interest or both
on any Class shall or may be made upon
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the occurrence of specified events, in accordance with a schedule or formula, or
on the basis of collections from designated portions of the related pool of
Receivables. Any such series may include one or more Classes of Accrual
Securities, as to which certain accrued interest will not be distributed but
rather will be added to the principal balance (or nominal balance, in the case
of Accrual Securities which are also Strip Securities) thereof on each Payment
Date, as hereinafter defined, or in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series may include
one or more other Classes of Senior Securities that are senior to one or more
other Classes of Subordinate Securities in respect of certain distributions of
principal and interest and allocations of losses on Receivables.
In addition, certain Classes of Senior (or Subordinate) Securities may be
senior to other Classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
GENERAL PAYMENT TERMS OF SECURITIES
As provided in the related Trust Document and as described in the related
Prospectus Supplement, Securityholders will be entitled to receive payments on
their Securities on the specified Payment Dates. Payment Dates with respect to
the Securities will occur monthly, quarterly or semi-annually, as described in
the related Prospectus Supplement.
The related Prospectus Supplement will describe the Record Date preceding
such Payment Date, as of which the Trustee, the Indenture Trustee or its paying
agent will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date. As more fully described in the
related Prospectus Supplement, the Payment Date may be the fifteenth or
twenty-fifth day of each month (or, in the case of quarterly-pay Securities, the
fifteenth or twenty-fifth day of every third month; and in the case of
semi-annual pay Securities, the fifteenth or twenty-fifth day of every sixth
month) and the Record Date will be the close of business as of the last day of
the calendar month that precedes the calendar month in which such Payment Date
occurs.
Each Trust Document will describe a Monthly Period preceding each Payment
Date (for example, in the case of monthly-pay Securities, the calendar month
preceding the month in which a Payment Date occurs). As more fully provided in
the related Prospectus Supplement, collections received on or with respect to
the related Receivables held by or pledged to a Trust during a Monthly Period
will be required to be remitted by the related Servicer to the related Trustee
or Indenture Trustee prior to the related Payment Date and will be used to fund
payments to Securityholders on such Payment Date. As may be described in the
related Prospectus Supplement, the related Trust Document may provide that all
or a portion of the payments collected on or with respect to the related
Receivables may be applied by the related Trustee or Indenture Trustee to the
acquisition of additional Receivables during a specified period (rather than be
used to fund payments of principal to Securityholders during such period) with
the result that the related Securities will possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in
the earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Trust Document may provide that all or a portion of such collected
payments may be retained by the Trustee (and held in certain temporary
investments, including Receivables) for a specified period prior to being used
to fund payments of principal and/or interest to Securityholders.
Such retention and temporary investment by the Trustee or Indenture
Trustee of such collected payments may be required by the related Trust Document
for the purposes of (a) slowing the amortization rate of the related Securities
relative to the rent payment schedule of the related Receivables, or (b)
attempting to match the amortization rate of the related Securities to an
amortization schedule established at the time such Securities are issued. Any
such feature applicable to any Securities may terminate upon the occurrence of
events to be described in the related Prospectus Supplement, resulting in
distributions to the specified Securityholders and an acceleration of the
amortization of such Securities.
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Neither the Securities nor the underlying Receivables will be guaranteed
or insured by any governmental agency or instrumentality or the Sponsor, any
Transferor, the related Servicer, the related Originator, any Trustee, any
Indenture Trustee or any of their respective affiliates unless specifically set
forth in the related Prospectus Supplement.
As may be described in the related Prospectus Supplement, Securities of
each series covered by a particular Trust Document or Indenture will either
evidence specified beneficial ownership interest in a separate Trust Estate
created pursuant to such Trust Document or represent debt secured by the related
Trust Estate. To the extent that any Trust Estate includes certificates of
interest or participations in Receivables, the related Prospectus Supplement
will describe the material terms and conditions of such certificates or
participations.
BOOK-ENTRY REGISTRATION
As may be described in the related Prospectus Supplement, Securityholders
of a given series may hold their Securities through DTC (in the United States)
or CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Securities in respect of a
given series. CEDEL and Euroclear will hold omnibus positions on behalf of the
CEDEL Participants (as defined below) and the Euroclear Participants (as defined
below) (collectively, the "Participants"), respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries") which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for DTC Participants and to facilitate the clearance and settlement
of securities transactions between DTC Participants through electronic
book-entries, thereby eliminating the need for physical movement of notes or
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in the ordinary way in accordance with their applicable rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
CEDEL or Euroclear cash account only as of the business day following settlement
in DTC.
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The Securityholders of a given series that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, Securities of such series may do so only
through Participants and Indirect Participants. In addition, Securityholders of
a given series will receive all distributions of principal and interest through
the Participants who in turn will receive them from DTC. Under a book-entry
format, Securityholders of a given series may experience some delay in their
receipt of payments, since such payments will be forwarded by the applicable
Trustee to Cede, as nominee for DTC. DTC will forward such payments to the
related DTC Participants, which thereafter will forward them to Indirect
Participants or such Securityholders. It is anticipated that the only
"Securityholder" in respect of any series will be Cede, as nominee of DTC.
Securityholder of a given series will not be recognized as Securityholders of
such series, and such Securityholders will be permitted to exercise the rights
of Securityholders of such series only indirectly through DTC and its
Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities of a given series among Participants on whose behalf it acts with
respect to such Securities and to receive and transmit distributions of
principal of, and interest on, such Securities. Participants and Indirect
Participants with which the Securityholders of a given series have accounts with
respect to such Securities similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective
Securityholders of such series. Accordingly, although such Securityholders will
not possess Securities, the Rules provide a mechanism by which Participants will
receive payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder of a given series to pledge Securities of such series to persons
or entities that do not participate in the DTC system, or to otherwise act with
respect to such Securities, may be limited due to the lack of a physical
certificate for such Securities.
DTC will advise the Trustee in respect of each Series that it will take
any action permitted to be taken by a Securityholder of the related series only
at the direction of one or more Participants to whose accounts with DTC the
Securities of such series are credited. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of Participants whose holdings include such undivided interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 28 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC described above. Euroclear is operated by Morgan Guaranty Trust Company of
New York, Brussels, Belgium office, under contract with Euroclear Clearance
System, S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the "Euroclear Operator" (as defined below), and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
Underwriters. Indirect access to the Euroclear
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System is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The "Euroclear Operator" is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of relationship with persons holding through Euroclear Participants.
Except as required by law, the Trustee or Indenture Trustee in respect of
a series will not have any liability for any aspect of the records relating to
or payments made or account of beneficial ownership interests of the related
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DEFINITIVE NOTES
As may be described in the related Prospectus Supplement, the Securities
will be issued in fully registered, certificated form ("Definitive Securities")
to the Securityholders of a given series or their nominees, rather than to DTC
or its nominee, only if (i) the Trustee in respect of the related series advises
in writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to such Securities and such Trustee
is unable to locate a qualified successor, (ii) such Trustee or Indenture
Trustee, at its option, elects to terminate the book-entry-system through DTC or
(iii) after the occurrence of an "Event of Default" under the related Indenture
or a default by the Servicer under the related Trust Documents Securityholders
representing at least a majority of the outstanding principal amount of such
Securities advise the applicable Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in such Securityholders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee or Indenture Trustee will be required to
notify all such Securityholders through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the definitive certificates
representing such Securities and receipt of instructions for re-registration,
the applicable Trustee or Indenture Trustee will reissue such Securities as
Definitive Securities to such Securityholders.
Distributions of principal of, and interest on, such Securities will
thereafter be made by the applicable Trustee or Indenture Trustee in accordance
with the procedures set forth in the related Trust Document directly to holders
of Definitive Securities in whose names the Definitive Securities were
registered at the close of business on the applicable Record Date specified for
such Securities in the related Prospectus Supplement. Such distributions will
be made by check mailed to the address of such holder as it appears on the
register maintained by the applicable Trustee. The final payment on any such
Security, however, will be made only upon presentation and surrender of such
Security at the office or agency specified in the notice of final distribution
to the applicable Securityholders.
Definitive Securities in respect of a given series of Securities will be
transferable and exchangeable at the offices of the applicable Trustee or
Indenture Trustee or of a certificate registrar named in a notice delivered to
holders of such Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the applicable Trustee or Indenture
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
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DESCRIPTION OF THE TRUST DOCUMENTS
The following summary, together with the information relating to
particular Trust Documents in the related Prospectus Supplement, describes all
material aspects of each Trust Document pursuant to which a Trust Estate will be
created and the related Securities in respect of such Trust Estate will be
issued. For purposes of this Prospectus, the term "Trust Document" as used with
respect to a Trust means, collectively, and except as otherwise specified, any
and all agreements relating to the establishment of the related Trust, the
servicing of the related Receivables and the issuance of the related Securities,
including, without limitation, Pooling Agreements, Trust Agreements and
Indentures, (i.e., pursuant to which any Notes shall be issued). Forms of the
Trust Documents have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part. The summary does not purport to be complete.
It is qualified in its entirety by reference to the provisions of the Trust
Documents.
ACQUISITION OF THE RECEIVABLES PURSUANT TO A RECEIVABLES TRANSFER AGREEMENT
On the Closing Date specified with respect to any given series of
Securities, the Sponsor will cause each Issuer to acquire the related
Receivables from the Sponsor or related Transferor pursuant to a Receivables
Transfer Agreement, and, in the case of Notes, the Issuer will pledge its right,
title and interests in and to such Receivables to an Indenture Trustee on behalf
of Securityholders pursuant to an Indenture. The rights and benefits of the
Sponsor under such Receivables Transfer Agreement will be assigned to the
related Trustee or Indenture Trustee on behalf of Securityholders as collateral
for the Securities of the related series issued by a Trust or pursuant to an
Indenture. The obligations of the Sponsor and the related Servicer under such
Trust Documents include those specified below and in the related Prospectus
Supplement.
As more fully described in the related Prospectus Supplement, the Sponsor
will be obligated to acquire from the related Trust Estate its interest in any
Receivable transferred to a Trust or pledged to a Trustee on behalf of
Securityholders if the interest of the Securityholders therein is materially
adversely affected by a breach of any representation or warranty made by the
Sponsor with respect to such Receivable, which breach has not been cured
following the discovery by or notice to the Sponsor of the breach. In addition,
if so specified in the related Prospectus Supplement, the Sponsor may from time
to time reacquire certain Receivables or substitute other Receivables for the
Receivables held by a Trust Estate subject to specified conditions set forth in
the related Trust Document and Receivables Transfer Agreement.
ACCOUNTS
With respect to each series of Securities, the Servicer will establish and
maintain with the applicable Trustee one or more accounts, in the name of such
Trustee on behalf of the related Securityholders, into which all payments made
on or with respect to the related Receivables will be deposited (the "Collection
Account"). The Servicer will also establish and maintain with such Trustee
separate accounts, in the name of such Trustee on behalf of such
Securityholders, in which amounts released from the Collection Account and the
reserve account or other Credit Enhancement, if any, for distribution to such
Securityholders will be deposited and from which distributions to such
Securityholders will be made (the "Distribution Account").
Any other accounts to be established with respect to a Trust, including
any reserve account, will be described in the related Prospectus Supplement.
For any series of Securities, funds in the Collection Account, the
Distribution Account, any reserve account and other accounts identified as such
in the related Prospectus Supplement (collectively, the "Trust Accounts") shall
be invested as provided in the related Trust Document in Eligible Investments.
"Eligible Investments" are generally limited to investments acceptable to the
Rating Agencies as being consistent with the rating of such Securities. Subject
to certain conditions, Eligible Investments may include securities issued by the
Sponsor, the related Originator, the related Servicer or their respective
affiliates or other trusts created by the Sponsor or its affiliates. Except as
described below or in the related Prospectus Supplement, Eligible Investments
are limited to obligations or securities that mature not later than the business
day immediately preceding the related Payment Date. However, subject to certain
conditions, funds in the reserve account may be invested in securities that will
not mature prior to the date of the next distribution and will not be sold to
meet any shortfalls. Thus, the amount of cash in any reserve account at any time
may be less than the balance of such reserve account. If the amount required to
be withdrawn from any reserve account to cover shortfalls in collections on the
related Receivables exceeds the amount of cash in such reserve account a
temporary shortfall in the amounts distributed to the related Securityholders
could result,
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which could, in turn, increase the average life of the Securities of such
series. Except as otherwise specified in the related Prospectus Supplement,
investment earnings on funds deposited in the applicable Trust Accounts, net of
losses and investment expenses (collectively, "Investment Earnings"), shall be
deposited in the applicable Collection Account, Distribution Account on each
Payment Date and shall be treated as collections of interest on the related
Receivables.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution has a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means, with respect to a Trust, (a) the corporate trust
department of the related Indenture Trustee or the related Trustee, as
applicable, or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), which (i) (A) has either
(w) a long-term unsecured debt rating acceptable to the Rating Agencies or (x) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies or (B) the parent corporation of which has either (y) a
long-term unsecured debt rating acceptable to the Rating Agencies or (z) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies and (ii) whose deposits are insured by the FDIC.
To the extent that the Servicer's unsecured debt ratings are acceptable to
the Rating Agencies, amounts deposited to any Trust Account may be commingled
with the Servicer's general account moneys. Any rights to so commingle moneys
will be described in the related Prospectus Supplement.
The material aspects of any particular Servicer's collections procedures
will be set forth in the related Prospectus Supplement.
PAYMENTS ON RECEIVABLES
SERVICING COMPENSATION
The Servicer will be entitled to receive a servicing fee for each Monthly
Period (the "Servicing Fee") in an amount equal to a specified percentage per
annum (as set forth in the related Prospectus Supplement, the "Servicing Fee
Rate") of the value of the assets held in the related Trust Estate, generally as
of the first day of such Monthly Period. Each Prospectus Supplement and
Servicing Agreement will specify the priority of distributions with respect to
the Servicing Fee (together with any portion of the Servicing Fee that remains
unpaid from prior Payment Dates), and whether and to what extent such Servicing
Fee may be paid prior to any distribution to the related Securityholders.
The Servicer will also collect and retain any late fees, the penalty
portion of interest paid on past due amounts and other administrative fees or
similar charges allowed by applicable law with respect to the Receivables, and
will be entitled to reimbursement from each Trust for certain liabilities.
Payments by or on behalf of obligors will be allocated to scheduled payments and
late fees and other charges in accordance with such Servicer's normal practices
and procedures.
The Servicing Fee will compensate the Servicer for performing the
functions of a third party servicer of similar types of receivables as an agent
for their beneficial owner, including collecting and posting all payments,
responding to inquiries of obligors on the related Receivables, investigating
delinquencies, sending payment coupons to obligors, reporting tax information to
obligors, paying costs of collection and disposition of defaults, and policing
the collateral. The Servicing Fee also will compensate the related Servicer for
administering the related Receivables, accounting for collections and furnishing
statements to the applicable Trustee and the applicable Indenture Trustee, if
any, with respect to distributions. The Servicing Fee also will reimburse the
related Servicer for certain taxes, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering the
Receivables.
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DISTRIBUTIONS
With respect to each series of Securities, beginning on the Payment Date
specified in the related Prospectus Supplement, distributions of principal and
interest (or, where applicable, of principal or interest only) on each Class of
such Securities entitled thereto will be made by the applicable Indenture
Trustee to the Noteholders and by the applicable Trustee to the
Certificateholders of such series. The timing, calculation, allocation, order,
source, priorities of and requirements for each class of Noteholders and all
distributions to each class of Certificateholders of such series will be set
forth in the related Prospectus Supplement.
With respect to each series of Securities, on each Payment Date
collections on the related Receivables will be transferred from the Collection
Account to the Distribution Account for distribution to Securityholders,
respectively, to the extent provided in the related Prospectus Supplement.
Credit Enhancement, such as a reserve account, may be available to cover any
shortfalls in the amount available for distribution on such date, to the extent
specified in the related Prospectus Supplement. As more fully described in the
related Prospectus Supplement, and unless otherwise specified therein,
distributions in respect of principal of a Class of Securities of a given series
will be subordinate to distributions in respect of interest on such Class, and
distributions in respect of the Certificates of such series may be subordinate
to payments in respect of the Notes of such series.
CREDIT AND CASH FLOW ENHANCEMENTS
The amounts and types of Credit Enhancement arrangements, if any, and the
provider thereof, if applicable, with respect to each class of Securities of a
given series will be set forth in the related Prospectus Supplement. If and to
the extent provided in the related Prospectus Supplement, credit enhancement may
be in the form of a Policy, subordination of one or more Classes of Securities,
reserve accounts, overcollateralization, letters of credit, credit or liquidity
facilities, third party payments or other support, surety bonds, guaranteed cash
deposits or such other arrangements as may be described in the related
Prospectus Supplement or any combination of two or more of the foregoing. If
specified in the applicable Prospectus Supplement, Credit Enhancement for a
Class of Securities may cover one or more other Classes of Securities of the
same series, and Credit Enhancement for a series of Securities may cover one or
more other series of Securities.
The presence of Credit Enhancement for the benefit of any Class or series
of Securities is intended to enhance the likelihood of receipt by the
Securityholders or such Class or series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. As more specifically provided in the related Prospectus
Supplement, the Credit Enhancement for a Class or series of Securities will not
provide protection against all risks of loss and will not guarantee repayment of
the entire principal balance and interest thereon. If losses occur which exceed
the amount covered by any Credit Enhancement or which are not covered by any
Credit Enhancement, Securityholders of any Class or series will bear their
allocable share of deficiencies, as described in the related Prospectus
Supplement. In addition, if a form of Credit Enhancement covers more than one
series of Securities, Securityholders of any such series will be subject to the
risk that such Credit Enhancement will be exhausted by the claims of
Securityholders of other series.
STATEMENTS TO INDENTURE TRUSTEES AND TRUSTEES
Prior to each Payment Date with respect to each series of Securities, the
related Servicer will provide to the applicable Indenture Trustee and/or the
applicable Trustee and Credit Enhancer as of the close of business on the last
day of the preceding related Monthly Period a statement setting forth
substantially the same information as is required to be provided in the periodic
reports provided to Securityholders of such series described under "Description
of the Securities -- Reports to Securityholders".
EVIDENCE AS TO COMPLIANCE
Each Trust Document will provide that a firm of independent public
accountants will furnish to the related Trust and/or the applicable Indenture
Trustee and Credit Enhancer, annually, a statement as to compliance by the
related Servicer during the preceding twelve months (or, in the case of the
first such certificate, the period from the applicable Closing Date) with
certain standards relating to the servicing of the Receivables.
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Each Trust Document will also provide for delivery to the related Trust
and/or the applicable Indenture Trustee of a certificate signed by an officer of
the related Servicer stating that such Servicer either has fulfilled its
obligations under such Trust Document in all material respects throughout the
preceding 12 months (or, in the case of the first such certificate, the period
from the applicable Closing Date) or, if there has been a default in the
fulfillment of any such obligation in any material respect, describing each such
default. Each Servicer also will agree to give each Indenture Trustee and each
Trustee notice of certain "Servicer Defaults" (as defined below) under the
related Trust Document.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Indenture
Trustee or the applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
Each Trust Document will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder, except upon determination that
the performance by such Servicer of such duties is no longer permissible under
applicable law. No such resignation will become effective until the related
Trustee or a successor servicer has assumed the Servicer's servicing obligations
and duties under the Trust Document.
Except as otherwise provided in the related Prospectus Supplement, each
Trust Document will further provide that neither the related Servicer nor any of
its respective directors, officers, employees, or agents shall be under any
liability to the related Issuer or the related Securityholders for taking any
action or for refraining from taking any action pursuant to such Trust Document,
or for errors in judgment; provided, however, that neither such Servicer nor any
such person will be protected against any liability that would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. In addition, such Trust Document will provide that the
Servicer is under no obligation to appear in, prosecute, or defend any legal
action that is not incidental to its servicing responsibilities under such Trust
Document and that, in its opinion, may cause it to incur any expense or
liability.
Under the circumstances specified in any such Trust Document, any entity
into which the Servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the Servicer is a party, or any entity
succeeding to the business of the Servicer or, with respect to its obligations
as Servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor to such Servicer
under such Trust Document.
SERVICER DEFAULT
"Servicer Default" under a Trust Document will include (i) any failure by
the Servicer to deliver to the applicable Trustee for deposit in any of the
related Trust Accounts any required payment or to direct such Trustee or
Indenture Trustee to make any required distributions therefrom, which failure
continues unremedied for greater than the number of days specified in the
related Trust Document after written notice from such Trustee or Indenture
Trustee is received by such Servicer or after discovery by such Servicer; (ii)
any failure by the Servicer duly to observe or perform in any material respect
any other covenant or agreement in such Trust Document, which failure materially
and adversely affects the rights of the related Securityholders and which
continues unremedied for greater than the number of days specified in the
related Trust Document after the giving of written notice of such failure (1) to
the Servicer by the applicable Trustee or Indenture Trustee or (2) to the
Servicer and to the applicable Trustee by holders of the related Securities, as
applicable, evidencing not less than 25% of the voting rights of such
outstanding Securities; and (iii) any Insolvency Event. An "Insolvency Event"
shall mean financial insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings with respect to the Servicer and certain
actions by the Servicer indicating its insolvency, reorganization pursuant to
bankruptcy proceedings, or inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT
As more fully described in the related Prospectus Supplement, as long as a
Servicer Default under a Trust Document remains unremedied, the applicable
Trustee, Indenture Trustee, Credit Enhancer or holders of Securities of the
related series evidencing not less than 25% of the voting rights of such then
outstanding Securities may terminate all the rights and obligations of the
Servicer, if any, under such Trust Document, whereupon a successor
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servicer appointed by such Trustee or Indenture Trustee or such Trustee or
Indenture Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Trust Document and will be entitled to
similar compensation arrangements. If, however, a bankruptcy trustee or similar
official has been appointed for the Servicer, and no Servicer Default other than
such appointment has occurred, such bankruptcy trustee or official may have the
power to prevent the applicable Trustee or Indenture Trustee or such
Securityholders from effecting a transfer of servicing. In the event that the
Trustee or Indenture Trustee is unwilling or unable to so act, it may appoint,
or petition a court of competent jurisdiction for the appointment of, a
successor with a net worth of at least $25,000,000 and whose regular business
includes the servicing of a similar type of receivables. Such Trustee or
Indenture Trustee may make such arrangements for compensation to be paid, which
in no event may be greater than the servicing compensation payable to the
Servicer under the related Trust Document.
WAIVER OF PAST DEFAULTS
With respect to each Trust Estate, unless otherwise provided in the
related Prospectus Supplement and subject to the approval of any Credit
Enhancer, the holders of Securities evidencing at least a majority of the voting
rights of such then outstanding Securities may, on behalf of all Securityholders
of the related Securities, waive any default by the Servicer, or by the Sponsor,
in the performance of its obligations under the related Trust Document and its
consequences, except a default in making any required deposits to or payments
from any of the Trust Accounts in accordance with such Trust Document. No such
waiver shall impair the Securityholders' rights with respect to subsequent
defaults.
AMENDMENT
As more fully described in the related Prospectus Supplement, each of the
Trust Documents may be amended by the parties thereto, without the consent of
the related Securityholders, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Trust
Documents or of modifying in any manner the rights of such Securityholders;
provided that such action will not, in the opinion of counsel satisfactory to
the applicable Trustee or Indenture Trustee, materially and adversely affect the
interests of any such Securityholder and subject to the approval of any Credit
Enhancer. As may be describe in the related Prospectus Supplement, the Trust
Documents may also be amended by the Sponsor, the Servicer, and the applicable
Trustee or Indenture Trustee with the consent of the holders of Securities
evidencing at least a majority of the voting rights of such then outstanding
Securities for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such Trust Documents or of modifying in
any manner the rights of such Securityholders; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments on the related Receivables or
distributions that are required to be made for the benefit of such
Securityholders or (ii) reduce the aforesaid percentage of the Securities of
such series which are required to consent to any such amendment, without the
consent of the Securityholders of such series.
EVENTS OF DEFAULT
With respect to each series of Securities which are Notes, "Events of
Default" under the Trust Documents will consist of: (i) a default for the number
of days specified in the related Trust Document in the payment of any interest
on any Security; (ii) a default in the payment of the principal of or any
installment of the principal of any Security when the same becomes due and
payable; (iii) a default in the observance or performance in any material
respect of any covenant or agreement of the related Issuer made in the Trust
Documents, or any representation or warranty made by the related Issuer in the
Trust Documents or in any certificate delivered pursuant thereto or in
connection therewith having been incorrect as of the time made, and the
continuation of any such default or the failure to cure such breach of a
representation or warranty for a period of 30 days after notice thereof is given
to the related Issuer by the Trustee or the Indenture Trustee or the Trust and
the Indenture Trustee by the holders of at least 25% in principal amount of the
Securities then outstanding; or (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of the related Issuer.
If an Event of Default should occur and be continuing with respect to the
Securities of any series, if such Securities are Notes, the related Indenture
Trustee or a majority of the securityholders may declare the principal of the
Securities to be immediately due and payable. Such declaration may, under
certain circumstances, be rescinded by a majority of the securityholders.
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INSOLVENCY EVENT
As described in the related Prospectus Supplement, if an Insolvency Event
occurs with respect to a Debtor relating to the applicable Trust Estate, such
Trust Estate will terminate, and the Receivables held in the related Trust
Estate will be liquidated and each such Trust will be terminated 90 days after
the date of such Insolvency Event, unless, before the end of such 90-day period,
the Trustee of such Trust shall have received written instructions from each of
the related Securityholders (other than the Sponsor) and/or the Credit Enhancer
to the effect that such party disapproves of the liquidation of such
Receivables. Promptly after the occurrence of any Insolvency Event with respect
to a Debtor, notice thereof is required to be given to such Securityholders
and/or Credit Enhancer; provided, however, that any failure to give such
required notice will not prevent or delay termination of any Trust. Upon
termination of any Trust, the applicable Trustee or Indenture Trustee shall
direct that the assets of such Trust be promptly sold (other than the related
Trust Accounts) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation of
such Receivables will be treated as collections on such Receivables and
deposited in the related Collection Account. If the proceeds from the
liquidation of such Receivables and any amounts on deposit in any reserve
account, and the related Distribution Account are not sufficient to pay the
Securities of the related series in full, and no additional Credit Enhancement
is available, the amount of principal returned to Securityholders will be
reduced and some or all of such Securityholders will incur a loss.
Each Trust Document will provide that the applicable Trustee or Indenture
Trustee does not have the power to commence a voluntary proceeding in bankruptcy
with respect to any related Issuer without the unanimous prior approval of all
Securityholders (including the Sponsor, if applicable) of such Issuer and the
delivery to such Trustee or Indenture Trustee by each such Securityholder of a
certificate certifying that such Securityholder reasonably believes that such
Trust is insolvent.
TERMINATION
With respect to each Trust Estate, the obligations of the related Servicer,
the related Originator(s), the Sponsor and the applicable Trustee or Indenture
Trustee pursuant to the related Trust Document will terminate upon the earlier
to occur of (i) the maturity or other liquidation of the last related Receivable
and the disposition of any amounts received upon liquidation of any such
remaining Receivables and (ii) the payment to Securityholders of the related
series of all amounts required to be paid to them pursuant to such Trust
Document. As more fully described in the related Prospectus Supplement, in order
to avoid excessive administrative expense, the related Servicer will be
permitted in respect of the applicable Trust Estate, unless otherwise specified
in the related Prospectus Supplement, at its option to purchase from such Trust
Estate, as of the end of any Monthly Period immediately preceding a Payment
Date, if the Contract Balance of the related Contracts is less than a specified
percentage (set forth in the related Prospectus Supplement) of the initial Pool
Balance in respect of such Trust Estate, all such remaining Receivables at a
price at least equal to the amount necessary to pay in full all outstanding
Securities of such series. The related Securities will be redeemed following
such purchase.
If and to the extent provided in the related Prospectus Supplement with
respect to a Trust Estate, the applicable Trustee will, within ten days
following a Payment Date as of which the Pool Balance is equal to or less than
the percentage of the initial Pool Balance specified in the related Prospectus
Supplement, solicit bids for the purchase of the Receivables remaining in such
Trust, in the manner and subject to the terms and conditions set forth in such
Prospectus Supplement; such solicitation of bids will require that the Trustee
solicit, through either public advertisement or the distribution of bid
materials to market participants, a minimum number of bids (which will generally
not be fewer than three) and will require a minimum bid equal to the amount
necessary to pay the oustanding Securities (together with accrued and unpaid
interest thereon) in full. If such Trustee receives satisfactory bids as
described in such Prospectus Supplement, then the Receivables remaining in such
Trust Estate will be sold to the highest bidder.
As more fully described in the related Prospectus Supplement, any
outstanding Notes of the related series will be redeemed concurrently with
either of the events specified above and the subsequent distribution to the
related Securityholder of all amounts required to be distributed to them
pursuant to the applicable Trust Document may effect the prepayment of the
Securities of such series. Neither the related Trust Estate nor the related
Securityholders will have any continuing direct or indirect liability following
such events.
ADMINISTRATOR
If an Administrator is specified in the related Prospectus Supplement,
such Administrator will enter into an agreement (the "Administration Agreement")
pursuant to which such Administrator will agree, to the extent
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provided in such Administration Agreement, to provide the notices and to perform
other administrative obligations required by the related Indenture and the Trust
Documents.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
GENERAL
The Contracts will be either "instruments", "chattel paper" (each as
defined in the Uniform Commercial Code), or would be "chattel paper" but for a
technical definitional matter, but in any event are not treated materially
different from "chattel paper" for purposes of title transfer, security
interests or remedies on default. Pursuant to the UCC for most purposes, a sale
of chattel paper is treated in a manner similar to a transaction creating a
security interest in chattel paper. With respect to the Receivables other than
the Underlying Collateral the Sponsor, the related Servicer and/or the related
Originator(s) will cause the filing of appropriate UCC-1 financing statements
to be made with the appropriate governmental authorities. Under the Trust
Documents, the related Servicer will be obligated from time to time to take
such actions as are necessary to protect and perfect the Trust's or the
Trustee's interests in the Contracts and their proceeds.
THE UNDERLYING COLLATERAL
GENERAL. The manner in which a security interest in the Underlying
Collateral may be perfected depends on the type of assets comprising such
Underlying Collateral. Security interests in certain of the Underlying
Collateral must be perfected by notation of the secured party's lien on the
certificate of title or by actual possession of the certificate of title,
depending on the law of the state wherein the purchaser resides. Security
interests in certain other Underlying Collateral must be perfected by the filing
of a UCC financing statement, naming the Obligor as debtor and the Originator or
the Sponsor as secured party.
As specified herein and related Prospectus Supplement, because of the
administrative burden and expense that would be entailed in so doing, neither
the Originators nor the Sponsor will, as the case may be (x) file, or
necessarily will be required to file, UCC financing statements identifying such
Underlying Collateral transferred and pledged in favor of the related Trust
and Indenture Trustee on behalf of the Securityholders, (y) make a notation of
the lien of the related Trust or Indenture Trustee on behalf of the
Securityholders on, or take possession of, the certificate of title with
respect to such Underlying Collateral, or (z) make a notation of the lien of
the related Trust or Indenture Trustee on behalf of the Securityholders on the
appropriate Federal registry in respect of such Underlying Collateral. As
discussed below, in the absence of such filings, notation or possession any
security interest in such Underlying Collateral may not be perfected in favor
of the related Trust or Indenture Trustee. As a result the Indenture Trust or
Trustee could lose priority of its security interest in such Underlying
Collateral. Neither the Originators nor the Sponsor will have any obligation to
reacquire the Underlying Collateral as to which such aforementioned occurrence
results in the loss of lien priority after the date such Trust Estate receives
an interest in such Underlying Collateral unless otherwise obligated in the
related Prospectus Supplement.
SECURITY INTEREST IN THE UNDERLYING COLLATERAL. As discussed above,
security interests in certain of the Underlying Collateral must be perfected by
notation of the secured party's lien on the certificate of title or by actual
possession of the certificate of title, depending on the law of the state
wherein the purchaser resides and security interests in certain other of the
Underlying Collateral must be perfected by the filing of a UCC financing.
Pursuant to the related Trust Document, the Sponsor will assign the
security interests in the property to the related Trust. In most states, an
assignment such as that under the related Trust Documents should be an effective
transfer of a security interest without amendment of any lien noted on the
related certificate of title or financing statement, and the assignee should
succeed to the assignor's status as the secured party. In the absence of fraud
or forgery by the obligor or administrative error by state recording officials,
the notation of the lien of the related Originator on the certificate of title
or the UCC financing statement should be sufficient to protect the related Trust
or Indenture Trustee against the rights of subsequent purchasers of property or
subsequent lenders who take a security interest in the Underlying Collateral.
However, in the absence of such an amendment, the security interest of the
related Trust or Indenture Trustee in the related collateral might be defeated
by, among others, the trustee in bankruptcy of the Sponsor or the related
Originator. However, such failure would obligate the related Originator to
repurchase the affected Contract if the interests of the related Securityholders
or Trust were materially and adversely affected.
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In most states, a perfected security interest in collateral subject to
certificate of title or a financing statement continues for four months after
the property is moved to a different state and thereafter until the owner
re-registers the collateral in the new state, but in no event beyond the
surrender of the certificate of title. A majority of states require surrender of
a certificate of title in order to re-register. Accordingly, the secured party
must surrender possession if it holds the certificate of title to such
Underlying Collateral. In the case of Underlying Collateral registered in states
which provide for notation of a lien but not possession of the certificate of
title by the holder of the security interest in the related collateral, the
secured party should receive notice of surrender if the security interest in the
collateral is noted on the certificate of title. Accordingly, the secured party
should have the opportunity to re-perfect its security interest in the
collateral in the state of relocation. In states that do not require a
certificate of title for registration, re-registration could defeat perfection.
Under the laws of most states, liens for repairs performed on property and
liens for unpaid taxes take priority over even a perfected security interest in
property. The related Originator will represent in the related Trust Documents
or Receivables Transfer Agreement, that, immediately prior to the sale,
assignment and transfer thereof to the related Trust or pledge to the related
Indenture Trustee, each Contract held by such Trust or Indenture Trustee was
secured by a valid, subsisting and enforceable first priority perfected security
interest in favor of the related Originator, as secured party. However, liens
for taxes, judicial liens or liens arising by operation of law could arise at
any time during the term of a Contract. In addition, the laws of certain states
and federal law permit confiscation of motor vehicles and certain other consumer
property by governmental authorities under certain circumstances if used in
unlawful activities, which may result in the loss of a secured party's perfected
security interest in the confiscated property. No notice will be given to the
Trustee, the Indenture Trustee or the Securityholders in the event such a lien
or confiscation arises, and if such lien arises or confiscation occurs after the
date of issuance of any series of Securities, neither the Sponsor nor the
Servicer will be required to repurchase or purchase the related Contract.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the purchase, ownership and disposition of the Notes and the Certificates.
Dewey Ballantine LLP, special federal tax counsel ("Federal Tax Counsel"), is of
the opinion that the discussion hereunder fully and fairly discloses all
material federal tax risks associated with the purchase, ownership and
disposition of the Notes and Certificates. The summary does not purport to deal
with federal income tax consequences or special rules that are applicable to
certain categories of holders. Moreover, there are no cases or Internal Revenue
Service ("IRS") rulings on all of the issues discussed below. As a result, the
IRS may disagree with all or a part of the discussion below. Prospective
investors are urged to consult their own tax advisors in determining the
federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of the Notes and the Certificates.
Federal Tax Counsel will, in addition to delivering its opinion with
respect to the discussion set forth herein, deliver separate opinions in
connection with each issuance of Securities. Such opinions will be delivered at
pricing, and will be filed with the Commission on a Current Report within two
business days of pricing (and in any event prior to the issuance of the related
Securities).
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. The opinion of Federal Tax
Counsel, however, is not binding on the IRS or the courts. No ruling on any of
the issues discussed below will be sought from the IRS. For purposes of the
following summary, references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each Trust and the Notes, Certificates and related terms,
parties and documents applicable to such Trust.
The federal income tax consequences to Certificateholders will vary
depending on whether the Trust will be treated as a partnership under the Code,
whether the Trust will be treated as a grantor trust, or whether it is intended
that the Trust serve as a security device for the issuance of Certificates that
are to be treated as indebtedness for federal income tax purposes. The
Prospectus Supplement for each series of Certificates will specify whether the
Trust will be treated as a partnership, a grantor trust, or is intended to serve
as a security device as just described. In addition, if the related Prospectus
Supplement so provides, the Transaction Documents for a Trust may provide that
an election will be made on or after September 1, 1997 to qualify such Trust as
a Financial Asset Securitization Investment Trust ("FASIT") pursuant to new
provisions of the Code which will be effective as of such date.
TRUSTS TREATED AS PARTNERSHIPS
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion that a Trust which is
intended to be a partnership, as specified in the related Prospectus Supplement,
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that (1) the Trust will not have
certain characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
If the Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income on the
Receivables, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments on
the Notes and distributions on the Certificates, and Certificateholders could be
liable for any such tax that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
Treatment of the Notes as Indebtedness. The Sponsor will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Federal Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, advise the Sponsor that in its
opinion the Notes will be
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classified as debt for federal income tax purposes. The discussion below assumes
this characterization of the Notes is correct.
Treatment of Original Issue Discount. The discussion below assumes that
all payments on the Notes are denominated in U.S. dollars, and that the Notes
are not Strip Securities. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for "qualified stated interest"
under Treasury regulations (the "OID regulations") relating to original issue
discount ("OID"), and that any OID on the Notes (i.e., any excess of the
principal amount of the Notes over their issue price) does not exceed a de
minimis amount (i.e., generally 1/4% of their principal amount multiplied by the
number of full years included in their term), all within the meaning of the OID
regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
OID as Interest Income. Based on the above assumptions the Notes generally
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
regulations, a holder of a Note issued with a de minimis amount of OID generally
must include such OID in income, on a pro rata basis, as principal payments are
made on the Note. However, a holder may elect to accrue de minimis OID under a
constant yield method in connection with an election to accrue all interest,
discount, and premium on the Note using the constant yield method. See "Trusts
Treated as Grantor Trusts -- Taxation of Holders if Stripped Bond Rules Do Not
Apply -- Election to Treat All Interest as OID" for a discussion of such
election. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
OID Treatment Upon Sale or Other Disposition. If a Noteholder sells a
Note, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the Note. The adjusted tax basis of a Note to a particular Noteholder
will equal the holder's cost for the Note, increased by any market discount,
acquisition discount, OID, if any, and gain previously included by such
Noteholder in income with respect to the Note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss generally 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. Capital losses generally may
be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a Foreign Investor, as defined below, generally will be considered "portfolio
interest," and generally will not be subject to United States federal income tax
and withholding tax, if the interest is not effectively connected with the
conduct of a trade or business within the United States by the Foreign Investor
and the Foreign Investor (i) is not actually or constructively a "10 percent
shareholder" of the Trust or the Sponsor (including a holder of 10% of the
outstanding Certificates) or a "controlled foreign corporation" with respect to
which the Trust or the Sponsor is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a Foreign Investor and
providing the Foreign Investor's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
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organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the Foreign Investor
that owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any gain realized on the sale, redemption, retirement or other taxable
disposition of a Note by a foreign person will be exempt from United States
federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Investor, (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year, and (iii) in the case of gain representing accrued
interest or OID, the conditions described in the immediately preceding paragraph
are satisfied.
If the interest, gain or income on a Note held by a Foreign Investor is
effectively connected with the conduct of a trade or business in the United
States by the Foreign Investor (although exempt from the withholding tax
previously discussed if the holder provides an appropriate and timely statement
on Form 4224), the holder generally will be subject to United States federal
income tax on the interest, gain or income at regular federal income tax rates.
In addition, if the Foreign Investor is a foreign corporation, it may be subject
to a branch profits tax equal to 30% of its "effectively connected earnings and
profits" within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty (as modified by the branch profits tax rules).
Proposed Treasury regulations which would be effective for payments made
after December 31, 1997 if adopted in their current form would provide
alternative certification requirements and means by which a Foreign Investor
could claim the exemptions from federal income and withholding taxes.
For purposes of this tax discussion, a Foreign Person or Foreign Investor
is any person other than (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includible in gross income for United States federal income
taxation regardless of source, or (iv) a trust other than a "Foreign Trust," as
such term is defined in Section 7701(a)(31) of the Code.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing, among other
things, the holder's name, address, correct federal taxpayer identification
number and a statement that the holder is not subject to backup withholding.
Should a nonexempt Noteholder fail to provide the required certification, the
Trust will be required to withhold 31 percent of the amount otherwise payable to
the holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust. If so treated, the Trust might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on Notes recharacterized as equity). Alternatively, the
Trust might be treated as a publicly traded partnership that would not be
taxable as a corporation if it met certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
Foreign Investors generally would be subject to U.S. tax and U.S. tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of Trust expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the Trust as a Partnership. The Sponsor will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Trust as a partnership for purposes of federal and state income tax, franchise
tax and any other tax measured in whole or in part by income, with the assets of
the partnership being the assets held by the Trust, the partners of the
partnership being the Certificateholders, and the Notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the Trust, the Certificates, the Notes and the Sponsor is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
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For example, because the Certificates may have certain features
characteristic of debt, the Certificates might be considered debt of the Sponsor
or the Trust. Generally, provided such Certificates are issued at or close to
face value, any characterization would not result in materially adverse tax
consequences to Certificateholders as compared to the consequences from
treatment of the Certificates as equity in a partnership, described below. If
Certificates are issued at a substantial discount, a discussion of the relevant
tax consequences will be set forth in the related Prospectus Supplement. The
following discussion assumes that the Certificates represent equity interests in
a partnership.
Strip Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Strip Securities, and that a series of Securities includes a single class of
Certificates. If these conditions are not satisfied with respect to any given
series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. In certain instances, however, the
Trust could have an obligation to make payments of withholding tax on behalf of
a Certificateholder. See "Backup Withholding" and "Tax Consequences to Foreign
Certificateholders" below. The Trust's income will consist primarily of interest
and finance charges earned on the Receivables (including appropriate adjustments
for market discount, OID and bond premium) and any gain upon collection or
disposition of Receivables. The Trust's deductions will consist primarily of
interest accruing with respect to the Notes, servicing and other fees, and
losses or deductions upon collection or disposition of Receivables.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Interest Rate for such month and interest on amounts previously
due on the Certificates but not yet distributed; (ii) any Trust income
attributable to discount on the Receivables that corresponds to any excess of
the principal amount of the Certificates over their initial issue price; (iii)
prepayment premium payable to the Certificateholders for such month; and (iv)
any other amounts of income payable to the Certificateholders for such month.
Such allocation will be reduced by any amortization by the Trust of premium on
Receivables that corresponds to any excess of the issue price of Certificates
over their principal amount. Based on the economic arrangement of the parties,
this approach for allocating Trust income should be permissible under applicable
Treasury regulations, although Federal Tax Counsel is unable to opine that the
IRS would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Interest Rate
plus the other items described above even though the Trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
income even if they have not received cash from the Trust to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust.
All of some of the taxable income allocated to a Certificateholder that is
a pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust. Such deductions may also be subject to reduction under Section 68 of
the Code if the individual's adjusted gross income exceeds certain limits.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the Trust
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
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Discount and Premium. It is believed that the Receivables will not be
issued with OID, and, therefore, the Trust should not have OID income. However,
the purchase price paid by the Trust for the Receivables may be greater or less
than the remaining principal balance of the Receivables at the time of purchase.
If so, the Receivables will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust will make this calculation on an
aggregate basis, but might be required to recompute it on a
Receivable-by-Receivable basis.)
If the Trust acquires the Receivables at a market discount or premium, the
Trust will elect to include any such discount in income currently as it accrues
over the life of the Receivables or to offset any such premium against interest
income on the Receivables. As indicated above, a portion of such market discount
income or premium deduction will be allocated to Certificateholders if the
related Trust Agreement so provides. Any such allocation will be disclosed in
the related Prospectus Supplement.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust, as a new partnership. Proposed
regulations would provide that if a termination occurs the partnership will be
considered to transfer its assets and liabilities to a new partnership in
exchange for interests in that new partnership which it would then be treated as
transferring to its partners. The Trust will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Trust may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual purchase takes place.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Affiliated
Purchaser is authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by future
regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificates than the selling Certificateholder
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had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Owner Trustee, or the Administrator, if any,
is required to keep or have kept complete and accurate books of the Trust. Such
books will be maintained for financial reporting and tax purposes on an accrual
basis and the fiscal year of the Trust will be the calendar year. The Owner
Trustee will file a partnership information return ("IRS Form 1065") with the
IRS for each taxable year of the Trust and will report each Certificateholder's
allocable share of items of Trust income and expense to holders and the IRS on
Schedule K-l. The Trust will provide the Schedule K-l information to nominees
that fail to provide the Trust with the information statement described below
and such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, holders must file tax returns that are
consistent with the information return filed by the Trust or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and taxpayer identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Sponsor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS with respect to partnership
items. The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificateholders, and a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. As discussed below, an
investment in a Certificate is not suitable for any Foreign Person, as defined
above, which is not eligible for a complete exemption from U.S. withholding tax
on interest under a tax treaty with the United States. Accordingly, no interest
in a Certificate should be acquired by or on behalf of any such Foreign Person.
No regulations, published rulings or judicial decisions exist that would
discuss the characterization for Federal withholding tax purposes with respect
to a Foreign Person of a partnership with activities substantially the same as
the Trust. Depending upon the particular terms of the related Trust Agreement
and Sale and Servicing Agreement, a trust may be considered to be engaged in a
trade or business in the United States for purposes of Federal withholding taxes
with respect to non-U.S. persons. If the Trust is considered to be engaged in a
trade or business in the United States for such purposes, the income of the
Trust distributable to a non-U.S. person would be subject to Federal withholding
tax at a rate of 35% for persons taxable as a corporation and 39.6% for all
other Foreign Persons. Also, in such cases, a Foreign Person that is a
corporation may be subject to the branch profits tax. If the Trust is notified
that a Certificateholder is a Foreign Person, the Trust may withhold as if it
were engaged in a trade or business in the United States in order to protect the
Trust from possible adverse consequences of a failure to withhold. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust to change its withholding procedures.
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If a Trust is engaged in a trade or business, each foreign
Certificateholder will be required to file a United States federal individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the Trust's income. A foreign holder generally
would be entitled to file with the IRS a claim for refund with respect to
withheld taxes, taking the position that no taxes were due because the Trust was
not engaged in a United States trade or business. However, interest payments
made to (or accrued by) a Certificateholder who is a Foreign Person may be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust and for that reason or because of the
nature of the Receivables, the interest will likely not be considered "portfolio
interest." See " -- Tax Consequences to Holders of the Notes Issued by a
Partnership-Foreign Holders" for a discussion of portfolio interests. As a
result, even if the Trust is not considered to be engaged in a U.S. trade or
business, Certificateholders would be subject to United States Federal income
tax which must be withheld at a rate of 30% on their share of the Trust's income
(without reduction for interest expense), unless reduced or eliminated pursuant
to an applicable income tax treaty. If the Trust is notified that a
Certificateholder is a Foreign Person, the Trust may be required to withhold and
pay over such tax, which can exceed the amounts otherwise available for
distribution to such a Certificateholder. A Foreign Person would generally be
entitled to file with the IRS a refund claim for such withheld taxes, taking the
position that the interest was portfolio interest and therefore not subject to
U.S. tax. However, the IRS may disagree and no assurance can be given as to the
appropriate amount of tax liability. As a result, each potential foreign
Certificateholder should consult its tax advisor as to whether the tax
consequences of holding an interest in a Certificate make it an unsuitable
investment.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
TRUSTS TREATED AS GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE TRUST AS A GRANTOR TRUST
As specified in the related Prospectus Supplement, if a partnership
election is not made and the Certificates are not treated as debt for federal
income tax purposes as discussed below, Federal Tax Counsel will deliver its
opinion that the Trust will not be classified as an association taxable as a
corporation and that such Trust will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates (referred to herein as "Grantor Trust Securityholders") will be
treated for federal income tax purposes as owners of a portion of the Trust's
assets as described below. The Certificates issued by a Trust that is treated as
a grantor trust are referred to herein as "Grantor Trust Certificates. "
Characterization. Each Grantor Trust Securityholder will be treated as the
owner of a pro rata undivided interest in the interest and principal portions of
the Trust represented by the Grantor Trust Certificates and will be considered
the equitable owner of a pro rata undivided interest in each of the Receivables
in the Trust. Any amounts received by a Grantor Trust Securityholder in lieu of
amounts due with respect to any Receivable because of a default or delinquency
in payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each Grantor Trust Securityholder will be required to report on its
federal income tax return in accordance with such Grantor Trust Securityholder's
method of accounting its pro rata share of the entire income from the
Receivables in the Trust represented by Grantor Trust Certificates, including
interest, OID, if any, prepayment fees, assumption fees, any gain recognized
upon an assumption and late payment charges received by the Servicer. Under
Sections 162 or 212 each Grantor Trust Securityholder will be entitled to deduct
its pro rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust. Grantor Trust Securityholders that are individuals, estates or trusts
will be entitled to deduct their share of expenses only to the extent such
expenses plus such holder's other miscellaneous itemized deductions exceed two
percent of such holder's adjusted gross income. Such deductions may also be
limited by Code Section 68 for an individual whose adjusted gross income exceeds
certain limits. A Grantor Trust Securityholder using the cash method of
accounting must take into account its pro rata share of income and deductions as
and when collected by or paid to the Servicer. A Grantor Trust Securityholder
using an accrual method of accounting must take into account its pro rata share
of income and deductions as they become due or are paid to the Servicer,
whichever is earlier. If the servicing fees or other amounts paid to the
Servicer exceed reasonable servicing compensation, the amount of such excess
would be considered as an
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ownership interest retained by the Servicer (or any person to whom the Servicer
assigned all or a portion of the servicing fees) in a portion of the interest
payments on the Receivables. The Receivables would then be subject to the
stripped bond rules of the Code discussed below.
TAXATION OF HOLDERS IF STRIPPED BOND RULES APPLY
In the absence of comprehensive regulations, Federal Tax Counsel is unable
to opine as to the tax treatment of stripped bonds. The preamble to certain
stripped bond regulations suggests that each purchaser of a Grantor Trust
Certificate will be treated with respect to each Receivable as the purchaser of
a single stripped bond consisting of all of the stripped portions of the
applicable Receivable (such portions with respect to a Receivable are referred
to herein as a "Stripped Bond") which generally should be treated as a single
debt instrument issued on the day it is purchased for purposes of calculating
any original issue discount. Generally, under Treasury regulations relating to
Stripped Bonds (the "Section 1286 Treasury Regulations"), if the discount on a
Stripped Bond is larger than a de minimis amount (as calculated for purposes of
the OID rules of the Code) such Stripped Bond will be considered to have been
issued with OID. See " -- Original Issue Discount" herein. Based on the preamble
to the Section 1286 Treasury regulations, although the matter is not entirely
clear, the interest income on the Certificates at the sum of the Pass-Through
Rate and the portion of the Servicing Fee Rate that does not constitute excess
servicing should be treated as "qualified stated interest" within the meaning of
the Section 1286 Treasury regulations, assuming all other requirements for
treatment as qualified stated interest are satisfied, and such income will be so
treated in the Trustee's tax information reporting.
Original Issue Discount. When Stripped Bonds have more than a de minimis
amount of OID, the special rules of the Code relating to "original issue
discount" (currently Sections 1271 through 1275) will be applicable to a Grantor
Trust Securityholder's interest in those Stripped Bonds. Generally, a Grantor
Trust Securityholder that acquires an interest in a Stripped Bond issued or
acquired with OID must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Stripped Bond for each day on which it owns
a Certificate, including the date of purchase but excluding the date of
disposition. Although the proper method is not entirely clear, the Trust intends
to calculate the daily portions of OID with respect to a Stripped Bond generally
as follows. A calculation will be made of the portion of OID that accrues on the
Stripped Bond during each successive monthly accrual period (or shorter period
in respect of the date of original issue or the final Distribution Date). This
will be done, in the case of each full monthly accrual period, by adding (i) the
present value of all remaining payments to be received on the Stripped Bond
under the prepayment assumption, if any, used in respect of the Stripped Bonds
and (ii) any payments received during such accrual period, and subtracting from
that total the "adjusted issue price" of the Stripped Bond at the beginning of
such accrual period. No representation is made that the Stripped Bonds will
prepay at any prepayment assumption. The "adjusted issue price" of a Stripped
Bond at the beginning of the first accrual period is its issue price (as
determined for purposes of the OID rules of the Code) and the "adjusted issue
price" of a Stripped Bond at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment (other than "qualified stated interest") made at the
end of or during that accrual period. The OID accruing during such accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the period. With respect to an initial
accrual period shorter than a full monthly accrual period, the daily portions of
OID must be determined according to an appropriate allocation under either an
exact or approximate method set forth in the OID Regulations, or some other
reasonable method, provided that such method is consistent with the method used
to determine the yield to maturity of the Receivables.
With respect to the Stripped Bonds, the method of calculating OID as
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in any given accrual period to reflect the fact that
prepayments are occurring at a faster or slower rate than the prepayment
assumption used in respect of the Stripped Bonds.
TAXATION OF HOLDERS IF STRIPPED BOND RULES DO NOT APPLY
Premium. The price paid for a Grantor Trust Certificate by a holder will
be allocated to such holder's undivided interest in each Receivable based on
each Receivable's relative fair market value, so that such holder's undivided
interest in each Receivable will have its own tax basis. A Grantor Trust
Securityholder that acquires an interest in Receivables at a premium may elect
to amortize such premium under a constant interest method. Amortizable bond
premium will be treated as an offset to interest income on such Grantor Trust
Certificate. The basis for such Grantor Trust Certificate will be reduced to the
extent that amortizable premium is applied to offset interest
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payments. It is unclear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under Section 171. A Grantor
Trust Securityholder that makes this election for Receivables that are construed
to be acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such Grantor Trust Securityholder acquires during the year of the
election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption or it prepays faster than the prepayment assumption, the holder of a
Grantor Trust Certificate acquired at a premium should recognize a loss if a
Receivable prepays in full, equal to the difference between the portion of the
prepaid principal amount of such Receivable that is allocable to the Grantor
Trust Certificate and the portion of the adjusted basis of the Grantor Trust
Certificate that is allocable to such Receivable.
Market Discount. A Grantor Trust Securityholder that acquires an undivided
interest in Receivables may be subject to the market discount rules of Sections
1276 through 1278 to the extent an undivided interest in a Receivable is
considered to have been purchased at a "market discount." Generally, the amount
of market discount is equal to the excess of the portion of the principal amount
of such Receivable allocable to such holder's undivided interest over such
holder's tax basis in such interest. Market discount with respect to a
Receivable will be considered to be zero if the amount allocable to the
Receivable is less than 0.25% of the Receivable's stated redemption price at
maturity multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond shall be
treated as ordinary income to the extent that it does not exceed the accrued
market discount at the time of such payment. The amount of accrued market
discount for purposes of determining the tax treatment of subsequent principal
payments or dispositions of the market discount bond is to be reduced by the
amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Because the regulations described above have not been issued, Federal Tax
Counsel is unable to opine as to what effect those regulations might have on the
tax treatment of a Grantor Trust Certificate purchased at a discount.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred to above applies. Any such deferred
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includible in income. If such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID regulations permit a
Grantor Trust Securityholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were to be
made with respect to a Grantor Trust Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Grantor Trust Securityholder acquires during the year
of the election or thereafter. Similarly, a Grantor Trust Securityholder that
makes this election for a Grantor Trust Certificate that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Grantor Trust Securityholder owns or acquires. See " -- Premium" herein. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Grantor Trust Certificate is irrevocable.
TAXATION OF HOLDERS REGARDLESS OF WHETHER STRIPPED BOND RULES APPLY
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<PAGE> 46
Sale or Exchange of a Grantor Trust Certificate. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the owner's
adjusted basis in the Grantor Trust Certificate. Such adjusted basis generally
will equal the seller's purchase price for the Grantor Trust Certificate,
increased by the OID included in the seller's gross income with respect to the
Grantor Trust Certificate, and reduced by principal payments on the Grantor
Trust Certificate previously received by the seller. Subject to the discussion
of market discount above, such gain or loss generally will be capital gain or
loss to an owner for which a Grantor Trust Certificate is a "capital asset"
within the meaning of Section 1221, and will be long-term or short-term
depending on whether the Grantor Trust Certificate has been owned for the
long-term capital gain holding period (currently more than one year).
Grantor Trust Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1), so that gain or loss recognized from the sale of a
Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
Non-U.S. Persons. To the extent that a Grantor Trust Certificate evidences
ownership in underlying Receivables that were issued on or before July 18, 1984,
interest or OID paid by the person required to withhold tax under Section 1441
or 1442 to (i) an owner that is a Foreign Person or (ii) a Grantor Trust
Securityholder holding on behalf of an owner that is a Foreign Person will be
subject to federal income tax, collected by withholding, at a rate of 30% or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued OID recognized by the owner on the sale or exchange of such a Grantor
Trust Certificate also will be subject to federal income tax at the same rate.
Generally, such payments would be considered portfolio interest and would not be
subject to withholding to the extent that a Grantor Trust Certificate evidences
ownership in Receivables issued after July 18, 1984, if such Grantor Trust
Securityholder complies with certain identification requirements (including
delivery of a statement, signed by the Grantor Trust Securityholder under
penalties of perjury, certifying that such Grantor Trust Securityholder is the
beneficial owner, is not a U.S. Person and providing the name and address of
such Grantor Trust Securityholder). Additional restrictions apply to Receivables
where the Obligor is not a natural person in order to qualify for the exemption
from withholding. See " -- Tax Consequences to Holders of the Notes Issued by a
Partnership -- Foreign Holders" for a discussion of when interest will
constitute portfolio interest.
Information Reporting and Backup Withholding. The Servicer will furnish or
make available, within a reasonable time after the end of each calendar year, to
each person who was a Grantor Trust Securityholder at any time during such year,
such information as may be deemed necessary or desirable to assist Grantor Trust
Securityholders in preparing their federal income tax returns, or to enable
holders to make such information available to beneficial owners or financial
intermediaries that hold Grantor Trust Certificates as nominees on behalf of
beneficial owners. If a holder, beneficial owner, financial intermediary or
other recipient of a payment on behalf of a beneficial owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
CERTAIN SECURITIES TREATED AS INDEBTEDNESS
Upon the issuance of Notes that are intended to be treated as indebtedness
for federal income tax purposes, Federal Tax Counsel will opine that based upon
its analysis of the factors discussed below and certain assumptions and
qualifications the Notes will be treated as indebtedness for federal income tax
purposes. However, opinions of counsel are not binding on the IRS and there can
be no assurance that the IRS could not successfully challenge this conclusion.
The Sponsor will express in the Trust Documents its intent that for
federal, state and local income and franchise tax purposes, the Notes will be
indebtedness secured by the Receivables. The Sponsor agrees and each Noteholder,
by acquiring an interest in a Note, agrees or will be deemed to agree to treat
the Notes as indebtedness for federal state and local income or franchise tax
purposes. However, because different criteria are used to determine the non-tax
accounting characterization of the transactions contemplated by the Trust
Documents, the Sponsor expects to treat such transactions, for regulatory and
financial accounting purposes, as a sale of ownership interests in the
Receivables and not as debt obligations.
44
<PAGE> 47
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan the repayment of which is secured by
the property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction. The form of a transaction, while a
relevant factor, is not conclusive evidence of its economic substance. In
appropriate circumstances, the courts have allowed taxpayers, as well as the IRS
to treat a transaction in accordance with its economic substance, as determined
under federal income tax laws, notwithstanding that the participants
characterize the transaction differently for non-tax purposes. In some
instances, however, courts have held that a taxpayer is bound by a particular
form it has chosen for a transaction, even if the substance of the transaction
does not accord with its form. It is expected that Federal Tax Counsel will
advise that the rationale of those cases will not apply to the transactions
evidenced by a series of Notes.
While the IRS and the courts have set forth several factors to be taken
into account in determining whether the substance of a transaction is a sale of
property or a secured indebtedness for federal income tax purposes, the primary
factor in making this determination is whether the transferee has assumed the
risk of loss or other economic burdens relating to the property and has obtained
the economic benefits of ownership thereof. Federal Tax Counsel will analyze and
rely on several factors in reaching its opinion that the weight of the benefits
and burdens of ownership of the Receivables has not been transferred to the
Noteholders and that the Notes are properly characterized as indebtedness for
federal income tax purposes. Contrary characterizations that could be asserted
by the IRS are described below under " -- Possible Characterization of the
Transaction as a Partnership or as an Association Taxable as a Corporation."
TAXATION OF INCOME OF NOTEHOLDERS
As set forth above, it is expected that Federal Tax Counsel will advise
the Sponsor that the Notes will constitute indebtedness for Federal income tax
purposes, and accordingly, holders of Notes generally will be taxed in the
manner described above in "Trusts Treated as Partnerships -- Tax Consequences to
Holders of Notes Issued by a Partnership. "
If the Notes are issued with OID that is more than a de minimis amount as
defined in the Code and Treasury regulations (see "Trusts Treated as
Partnerships -- Tax Consequences to Holders of Notes Issued by a Partnership") a
United States holder of a Note (including a cash basis holder) generally would
be required to accrue the OID on its interest in a Note in income for federal
income tax purposes on a constant yield basis, resulting in the inclusion of OID
in income in advance of the receipt of cash attributable to that income. Under
section 1272(a)(6) of the Code, special provisions apply to debt instruments on
which payments may be accelerated due to prepayments of other obligations
securing those debt instruments. However, no regulations have been issued
interpreting those provisions, and the manner in which those provisions would
apply to the Notes is unclear. Additionally, the IRS could take the position
based on Treasury regulations that none of the interest payable on a Note is
"unconditionally payable" and hence that all of such interest should be included
in the Note's stated redemption price at maturity. Accordingly, Federal Tax
Counsel is unable to opine as to whether interest payable on a Note constitutes
"qualified stated interest" that is not included in a Note's stated redemption
price at maturity. Consequently, prospective investors in Notes should consult
their own tax advisors concerning the impact to them in their particular
circumstances. The Prospectus Supplement will indicate whether the Trust intends
to treat the interest on the Notes as "qualified stated interest".
TAX CHARACTERIZATION OF TRUST
Consistent with the treatment of the Notes as indebtedness, the Trust will
be treated as a security device to hold Receivables securing the repayment of
the Notes. In connection with the issuance of Notes of any series, Federal Tax
Counsel will render an opinion that, based on the assumptions and qualifications
set forth therein, under then current law, the issuance of the Notes of such
series will not cause the applicable Trust to be characterized for Federal
income tax purposes as an association (or publicly traded partnership) taxable
as a corporation.
45
<PAGE> 48
POSSIBLE CLASSIFICATION OF THE TRANSACTION AS A PARTNERSHIP OR AS AN
ASSOCIATION TAXABLE AS A CORPORATION
The opinion of Federal Tax Counsel with respect to Notes will not be
binding on the courts or the IRS. It is possible that the IRS could assert that,
for federal income tax purposes, the transactions contemplated constitute a sale
of the Receivables (or an interest therein) to the Noteholders and that the
proper classification of the legal relationship between the Sponsor and some or
all of the Noteholders resulting from the transactions is that of a partnership
(including a publicly traded partnership), a publicly traded partnership taxable
as a corporation, or an association taxable as a corporation. The Sponsor
currently does not intend to comply with the federal income tax reporting
requirements that would apply if any Classes of Securities were treated as
interests in a partnership or corporation.
If a transaction were treated as creating a partnership between the
Sponsor and the Noteholders, the partnership itself would not be subject to
federal income tax (unless it were characterized as a publicly traded
partnership taxable as a corporation); rather, the partners of such partnership,
including the Noteholders, would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of a Note could
differ if the Notes were held to constitute partnership interests, rather than
indebtedness. Moreover, unless the partnership were treated as engaged in a
trade or business, an individual's share of expenses of the partnership would be
miscellaneous itemized deductions that, in the aggregate, are allowed as
deductions only to the extent they exceed two percent of the individual's
adjusted gross income, and would be subject to reduction under Section 68 of the
Code if the individual's adjusted gross income exceeded certain limits. As a
result, the individual might be taxed on a greater amount of income than the
stated rate on the Notes. Finally, all or a portion of any taxable income
allocated to a Noteholder that is a pension, profit-sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
may, under certain circumstances, constitute "unrelated business taxable income"
which generally would be taxable to the holder under the Code.
If it were determined that a transaction created an entity classified as
an association or as a publicly traded partnership taxable as a corporation, the
Trust would be subject to federal income tax at corporate income tax rates on
the income it derives from the Receivables, which would reduce the amounts
available for distribution to the Noteholders. Such classification may also have
adverse state and local tax consequences that would reduce amounts available for
distribution to Noteholders. Moreover, distributions on Notes that are
recharacterized as equity in an entity taxable as a corporation would not be
deductible in computing the entity's taxable income, and cash distributions on
such Notes generally would be treated as dividends for tax purposes to the
extent of such deemed corporation's earnings and profits.
FOREIGN INVESTORS
If the IRS were to contend successfully that the Notes are interest in a
partnership and if such partnership were considered to be engaged in a trade or
business in the United States, the partnership would be subject to a withholding
tax on income of the Trust that is allocable to a Foreign Investor and such
Foreign Investor would be credited for his or her share of the withholding tax
paid by the partnership. In such case, the holder generally would be subject to
United States federal income tax at regular income tax rates, and possibly a
branch profits tax in the case of a corporate holder.
Alternatively, although there may be arguments to the contrary, if such
partnership is not considered to be engaged in a trade or business within the
United States and if income with respect to the Notes is not otherwise
effectively connected with the conduct of a trade or business in the United
States by the Foreign Investor, the Foreign Investor would be subject to United
States income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the holder's distributive share of the partnership's
interest income. See "Trusts Treated as Partnerships -- Tax Consequences to
Holders of the Certificates Issued by the Partnership -- Tax Consequences to
Foreign Noteholders" for a more detailed discussion of the consequences of an
equity investment by a Foreign Investor in an entity characterized as a
partnership.
If the Trust were taxable as a corporation, distribution to foreign
investors, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30% unless such rate were reduced or eliminated by an
applicable income tax treaty.
46
<PAGE> 49
STATE AND LOCAL TAXATION
The discussion above does not address the tax treatment of a Trust, the
Certificates, the Notes or the holders of Certificates or Notes of any series
under state and local tax laws. Prospective investors are urged to consult their
own tax advisors regarding state and local tax treatment of the Trust, the
Certificates, the Notes and the consequences of purchase, ownership or
disposition of the Certificates and Notes under any state or local tax law.
ERISA CONSIDERATIONS
The Prospectus Supplement for each series of Securities will summarize,
subject to the limitations discussed therein, considerations under ERISA
relevant to the purchase of such Securities by employee benefit plans and
individual retirement accounts.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. By placements by the Sponsor with institutional investors through
dealers;
3. By direct placements by the Sponsor with institutional investors; and
4. By competitive bid.
In addition, if specified in the related Prospectus Supplement, a series
of Securities may be offered in whole or in part in exchange for the Receivables
(and other assets, if applicable) that would comprise the Trust Estate in
respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The Securities will be set forth
on the cover of the Prospectus Supplement relating to such series and the
members of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Prospectus Supplement will describe any such compensation paid by the
Sponsor.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting
47
<PAGE> 50
on a best efforts basis) and that, in limited circumstances, the Sponsor will
indemnify the several underwriters and the underwriters will indemnify the
Sponsor against certain civil liabilities, including liabilities under the
Securities Act or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Sponsor and purchasers of
Securities of such series.
Purchasers of Securities, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Securities. Holders of Securities should consult with their legal advisors in
this regard prior to any such reoffer or sale.
LEGAL OPINIONS
Certain legal matters relating to the issuance of the Securities of any
series, including certain federal and state income tax consequences with respect
thereto, will be passed upon by Dewey Ballantine LLP, New York, New York, Dewey
Ballantine LLP, Washington, D.C., or other counsel specified in the related
Prospectus Supplement.
FINANCIAL INFORMATION
A Trust Estate will be formed with respect to each Series of Securities
and no Trust Estate will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities, except
for serial issuances by a Master Trust. The Sponsor's activities will be limited
solely to the activities of Trust Estates to be formed with respect to each
Series of Securities. Accordingly, no financial statements with respect to any
Trust Estate will be included in this Prospectus or in the related Prospectus
Supplement.
A Prospectus Supplement may contain the financial statements of the
related Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each series
of Securities, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
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INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
ABS.........................................................................18
Accrual Securities.......................................................... 8
Additional Receivables......................................................11
Administration Agreement....................................................32
ALHC........................................................................18
Article 2A..................................................................15
Cede........................................................................11
CEDEL Participants..........................................................25
Certain Legal Aspects of the Contracts......................................12
Certificates................................................................ 1
Class....................................................................... 1
Code........................................................................35
Collection Account..........................................................27
Commission.................................................................. 3
Contracts................................................................... 1
Cooperative.................................................................25
Credit and Cash Flow Enhancement............................................11
Credit Enhancement..........................................................16
Credit Enhancer.............................................................16
Cross-Collateralization.....................................................10
Cut-Off Date................................................................17
Debt Securities.............................................................12
Debtors.....................................................................15
Definitive Securities.......................................................26
Depositaries................................................................24
Direct Participants.........................................................16
Distribution Account........................................................27
DTC.........................................................................11
Eligible Deposit Account....................................................28
Eligible Institution........................................................28
Eligible Investments........................................................27
ERISA.......................................................................13
ERISA Considerations........................................................13
Euroclear Operator..........................................................26
Euroclear Participants......................................................25
Events of Default...........................................................31
Exchange Act................................................................ 3
FASIT...................................................................12, 35
Federal Tax Counsel.....................................................12, 35
Fixed Income Securities..................................................... 7
Foreign Trust...............................................................37
Grantor Trust Certificates..................................................41
Grantor Trust Securities....................................................12
Grantor Trust Securityholders...............................................41
Indenture................................................................... 5
Indenture Trustee........................................................... 6
Indirect Participants...................................................16, 24
Insolvency Event............................................................30
Insolvency Laws.............................................................15
Interest Rate............................................................... 7
Investment Company Act......................................................10
Investment Earnings.........................................................28
IRS.........................................................................35
IRS Form 1065...............................................................40
Issuer...................................................................... 5
Mandatory Termination.......................................................12
Material Risks.............................................................. 5
Material Tax Consequences...................................................12
Monthly Period............................................................. 9
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<PAGE> 52
No Investment Companies..................................................... 9
Notes....................................................................... 1
Obligor.....................................................................10
OID.........................................................................36
OID Regulations.............................................................36
Optional Termination........................................................12
Originator.................................................................. 1
Owner Trustee............................................................... 7
Participants................................................................24
Partnership Interests.......................................................12
Payment Date................................................................ 8
Pass-Through Rate........................................................... 3
Policy...................................................................... 1
Pool Balance................................................................21
Pool Factor.................................................................21
Pooling Agreement........................................................... 5
Pre-Funded Amount...........................................................17
Pre-Funding Account.........................................................11
Pre-Funding Amount..........................................................11
Prepayment..................................................................16
Prospectus Supplement....................................................... 1
Ratings.....................................................................13
Receivables................................................................. 1
Receivables Transfer Agreement..........................................10, 11
Record Date................................................................. 8
Registration of Securities..................................................11
Registration Statement...................................................... 3
Rules.......................................................................25
Sale and Servicing Agreement................................................ 5
Section 1286 Treasury Regulations...........................................42
The Securities............................................................1, 6
The Securities Act........................................................2, 3
Security Insurer............................................................11
Securityholders............................................................. 8
Senior Securities........................................................... 8
Servicer..................................................................1, 5
Servicer Default............................................................30
Servicer's Compensation.....................................................12
Servicing Fee...............................................................28
Servicing Fee Rate..........................................................28
Short-Term Note.............................................................36
Sponsor...................................................................1, 5
Strip Securities............................................................ 8
Stripped Bond...............................................................42
Subordinate Securities...................................................... 8
Sub-Servicer................................................................ 5
Terms and Conditions........................................................26
Transferor................................................................1, 5
Trust.....................................................................1, 5
Trust Accounts..............................................................27
Trust Agreement............................................................. 5
Trust Documents............................................................. 7
Trust Estate..............................................................1, 6
Trustee..................................................................... 5
Underlying Collateral....................................................... 1
Vendor...................................................................... 1
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<PAGE> 53
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus Supplement or the Prospectus in connection with the offer made by
this Prospectus Supplement and the Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Sponsor or the Underwriter(s). This Prospectus Supplement and the
Prospectus do not constitute an offer or solicitation by anyone in any state in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. The delivery of this Prospectus
Supplement or the Prospectus at any time does not imply that information herein
or therein is correct as of any time subsequent to its date.
TABLE OF CONTENTS
PROSPECTUS
Page
Prospectus Supplement.....................3
Available Information.....................3
Incorporation of Certain Documents by
Reference................................3
Reports to Securityholders................4
Summary of Terms..........................5
Material Risks...........................14
The Trust Estates........................17
Advanta Business Services Corp.
Underwriting, Originating and
Servicing Practices.....................18
The Issuers..............................20
The Receivables..........................21
Pool Factors.............................21
Use of Proceeds..........................21
The Trustee..............................22
Description of the Securities............22
Description of the Trust Documents.......27
Certain Legal Aspects of the
Receivables..............................33
Certain Federal Income Tax
Consequences.............................35
State and Local Taxation.................47
ERISA Considerations.....................47
Methods of Distribution..................47
Legal Opinions...........................48
Financial Information....................48
Additional Information...................48
Index of Terms...........................49
Until _____________, 199_ (90 days after the date of this Prospectus
Supplement), all dealers effecting transactions in the Securities, whether or
not participating in this distribution, may be required to deliver a Prospectus
Supplement and a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus Supplement and a Prospectus when acting as underwriter(s)
and with respect to their unsold allotments or subscriptions.
EQUIPMENT RECEIVABLES ASSET-BACKED
SECURITIES 199_-_
ADVANTA BUSINESS
SERVICES CORP.
PROSPECTUS
[UNDERWRITER]
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses
(other than underwriting discounts and commissions) to be incurred in
connection with the issuance and distribution of the Offered Certificates.
<TABLE>
<S> <C>
SEC Filing Fee ...................................................... $ 303
Trustee's Fees and Expenses* ........................................ *
Legal Fees and Expenses* ............................................ 212,500
Accounting Fees and Expenses* ....................................... 30,000
Printing and Engraving Expenses* .................................... 35,000
Blue Sky Qualification and Legal
Investment Fees and Expenses* ..................................... 10,000
Rating Agency Fees* ................................................. 40,000
Miscellaneous* ...................................................... 200,000
--------
TOTAL.......................................................... $ *
========
</TABLE>
____________
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Indemnification. Under the laws which govern the organization
of the registrant, the registrant has the power and in some instances may be
required to provide an agent, including an officer or director, who was or is a
party or is threatened to be made a party to certain proceedings, with
indemnification against certain expenses, judgments, fines, settlements and
other amounts under certain circumstances.
Article VII of the By-laws of Advanta Business Services Corp.
provides that all officers and directors of the corporation shall be
indemnified by the corporation from and against all expenses, liabilities or
other matters arising out of their status as an officer or director for their
acts, omissions or services rendered in such capacities.
The forms of the Underwriting Agreement, filed as Exhibits 1.1
and 1.2 to this Registration Statement, provide that Advanta Business Services
Corp. will indemnify and reimburse the underwriter(s) and each controlling
person of the underwriter(s) with respect to certain expenses and liabilities,
including liabilities under the Securities Act of 1933 or other federal or state
regulations or under the common law, which arise out of or are based on certain
material misstatements or omissions in the Registration Statement. In
addition, the Underwriting Agreements provide that the underwriter(s) will
similarly indemnify and reimburse Advanta Business Services Corp. with respect
to certain material misstatements or omissions in the Registration Statement
which are based on certain written information furnished by the underwriter(s)
for use in connection with the preparation of the Registration Statement.
Insurance. As permitted under the laws which govern the
organization of the registrant, the registrant's By-laws permit the board of
directors to purchase and maintain insurance on behalf of the registrant's
agents, including its officers and directors, against any liability asserted
against them in such capacity or arising out of such agents' status as such,
whether or not such registrant would have the power to indemnify them against
such liability under applicable law.
<PAGE> 55
ITEM 16. EXHIBITS.
1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of Advanta Business Services
Corp.
3.2 -- By-Laws of Advanta Business Services Corp.
4.1 -- Master Business Receivables Asset-Backed Financing
Facility Agreement.
4.2 -- Form of Supplement to Master Facility Agreement.
4.3 -- Master Contribution Agreement.
4.4 -- Form of Supplement to Master Contribution Agreement.
5.1* -- Opinion of Dewey Ballantine with respect to validity.
8.1* -- Opinion of Dewey Ballantine with respect to tax matters.
23.1* -- Consents of Dewey Ballantine are included in its opinions
filed as Exhibits 5.1 and 8.1 hereto.
99.1* -- Form of Prospectus Supplement.
* Filed herewith.
Item 17. Undertakings.
A. Undertaking in respect of indemnification
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 provisions described above in Item
15, 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 Securities Act of 1933 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 their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by them
is against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
B. Undertaking pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this Registration
Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or
events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the Registration Statement;
(iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information in
the Registration Statement; provided, however, that paragraphs (i) and
(ii) do not apply if the information required to be included in the
post-effective amendment is contained in periodic reports filed by the
Issuer pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
II-2
<PAGE> 56
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
C. Undertaking pursuant to Rule 430A.
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in Reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to
be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(d) Undertaking pursuant to Item 512(b) of Regulation S-K.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(e) Undertaking pursuant to Item 512(d) of Regulation S-K.
The undersigned registrant hereby undertakes, with respect to
Securities offered through competitive bids, (1) to use its best efforts to
distribute prior to the opening of bids, to prospective bidders, underwriters,
and dealers, a reasonable number of copies of a prospectus which at the time
meets the requirements of Section 10(a) of the Act, and relating to the
securities offered a competitive bidding, as contained in the registration
statement, together with any supplements thereto, and (2) to file an amendment
to the registration statement reflecting the results of bidding, the terms of
the reoffering and related matters to the extent required by the applicable
form, not later than the first use, authorized by the issuer after the opening
of bids, of a prospectus relating to the securities offered at competitive
bidding, unless no further public offering of such securities by the issuer and
no reoffering of such securities by the purchasers is proposed to be made."
II-3
<PAGE> 57
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Voorhees, State of New
Jersey, on December 24, 1997.
Advanta Business Services Corp.
as Registrant
By: /s/ Charles H. Podowski
-------------------------------------
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Charles H. Podowski, Michael
Rehling, Cole Silver, Michael Coco and Edward E. Millman, and each of them, his
true and lawful attorney-in-fact and agent, with full power and substitution
and resubstitution, for and in his name, place and stead, in any and all
capacities to sign any or all amendments (including posteffective amendments)
to this Registration Statement and any or all other documents in connection
therewith, and to file the same, with all exhibits thereto, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, 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 might or could be done in peson, hereby ratifying and
confirming all said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed on November 14, 1997 below
by the following persons in the capacities and on the dates indicated.
Signature Title
/s/ Dennis Alter Director
----------------------------
Dennis Alter
/s/ Alex W. Hart Director
----------------------------
Alex W. Hart
/s/ David D. Wesselink Director
----------------------------
David D. Wesselink
/s/ Charles H. Podowski Director and Chairman
---------------------------- of the Board
Charles H. Podowski
/s/ Edward E. Millman Senior Vice President and
---------------------------- Chief Financial Officer
Edward E. Millman
II-4
<PAGE> 58
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit Description of Documents
- --------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Advanta Business Services Corp.
- --------------------------------------------------------------------------------
3.2 By-Laws of Advanta Business Services Corp.
- --------------------------------------------------------------------------------
4.1 Master Business Receivables Asset-Backed Financing Facility
Agreement.
- --------------------------------------------------------------------------------
4.2 Form of Supplement to Master Facility Agreement.
- --------------------------------------------------------------------------------
4.3 Master Contribution Agreement.
- --------------------------------------------------------------------------------
4.4 Form of Supplement to Master Contribution Agreement.
- --------------------------------------------------------------------------------
*5.1 Opinion of Dewey Ballantine with respect to validity.
- --------------------------------------------------------------------------------
*8.1 Opinion of Dewey Ballantine with respect to tax matters.
- --------------------------------------------------------------------------------
*23.1 Consents of Dewey Ballantine are included in its opinions filed as
Exhibits 5.1 and 8.1 hereto.
- --------------------------------------------------------------------------------
*99.1 Form of Prospectus Supplement.
- --------------------------------------------------------------------------------
* Filed herewith.
II-5
<PAGE> 1
EXHIBIT 5.1
December 24, 1997
Re: Advanta Equipment Receivables
Ladies and Gentlemen:
We have acted as special counsel to Advanta Business Services
Corp., a Delaware corporation ("Advanta") as to certain matters in connection
with the Commercial Receivables Asset Backed Notes (the "Notes") which will be
issued from time to time pursuant to Supplements to a Master Facility Agreement
(the "Facility Agreement") dated as of May 1, 1997 among Advanta, the Obligors'
Agent and The Chase Manhattan Bank, as Trustee (the "Trustee").
The assets which will be pledged to the Trustee for the benefit
of holders of the Securities (the "Securityholders") will include a pool of
retail installment sales contracts (the "Receivables") secured by certain loan
agreements, lease agreements and promissory notes, all monies paid or payable
thereunder after the related Cut-Off Date, security interests in the underlying
collateral financed thereby, certain bank accounts and the proceeds thereof, the
right to receive certain insurance proceeds and certain other property.
Capitalized terms not otherwise defined herein have their
respective meanings as set forth in the Facility Agreement.
As such counsel, we have examined original or certified copies of
the Articles of Incorporation and Bylaws of Advanta, as amended to date, and the
resolutions adopted by the Board of Directors of Advanta ratifying the
execution, delivery and participation in the transactions contemplated by the
Agreements (as hereinafter defined). We have examined the Facility Agreement,
together with the Prospectus.
The term "Prospectus" means, together, the Base Prospectus and
the Prospectus Supplement. The term "Base Prospectus" means the prospectus
included in the Registration Statement. The term "Registration Statement" means
(i) the Registration Statement on Form S-3 (No. 333-38575), including the
exhibits thereto, (ii) all documents incorporated by reference therein pursuant
to Item 12 of Form S-3 and (iii) any post-effective amendment filed and declared
effective prior to the date of issuance of the Notes. The term "Prospectus
Supplement" means the form of prospectus supplement.
We have also examined such other documents, papers, statutes and
authorities as we have deemed necessary as a basis for the opinions hereinafter
set forth. In all such examinations made by us in connection with this opinion,
we have assumed the genuineness of all signatures, the completeness and
authenticity of all records and all documents submitted to us as originals, and
the conformity with the originals of all documents submitted to us as copies
thereof.
As to various matters of fact relevant to the opinions
hereinafter expressed, we have relied upon the representations and warranties
contained in the Agreements and statements and certificates of officers and
representatives of Advanta.
<PAGE> 2
In rendering the opinions expressed in paragraphs numbered 1 and
2 below, we have assumed, without investigation, that (i) each Receivable will
be enforced in a commercially reasonable manner and (ii) each Receivable has
been duly authorized, executed and delivered by the respective Obligor
thereunder and constitutes the valid and legally binding obligation of such
obligor enforceable against such obligor in accordance with its terms, subject
to standard exceptions.
We also have assumed, without investigation, (a) as to all
parties to the Facility Agreement, the due authorization, execution, and
delivery thereof, and the validity and enforceability thereof against all
parties thereto other than Advanta, (b) each party has full power, authority and
legal right, under its charter and other governing documents, corporate and
regulatory legislation and the laws of its jurisdiction of incorporation or
organization, to execute and deliver the Facility Agreement and to carry out the
transactions contemplated thereunder, (c) Advanta has the respective rights in
the Receivables as contemplated by the Agreements as of the date hereof, (d) the
purchase price for the Notes has been delivered and received in accordance with
the terms of the Underwriting Agreement and the Facility Agreement, respectively
and (e) the Facility Agreement will be enforced in good faith and in a
commercially reasonable manner.
We have assumed that the Receivables and rights to receive
payment under the Receivables are not subject to any right, lien or interest of
any government or any agency or instrumentality thereof (including without
limitation any federal or state tax lien, or lien arising under Title IV of
ERISA) and that they are not subject to any lien arising by operation of law or
any judicial lien.
We have also assumed that the Notes constitute debt and not
equity for purposes of ERISA and that each employee benefit plan covered by
ERISA, any of whose assets are invested in a Note, is a plan to which an
administrative prohibited transaction exemption is fully available.
For the purpose of rendering the opinions expressed in paragraph
number 8 below, our inquiry has been limited to a review of the Officer's
Certificates of Advanta.
With respect to matters of fact, we have relied, without
investigation, on, and assumed the accuracy and completeness of, each Officer's
Certificate and the representations of Advanta in the instruments and documents
delivered at the closing. Where matters are stated to be to the best of our
knowledge, or known to us, our investigations consisted of inquiries of Advanta,
the results of which are reflected in the Officer's Certificates being furnished
to you with this opinion, and we have not made any investigation as to, and have
not independently verified the facts underlying, such matters nor have we
undertaken a search of court dockets in any jurisdiction.
To the extent that our opinions expressed in paragraphs numbered
1 and 2 below are related to the enforceability of the choice of law provisions
contained in the Facility Agreement, such opinions are based upon our reading of
the provisions of Section 5-1401 of the General Obligations Law of the State of
New York. While we have not found any reported cases construing such statutory
provisions, we believe that a New York court applying such statutory provisions
to the Agreements would give effect to the choice of law provisions set forth
therein.
Statements in this opinion as to the validity, binding effect and
enforceability of agreements, instruments and documents are subject (i) to
limitations as to enforceability imposed by bankruptcy,
<PAGE> 3
insolvency, moratorium, reorganization and other similar laws of general
application relating to or affecting the enforceability of creditors' rights;
(ii) to general limitations under equitable principles limiting the availability
of equitable remedies; (iii) to the equitable discretion of the court before
which any proceeding therefor may be brought; (iv) as to the enforceability of
any security interest or security agreement, to the limitations of good faith,
fair dealing and commercial reasonableness imposed by the Uniform Commercial
Code of the State of New York, as in effect on the date hereof ("UCC") as to the
remedies set out in such agreements, instruments and documents; and (v) as to
rights to indemnity, limitations that may exist under federal and state laws or
the public policy underlying such laws.
Statements in this opinion as to enforceability are further
qualified by (i) the application of judicial decisions involving statutes or
principles of equity which have held that certain covenants and other provisions
of agreements, including those providing for the acceleration of indebtedness
due under debt instruments upon the occurrence of events therein described, are
unenforceable in circumstances where it can be demonstrated that the enforcement
of such provisions is not reasonably necessary for the protection of the lender;
(ii) the effect of the law of any jurisdiction other than the State of New York
which limits the rate of interest which may be charged or collected; and (iii)
the validity, binding effect or enforceability, under certain circumstances, of
contractual provisions in the Agreements with respect to indemnification or
waiving defenses to obligations where such indemnification or such waivers are
against public policy, or granting self-help or summary remedies.
Based upon and subject to the foregoing, we are of the opinion
that:
1. The Facility Agreement has been duly executed and delivered by
Advanta and constitutes the valid, legal and binding agreement of Advanta,
enforceable against Advanta in accordance with its terms.
2. Assuming the Facility Agreement has been duly executed and
delivered by the parties thereto (other than Advanta), each such agreement
constitutes the valid, legal and binding agreement of Advanta, enforceable
against Advanta in accordance with its terms. The Facility Agreement creates a
valid and enforceable security interest in the Collateral (as defined therein)
pledged thereunder to the Trustee.
3. No consent, approval, authorization or order of, registration
or filing with, or notice to, courts, governmental agency or body or other
tribunal is required under federal laws or the laws of the State of New York,
for the execution, delivery and performance by Advanta of the Facility
Agreement, the offer, issuance, sale or delivery of the Notes, except such which
have been obtained.
4. No consent, approval, authorization or order of, registration
or filing with, or notice to, courts, governmental agency or body or other
tribunal is required under federal laws or the laws of the State of New York,
for the execution, delivery and performance by Advanta of the Facility
Agreement, except such which have been obtained.
5. The Notes have been duly authorized by all requisite action
and, when duly and validly executed by the Trustee and authenticated by the
Trustee in accordance with the Facility Agreement,
<PAGE> 4
will be validly issued and outstanding and entitled to the benefits of the
Facility Agreement.
6. The arrangement pursuant to which the Receivables are held
does not constitute an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
7. The Facility Agreement has been duly qualified under the Trust
Indenture Act of 1939, as amended.
We are members of the bar of the State of New York and this opinion is
limited to the laws of the State of New York and the Federal laws of the United
States of America.
This opinion is furnished by us as counsel to the Registrant. We hereby
consent to the filing of this opinion as an Exhibit to the Registration
Statement and to the reference to Dewey Ballantine in the Registration Statement
and the related prospectus under the heading "Legal Matters."
Very truly yours,
/s/ Dewey Ballantine LLP
<PAGE> 1
EXHIBIT 8.1
December 24, 1997
TO THE CHASE MANHATTAN
BANK, AS TRUSTEE:
Re: Advanta Equipment Receivables
Ladies and Gentlemen:
We have acted as special tax counsel to Advanta Business Services
Corp., a Delaware corporation ("Advanta") as to certain matters in connection
with the issuance of Commercial Receivables Asset Backed Notes (the "Notes")
which will be issued from time to time pursuant to Supplements to Master
Facility Agreement dated as of May 1, 1997 (the "Facility Agreement"), by and
among Advanta, the Obligors' Agent named therein and the Trustee.
As special tax counsel, we have reviewed such documents as we
deemed appropriate for the purposes of rendering the opinions set forth below,
including the following: (i) the Facility Agreement, and (ii) the Prospectus.
The term "Prospectus" means, together, the Base Prospectus and
the Prospectus Supplement. The term "Base Prospectus" means the prospectus
included in the Registration Statement. The term "Registration Statement" means
(i) the Registration Statement on Form S-3 (No. 333-38575), including the
exhibits thereto, (ii) all documents incorporated by reference therein pursuant
to Item 12 of Form S-3 and (iii) any post-effective amendment filed and declared
effective prior to the date of issuance of the Notes. The term "Prospectus
Supplement" means the form of prospectus supplement.
We have examined the question of whether the Notes will be
treated as indebtedness for federal income tax purposes. Our analysis is based
on the provisions of the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations promulgated thereunder as in effect on the date hereof and
on existing judicial and administrative interpretations thereof. These
authorities are subject to change and to differing interpretations, which could
apply retroactively. The opinion of special tax counsel is not binding on the
courts or the Internal Revenue Service (the "IRS").
In general, whether a transaction constitutes the issuance of
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
the form of the transaction or the manner in which the instruments are labeled.
The IRS and the courts have set forth various factors to be taken into account
in determining whether or not a transaction constitutes the issuance of
indebtedness for federal income tax purposes, which we have reviewed as they
apply to this transaction.
Based on the foregoing, and such legal and factual investigations
as we have deemed appropriate, we are of the opinion that for federal income tax
purposes:
(1) The Notes will be treated as indebtedness because (i) the
characteristics of the transaction strongly indicates that in economic
substance, the transaction is the issuance of indebtedness, (ii) the form of the
transaction is an issuance of indebtedness; and (iii) the parties have stated
unambiguously their intention to treat the transaction as the issuance of
indebtedness for tax purposes.
(2) The information appearing under the caption "Federal Income
Tax Consequences" in the Prospectus and Prospectus Supplement provide a fair and
accurate summary of all material federal income tax consequences of an
investment in the Notes.
This opinion is furnished by us as counsel to the Registrant. We
hereby consent to the filing of this opinion as an Exhibit to the Registration
Statement and to the reference to Dewey Ballantine in the Registration Statement
and the related prospectus under the heading "Legal Matters."
Very truly yours,
/s/ Dewey Ballentine LLP
<PAGE> 1
PROSPECTUS SUPPLEMENT EXHIBIT 99.1
(TO PROSPECTUS DATED (FORM OF PROSPECTUS SUPPLEMENT)
- --------------------------------------------------------------------------------
$______________
ADVANTA BUSINESS SERVICES CORP.,
SPONSOR AND SERVICER
$_________ ___% CLASS A-1 EQUIPMENT RECEIVABLES ASSET-BACKED NOTES, SERIES _____
$_________ ___% CLASS A-2 EQUIPMENT RECEIVABLES ASSET-BACKED NOTES, SERIES _____
$_________ ___% CLASS A-3 EQUIPMENT RECEIVABLES ASSET-BACKED NOTES, SERIES _____
$_________ ___% CLASS M EQUIPMENT RECEIVABLES ASSET-BACKED NOTES, SERIES _____
$_________ ___% CLASS B EQUIPMENT RECEIVABLES ASSET-BACKED NOTES, SERIES _____
The Advanta Equipment Receivables Asset-Backed Notes, Series
_____ will consist of the following classes (each, a "Class"): (i) the Class A-1
Notes (the "Class A-1 Notes"), the Class A-2 Notes (the "Class A-2 Notes") and
the Class A-3 Notes (the "Class A-3 Notes"; together with the Class A-1 Notes
and Class A-2 Notes, the "Class A Notes"), (ii) the Class M Notes (the "Class M
Notes") and (iii) the Class B Notes (the "Class B Notes"; together with the
Class A Notes and the Class M Notes, the "Notes"). The Class M Notes and the
Class B Notes are subordinate to the Class A Notes; the Class B Notes are
subordinate to the Class M Notes.
The Notes will represent asset-backed debt obligations of
Advanta Business Receivables LLC ("ABR LLC") and Advanta Leasing Receivables
Corp. III ("ALRC III"), as joint and several obligors (the "Issuers"). The
Contracts were originated or acquired by Advanta Business Services Corp. ("ABS"
or the "Sponsor"). The Issuers will establish a trust estate with respect to the
Notes (the "Trust Estate") with ________, as trustee (the "Trustee"). The Trust
Estate will consist initially primarily of (x) a combination of leases
(including, but not limited to, finance leases, true leases and full payout
leases), loans contracts and promissory notes financing the purchase or lease of
a variety of commercial assets, commercial products or personal property used
exclusively for commercial purposes, which will primarily consist of
"small-ticket" office equipment items for businesses, such as computers, copy
machines, facsimile machines, telephones, alarm systems, and similar items,
certain monies relating thereto received after the Cut-Off Date (the
"Contracts"), certain interests in the underlying equipment, items, intangibles
or property relating to the Contracts (the "Equipment," and together with the
Contracts, and including certain other property appurtenant thereto, the
"Receivables"), (y) $__________ (the "Initial Pre-Funded Amount") deposited in
an account (the "Pre-Funding Account") on the Closing Date from the proceeds of
the sale of the Notes and (z) a Reserve Account.
(cover continued on next page)
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
COMMENCING ON PAGE __ FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES OFFERED HEREBY.
THE NOTES WILL NOT REPRESENT AN INTEREST IN OR AN OBLIGATION OF
ADVANTA BUSINESS SERVICES CORP., ADVANTA CORP. OR ANY OF THEIR AFFILIATES,
OTHER THAN THE ISSUERS, NOR WILL THE NOTES BE INSURED OR GUARANTEED
BY ANY GOVERNMENTAL AGENCY OR BY ANY OTHER PERSON.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Initial Public Underwriting(1) Proceeds to
Offering Price Issuers(2)
- ---------------------------------------------------------- ----------------- ------------------ ---------------------
<S> <C> <C> <C>
Per Class A-1 Equipment Receivables Asset-Backed Note
- ---------------------------------------------------------- ----------------- ------------------ ---------------------
Per Class A-2 Equipment Receivables Asset-Backed Note
- ---------------------------------------------------------- ----------------- ------------------ ---------------------
Per Class A-3 Equipment Receivables Asset-Backed Note
- ---------------------------------------------------------- ----------------- ------------------ ---------------------
Per Class M Equipment Receivables Asset-Backed Note
- ---------------------------------------------------------- ----------------- ------------------ ---------------------
Per Class B Equipment Receivables Asset-Backed Note
- ---------------------------------------------------------- ----------------- ------------------ ---------------------
Total
- ---------------------------------------------------------- ----------------- ------------------ ---------------------
</TABLE>
(1) The Sponsor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting expenses estimated to be $ .
The Notes are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order in
whole or in part and to withdraw, cancel, or modify any order without notice. It
is expected that delivery of the Notes will be made in book-entry form through
the facilities of The Depository Trust Company, Cedel Bank, S.A. or the
Euroclear System on or about , .
The date of this Prospectus Supplement is ,
(cover page continued)
<PAGE> 2
Payments of principal and interest to the holders of the Class
A Notes (the "Class A Noteholders") will have the benefit of limited credit
support consisting of the subordination of the Class M Notes, subordination of
the Class B Notes, the Residual Interest, funds on deposit in the Reserve
Account, and amounts on deposit in certain other accounts, if any. The holders
of the Class M Notes (the "Class M Noteholders") will have the benefit of
limited credit support consisting of the subordination of the Class B Notes and
the Residual Interest, funds on deposit in the Reserve Account, and amounts on
deposit in certain other accounts, if any. The holders of the Class B Notes (the
"Class B Noteholders," together with the Class A Noteholders and the Class M
Noteholders, the "Noteholders") will have the benefit of limited credit support
in the form of the subordination of the Residual Interest, funds on deposit in
the Reserve Account, and amounts on deposit in certain other accounts, if any.
Capitalized terms used herein will have the meanings ascribed to such terms
herein. The pages on which terms are defined are set forth on the Index of Terms
contained herein.
Principal and interest will be paid to the Noteholders monthly
on the __ day (or the next succeeding Business Day if such __ day is not a
Business Day) of each month (each, a "Payment Date"), commencing, with respect
to interest, on __________, _____, and commencing, with respect to principal, on
the Amortization Date (as defined herein), as further described herein.
Pursuant to the terms of the Receivables Transfer Agreement
the Sponsor will agree to use its best efforts to transfer to the Issuers
additional qualifying Contracts and the related Equipment, and the Issuers will
agree to add such Contracts and interests certain in the related Equipment to
the Trust Estate, during the period from and including the Closing Date to and
including the _____________ Payment Date (the "Stated Amortization Date"), or,
if a Required Amortization Event (as defined herein) occurs with respect to a
Payment Date prior to the Stated Amortization Date, such earlier Payment Date
(the earlier to occur of the Stated Amortization Date or such earlier date, the
"Amortization Date") (such period being the "Interest-Only Period").
The Indenture will provide that, to the extent such additional
qualifying Contracts (the "Additional Contracts") and related Equipment (the
"Additional Equipment") (the Additional Contracts, Additional Equipment, and
other property appurtenant thereto is the "Additional Property") are available
from the Sponsor during the Pre-Funding Period (as defined herein) and the
Interest-Only Period, as applicable, the Trustee will, on each Payment Date
during such periods, disburse to the Issuers, in consideration of the pledge to
the Trustee of such Additional Property (x) first, from amounts remaining on
deposit in the Collection Account after the disbursement of certain payments
described herein, an amount equal to the lesser of (i) such remaining amount in
the Collection Account or (ii) the Aggregate Contract Balances with respect to
such Additional Property, (y) second, to the extent of the funds available
therein, if any, from the Additional Property Funding Account, an amount equal
to the lesser of (i) the funds available in the Additional Property Funding
Account and (ii) the Aggregate Contract Balances of the remaining Additional
Property, and (z) third, during the Pre-Funding Period only, to the extent the
amount on deposit in the Additional Property Funding Account is equal to zero as
of such date, from amounts on deposit in the Pre-Funding Account, an amount
equal to __% of the Aggregate Contract Balances of the remaining Additional
Property. Beginning with the Amortization Date, to the extent of Available Funds
available for such purpose, principal shall be due and payable to the
Noteholders as described herein.
The stated maturity date with respect to the Notes is the
Payment Date in ____________ (the "Stated Maturity Date"). However, if all
payments on the Contracts are made as scheduled, final payment with respect to
the Notes would occur prior to the Stated Maturity and it is expected that the
Notes will mature prior to the Stated Maturity. See "Summary of Terms--Expected
Maturity; Stated Maturity" herein.
The Issuers will have the option, subject to certain
conditions, to redeem all, but not less than all, of the Notes and thereby cause
early repayment of the Notes as of any Payment Date on which the Aggregate
Contract Balance is less than or equal to 10% of the Maximum Collateral Amount
(as defined herein). The Issuers will give notice of such redemption to the
Trustee at least 30 days before the Payment Date fixed for such redemption. Upon
deposit of funds necessary to effect such redemption, the Trustee shall pay the
remaining unpaid principal amount on the Notes and all accrued and unpaid
interest as of the Payment Date fixed for redemption. See "Description of the
Notes--Redemption."
The Notes offered hereby are being offered pursuant to this
prospectus supplement (the "Prospectus Supplement") and the accompanying
prospectus dated __________ (the "Prospectus"). Sales of the Notes may not be
consummated unless the purchaser has received this Prospectus Supplement and the
accompanying Prospectus.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY ENGAGE
IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE NOTES OFFERED HEREBY, INCLUDING PURCHASES OF NOTES TO STABILIZE THE MARKET
PRICE AND THE IMPOSITION OF BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE
"UNDERWRITING" HEREIN.
AVAILABLE INFORMATION
The Sponsor has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
series of securities offered pursuant to the Prospectus and described herein.
For further information, reference is made to the Registration Statement which
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549;
Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661 and Seven
World
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Trade Center, Suite 1300, New York, New York 10048. Copies of the Registration
Statement may be obtained from the Public Reference Branch of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site at http://www.sec.gov pursuant to Item 502(a)
under Regulation S-K as recently amended in SEC Release No. 33-7289 (May 9,
1996). The Sponsor will file with the Commission such periodic reports with
respect to the Notes as are required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and the rules and regulations of the Commission
thereunder.
REPORTS TO NOTEHOLDERS
During such time as the Notes remain in book-entry form, any
quarterly and annual reports containing information concerning the Notes and
required to be filed with the Commission will be sent to Cede & Co. ("Cede"), as
nominee of The Depository-Trust Company ("DTC"), the Euroclear System
("Euroclear") or Cedel Bank, S.A. ("CEDEL") as registered holders of the Notes
pursuant to the Indenture. Such reports will be made available by DTC, Euroclear
or CEDEL and its participants to holders of interests in the Notes in accordance
with the rules, regulations and procedures creating and affecting DTC, Euroclear
and CEDEL, respectively. See "Description of the Notes-Book Entry Registration
Notes" in the Prospectus. However, such reports will not be sent directly to
each beneficial owner while the Notes are in book-entry form. Upon the issuance
of fully registered, certificated Notes, such reports will be sent directly to
each Noteholder. Such reports will be prepared in accordance with generally
accepted accounting principles.
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SUMMARY OF TERMS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE HEREIN AND IN THE PROSPECTUS. CERTAIN
CAPITALIZED TERMS USED HEREIN ARE DEFINED ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT ON THE PAGES INDICATED IN THE "INDEX OF TERMS" OR, TO THE EXTENT NOT
DEFINED HEREIN, HAVE THE MEANINGS ASSIGNED TO SUCH TERMS IN THE PROSPECTUS.
- --------------------------------------------------------------------------------
Issuers ...................... Advanta Business Receivables LLC ("ABR LLC")
and Advanta Leasing Receivables Corp III
("ALRC III") will be joint and several
obligors with respect to the Notes.
Securities Offered ........... $_____________ aggregate principal amount of
_____% Class A-1 Equipment Receivables
Asset-Backed Notes, Series _____, (the "Class
A-1 Notes"), $_____________ aggregate
principal amount of _____% Class A-2 Equipment
Receivables Asset-Backed Notes, Series _____
(the "Class A-2 Notes"), $_____________
aggregate principal amount of _____% Class A-3
Equipment Receivables Asset-Backed Notes,
Series _____ (the "Class A-3 Notes"; together
with the Class A-1 Notes and Class A-2 Notes,
the "Class A Notes"); $_____________ aggregate
principal amount of _____% Class M Equipment
Receivables Asset-Backed Notes, Series _____
(the "Class M Notes") and $_____________
aggregate principal amount of _____% Class B
Equipment Receivables Asset-Backed Notes,
Series _____ (the "Class B Notes"; together
with the Class A Notes and the Class M Notes,
the "Notes") The Class M Notes will be
subordinated to the Class A Notes, and the
Class B Notes will be subordinated to both the
Class A Notes and the Class M Notes, each to
the extent provided in the Indenture as
described herein.
The combined aggregate principal amount of the
Class A Notes, the Class M Notes and the Class
B Notes will comprise ___% of the sum of (x)
the Original Aggregate Contract Balance and
(y) the Initial Pre-Funded Amount The
aggregate principal amounts of the Notes set
forth herein are based upon the Original
Aggregate Contract Balance calculated at the
Statistical Discount Rate (defined herein)
[The aggregate of the Class A-1, Class A-2,
Class A-3, Class M and Class B Initial
Principal Balances will be calculated using
the Actual Discount Rate].
"Senior-Subordinate"
Nature of the Notes........... The Notes are being issued in accordance with
a "senior-subordinate" structure, such that
the Class M and Class B Notes are subordinate
in payment priority to the Class A Notes, and
the Class B Notes are subordinate in priority
to the Class M Notes. Losses and delinquencies
experienced by the Receivables will first,
impact the Class B Noteholders, second, impact
the Class M Noteholders and third, impact the
Class A Noteholders. See "Description of the
Notes" herein.
Closing Date ................. On or about __________, _____ (the "Closing
Date").
Cut-Off Date ................. With respect to the Initial Contracts,
__________, _____ and, with respect to any
Additional Contracts, the date specified as
the Cut-Off Date applicable thereto (each such
date, a "Cut-Off Date").
Calculation Date ............. With respect to any Collection Period, the
close of business on the last day of
such Collection Period is the "Calculation
Date Contract Balances with respect to a
Payment Date shall be calculated on the
Calculation Date.
Business Day ................. Any day other than a Saturday or a Sunday, or
other day on which banks in the City of New
York or Delaware are required, or authorized
by law, to close (each such day, a "Business
Day").
Denominations ................ The Notes will be issued in minimum
denominations of $1,000 and
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integral multiples of $1,000 in excess
thereof, except that one Note of each Class
may be issued in another denomination.
Interest Rates ............... _____% per annum on the Class A-1 Notes (the
"Class A-1 Interest Rate"), _____% per annum
on the Class A-2 Notes (the "Class A-2
Interest Rate"), _____% per annum on the Class
A-3 Notes (the "Class A-3 Interest Rate"),
____% per annum on the Class M Notes (the
"Class M Interest Rate") and ____% per annum
on the Class B Notes (the "Class B Interest
Rate") calculated in each case on the basis of
a year of 360 days comprised of twelve 30-day
months With respect to any particular Class,
the "Interest Rate" refers to the applicable
rate indicated in the immediately preceding
sentence.
Initial Principal
Balances ..................... $_____________ for the Class A-1 Balances
Notes (the "Class A-1 Initial Principal
Balance"), $_____________ for the Class A-2
Notes (the "Class A-2 Initial Principal
Balance"), $_____________ for the Class A-3
Notes (the "Class A-3 Initial Principal
Balance", together with the Class A-1 Initial
Principal Balance and the Class A-2 Initial
Principal Balance, the "Class A Initial
Principal Balance"), $_____________ for the
Class M Notes (the "Class M Initial Principal
Balance") and $______________ for the Class B
Notes (the "Class B Initial Principal
Balance") The outstanding Class A-1 Note
principal balance for any Payment Date shall
be equal to the Class A-1 Initial Principal
Balance less any Principal Payments previously
made on the Class A-1 Notes (the "Class A-1
Principal Balance"); the outstanding Class A-2
Note principal balance for any Payment Date
shall be equal to the Class A-2 Initial
Principal Balance less any Principal Payments
previously made on the Class A-2 Notes (the
"Class A-2 Principal Balance"); the
outstanding Class A-3 Note principal balance
for any Payment Date shall be equal to the
Class A-3 Initial Principal Balance less any
Principal Payments previously made on the
Class A-3 Notes (the "Class A-3 Principal
Balance," together with the Class A-1
Principal Balance and the Class A-2 Principal
Balance as of such date, the "Class A
Principal Balance" as of such date); the
outstanding Class M Note principal balance for
any Payment Date shall be equal to the Class M
Initial Principal Balance less any Principal
Payments previously made on the Class M Notes
(the "Class M Principal Balance"); the
outstanding Class B Note principal balance for
any Payment Date shall be equal to the Class B
Initial Principal Balance less any Principal
Payments previously made on the Class B Notes
(the "Class B Principal Balance") See
"Description of the Notes."
Discounted Present
Value of the Contracts ....... On any date of calculation with respect to a
Contract, the present value of the Scheduled
Payments to become due with respect to such
Contract on and after such date of
calculation, discounted monthly to the
Calculation Date immediately prior to such
date of calculation (or to such date of
calculation if such date of calculation is a
Calculation Date) at one-twelfth of the Actual
Discount Rate is the "Contract Balance" of
such Contract, except that a Defaulted
Contract has a Contract Balance of $0.
The "Actual Discount Rate" is the sum of (i)
the weighted average of the Class A-1 Interest
Rate, the Class A-2 Interest Rate, the Class
A-3 Interest Rate, the Class M Interest Rate
and the Class B Interest Rate,
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(ii) the Servicer Fee Percentage (as defined
herein) and (iii) __%.
The "Scheduled Payments" with respect to any
Contract are the stated periodic rental
payments (exclusive of any amounts in respect
of insurance or taxes) set forth in such
Contract due from the related obligor (such
obligor, a "User").
"Aggregate Contract Balance" means, with
respect to any Payment Date, the aggregate
Contract Balance of all Contracts (other than
Defaulted Contracts) in the Trust Estate as of
the related Calculation Date.
Expected Maturity;
Stated Maturity .............. The expected maturity dates with respect to
the Class A-1 Notes, Class A-2 Notes, Class
A-3 Notes, Class M Notes and the Class B Notes
are the Payment Dates in _______, _______,
______, ______ and _____ respectively The
stated maturity date with respect to the Notes
will be the Payment Date in ___________ (the
"Stated Maturity Date") However, if all
payments on the Contracts are made as
scheduled, final payment with respect to the
Notes would occur prior to the Stated Maturity
Date.
Limited Obligations;
Asset-Backed Debt ............ The Notes will represent obligations solely of
the Issuers and are secured solely by the
Trust Estate To the extent that the Issuers
own other property, neither such other
property nor any proceeds thereof will be
available to fund payments on the Notes
Sponsor and Servicer ......... Advanta Business Services Corp ("ABS" or the
"Sponsor," or in its capacity as servicer, the
"Servicer"), a Delaware corporation
Trust Estate ................. The assets pledged to the Trustee to secure
the Notes will consist of, initially, (i) a
combination of leases (including, but not
limited to, finance leases, true leases and
full payout leases), loans contracts and
promissory notes financing the purchase or
lease of a variety of commercial assets,
commercial products or personal property used
exclusively for commercial purposes
(collectively, the "Initial Contracts") and
certain payments which become due thereunder
subsequent to the Cut-Off Date with respect to
the Initial Contracts, together with certain
other property appurtenant thereto, (ii)
certain interests in the Equipment (and
certain proceeds (including net insurance
proceeds) thereof) relating to the Initial
Contracts (the "Initial Property"), (iii)
funds on deposit in the Pre-Funding Account
and the Capitalized Interest Account and
certain other accounts held by the Trustee and
(iv) the rights of the Sponsor under any
applicable agreements (such as broker, vendor
or purchase agreements) pursuant to which the
Sponsor acquired the Contracts. Thereafter,
Additional Property may be pledged to the
Trustee to secure the Notes. The Initial
Contracts, together with any Additional
Contracts are referred to as the "Contracts"
and the Initial Equipment, together with any
Additional Equipment is referred to as the
"Equipment." The Contracts, together with
certain interests in the related Equipment and
other property appurtenant thereto, are
collectively referred to as the "Receivables."
To facilitate servicing, the Servicer will
retain possession of the Contracts and the
related Contract Files and will hold such
Contract Files in accordance with the
provisions of the Indenture, subject to the
interests of the Trustee and the Noteholders.
"Contract Files" shall
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<PAGE> 7
mean, with respect to each Contract, the
following documents: (i) the executed original
counterparts of the Contract that constitutes
"chattel paper" for purposes of Sections
9-105(1)(b) and 9-305 of the Uniform
Commercial Code (the "UCC"); (ii) a copy of
all documents, if any, that the Sponsor or the
Servicer keeps on file in accordance with the
Sponsor's or Servicer's customary procedures;
and (iii) copies (together with all
amendments, assignments and continuations
thereof) of all UCC financing statements filed
with respect to the Contracts, identifying the
User as debtor and the Sponsor as secured
party, if any.
On each Payment Date prior to the Amortization
Date, to the extent necessary, (i) all amounts
remaining on deposit in the Collection Account
after making certain payments as described
herein, (ii) all amounts on deposit in the
Additional Property Funding Account, if any,
and (iii) during the Pre-Funding Period only,
to the extent that the amount on deposit in
the Additional Property Funding Account is
equal to zero, all amounts on deposit in the
Pre-Funding Account, will be disbursed by the
Trustee to the Issuers, in the preceding order
of priority, in consideration of the Issuers'
pledge to the Trustee of Additional Property
relating to Additional Contracts having an
Aggregate Contract Balance on the related
Cut-Off Date equal as nearly as practicable to
such amounts; provided, that, with respect to
amounts to be released on any such Payment
Date from the Pre-Funding Account, only __% of
the remaining Aggregate Contract Balance of
such Additional Contracts (after the
application of the amounts on deposit in the
Collection Account and the Additional Property
Funding Account on such Payment Date with
respect to such Additional Contracts) will be
released from the Pre-Funding Account to the
Issuers. On each Payment Date commencing with
the Amortization Date, principal is required
to be paid to the Noteholders, as described
herein.
The Issuers' reversionary rights to the Trust
Estate, to the extent that the proceeds
thereof are not required to be applied to the
payment of the Notes, is the "Residual
Interest." As of any date of determination,
the "Principal Balance" of the Residual
Interest is equal to the excess of (x) the
Aggregate Contract Balance plus the amount
then on deposit in the Pre-Funding Account
over (y) the Outstanding Principal Balances of
all Classes of the Notes.
Pursuant to the Master Contribution Agreement,
dated as of May 1, 1997, between the Sponsor
and ALRC III, together with a supplement
thereto dated as of __________ (together, the
"Receivables Transfer Agreement"), the
Sponsor, as an originator, will make certain
representations and warranties to the Issuers
with respect to, among other things, the
Equipment and the Contracts, which
representations and warranties will be
assigned to the Trustee under the Indenture.
The Pre-Funding Account....... On the Closing Date, the Trustee will be
required to deposit $____________ (the
"Initial Pre-Funded Amount") from the proceeds
of the sale of the Notes in an account (the
"Pre-Funding Account") in the name of the
Trustee for the benefit of the Noteholders.
During the period (the "Pre-Funding Period")
from the Closing Date until the earliest of
(i) the date on which the amount on deposit in
the Pre-Funding Account is less than $100,000,
(ii) the date on which a
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<PAGE> 8
Required Amortization Event has occurred and
is continuing or (iii) the close of business
on _________ (such earliest date, the "Funding
Termination Date"), the Issuers may deliver
the Additional Property to the Trustee in
consideration of a corresponding disbursement
of amounts on deposit in the Pre-Funding
Account in an amount equal to __% of the
Contract Balances (as of the related Cut-Off
Date) of such Additional Property (the
Aggregate Contract Balance of Additional
Contracts which can be pledged based on the
Initial Pre-Funded Amount, the "Pre-Funding
Contract Balance"); provided, that no amounts
shall be disbursed from the Pre-Funding
Account on any date unless the balances of the
Additional Property Funding Account and the
Collection Account are equal to zero on such
date. Any amount remaining on deposit in the
Pre-Funding Account on the Funding Termination
Date will be used on the Payment Date
immediately following the Funding Termination
Date to prepay the Notes, the Class A Notes
receiving _____% (the "Class A Pre-Funding
Percentage"), the Class B Notes receiving ___%
(the "Class M Pre-Funding Percentage") and the
Class B Notes receiving ______% (the "Class B
Pre-Funding Percentage") of such remaining
amount; provided, that if such remaining
amount is less than $100,000, and, as of such
Payment Date, the Interest-Only Period has not
ended, such remaining amount will be deposited
in the Additional Property Funding Account.
[Any amount so applied as a payment to the
Class A Notes will be applied pro rata to the
Class A-1, the Class A-2 and Class A-3 Notes
in accordance with their respective,
then-outstanding Principal Balances.]
The Capitalized
Interest Account ............. On the Closing Date, the Trustee will be
required to deposit a portion of the proceeds
of the sale of the Notes in an account (the
"Capitalized Interest Account") in the name of
the Trustee for the benefit of the
Noteholders. The amount on deposit in the
Capitalized Interest Account will be used, as
necessary, by the Trustee, on each Payment
Date occurring during the Pre-Funding Period
only, to fund the aggregate amount of interest
accruing at the weighted average of the Class
A-1 Interest Rate, the Class A-2 Interest
Rate, the Class A-3 Interest Rate, the Class M
Interest Rate and the Class B Interest Rate on
the amount on deposit in the Pre-Funding
Account, less projected investment earnings on
the Pre-Funding Account, as of the related
Payment Date. Any amounts on deposit in the
Capitalized Interest Account on the Payment
Date immediately following the Funding
Termination Date (after taking into account
any transfers from the Capitalized Interest
Account to the Collection Account on such
Payment Date) will be released from the Trust
Estate and paid to the Issuers.
Required Amortization Event.... The earliest to occur of any of the following:
(i) the occurrence of an Event of Servicing
Termination" or an Event of Default (as
defined herein), (ii) the amount on deposit in
the Additional Property Funding Account
exceeds $_______, (iii) the bankruptcy of the
Servicer or either of the Issuers, (iv) as of
any Determination Date, the three-month
average ratio of the Aggregate Contract
Balance of Delinquent Contracts which are 61
days or more delinquent to the Aggregate
Contract Balance, exceeds _____%, (v) as of
any Determination Date, the 3 month average
ratio of the Aggregate Contract Balance of all
Contracts which become and continue to be
Defaulted Contracts during
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<PAGE> 9
the Initial Period to the Aggregate Contract
Balances, exceeds _____% (a "Required
Amortization Event").
Trustee....................... ___________ (the "Trustee"). The Trustee's
offices are located at _____________.
Determination Date............ The ___ Business Day prior to each Payment
Date. On such date (each, a "Determination
Date"), the Servicer will determine the amount
of payments received on the Contracts in
respect of the immediately preceding calendar
month (each such period, a "Collection
Period") which will be available for
distribution on the Payment Date. See
"Description of the Notes--Distributions on
Notes."
Payment Dates................. Payments on the Notes will be made on the
_________day of each month (or if such day is
not a Business Day, the next succeeding
Business Day), commencing on __________, _____
(each, a "Payment Date"), to holders of record
on the last day of the immediately preceding
calendar month (each, a "Record Date"). See
"Description of the Notes--Distributions on
Notes."
Interest Payments............. On each Payment Date, the interest due (the
"Interest Payments") with respect to each
Class of Notes since the last Payment Date
will be the interest that has accrued on such
Notes since the last Payment Date, or in the
case of the first Payment Date, since the
Closing Date (each such period, an "Interest
Accrual Period") at the applicable Interest
Rate applied to the then unpaid principal
amounts (the "Outstanding Principal Balance")
of the Notes of each Class, after giving
effect to payments of principal, on the
preceding Payment Date (such amount for the
Class A Notes, the "Class A Note Interest,"
for the Class M Notes, the "Class M Note
Interest" and for the Class B Notes, the
"Class B Note Interest"). In addition, on each
Payment Date, any Interest Payment shortfalls
for any prior Payment Date shall accrue and be
due to Noteholders (such Interest Payment
shortfalls on the Class A Notes, the "Class A
Overdue Interest," the Class M Notes, the
"Class M Overdue Interest" and the Class B
Notes, "Class B Overdue Interest"). See
"Description of the Notes--General" and
"Distributions on Notes."
Interest-Only Period.......... As described above under "The Trust Estate"
and "The Pre-Funding Account" and as described
below under "Flow of Funds," from time to time
the Issuers may pledge Additional Property to
the Trustee. The Indenture provides that,
unless a Required Amortization Event occurs
prior to the _________ 1998 Payment Date,
amounts which would otherwise be paid as
principal to the holders of the Notes will be
released to the Issuers in consideration of
the Issuers pledge to the Trustee, for the
benefit of the Noteholders, of Additional
Property, with the result that the Noteholders
will receive payments of interest only, and no
payments of principal, on each Payment Date
prior to and including the _______ Payment
Date (other than any amounts disbursed to the
Noteholders from the Pre-Funding Account
following the end of the Pre-Funding Period as
a prepayment of principal on the Notes). See
"Description of the Notes" and "Prepayment and
Yield Considerations" herein.
Principal Payments............ Unless a Required Amortization Event occurs
earlier, the Noteholders will receive no
principal payments until the __________
Payment Date (other than any amounts disbursed
to the Noteholders from the Pre-
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<PAGE> 10
Funding Account following the end of the
Pre-Funding Period as a prepayment of
principal on the Notes).
For each Payment Date during the Amortization
Period, each of the Class A Noteholders, the
Class M Noteholders and the Class B
Noteholders will be entitled to receive
payments of principal ("Principal Payments"),
to the extent funds are available therefor, in
the priorities set forth in the Indenture and
described herein below and under "--Flow of
Funds."
On each Payment Date during the Amortization
Period, to the extent funds are available
therefor, the principal will be paid to the
Noteholders in the following priority: (a)(i)
to the Class A-1 Noteholders only, until the
Outstanding Principal Balance on the Class A-1
Notes has been reduced to zero, the Class A
Principal Payment, then (ii) to the Class A-2
Noteholders only, until the Outstanding
Principal Balance on the Class A-2 Notes has
been reduced to zero, the Class A Principal
Payment, then (iii) to the Class A-3
Noteholders only, until the Outstanding
Principal Balance on the Class A-3 Notes has
been reduced to zero, the Class A Principal
Payment, (b) to the Class M Noteholders, until
the Outstanding Principal Balance on the Class
M Notes has been reduced to zero, the Class M
Principal Payment and (c) to the Class B
Noteholders, the Class B Principal Payment.
In addition, on each Payment Date, any
Principal Payment shortfalls for any prior
Payment Date shall accrue and be due to the
related Noteholders (such Principal Payment
shortfalls on the Class A-1 Notes, the "Class
A-1 Overdue Principal," the Class A-2 Notes,
the "Class A-2 Overdue Principal," the Class
A-3 Notes, (the "Class A-3 Overdue Principal,"
the Class M Notes, the "Class M Overdue
Principal" and the Class B Notes, the "Class B
Overdue Principal") on subsequent Payment
Dates.
The "Class A Principal Payment" is the amount
necessary to reduce the aggregate Outstanding
Principal Balance of the Class A Notes to the
Class A Target Investor Principal Amount.
The "Class A Target Investor Principal Amount"
with respect to each Payment Date is an amount
equal to the product of (a) the Class A
Percentage and (b) the Aggregate Contract
Balance as of the related Calculation Date.
The "Class M Principal Payment" is the amount
necessary to reduce the Outstanding Principal
Balance of the Class M Notes to the greater of
the Class M Target Investor Principal Amount
and the Class B Floor.
The "Class B Principal Payment" is the amount
necessary to reduce the Outstanding Principal
Balance the Class B Notes to the greater of
the Class B Target Investor Principal Amount
and the Class B Floor.
The "Class M Target Investor Principal Amount"
with respect to each Payment Date is an amount
equal to the product of (a) the Class M
Percentage and (b) the Aggregate Contract
Balance as of the related Calculation Date.
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The "Class B Target Investor Principal Amount"
with respect to each Payment Date is an amount
equal to the product of (a) the Class B
Percentage and (b) the Aggregate Contract
Balance as of the related Calculation Date.
The "Class B Floor" with respect to each
Payment Date means (a) _____% of the Original
Aggregate Contract Balance, plus (b) the
Cumulative Loss Amount with respect to such
Payment Date, minus (c) the sum, as of the
related Determination Date, of the Outstanding
Principal Balance of the Residual Interest and
the amount on deposit in the Reserve Account
after giving effect to withdrawals to be made
on such Payment Date.
The "Class A Percentage" is _________%; the
"Class M Percentage" is _________% and the
"Class B Percentage" is _______%.
The "Cumulative Loss Amount" with respect to
each Payment Date is an amount equal to the
excess, if any, of (a) the Contract Balance of
all Contracts which have become Defaulted
Contracts since the Closing Date over (b) the
sum of (i) the Contract Balances of all
Defaulted Contracts which became Reinstated
Contracts (as described below under "Defaulted
Contracts") and (ii) Defaulted Residual
Receipts.
The Contracts and
the Equipment................. The statistical information presented in
this Prospectus Supplement concerning the
Initial Contracts as of the Cut-Off Date has
been calculated using an assumed discount rate
of ______% per annum (the "Statistical
Discount Rate"). The Aggregate Contract
Balance of the Initial Contracts as of the
Cut-Off Date is $___________ using the
Statistical Discount Rate (the "Original
Aggregate Contract Balance"). The Aggregate
Contract Balance of the Initial Contracts as
of the Cut-Off Date is $___________ using the
Actual Discount Rate. The statistical
distribution of such characteristics of the
Initial Contract as of the Cut-Off Date using
the Actual Discount Rate will vary somewhat
from the statistical distribution of such
characteristics of the Initial Contracts as of
the Cut-Off Date using the Statistical
Discount Rate as presented in this Prospectus
Supplement, although such variance will not be
material. [In addition, certain Initial
Contracts included in the statistical
information included herein were determined
not to meet the eligibility requirements for
the final pool.] As a result, the statistical
distribution of characteristics as of the
Closing Date for the final Contract pool will
vary somewhat from the statistical
distribution of such characteristics as
presented in this Prospectus Supplement,
although such variance will not be material.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
measured by the Aggregate Contract Balance of
the Initial Contracts as of the Cut-Off Date
using the Statistical Discount Rate.
The Initial Contracts consist or, in the case
of the Additional Contracts, will consist, of
(i) transactions originated by the Sponsor,
agents of the Sponsor, vendors or brokers in
the name of the Sponsor and (ii) transactions
acquired by the Sponsor from third parties and
underwritten by the Sponsor in the same manner
as Contracts originated by the Sponsor.
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<PAGE> 12
Certain of the Initial Contracts may contain
provisions requiring that the related User
purchase the related Equipment at the end of
the related Contract term for an amount which
may in certain cases be the fair market value
of the related Equipment at Contract maturity.
Such amount may be (i) a specified amount or
(ii) a minimum specified amount plus an
unspecified excess amount which together with
the minimum specified amount is the lesser of
(a) the fair market value of the related
Equipment at Contract maturity or (b) a
maximum specified amount. Any payment of such
a specified amount or minimum specified amount
received from a User in connection with a
required purchase by such User at maturity of
the related Contract is a "Final Contract
Payment." Any such excess amount received from
a User is an "Excess Amount."
Certain Initial Contracts do not contain a
provision requiring the User to purchase the
related Equipment, but rather contain an
end-of-term purchase option (such Initial
Contracts and Equipment, the "Purchase Option
Contracts" and the "Purchase Option
Equipment," respectively). Such purchase
options are exercisable at varying amounts,
and are referred to as "Purchase Option
Payments." In the event that a User under a
Purchase Option Contract does not exercise its
purchase option, such User is required to
either re-lease the Equipment or return the
related Purchase Option Equipment to the
Servicer. The Servicer may, but has no
obligation to, purchase any such returned
Purchase Option Equipment. The amounts of (x)
any Purchase Option Payments, (y) other
proceeds of the sale of Purchase Option
Equipment to the extent such proceeds exceed
any Scheduled Payments and Final Contract
Payments remaining unpaid, and (z) Excess
Amounts are collectively referred to as
"Residual Receipts". Final Contract Payments
are not Residual Receipts. Residual Receipts
will be deposited in the Collection Account
and will be included in Available Funds, with
the result that such amounts will be available
to fund shortfalls in amounts due to the
Noteholders on each Payment Date, as well as
to fund the Reserve Account.
All proceeds of the sale of Equipment related
to Defaulted Contracts and any amounts
collected related to the failure of such User
to pay any required amounts under the related
Contract or to return the Equipment, in each
case as reduced by (i) any unreimbursed
Servicer Advances with respect to such
Contract or such Equipment and (ii) any
reasonably incurred out-of-pocket expenses
incurred by the Servicer in enforcing such
Contract or in liquidating such Equipment are
referred to as "Defaulted Residual Receipts".
Defaulted Residual Receipts will be deposited
in the Collection Account as Available Funds
on each Payment Date. Defaulted Residual
Receipts are not Residual Receipts.
Generally, a User does not have the right to
prepay its obligations under its Contract if
such Contract is a lease in form; Contracts
which are loans in form generally are
prepayable. However, pursuant to the terms of
the Indenture, the Servicer may allow
prepayment by a User with respect to a
Contract of an amount not less than the
Prepayment Amount related thereto. The
"Prepayment Amount" is defined to mean, with
respect to a Contract, as of any date, the sum
of (a) the Contract Balance of such Contract
(without deduction for any security deposit
paid by the related User, unless such security
deposit has been applied to the Contract
Balance pursuant to the Servicer's credit and
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<PAGE> 13
collection policy and deposited into the
Collection Account) plus (b) the product of
the Contract Balance and one-twelfth of the
Actual Discount Rate and (c) the residual
value, if any, of the related Equipment, as
reflected on the Servicer's servicing system.
Prepayment Amounts will be deposited in the
Collection Account as Available Funds.
Generally, the Contracts that are in the form
of leases are on a "net" basis (i.e., the User
assumes all responsibility with respect to the
related Equipment, including the obligation to
pay all costs relating to its operation,
maintenance, repair and insurance). Generally,
the Contracts that are in the form of leases
also contain provisions which unconditionally
obligate the User to make all Scheduled
Payments and any Final Contract Payment
thereunder.
The Initial Contracts and related Equipment
have been selected from the Sponsor's
portfolio of leases, loans and other contracts
based on the criteria specified in the
Receivables Transfer Agreement and any
Additional Equipment and Additional Contracts
must conform to such criteria at the time of
the pledge of such Additional Equipment and
Additional Contracts to the Trustee, for the
benefit of the Noteholders.
Affirmative
Covenants..................... The Sponsor will covenant and agree
in the Receivables Transfer Agreement, among
other things, that during the Interest-Only
Period, (i) the Sponsor will remain in the
business of originating and purchasing
equipment and related leases, loans, and other
contracts substantially similar to the Initial
Equipment and Initial Contracts, (ii) the
Sponsor will use its best efforts to originate
and purchase such equipment and related
leases, loans and other contracts in a
quantity no less than the cumulative amount
during the Interest-Only Period of (a) amounts
remaining on deposit in the Collection Account
after making certain payments as described
herein, (b) amounts on deposit in the
Additional Property Funding Account and (c)
during the Pre-Funding Period only, amounts on
deposit in the Pre-Funding Account, (iii) the
Sponsor will not sell, or enter into
agreements to sell, such equipment or related
leases, loans and other contracts to others in
a manner which would materially and adversely
affect the Sponsor's ability to perform its
obligations under the Receivables Transfer
Agreement, to make available Additional
Contracts for pledge to the Trustee.
The Indenture................. The Notes are to be issued pursuant to,
and are to be in such form, bear interest and
be payable on such terms as are prescribed in
the Master Business Receivables Asset-Backed
Financing Facility, dated as of May 1, 1997,
by and among the Servicer, ALRC III and the
Trustee, and a Supplement thereto dated as of
_________ (the "Indenture").
Redemption.................... The Issuers will have the option, subject
to certain conditions, to redeem all, but not
less than all, of the Notes and thereby cause
early repayment of the Notes as of any Payment
Date on which the Aggregate Contract Balance
(after giving effect to the payment of
principal on such Payment Date) is less than
or equal to 10% of the Maximum Collateral
Amount. The "Maximum Collateral Amount" is
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<PAGE> 14
the sum of (x) the Original Aggregate Contract
Balance plus (y) the Contract Balance of each
Additional Contract included in the Trust
Estate as a result of the Pre-Funding feature.
The Issuers will give notice of such
redemption to the Trustee at least 30 days
before the Payment Date fixed for such
prepayment. Upon deposit of funds necessary to
effect such redemption, the Trustee shall pay
the remaining unpaid principal amount of the
Notes and all accrued and unpaid interest as
of the Payment Date fixed for redemption. See
"Description of the Notes--Redemption."
Flow of Funds................. The Indenture will require that the
Trustee establish an account (the "Collection
Account") and that the Servicer deposit to the
Collection Account (or the Advance Payment
Account, as described herein), all collections
or receipts received by the Servicer on the
Contracts no later than two Business Days
following the Servicer's determination that
such amounts relate to the Contracts or the
Equipment.
The following discussion makes use of a number
of terms defined below under "Description of
the Notes--Flow of Funds."
On each Payment Date prior to the Amortization
Date, the Trustee will be required to make the
following payments from the Available Funds
(including amounts transferred from the
Reserve Account on such Payment Date) then on
deposit in the Collection Account or, with
respect to paragraph (vi), from amounts on
deposit in the Additional Property Funding
Account, in the following order of priority:
(i) from the Available Funds, to the
Servicer, any unrecoverable Servicer Advances;
(ii) from the Available Funds then
remaining in the Collection Account, to the
Servicer, if ABS is not then the Servicer, the
Servicing Fee then due, together with certain
miscellaneous amounts;
(iii) from the Available Funds then
remaining in the Collection Account, to the
Class A Noteholders, the Class A Note Interest
and Class A Overdue Interest for the related
Interest Accrual Period; pari passu with
respect to each Class of Class A Notes;
(iv) from the Available Funds then
remaining in the Collection Account, to the
Class M Noteholders, the Class M Note Interest
and the Class M Overdue Interest for the
related Interest Period;
(v) from the Available Funds then
remaining in the Collection Account, to the
Class B Noteholders, the Class B Note Interest
and the Class B Overdue Interest for the
related Interest Accrual Period;
(vi) from the sum of (x) the Available
Funds then remaining in the Collection
Account, and (y) the amount then on deposit in
the Additional Property Funding Account (such
sum, the "Available Additional Property
Funding Amount"), as follows:
(A) to the Issuers, an amount equal
to the least of:
(i) the Available Additional
Property Funding
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<PAGE> 15
Amount,
(ii) the Aggregate Net Cumulative
Contract Balance Decline Amount; and
(iii) the Aggregate Contract
Balances of all Additional Contracts
(calculated as of the related Cut-Off
Date) actually pledged to the Trustee
on such Payment Date (exclusive of
any Additional Contracts pledged to the
Trustee on such Payment Date with
respect to the Pre-Funding feature);
and
(B) to the Additional Property
Funding Account, the lesser of
(i) the excess, if any, (x) the
Aggregate Net Cumulative Contract
Balance Decline over (y) the amount
described in clause (A)(iii) above;
and
(ii) the remaining Available
Additional Property Funding Amount;
(vii) from the Available Funds then
remaining in the Collection Account, to the
Servicer, if ABS is the Servicer, the
Servicing Fee then due, together with certain
miscellaneous amounts;
(viii) from the Available Funds then
remaining in the Collection Account to the
Reserve Account, to the extent necessary to
increase the amount on deposit in the Reserve
Account to the Required Reserve Amount for
such Payment Date; and
(ix) to the Issuers, as the holders of
the Residual Interest, any remaining Available
Funds on deposit in the Collection Account.
On the Payment Date which is also the
Amortization Date and on each Payment Date
thereafter (such period being the
"Amortization Period") , the Trustee will be
required to make the following payments from
the Available Funds (including amounts
transferred from the Reserve Account on such
Payment Date) then on deposit in the
Collection Account, in the following order of
priority:
(i) from the Available Funds, to the
Servicer, any unrecoverable Servicer Advances;
(ii) from the Available Funds then
remaining in the Collection Account, to the
servicer, if ABS is not then the Servicer, the
Servicing Fee then due, together with certain
miscellaneous amounts;
(iii) from the Available Funds then
remaining in the Collection Account, to the
Class A Noteholders, the Class A Note Interest
and Class A Overdue Interest for the related
Interest Accrual Period, pari passu with
respect to each Class of Class A Notes;
(iv) from the Available Funds then
remaining in the Collection Account, to the
Class M Noteholders, the Class M Note Interest
and the Class M Overdue Interest for the
related Interest Period;
(v) from the Available Funds then
remaining in the
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<PAGE> 16
Collection Account, to the Class B
Noteholders, the Class B Note Interest and the
Class B Overdue Interest for the related
Interest Accrual Period;
(vi) until the Class A Principal Amount
has been reduced to zero, from the Available
Funds then remaining in the Collection
Account, (such an amount to be paid on
"sequential-pay" fashion with respect to the
Class A-1 Notes, the Class A-2 Notes and the
Class A-3 Notes, in that order) the Class A
Principal Payment and the Class A Overdue
Principal;
(vii) until the Class M Principal Balance
has been reduced to zero, to the Class M
Noteholders, from the Available Funds then
remaining in the Collection Account, the Class
M Principal Payment and the Class M Overdue
Principal;
(viii) until the Class B Principal
Balance has been reduced to zero, to the Class
B Noteholders, from the Available Funds then
remaining in the Collection Account, the Class
B Principal Payment and the Class B Overdue
Principal;
(ix) from the Available Funds then
remaining in the Collection Account, to the
Servicer, if ABS is then the Servicer, the
Servicing Fee then due, together with certain
miscellaneous amounts;
(x) from the Available Funds then
remaining in the Collection Account, to the
Reserve Account, to the extent necessary to
increase the amount on deposit in the Reserve
Account to the Required Reserve Amount for
such Payment Date;
(xi) to the Issuers, as the holder of the
Residual Interest, any remaining Available
Funds on deposit in the Collection Account.
In addition to the distributions from the
Collection Account on each Payment Date, on
the Payment Date immediately following the
Funding Termination Date, any amounts
remaining on deposit in the Pre-Funding
Account on such Payment Date will be
distributed as a prepayment of principal on
the Notes, with the Class A Notes, the Class M
Notes and the Class B Notes receiving the
Class A Pre-Funding Percentage, the Class M
Pre-Funding Percentage and the Class B
Pre-Funding Percentage, respectively, of such
remaining amounts; provided, that if such
remaining amount is less than $100,000 and, as
of such Payment Date, the Interest-Only Period
has not ended, such remaining amount will be
deposited in the Additional Property Funding
Account.
See "Description of the Notes--Flow of Funds."
Subordination Provisions...... A portion of the credit enhancement available
for the benefit of the Class A Noteholders is
provided by the subordination of the Class M
Notes, of the Class B Notes and of the
Residual Interest. A portion of the credit
enhancement available for the benefit of the
Class M Notes is provided by the subordination
of the Class B Notes and of the Residual
Interest. A portion of the credit enhancement
available for the benefit of the Class B
Noteholders is provided by the Residual
Interest.
The cash flow and subordination provisions of
the Indenture provide
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<PAGE> 17
that Available Funds on each Payment Date will
be used to fund payments to the Noteholders
(and to pay the fees and expenses of the
Servicer). "Available Funds" with respect to a
Payment Date generally include (i) amounts
collected during the immediately preceding
Collection Period with respect to the
Contracts and the Equipment, including,
without limitation, Scheduled Payments, Final
Contract Payments, Defaulted Residual
Receipts, Residual Receipts, Prepayment
Amounts, investment earnings on each of the
Accounts and any amounts required to be
transferred to the Collection Account from the
Capitalized Interest Account with respect to
such Payment Date plus (ii) amounts
transferred from the Reserve Account with
respect to such Payment Date and deposited in
the Collection Account.
Defaulted Contracts........... A "Defaulted Contract" will mean any Contract
(a)(i) that is a Delinquent Contract with
respect to which a User is contractually
delinquent for 121 days or more (without
regard to any Servicer Advances or the
application of any security deposit provided
by the User (a "Security Deposit") or (ii) as
to which the Servicer has determined in
accordance with its customary servicing
practices that eventual payment of the
remaining Scheduled Payments thereunder is
unlikely or (iii) that has been rejected by or
on behalf of the User in a bankruptcy
proceeding and (b) as to which a Release Event
has not occurred. With respect to any
Contract, a "Release Event" is a payment in
full of such Contract or a removal of such
Contract from the Trust Estate by the Servicer
pursuant to the terms of the Indenture.
However, during the period from the Closing
Date to the end of the Collection Period
relating to the Payment Date immediately
preceding the Amortization Date (the "Initial
Period"), a Contract remains a "Defaulted
Contract" only for so long as it continues to
meet the requirements for being a "Defaulted
Contract." If, at any time during the Initial
Period, a Contract no longer meets the
requirements for being a "Defaulted Contract,"
such Contract is no longer a "Defaulted
Contract." In addition, the Indenture requires
that during the Initial Period a Defaulted
Contract be assigned a Contract Balance of
zero at the time such Contract becomes a
Defaulted Contract. However, if at any time
during the Initial Period, a Defaulted
Contract no longer meets the requirements for
being a Defaulted Contract and therefore is no
longer considered a Defaulted Contract, the
Contract Balance of such Contract shall no
longer be zero, but rather shall be
recalculated to reflect the Contract Balance
of a Contract which is not a Defaulted
Contract.
One effect of the ability of a "Defaulted
Contract" to restore itself to non-defaulted
status during the Initial Period is that the
Contract Balances of any Contracts that became
Defaulted Contracts during the Initial Period,
but that no longer meet the requirements for
being "Defaulted Contracts" at the end of the
Initial Period (i.e., have returned to
performing status subsequent to their
default), are not paid to the Noteholders as
an accelerated payment of principal unless
they become Defaulted Contracts again after
the Initial Period.
Another effect is that the percentage of
Defaulted Contracts during the Initial Period
will reflect only those Contracts currently in
default and will not reflect Contracts that
were in default but which have returned to
performing status.
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<PAGE> 18
Since the Available Funds on any Payment Date
commencing with the Amortization Date are
applied in the order of priority described
above under "Flow of Funds" until such
Available Funds are exhausted, the effect of
including in the required "Class A Principal
Payment," in the "Class B Principal Payment"
and in the "Class M Principal Payment" the
amount of or, deemed loss (i.e., the Contract
Balance of any Defaulted Contract) and
prioritizing the payment of the Class A
Principal Payment, the Class M Principal
Payment and the Class B Principal Payment (in
that order) is to allocate losses first, to
the holder of the Residual Interest, second,
to the Class B Noteholders, third, to the
Class M Noteholders and fourth, to the Class A
Noteholders.
Through the operation of the "Class A Overdue
Principal," "Class M Overdue Principal" and
"Class B Overdue Principal" provisions, the
Class A Noteholders and the Class B
Noteholders are entitled to receive any
aggregate, cumulative shortfalls of Class A
Principal Amounts, Class M Principal Balances
or Class B Principal Balances not paid on
prior Payment Dates.
Reserve Account............... The Noteholders will have the benefit of funds
on deposit in an account (the "Reserve
Account") to the extent that, on any Payment
Date, there is a shortfall in the amount
available to pay amounts owing the Servicer
and to make interest and principal payments on
the Notes. The Reserve Account will be funded
by an initial deposit of ____% of the Original
Aggregate Contract Balance. Thereafter, to the
extent provided in the Indenture, additional
deposits will be made to the Reserve Account
(x) in connection with each addition of
Additional Contracts to the Trust Estate as a
result of the operation of the Pre-Funding
feature (in amounts equal to ___% of the
Contract Balance of each such Additional
Contract as of the related Cut-Off Date and
(y) on each Payment Date, to the extent that
the amount on deposit in the Reserve Account
(the "Available Reserve Amount") is less than
the Required Reserve Amount. The "Required
Reserve Amount" generally equals the lesser of
(a) ____% of the Maximum Collateral Amount and
(b) the Outstanding Principal Balance of the
Notes, subject to certain floors and triggers
set forth in the Indenture. Amounts on deposit
in the Reserve Account in excess of the
Required Reserve Amount will be disbursed to
the Issuers in accordance with the provisions
of the Indenture.
Amounts on deposit in the Reserve Account on
any Payment Date shall be withdrawn therefrom
and transferred to the Collection Account if
the Available Funds (exclusive of such amounts
transferred from the Reserve Account) with
respect to such Payment Date are insufficient
to fund in full the items described above
under "Flow of Funds," if such items are of a
higher priority than the funding of the
Reserve Account.
Servicing..................... The Servicer will be responsible for
servicing, managing and administering the
Trust Estate and enforcing and making
collections on the Contracts. The Servicer
will be required to exercise the degree of
skill and care in performing these functions
that it customarily exercises with respect to
similar property owned or serviced by the
Servicer. The Servicer will be entitled to
receive (a) a monthly fee (the "Servicer Fee")
of the product of (i) one-twelfth of 1.00%
(the "Servicer Fee Percentage") and (ii) the
Aggregate Contract Balance of all Contracts as
of the beginning of the previous Collection
Period,
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<PAGE> 19
payable out of the Collection Account, (b)
late payment fees and (c) certain other fees
paid by the Users ("Servicing Charges"), as
compensation for acting as Servicer.
Under certain limited circumstances, the
Servicer may resign or be removed, in which
event either the Trustee or a third party
meeting the requirements set forth in the
Receivables Transfer Agreement will be
appointed as successor Servicer. See
"Description of the Notes--Events of Servicing
Termination."
The Servicer will be required to cause amounts
collected on the Contracts to be deposited to
the Collection Account or the Advance Payment
Account, as applicable, maintained by the
Trustee no later than two Business Days
following the Servicer's determination that
such amounts relate to the Contracts or the
Equipment. See "Description of the Notes--The
Accounts."
Substitution and
Modifications................. The Indenture permits the Servicer, subject to
certain requirements, to make substitutions in
replacement of Defaulted Contracts or modify
Contracts; provided, that (x) the substitute
Contract, or the Contract as modified, has a
Contract Balance not lower than the Contract
Balance of the substituted Contract
(calculated immediately prior to each Contract
becoming a Defaulted Contract), or the
Contract prior to such modification, as the
case may be, and (y) the aggregate, cumulative
Contract Balance of such substituted or
modified Contracts may not exceed 10% of the
Maximum Collateral Amount (exclusive of the
Contract Balance of Contracts substituted for
other contracts which were determined to have
breached a representation or warranty).
In addition, the Sponsor may deliver
qualifying, Substitute Contracts as
replacements for Contracts which are
determined to have breached representations or
warranties, the Contract Balances such
Substitute Contracts will not be applied
against the 10% limit described above.
Advances...................... Subject to the limitations described herein,
on or prior to each Payment Date, the Servicer
will be required to make advances (each, a
"Servicer Advance") for delinquent Scheduled
Payments and Final Contract Payments, but only
to the extent it determines in its sole
discretion that such advances will be
recoverable in future periods.
A "Delinquent Contract" will mean, as of any
date, any Contract (a) as to which less than
90% of any Scheduled Payment was received by
the Servicer when due as of the close of
business on the Calculation Date immediately
preceding such date and (b) which is not a
Defaulted Contract. With respect to any
Delinquent Contract, whenever the Servicer
shall have determined that it will be unable
to recover a Servicer Advance or a portion
thereof on such Delinquent Contract, the
Servicer will not be required to make such
Servicer Advance or portion thereof, but will
be required to enforce its remedies (including
acceleration) under such Contract. The
Indenture shall provide that, in the event
that the Servicer determines that any Servicer
Advances previously made are nonrecoverable
("Nonrecoverable Advances") or any Delinquent
Contracts for which the Servicer has made a
Servicer Advance in respect thereof become
Defaulted Contracts, the Trustee shall draw on
the Collection Account to repay such Servicer
Advances
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<PAGE> 20
to the Servicer.
Federal Income Tax
Considerations................ It is intended that the Notes will be
characterized as indebtedness of the Issuer
for federal income tax purposes. If
characterized as indebtedness, interest on
such Notes will be taxable as ordinary income
when received by a Noteholder on the cash
method of accounting and when accrued by
Noteholders on the accrual method of
accounting. See "Material Federal Income Tax
Considerations."
ERISA
Considerations................ The Employee Retirement Income Security Act of
1974, as amended ("ERISA") places certain
restrictions on those pension and other
employee benefits plans to which it applies.
Pursuant to regulations issued by the United
States Department of Labor defining "plan
assets," if the Notes are considered to be
indebtedness without substantial equity
features under local law, the assets of the
Issuer will not be considered assets of any
ERISA plan holding the Notes, thereby
generally avoiding potential application of
ERISA's prohibited transaction rules. However,
in certain circumstances, the prohibited
transaction rules may be applicable to the
purchase of the Notes even if the Notes are
not deemed to have substantial equity
features. Certain exemptions from the
prohibited transaction rules could be
applicable, however, with respect to the
acquisition and holding of the Notes.
Accordingly, the Notes may be acquired by
ERISA plans, subject to certain restrictions.
Before purchasing any of the Notes,
fiduciaries of such plans should determine
whether an investment in the Notes is
appropriate under ERISA. See "ERISA
Considerations."
Rating........................ It is a condition to the issuance of the Notes
that the Class A Notes be rated at least
"___," the Class M Notes be rated at least
"___" and that the Class B Notes be rated at
least "___" by Standard & Poor's Ratings Group
("S&P"), Moody's Investors Service, Inc.
("Moody's") and Fitch Investors Service, L.P.
("Fitch"), respectively (each a "Rating
Agency"). The ratings assess the likelihood of
timely payment of interest and the ultimate
payment of principal to the Noteholders by the
Stated Maturity Date. There is no assurance
that any rating will not be lowered or
withdrawn if, in the judgement of any Rating
Agency, circumstances in the future so
warrant. See "Rating of the Notes."
Material Risks................ Certain material risks may be present in an
investment in the Notes. See "Risk Factors."
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<PAGE> 21
MATERIAL RISKS
Prospective Noteholders should consider, in addition to the
factors described under "Material Risks" in the Prospectus, the following
additional risk factors in connection with the purchase of Notes.
THE ISSUERS HAVE THE RIGHT TO REMOVE CONTRACTS IN CERTAIN CASES IN
EXCHANGE FOR THE DELIVERY OF SUBSTITUTE CONTRACTS. As described herein, pursuant
to the Indenture, the Issuers have the option, but not the obligation, to
designate one or more contracts to be a Substitute Contract as a replacement for
any Contract which, due to a breach of a representation or warranty, must be
removed from the Trust Estate or, to a limited extent, if such Contract becomes
a Defaulted Contract, in which event the scheduled payments from such Substitute
Contract will replace (in whole or in part) the remaining scheduled payments on
the removed or Defaulted Contract.
The Sponsor is not required to designate one or more contracts as
a Substitute Contract. Accordingly, Noteholders should not expect that
Substitute Contracts will be available.
THE RATE OF PRINCIPAL PREPAYMENT ON THE NOTES MAY BE INFLUENCED BY
SUBSTITUTIONS AND REPURCHASES. Because the rate of payment of principal on the
Notes during the Amortization Period will depend, among other things, on the
rate of payment on the Contracts, such rate of payments of principal on the
Notes cannot be predicted. Payments on the Contracts will include scheduled
payments as well as Prepayments permitted by the Servicer, payments as a result
of Defaulted Contracts (to the extent not replaced by Substitute Contracts), and
payments upon repurchases by the Sponsor on account of a breach of certain
representations and warranties in the Receivables Transfer Agreement (to the
extent not replaced by Substitute Contracts). The rate of early terminations of
Contracts due to Prepayments and defaults may be influenced by a variety of
economic and other factors. For example, adverse economic conditions and certain
natural disasters such as floods, hurricanes, earthquakes and tornadoes may
affect Prepayments. The risk of reinvesting unscheduled distributions resulting
from Prepayments of the Notes will be borne by the Noteholders. See "Prepayment
and Yield Considerations."
INTERESTS IN THE EQUIPMENT; CERTAIN SECURITY INTERESTS NOT
PERFECTED, WHICH MAY RESULT IN DIMINISHED RECOVERY VALUES. The Contracts
generally consist of "chattel paper" which creates a security interest in the
related item of Equipment which constitutes the Underlying Collateral with
respect to such Contract. A security interest in personal property is generally
not a perfected security interest unless a UCC financing statement has been
filed in the appropriate filing office with respect to such security interest.
Prior to the Cut-Off Date, the Sponsor will have filed UCC financing statements
in its favor against Users only in respect of Equipment, with an original
Equipment cost in excess of $25,000. Financing statements in favor of the
Sponsor with respect to approximately ____% of the Original Aggregate Contract
Balance will have been so filed. Generally, no action will be taken to perfect
the interest of the Sponsor in any Equipment to the extent the original
Equipment cost of the related Equipment is less than or equal to $25,000. As a
result, the Sponsor does not have a perfected security interest in Equipment
with an original Equipment cost of less than or equal to $25,000, which
represents approximately ____% of the Original Aggregate Contract Balance. To
the extent UCC financing statements evidencing the Sponsor's security interest
in the Equipment have not been filed against the User (i.e., with respect to
those Users relating to Equipment with an original cost of less than $25,000) no
such security interests in the Equipment will be perfected in favor of the
Sponsor, the Issuers or the Trustee and another party (such as a creditor of the
Sponsor) may acquire rights in the Sponsor's interest in the Equipment superior
to those of the Issuer or the Trustee. See "Certain Legal Matters" in the
Prospectus. The lack of a perfected security interest in certain Equipment will
result in claims against such Users being unsecured and may adversely affect the
ability of the Servicer to realize on such Equipment.
With respect to Contracts relating to items of Equipment with
original Equipment costs in excess of $25,000, the Sponsor will represent and
warrant that a UCC financing statement in its favor has been filed in the
appropriate filing office, with the result that the Sponsor has obtained a
perfected security interest in such Equipment. Because of the administrative
burden and expense involved, no UCC financing statements will be individually
assigned by the Sponsor to either the Issuers or the Trustee. However, general,
"blanket" UCC financing statements naming (i) the Sponsor, as debtor, and the
Issuers as secured party, and (ii) the Issuers, as debtors, and the Trustee as
secured party, will be filed in the states in which the principal executive
offices of such parties are located. Furthermore, certain provisions of the
Bankruptcy Code provide that the retention of bare legal
21
<PAGE> 22
title to a property interest, such as a lien on personal property, for servicing
purposes, does not, in and of itself, vest beneficial ownership of such a
property interest in the legal title holder. The likely legal result of the
foregoing, in light of the transfer of the Contracts and the Equipment to the
Issuers, is to transfer to the Issuers the benefits of all perfected security
interests in those items of Equipment in which the Sponsor itself had a
perfected security interest (i.e., with respect to items of Equipment with an
original Equipment cost in excess of $25,000). Pursuant to the Indenture, the
Issuers will pledge all of their respective right, title and interest in and to
the Trust Estate (including security interests in the Equipment) to the Trustee
for the benefit of the Noteholders.
EQUIPMENT OBSOLESCENCE MAY DIMINISH RECOVERY VALUES. In the event
a Contract becomes a Defaulted Contract and the User (and any guarantor) has
insufficient assets available to pay the Contract payments on the scheduled
payment dates, the only other source of moneys (other than the credit
enhancement provided by the subordination and the Reserve Account) for such
amounts will be the income and proceeds from the disposition of the related
Equipment. Because the market value of equipment generally declines with age and
may be subject to sudden, significant declines in value because of technological
advances, in the event of a repossession and sale of Equipment subject to a
Defaulted Contract, the Trustee may not recover the entire amount due on such
Contract. As a result, the Noteholders may be subject to delays in receiving
payments and suffer loss of their investment in the Notes.
THE SPONSOR'S ABILITY TO ORIGINATE ADDITIONAL CONTRACTS MAY
DETERMINE WHETHER THE INTEREST-ONLY PERIOD CAN BE MAINTAINED, AND WHEN THE
AMORTIZATION PERIOD MAY COMMENCE. It is expected that during the Interest-Only
Period, no principal will be paid to the Noteholders. If, however, during the
Interest-Only Period, (i) the Pre-Funding Account monies are not utilized to a
certain extent or (ii) a sufficient amount of Additional Contracts are not
available for pledge to the Trustee, the Noteholders may receive payments of
principal during the Interest-Only Period. See "The Pre-Funding Account" in the
Summary. The occurrence of either of the two events described above would
result, generally, from a shortage in availability of qualifying Additional
Contracts during the Interest-Only Period. Therefore, whether the Interest-Only
Period is an "interest-only period" as expected, depends in large part on the
Sponsor's ability to originate Additional Contracts. See "Social, Economic and
Other Factors" below. The Sponsor does not, as of the date of this offering,
expect that any shortage in availability will in fact arise during the
Interest-Only Period, and has agreed to originate, and subsequently transfer to
one of the Issuers, who will subsequently pledge to the Trustee, for the benefit
of the Noteholders, a sufficient amount of Additional Contracts such that
neither of the events described above will occur. However, if the Sponsor is
unable to originate Additional Contracts as expected, there is a risk that the
Noteholders may receive payments of principal during the Interest-Only Period.
SOCIAL, ECONOMIC AND OTHER FACTORS MAY ALSO DETERMINE WHETHER THE
INTEREST-ONLY PERIOD CAN BE MAINTAINED, AND WHEN THE AMORTIZATION PERIOD MAY
COMMENCE. The ability of the Issuers to pledge Additional Contracts to the
Trustee is dependent in part upon whether the Users thereunder perform their
payment and other obligations required by such Additional Contracts in order
that such Additional Contracts meet the specified requirements for transfer on
the related Cut-Off Date during the Interest-Only Period. The performance by
such Users may be affected as a result of a variety of social and economic
factors. Economic factors include interest rates, unemployment levels, the rate
of inflation and consumers' general perception of economic conditions. However,
the Sponsor is unable to determine and has no basis to predict whether or to
what extent economic or social factors will affect the performance by such Users
and the availability of Additional Contracts.
22
<PAGE> 23
CREDIT ENHANCEMENT IS LIMITED, AND, IF IT IS EXHAUSTED; LOSSES MAY
RESULT. Credit enhancement with respect to the Notes will be provided by the
subordination of the Residual Interest and funds on deposit in the Reserve
Account. In addition, the Class A Notes have the benefit of the subordination of
the Class M and Class B Notes, and the Class M Notes have the benefit of the
subordination of the Class B Notes. However, on any Payment Date the amount
available to Noteholders is limited to the extent of funds on deposit in the
Collection Amount and the Reserve Account. Therefore, if a Contract becomes a
Defaulted Contract at a time when total losses on the Contracts are in excess of
the Outstanding Principal Balance of any subordinated Class and, the amounts, if
any, available to be withdrawn from the Reserve Account are reduced to zero, the
holders of Notes of any senior Class may experience losses.
[THE INITIAL CONTRACT POOL MAY HAVE GEOGRAPHIC CONCENTRATION]. As
of the Cut-Off Date, approximately ____%, ____%, ____%, ____%, ____% and ____%
of the Initial Contracts (based on the Original Aggregate Contract Balance) were
located in ____________, respectively. No other state accounts for more than
____% of the Initial Contracts. See "The Trust Estate." Accordingly, adverse
economic conditions or other factors particularly affecting any of these regions
could adversely affect the performance on the Initial Contracts.
THE SERVICER WILL BE PERMITTED TO COMMINGLE COLLECTIONS TO A
LIMITED EXTENT, WHICH MAY LEAD TO DELAYS IN THE EVENT OF A SERVICER BANKRUPTCY.
Under the Indenture, the Servicer is required to deposit all collections on the
Contracts received after the Cut-Off Date to the Collection Account within two
Business Days of receipt thereof. If bankruptcy or reorganization proceedings
were commenced with respect to the Servicer, those funds held by the Servicer
may be subject to an automatic stay resulting in a delay in the transfer of such
funds to the Trustee.
THE ISSUERS
The Issuers are Advanta Business Receivables LLC ("ABR LLC") and
Advanta Leasing Receivables Corp. III ("ALRC III"). The Issuers will be jointly
and severally liable on the Notes. Each Issuer is a special-purpose finance
subsidiary of the Sponsor. See "The Issuers" in the Prospectus.
USE OF PROCEEDS
The Issuers will apply the net proceeds from the sale of the Notes
as follows: (i) to make the deposit of the Initial Pre-Funding Amount to the
Pre-Funding Account; (ii) to make the deposit to the Capitalized Interest
Account, in the amount specified in the Indenture; (iii) to make the initial
deposit to the Reserve Account, in the amount specified in the Indenture; (iv)
to repay certain asset-backed warehouse indebtedness relating to certain of the
Initial Contracts and (v) to pay the Sponsor, in consideration of the transfer
to the Issuers of certain of the Initial Contracts.
THE TRUSTEE
________________ will be the Trustee under the Indenture. Advanta
Business Services Corp., as Sponsor or Servicer, and its affiliates may from
time to time enter into normal banking and trustee relationships with the
Trustee and its affiliates. The Trustee, the Servicer and any of their
respective affiliates may hold Notes in their own names. In addition, for
purposes of meeting the legal requirements of certain local jurisdictions, the
Trustee shall have the power to appoint a co-trustee or a separate trustee under
each Indenture. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Indenture will be
conferred or imposed upon the Trustee and such separate trustee or co-trustee
jointly, or in any jurisdiction in which the Trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee, who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee.
23
<PAGE> 24
THE TRUST ESTATE
GENERAL
The Trust Estate primarily consists of the Contracts and the
related security interests in the Equipment.
Approximately _____% of the Initial Contracts, measured by
Original Aggregate Contract Balance, consist of an agreement, including, as
applicable, schedules, supplements and amendments to a master lease, pursuant to
which specified Equipment is leased to a lessee at a specified monthly rental.
Approximately _____% of the Initial Contracts, measured by Original Aggregate
Contract Balance, take the form of finance contracts, installment sale contracts
and leases, loans and other contracts consisting of notes and accompanying
security agreements. Each Additional Contract will be in the form of a lease or
a loan.
Generally, the Initial Contracts that take the form of leases are
"net leases" (i.e., the User assumes all responsibility with respect to the
related Equipment, including the obligation to pay all costs relating to its
operation, maintenance, repair). In addition, all Initial Contracts that take
the form of leases contain "hell or high water" clauses unconditionally
obligating the User to make periodic payments, without setoff, at the time and
on the dates specified in such Contract, notwithstanding default by the Sponsor,
the Servicer, or Issuers, either or any assignee of any of them under such
Contract, damage to or destruction of the related Equipment or any other event.
The Contracts will take the form of leases, loans or other
contracts. Leases may be "true" leases or leases intended as security; loans may
include installment sale contracts. Leases, loans or other contracts typically
require a "residual" payment at the end of the term in the form of either a
purchase option or required balloon payment.
Users under the Initial Contracts that take the form of leases
may, upon prior written notice to the Servicer, assign or sublease the related
Equipment, provided that the Servicer consents to the assignee or sublessee in
accordance with the terms of the related Contract. The right to receive such
prior written notice and grant or deny such consent shall be exercised by the
Servicer pursuant to the authority delegated to it in the related Contract.
Notwithstanding any such assignment or sublease, each User will remain liable
for the lessee obligations under the related Contract and such Contract will
remain part of the assets pledged to the Trustee.
The Notes are secured by (i) Initial Contracts with an Original
Aggregate Contract Balance of $____________ (calculated using the Statistical
Discount Rate), (ii) a Pre-Funding Account with an Initial Pre-Funded Amount
equal to $____________, (iii) the Reserve Account and (iv) certain other
miscellaneous accounts.
The Initial Contracts consist of (i) transactions originated by
the Sponsor, agents of the Sponsor or brokers in the name of the Sponsor and
(ii) transactions acquired by the Sponsor from third-parties and underwritten by
the Sponsor in the same manner as Contracts originated by the Sponsor.
Certain of the Initial Contracts that take the form of leases
contain provisions requiring that the related User purchase the related
Equipment at the end of the related Contract term for an amount, which may in
certain cases be the fair market value of the related Equipment at Contract
maturity. Such amount may be (i) a specified amount or (ii) a minimum specified
amount plus an unspecified excess amount which together with the minimum
specified amount is the lesser of (a) the fair market value of the related
Equipment at Contract maturity or (b) a maximum specified amount. Any payment of
such a specified amount or minimum specified amount received from a User in
connection with a required purchase by such User at maturity of the related
Contract is a "Final Contract Payment." Any such excess amount received from a
User is an "Excess Amount."
Certain Initial Contracts that take the form of leases do not
contain a provision requiring the related User to purchase the related
Equipment, but rather contain an end-of-term purchase option (such Contracts and
Equipment, the "Purchase Option Contracts" and "Purchase Option Equipment,"
respectively). Such purchase options are exercisable at varying amounts, and are
referred to as "Purchase Option Payments." In the event that a User under a
Purchase Option Contract does not exercise its purchase option, such User is
required to either re-lease the Equipment or return the related Purchase Option
Equipment to the Servicer. The Servicer may, but has no obligation to, purchase
any such returned Purchase Option Equipment. The amounts of (x) any Purchase
Option
24
<PAGE> 25
Payments, (y) other proceeds of the sale of Purchase Option Equipment to the
extent such proceeds exceed any Scheduled Payments and Final Contract Payments
remaining unpaid, and (z) Excess Amounts are collectively referred to as
"Residual Receipts." Final Contract Payments are not "Residual Receipts."
All proceeds of the sale of Equipment related to Defaulted
Contracts and any amounts collected related to the failure of such User to pay
any required amounts under the related Contract or to return the Equipment, in
each case as reduced by (i) any unreimbursed Servicer Advances with respect to
such Contract or such Equipment and (ii) any reasonably incurred out-of-pocket
expenses incurred by the Servicer in enforcing such Contract or in liquidating
such Equipment are referred to as "Defaulted Residual Receipts."
Generally, the Initial Contracts that take the form of leases are
on a "net" basis, that is, the User is responsible for all operating expenses,
including taxes and insurance premiums. The Users under the Initial Contracts
generally are obligated to: (1) remit all Contract Payments due; (2) operate the
related Equipment in compliance with the manufacturers' instructions; (3)
maintain and service the related Equipment; and (4) insure the related Equipment
against casualty losses, public liability for bodily injury and against property
damage.
References herein to percentages of Contracts refer in each case
to the percentage of the Aggregate Contract Balance (calculated using the
Statistical Discount Rate) of the Initial Contracts as of the Cut-Off Date.
As of the Cut-Off Date, the Initial Contracts had remaining terms
to maturity of ___ to ___ months. The final Scheduled Payment or Final Contract
Payment on the Initial Contract with the latest maturity is due in ____, 200__.
As of the Cut-Off Date, the Contract Balances of the Initial Contracts range
from $________. No more than ___% of the Original Aggregate Contract Balance is
attributable to any one User (including affiliates of such User), and the
average Contract Balance is $_________.
The Initial Contracts which are leases in form generally do not
provide for a right of the User to prepay. However, under the Indenture, the
Servicer is permitted to allow prepayment in an amount not less than the
Prepayment Amount. In addition, in the event that a User requests an upgrade or
trade-in of Equipment, the Servicer may remove such Equipment and related
Contract from the Contracts, but only upon payment of an amount equal to the sum
of (1) the Contract Balance as of the first day of the Collection Period
preceding such removal, (2) one month's interest thereon at the Actual Discount
Rate, and (3) any Scheduled Payments due and outstanding under such Contract
that have not been paid by the User (collectively the "Prepayment Amount").
SUBSTITUTIONS AND MODIFICATIONS
Pursuant to the Indenture, the Servicer will have the right (but
not the obligation) at any time to substitute one or more Contracts (each a
"Substitute Contract") for a Contract ("Predecessor Contract") if:
(i) the Predecessor Contract then meets the requirements for
being a "Defaulted Contract," and
(ii) the Aggregate Contract Balance(s) of such Substitute
Contract or Contracts is at least equal to the Aggregate Contract
Balance(s) of such Predecessor Contract or Contracts, each as of the
Calculation Date immediately following the date of such substitution
and calculated, with respect to the Predecessor Contract, as if such
Predecessor Contract were not a Defaulted Contract.
In addition, the Servicer has the right to modify the payment terms of
the Contracts under certain circumstances, provided the Contract, as modified,
(i) has a Contract Balance not lower than the Contract Balance of the Contract
prior to the modification and (ii) does not have a maturity date later than the
maturity date of the Contract then pledged to the Trustee that has the latest
maturity date of all the Contracts then included in the Trust Estate. See
"Description of the Notes--Remittance and Other Servicing Procedures" for a
description of additional provisions regarding modifications.
25
<PAGE> 26
The Indenture further provides that the Aggregate Contract Balance of
all Contracts substituted or modified may not exceed 10% of the Maximum
Collateral Account (exclusive of the Contract Balance of Contracts substituted
for other Contracts which were determined to have breached a representation or
warranty).
Upon repossession and disposition of any Equipment subject to a
Defaulted Contract, any deficiency remaining will be pursued to the extent
deemed practicable by the Servicer. The Servicer on behalf of the holder of the
Residual Interest is directed to maximize the residual value of the Equipment
relating to any Defaulted Contract (the "Net Residual Value"), and, in such
regard, the Servicer may sell such Equipment at the best available price,
refurbish such Equipment and re-lease or sell such Equipment to third parties,
or take any other commercially reasonable steps to maximize such Equipment's Net
Residual Value. Defaulted Residual Receipts with respect to any such Defaulted
Contract, including any future payments received with respect to such Defaulted
Contracts, shall be paid to the Collection Account as Available Funds. If the
Servicer reasonably believes that the Net Residual Value of any Equipment is
zero or de minimis, it will dispose of such Equipment in accordance with its
standard procedures.
STATISTICAL INFORMATION
The statistical information presented in this Prospectus
Supplement concerning the pool of Contracts as of the Cut-Off Date is based on
the number and the Aggregate Contract Balance of the Initial Contracts as of the
Cut-Off Date (the "Original Aggregate Contract Balance"). The Aggregate Contract
Balance of the Initial Contracts as of the Cut-Off Date is $___________ using
the Statistical Discount Rate. The Aggregate Contract Balance of the Initial
Contracts as of the Cut-Off Date is $__________using the Actual Discount Rate.
The statistical distribution of such characteristics of the Initial Contracts as
of the Cut-Off Date using the Actual Discount Rate will vary somewhat from the
statistical distribution of such characteristics of the Initial Contracts as of
the Cut-Off Date using the Statistical Discount Rate as presented in this
Prospectus Supplement, although such variance will not be material. In addition,
certain Initial Contracts included in the statistical information included
herein were determined not to meet the eligibility requirements for the final
pool. As a result, the statistical distribution of characteristics as of the
Closing Date for the final Contract pool will vary somewhat from the statistical
distribution of such characteristics as presented in this Prospectus Supplement,
although such variance will not be material.
Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the Original Aggregate Contract Balance
(calculated using the Statistical Discount Rate).
Following is certain statistical information relating to the
Initial Contracts, calculated as of the Cut-Off Date. Certain columns may not
add to 100% due to rounding.
CERTAIN INFORMATION WITH RESPECT TO THE CONTRACTS AND THE USERS..
The following tables summarize certain information with respect to the Contracts
and the Users as of the Cut-Off Date.
26
<PAGE> 27
DISTRIBUTION OF CONTRACTS BY STATE
<TABLE>
<CAPTION>
Percentage of Percentage of Aggregate
State Number of Contracts Number of Contracts Aggregate Contract Balance Contract Balance
- ------------------------- ------------------- ------------------- -------------------------- -----------------------
<S> <C> <C> <C> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
- ------------------------------------------------------------------------------------------------------------------------------
Total...................
==============================================================================================================================
</TABLE>
27
<PAGE> 28
DISTRIBUTION OF CONTRACTS BY CONTRACT BALANCE
<TABLE>
<CAPTION>
Percentage of Number Aggregate Contract Percentage of Aggregate
Contract Balance Number of Contracts of Contracts Balance Contract Balance
- ----------------------------- ------------------- -------------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
$0.01 - 5,000.00
5,000.01 - 10,000.00
10,000.01 - 15,000.00
15,000.01 - 20,000.00
20,000.01 - 25,000.00
25,000.01 - 30,000.00
30,000.01 - 35,000.00
35,000.01 - 40,000.00
40,000.01 - 45,000.00
45,000.01 - 50,000.00
50,000.01 - 60,000.00
60,000.01 - 70,000.00
70,000.01 - 80,000.00
80,000.01 - 90,000.00
90,000.01 - 100,000.00
100,000.01 - 125,000.00
125,000.01 - 150,000.00
150,000.01 - 175,000.00
175,000.01 - 200,000.00
greater than $200,000.00
- --------------------------------------------------------------------------------------------------------------------------
Total.......................
==========================================================================================================================
</TABLE>
28
<PAGE> 29
DISTRIBUTION OF CONTRACTS BY
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
Percentage of Number of Aggregate Contract Percentage of Aggregate
Remaining Term Number of Contracts Contracts Balance Contract Balance
- ------------------ ------------------- ----------------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
1 - 12
13 - 24
25 - 36
37 - 48
49 - 60
61 - 72
73 - 84
- ------------------------------------------------------------------------------------------------------------------
Total......
==================================================================================================================
</TABLE>
DISTRIBUTION OF CONTRACTS BY EQUIPMENT TYPE
<TABLE>
<CAPTION>
Percentage of Number of Aggregate Contract Percentage of Aggregate
Equipment Type Number of Contracts Contracts Balance Contract Balance
- ---------------------------- ------------------- ----------------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
Computer
Copiers
Facsimiles
Security and Alarm Systems
Telephones
Miscellaneous
- ---------------------------------------------------------------------------------------------------------------------------
Total......................
===========================================================================================================================
</TABLE>
HISTORICAL DELINQUENCY INFORMATION. Delinquency information for
equipment leases in the Servicer's servicing portfolio.
HISTORICAL DELINQUENCY EXPERIENCE
SERVICING PORTFOLIO
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992
------------------ ----------------- ------------- ------------- ------------- -------------
$ % $ % $ % $ % $ % $ %
------- ------- ------- ------ ----- ------ ----- ------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Receivables
Balance(1)
No. of
Delinquent Days
30-59 Days
60-89 Days
90 Days +
- ---------------------------------------------------------------------------------------------------------------------------------
Total
Delinquency
</TABLE>
- ---------------------
(1) The Total Receivables Balance is equal to the aggregate future rent owing
on the leases in the Servicer's servicing portfolio.
29
<PAGE> 30
HISTORICAL DEFAULT EXPERIENCE. Loss information for the Servicer's servicing
portfolio is set forth below.
HISTORICAL LOSS EXPERIENCE
SERVICING PORTFOLIO
<TABLE>
<CAPTION>
Nine Months Year Ended December 31,
Ended ---------------------------------------------------
September 30,
1997 1996 1995 1994 1993 1992
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Average Receivables
Outstanding)1)....................
Net Losses...........................
Net Losses as a Percentage of Average
Receivables.......................
</TABLE>
- -------------------------
(1) Equals the arithmetic average of the beginning of the period Receivable
balance and the end of the period Receivable Balance. The Receivables
Balance is equal to the aggregate future rent owing on the leases in the
Servicer's servicing portfolio.
(2) Annualized.
30
<PAGE> 31
DESCRIPTION OF THE NOTES
GENERAL. The Notes will be issued pursuant to the Indenture. The
Notes will be available only in book-entry form; see "Description of the
Securities--Book-Entry Registration" in the Prospectus.
PAYMENT DATES. Payments on the Notes will be made on the ___ day
of each month (or if such day is not a Business Day, the next succeeding
Business Day), commencing on __________, _____ (each, a "Payment Date"), to
holders of record on the last day of the immediately preceding calendar month
(each, a "Record Date").
INTEREST PAYMENTS. On each Payment Date, the interest due (the
"Interest Payments") with respect to each Class of Notes since the last Payment
Date will be the interest that has accrued on such Notes since the last Payment
Date, or in the case of the first Payment Date, since the Closing Date (each
such period, an "Interest Accrual Period") at the applicable Interest Rate
applied to the then unpaid principal amounts (the "Outstanding Principal
Balance") of the Notes of each Class, after giving effect to payments of
principal, on the preceding Payment Date.
INTEREST-ONLY PERIOD. From time to time the Issuers may pledge
Additional Property to the Trustee. The Indenture provides that, unless a
Required Amortization Event occurs prior to the _________ 1998 Payment Date,
amounts which would otherwise be paid as principal to the holders of the Notes
will be released to the Issuers in consideration of the Issuers pledge to the
Trustee, for the benefit of the Noteholders, of Additional Property, with the
result that the Noteholders will receive payments of interest only, and no
payments of principal, on each Payment Date prior to and including the _______
Payment Date (other than any amounts disbursed to the Noteholders from the
Pre-Funding Account following the end of the Pre-Funding Period as a prepayment
of principal on the Notes).
PRINCIPAL PAYMENTS. Unless a Required Amortization Event occurs
earlier, the Noteholders will receive no principal payments until the __________
Payment Date (other than any amounts disbursed to the Noteholders from the
Pre-Funding Account following the end of the Pre-Funding Period as a prepayment
of principal on the Notes).
For each Payment Date during the Amortization Period, each of the
Class A Noteholders, the Class M Noteholders and the Class B Noteholders will be
entitled to receive payments of principal ("Principal Payments"), to the extent
funds are available therefor, in the priorities set forth in the Indenture and
described herein below and under "--Flow of Funds."
On each Payment Date during the Amortization Period, to the extent
funds are available therefor, the principal will be paid to the Noteholders in
the following priority: (a)(i) to the Class A-1 Noteholders only, until the
Outstanding Principal Balance on the Class A-1 Notes has been reduced to zero,
the Class A Principal Payment, then (ii) to the Class A-2 Noteholders only,
until the Outstanding Principal Balance on the Class A-2 Notes has been reduced
to zero, the Class A Principal Payment, then (iii) to the Class A-3 Noteholders
only, until the Outstanding Principal Balance on the Class A-3 Notes has been
reduced to zero, the Class A Principal Payment, (b) to the Class M Noteholders,
until the Outstanding Principal Balance on the Class M Notes has been reduced to
zero, the Class M Principal Payment and (c) to the Class B Noteholders, the
Class B Principal Payment.
The "Class A Principal Payment" is the amount necessary to reduce
the aggregate Outstanding Principal Balance of the Class A Notes to the Class A
Target Investor Principal Amount.
The "Class A Target Investor Principal Amount" with respect to
each Payment Date is an amount equal to the product of (a) the Class A
Percentage and (b) the Aggregate Contract Balance as of the related Calculation
Date.
The "Class M Principal Payment" is the amount necessary to reduce
the Outstanding Principal Balance of the Class M Notes to the Class M Target
Investor Principal Amount.
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<PAGE> 32
The "Class B Principal Payment" is the amount necessary to reduce
the Outstanding Principal Balance of the Class B Notes to the greater of the
Class B Target Investor Principal Amount and the Class B Floor.
The "Class M Target Investor Principal Amount" with respect to
each Payment Date is an amount equal to the product of (a) the Class M
Percentage and (b) the Calculation Date.
The "Class B Target Investor Principal Amount" with respect to
each Payment Date is an amount equal to the product of (a) the Class B
Percentage and (b) the Aggregate Contract Balance as of the related Calculation
Date.
The "Class B Floor" with respect to each Payment Date means (a)
_____% of the Original Aggregate Contract Balance, plus (b) the Cumulative Loss
Amount with respect to such Payment Date, minus (c) the sum, as of the related
Determination Date, of the Outstanding Principal Balance of the Residual
Interest and the amount on deposit in the Reserve Account after giving effect to
withdrawals to be made on such Payment Date.
The "Class A Percentage" is _________%; the "Class M Percentage"
is _________% and the "Class B Percentage" is _______%.
The "Cumulative Loss Amount" with respect to each Payment Date is
an amount equal to the excess, if any, of (a) the Contract Balance of all
Contracts which have become Defaulted Contracts since the Closing Date over (b)
the sum of (i) the Contract Balances of all Defaulted Contracts which became
Reinstated Contracts (as described below under "Defaulted Contracts") and (ii)
Defaulted Residual Receipts.
FLOW OF FUNDS. The Indenture will require that the Trustee
establish an account (the "Collection Account") and that the Servicer deposit to
the Collection Account (or the Advance Payment Account, as described herein),
all collections or receipts received by the Servicer on the Contracts no later
than two Business Days following the Servicer's determination that such amounts
relate to the Contracts or the Equipment.
A. On each Payment Date prior to the Amortization Date, the
Trustee will be required to make the following payments from the Available Funds
(including amounts transferred from the Reserve Account on such Payment Date)
then on deposit in the Collection Account or, with respect to paragraph (vi),
from amounts on deposit in the Additional Property Funding Account, in the
following order of priority:
(i) from the Available Funds, to the Servicer, any
unrecoverable Servicer Advances;
(ii) from the Available Funds then remaining in the
Collection Account, to the servicer, if ABS is not then the Servicer,
the Servicing Fee then due, together with certain miscellaneous
amounts;
(iii) from the Available Funds then remaining in the
Collection Account, to the Class A Noteholders, the Class A Note
Interest and Class A Overdue Interest for the related Interest Accrual
Period; pari passu with respect to each Class of Class A Notes;
(iv) from the Available Funds then remaining in the
Collection Account, to the Class M Noteholders, the Class M Note
Interest and the Class M Overdue Interest for the related Interest
Period;
(v) from the Available Funds then remaining in the
Collection Account, to the Class B Noteholders, the Class B Note
Interest and the Class B Overdue Interest for the related Interest
Accrual Period;
(vi) from the sum of the Available Funds then remaining in
the Collection Account, and (y) the amount then on deposit in the
Additional Property Funding Account, to (such sum, the "Available
Additional Property Funding Amount"), as follows:
(A) to the Issuers, an amount equal to the least of:
(i) the Available Additional Property Funding Amount,
(ii) the Aggregate Net Cumulative Contract Balance
Decline Amount; and
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(iii) the Aggregate Contract Balances of all Additional
Contracts (calculated as of the related Cut-Off
Date) actually pledged to the Trustee on such
Payment Date (exclusive of any Additional
Contracts pledged to the Trustee on such Payment
Date with respect to the Pre-Funding feature);
and
(B) to the Additional Property Funding Account, the
lesser of
(i) the excess, if any, (x) the Aggregate Net
Cumulative Contract Balance Decline over (y) the
amount described in Clause (A)(iii) above; and
(ii) the remaining Available Additional Property
Funding Amount;
(vii) from the Available Funds then remaining in the
Collection Account, to the Servicer, if ABS is the Servicer, the
Servicing Fee then due, together with certain miscellaneous amounts;
(viii) from the Available Funds then remaining in the
Collection Account to the Reserve Account, to the extent necessary to
increase the amount on deposit in the Reserve Account to the Required
Reserve Amount for such Payment Date; and
(ix) to the Issuers, as the holders of the Residual
Interest, any remaining Available Funds on deposit in the Collection
Account.
B. On the Payment Date which is also the Amortization Date and on
each Payment Date thereafter, the Trustee will be required to make the following
payments from the Available Funds (including amounts transferred from the
Reserve Account on such Payment Date) then on deposit in the Collection Account,
in the following order of priority:
(i) from the Available Funds, to the Servicer, any
unrecoverable Servicer Advances;
(ii) from the Available Funds then remaining in the
Collection Account, to the servicer, if ABS is not then the Servicer,
the Servicing Fee then due, together with certain miscellaneous
amounts;
(iii) from the Available Funds then remaining in the
Collection Account, to the Class A Noteholders, the Class A Note
Interest and Class A Overdue Interest for the related Interest Accrual
Period, pari passu with respect to each Class of Class A Notes;
(iv) from the Available Funds then remaining in the
Collection Account, to the Class M Noteholders, the Class M Note
Interest and the Class M Overdue Interest for the related Interest
Period;
(v) from the Available Funds then remaining in the
Collection Account, to the Class B Noteholders, the Class B Note
Interest and the Class B Overdue Interest for the related Interest
Accrual Period;
(vi) until the Class A Principal Amount has been reduced to
zero, from the Available Funds then remaining in the Collection
Account, (such an amount to be paid on "sequential-pay" fashion with
respect to the Class A-1 Notes, the Class A-2 Notes and the Class A-3
Notes, in that order) the Class A Principal Payment and the Class A
Overdue Principal;
(vii) until the Class M Principal Balance has been reduced
to zero, to the Class M Noteholders, from the Available Funds then
remaining in the Collection Account, the Class M Principal Payment and
the Class M Overdue Principal;
(viii) until the Class B Principal Balance has been reduced
to zero, to the Class B Noteholders, from the Available Funds then
remaining in the Collection Account, the Class B Principal Payment and
the Class B Overdue Principal;
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(ix) from the Available Funds then remaining in the
Collection Account, to the Servicer, if ABS is then the Servicer, the
Servicing Fee then due, together with certain miscellaneous amounts;
(x) from the Available Funds then remaining in the
Collection Account, to the Reserve Account, to the extent necessary to
increase the amount on deposit in the Reserve Account to the Required
Reserve Amount for such Payment Date;
(xi) to the Issuers, as the holder of the Residual
Interest, any remaining Available Funds on deposit in the Collection
Account.
In addition to the distributions from the Collection Account on
each Payment Date, on the Payment Date immediately following the Funding
Termination Date, any amounts remaining on deposit in the Pre-Funding Account on
such Payment Date will be distributed as a prepayment of principal on the Notes,
with the Class A Notes, the Class M Notes and the Class B Notes receiving the
Class A Pre-Funding Percentage, the Class M Pre-Funding Percentage and the Class
B Pre-Funding Percentage, respectively, of such remaining amounts; provided,
that if such remaining amount is less than $100,000 and, as of such Payment
Date, the Interest-Only Period has not ended, such remaining amount will be
deposited in the Additional Property Funding Account.
The "Aggregate Net Cumulative Contract Balance Decline Amount"
with respect to any Payment Date prior to the Amortization Date, is an amount
equal to the excess of (I) the sum, for each prior Collection Period (and
cumulative for all such prior Collection Periods) of (x) all Contract Principal
either received or advanced by the Servicer with respect to such Collection
Period and (y) the Contract Balances of each Contract which became a Defaulted
Contract during such Collection Period and as to which the Issuers did not
replace with a qualifying Substitute Contract over (II) the Aggregate Contract
Balances of all Additional Contracts actually pledged to the Trustee by the
Issuers in exchange for all amounts released to the Issuers pursuant to clause
(A)(iii) under "Flow of Funds" above on all prior Payment Dates. As used above,
"Contract Principal" means, with respect to any Contract and Collection Period,
an amount equal to the excess of (I) the Scheduled Payment due on such Contract
during such Collection Period over (ii) the product of (x) the Contract Balance
thereof, as of the opening of business on the first day of such Collection
Period and (y) one-twelfth of the Actual Discount Rate.
REQUIRED AMORTIZATION EVENT. The earliest to occur of any of the
following: (i) the occurrence of an Event of Servicing Termination or an Event
of Default, (ii) the amount on deposit in the Additional Property Funding
Account exceeds $_______, (iii) the bankruptcy of the Servicer or either of the
Issuers, (iv) as of any Determination Date, the three-month average ratio of the
Aggregate Contract Balance of Delinquent Contracts which are 61 days or more
delinquent to the Aggregate Contract Balance, exceeds _____%, (v) as of any
Determination Date, the 3 month average ratio of the Aggregate Contract Balance
of all Contracts which become and continue to be Defaulted Contracts during the
Initial Period to the Aggregate Contract Balances, exceeds _____%.
AFFIRMATIVE COVENANTS. The Sponsor will covenant and agree in the
Receivables Transfer Agreement, among other things, that during the
Interest-Only Period, (i) the Sponsor will remain in the business of originating
and purchasing equipment and related leases, loans, and other contracts
substantially similar to the Initial Equipment and Initial Contracts, (ii) the
Sponsor will use its best efforts to originate and purchase such equipment and
related leases, loans and other contracts in a quantity no less than the
cumulative amount during the Interest-Only Period of (a) amounts remaining on
deposit in the Collection Account after making certain payments as described
herein, (b) amounts on deposit in the Additional Property Funding Account and
(c) during the Pre-Funding Period only, amounts on deposit in the Pre-Funding
Account, (iii) the Sponsor will not sell, or enter into agreements to sell, such
equipment or related leases, loans and other contracts to others in a manner
which would materially and adversely affect the Sponsor's ability to perform its
obligations under the Receivables Transfer Agreement, to make available
Additional Contracts for pledge to the Trustee.
REDEMPTION. The Issuers will have the option, subject to certain
conditions, to redeem all, but not less than all, of the Notes and thereby cause
early repayment of the Notes as of any Payment Date on which the Aggregate
Contract Balance (after giving effect to the payment of principal on such
Payment Date) is less than or equal to 10% of the Maximum Collateral Amount. The
"Maximum Collateral Amount" is the sum of (x) the Original Aggregate Contract
Balance plus (y) the Contract Balance of each Additional Contract included in
the Trust Estate as a result of the Pre-Funding feature. The Issuers will give
notice of such redemption to each
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Noteholder and the Trustee at least 30 days before the Payment Date fixed for
such prepayment. Upon deposit of funds necessary to effect such redemption, the
Trustee shall pay the remaining unpaid principal amount of the Notes and all
accrued and unpaid interest as of the Payment Date fixed for redemption. See
"Description of the Notes--Redemption."
SUBORDINATION PROVISIONS. A portion of the credit enhancement
available for the benefit of the Class A Noteholders is provided by the
subordination of the Class M Notes, of the Class B Notes and of the Residual
Interest. A portion of the credit enhancement available for the benefit of the
Class M Notes is provided by the subordination of the Class B Notes and of the
Residual Interest. A portion of the credit enhancement available for the benefit
of the Class B Noteholders is provided by the Residual Interest.
The cash flow and subordination provisions of the Indenture
provide that Available Funds on each Payment Date will be used to fund payments
to the Noteholders (and to pay the fees and expenses of the Servicer).
"Available Funds" with respect to a Payment Date generally include (i) amounts
collected during the immediately preceding Collection Period with respect to the
Contracts and the Equipment, including, without limitation, Scheduled Payments,
Final Contract Payments, Defaulted Residual Receipts, Residual Receipts,
Prepayment Amounts, Prepayment Amounts, investment earnings on each of the
Accounts and any amounts required to be transferred to the Collection Account
from the Capitalized Interest Account with respect to such Payment Date plus
(ii) amounts transferred from the Reserve Account with respect to such payment
Date and deposited in the Collection Account.
On each Payment Date prior to the Amortization Date, with respect
to amounts due to the Noteholders, the Indenture requires that there be paid,
first, interest (together with any overdue interest and interest thereon) to the
Class A Noteholders; second, interest (together with any overdue interest and
interest thereon) to the Class M Noteholders; and, third, interest (together
with any overdue interest and interest thereon) to the Class B Noteholders.
On and after the Payment Date which is also the Amortization Date,
with respect to amounts due to the Noteholders, the Indenture requires that
there be paid, first, interest (together with any overdue interest and interest
thereon) to the Class A Noteholders; second, interest (together with any overdue
interest and interest thereon) to the Class M Noteholders; third, interest
(together with any overdue interest and interest thereon) to the Class B
Noteholders; fourth, principal to the Class A Noteholders (to be paid in
"sequential-pay" fashion); fifth, principal to the Class M Noteholders; and
sixth, principal to the Class B Noteholders, as further described herein.
DEFAULTED CONTRACTS. A "Defaulted Contract" will mean any Contract
(a)(i) that is a Delinquent Contract with respect to which a User is
contractually delinquent for 121 days or more (without regard to any Servicer
Advances or the application of any security deposit provided by the User (a
"Security Deposit") or (ii) as to which the Servicer has determined in
accordance with its customary servicing practices that eventual payment of the
remaining Scheduled Payments thereunder is unlikely or (iii) that has been
rejected by or on behalf of the User in a bankruptcy proceeding and (b) as to
which a Release Event has not occurred. With respect to any Contract, a "Release
Event" is a payment in full of such Contract or a removal of such Contract by
the Servicer pursuant to the terms of the Indenture. However, during the period
from the Closing Date to the end of the Collection Period relating to the
Payment Date immediately preceding the Amortization Date (the "Initial Period"),
a Contract remains a "Defaulted Contract" only for so long as it continues to
meet the requirements for being a "Defaulted Contract." If, at any time during
the Initial Period, a Contract no longer meets the requirements for being a
"Defaulted Contract," such Contract is no longer a "Defaulted Contract" (such
Contract, a "Reinstated Contract") In addition, the Indenture requires that
during the Initial Period a Defaulted Contract be assigned a Contract Balance of
zero at the time such Contract becomes a Defaulted Contract. However, if at any
time during the Initial Period, a Defaulted Contract no longer meets the
requirements for being a Defaulted Contract and therefore is no longer
considered a Defaulted Contract, the Contract Balance of such Contract shall no
longer be zero, but rather shall be recalculated to reflect the Contract Balance
of a Contract which is not a Defaulted Contract.
One effect of the ability of a "Defaulted Contract" to restore
itself to non-defaulted status during the Initial Period is that the Contract
Balances of any Contracts that became Defaulted Contracts during the Initial
Period, but that no longer meet the requirements for being "Defaulted Contracts"
at the end of the Initial Period (i.e., have returned to performing status
subsequent to their default), are not paid to the Noteholders as an accelerated
payment of principal unless they become Defaulted Contracts again after the
Initial Period.
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Another effect is that the percentage of Defaulted Contracts
during the Initial Period will reflect only those Contracts currently in default
and will not reflect Contracts that were in default but which have returned to
performing status.
Since the Available Funds on any Payment Date commencing with the
Amortization Date are applied in the order of priority described above under
"Flow of Funds" until such Available Funds are exhausted, the effect of
including in the required "Class A Principal Payment," in the "Class B Principal
Payment" and in the "Class M Principal Payment" the amount of or, deemed loss
(i.e., the Contract Balance of any Defaulted Contract) and prioritizing the
payment of the Class A Principal Payment, the Class M Principal Payment and the
Class B Principal Payment (in that order) is to allocate losses first, to the
holder of the Residual Interest, second, to the Class B Noteholders, third, to
the Class M Noteholders and fourth, to the Class A Noteholders.
Through the operation of the "Class A Overdue Principal," "Class M
Overdue Principal" and "Class B Overdue Principal" provisions, the Class A
Noteholders and the Class B Noteholders are entitled to receive any aggregate,
cumulative shortfalls of Class A Principal Amounts, Class M Principal Balances
or Class B Principal Balances not paid on prior Payment Dates.
RESERVE ACCOUNT. The Noteholders will have the benefit of funds on
deposit in an account (the "Reserve Account") to the extent that, on any Payment
Date, there is a shortfall in the amount available to pay amounts owing the
Servicer and to make interest and principal payments on the Notes. The Reserve
Account will be funded by an initial deposit of ____% of the Original Aggregate
Contract Balance. Thereafter, to the extent provided in the Indenture,
additional deposits will be made to the Reserve Account (x) in connection with
each addition of Additional Contracts to the Trust Estate as a result of the
operation of the Pre-Funding feature (in amounts equal to ___% of the Contract
Balance of each such Additional Contract as of the related Cut-Off Date and (y)
on each Payment Date, to the extent that the amount on deposit in the Reserve
Account (the "Available Reserve Amount") is less than the Required Reserve
Amount. The "Required Reserve Amount" generally equals the lesser of (a) ____%
of the Maximum Collateral Amount and (b) the Outstanding Principal Balance of
the Notes, subject to certain floors and triggers set forth in the Indenture.
Amounts on deposit in the Reserve Account in excess of the Required Reserve
Amount will be disbursed to the Issuers in accordance with the provisions of the
Indenture.
REPRESENTATIONS AND WARRANTIES OF THE SPONSOR
The Sponsor will make certain warranties in the Receivables
Transfer Agreement (as of the Closing Date with respect to the Initial Contracts
and as of the related date of pledge with respect to the Additional Contracts,
unless otherwise indicated), the benefits of which will be assigned to the
Trustee, including that: (i) as of the Cut-Off Date, no more than 10% of a
payment on any Contract was more than 60 days past due and (except for payments
which are 60 days or less past due) there was no default, breach, violation or
event permitting acceleration under the terms of any Contract, (ii) no provision
of any Contract has been waived, altered or modified in any respect, except by
instruments or documents contained in the related Contract File (other than
payment delinquencies permitted under clause (i) above), (iii) each Contract
represents the legal, valid and binding payment obligation of the User,
enforceable in accordance with its terms, subject to certain restrictions
imposed under bankruptcy laws and the availability of equitable relief, (iv) the
Contracts generally are not and will not be subject to any right of rescission,
setoff, counterclaim or defense, including the defense of usury, (v) all
requirements of applicable federal, state and local laws, and regulations
thereunder, including, without limitation, usury laws, if any, in respect of
each Contract have been complied with in all material respects, (vi) each
Contract contains provisions requiring the User to assume all risk of loss or
malfunction of the related Equipment, and making the User absolutely and
unconditionally liable for all payments required to be made thereunder, without
any right of setoff for any reason whatsoever, (vii) except for certain
specified Contracts with an Aggregate Contract Balance under $_______________,
each of which may be prepaid in an amount no less than the Prepayment Amount, no
Contract provides the User with a right to terminate or prepay, (viii) no
Contract provides for the substitution, exchange or addition of any other items
of equipment pursuant to such Contract which would result in any reduction of
the total Scheduled Payments thereon or extension of payments due under each
Contract except for such extensions which would not extend beyond the term of
the Initial Contract with the longest remaining term as of the Closing Date,
(ix) each Contract was assignable by the Sponsor and is assignable by the
related Issuer, (x) all necessary action shall have been taken by the Sponsor to
transfer to the related Issuer all of the Sponsor's right, title and interest in
and to each Contract and the related Equipment, (xi) neither the Contract nor
the related Equipment has been sold,
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transferred, assigned or pledged by the Sponsor to any person other than the
related Issuer, and immediately prior to assigning or pledging the Contracts and
the related Equipment to the Issuers, the Sponsor was the sole owner of each
Contract and the related Equipment free and clear of any liens and encumbrances,
(xii) no Contract has been satisfied, subordinated or rescinded, except for any
Contract prepaid in full after the Cut-Off Date but before the Closing Date and
(xiii) no one User (including its affiliates) has Contracts with an Aggregate
Contract Balance that exceeds ___% of the Original Aggregate Contract Balance.
The Sponsor will also represent that, as of the Closing Date, the
Initial Contracts have the following characteristics assuming a discount rate
equal to the Statistical Discount Rate: (A) each Initial Contract has a
remaining term as of the Closing Date of not less than __ months and not more
than ______ months, (B) the weighted average remaining term of the Initial
Contracts is approximately ___ months, (C) each Initial Contract has a Contract
Balance as of the Cut-Off Date of not more than $1,000,000, (D) as of the
Cut-Off Date, no item of Equipment has been repossessed, (E) no more than _____%
of the Original Aggregate Contract Balance is attributable to Contracts with
Users in any single state, and (F) no Initial Contract has a Scheduled Payment
or Final Contract Payment due after _____, 200_.
With respect to any Additional Contracts pledged to the Trustee,
for the benefit of the Noteholders, the Sponsor will make the following
representations as of the date of the related pledge of such Additional
Contracts assuming a discount rate equal to the Actual Discount Rate: (A) each
Additional Contract has a remaining term as of the related Cut-Off Date of not
less than __ months and not more than ___ months, (B) the weighted average
remaining term of the Contracts is not less than ___ months, (C) each Additional
Contract has a Contract Balance as of the related Cut-Off Date of not more than
$1,000,000, (D) as of the related Cut-Off Date, no item of Equipment related to
the Additional Contracts has been repossessed, (E) no more than ___% of the
Aggregate Contract Balance for all Contracts on the related Cut-Off Date is
attributable to Contracts with Users in any single state and (F) no Additional
Contract has a Scheduled Payment or Final Contract Payment due after ______,
200_,.
Such representations and warranties will survive the pledge of the
Trust Estate to the Trustee, for the benefit of the Noteholders.
Under the terms of the Receivables Transfer Agreement and the
Indenture, the Sponsor will be obligated (x) to accept the reconveyance of any
Contract and deposit the related Prepayment Amount with the Trustee, or (y)
deliver a qualifying Substitute Contract, in either case on or before the end of
the calendar month following the month of its discovery or receipt of notice of
a breach of a representation or warranty made by the Sponsor or the Servicer,
respectively, that materially adversely affects such Contract, which breach has
not been cured or waived in all material respects. This obligation either to
accept the reconveyance of such Contract and remit the Prepayment Amount or
deliver a qualifying Substitute Contract will constitute the sole remedy against
the Sponsor available to the Issuers, the Trustee and the Noteholders for a
breach of a representation or warranty made by the Sponsor, with respect to the
required characteristics of the Contracts.
INDEMNIFICATION
The Receivables Transfer Agreement will provide that the Sponsor
will defend and indemnify the Issuers, the Trustee and the Noteholders against
any and all losses, claims, damages and liabilities to the extent, but only to
the extent, that the same have been suffered by any such party by virtue of (i)
a breach by the Sponsor of its respective obligations (other than breach of the
Sponsor's representations and warranties, with respect to which the sole remedy
is expressly limited to the Sponsor's acceptance of the reconveyance of the
affected Contracts and the remittance of the Prepayment Amount, or delivery of
replacement Contracts, as discussed above) under the Receivables Transfer
Agreement or (ii) in the case of the Trustee, its performance of its duties
hereunder, except to the extent that such loss, claim, damage or liability
resulted from the Trustee's negligence or willful misconduct.
The Indenture will also provide that the Servicer will defend and
indemnify the Issuers, the Sponsor, the Trustee and the Noteholders against any
and all costs, expenses, losses, damages, claims and liabilities, including
reasonable fees and expenses of counsel and expenses of litigation, reasonably
incurred, arising out of or resulting from (i) the use, repossession or
operation by the Servicer or any affiliate thereof of any Equipment and (ii) the
failure of the Servicer to perform its duties under the Indenture. Advanta
Business Services Corp.'s obligations, as Servicer, to indemnify the Noteholders
for acts or omissions of Advanta Business Services Corp. as
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Servicer will survive the removal of the Servicer but will not apply to any acts
or omissions of a successor Servicer. Such indemnification does not extend to
indirect, incidental, special or consequential damages.
THE ACCOUNTS
The Servicer is required to establish and maintain in accordance
with the Indenture six accounts (each, an "Account"), the "Collection Account,"
the "Advance Payment Account," the "Additional Property Funding Account," the
"Pre-Funding Account," the "Reserve Account" and the "Capitalized Interest
Account," each to be held by the Trustee for the benefit of the Noteholders.
Each such Account will be one or more segregated trust accounts.
The Servicer is required to deposit to the Collection Account all
collections received by it with respect to the Contracts, within two Business
Days following the Servicer's determination that such amounts relate to the
Contracts or the Equipment, Servicer Advances are required to be deposited
therein not later than the Determination Date for the related Collection Period;
the Trustee will deposit in the Collection Account from the Advance Payment
Account, not later than the Determination Date, that portion of any Advance
Payments that constitute Scheduled Payments due during the immediately preceding
Collection Period; the Sponsor or the Servicer will deposit in the Collection
Account, not later than the Determination Date, any Prepayment Amount then due
and payable by it.
The Servicer is required to deposit all Advance Payments and all
Security Deposits received by the Servicer in the Advance Payment Account.
"Advance Payments" are amounts paid by a User during a Collection Period with
respect to amounts due from such User in subsequent Collection Periods but do
not include Prepayment Amounts. The Servicer is required to instruct the Trustee
to transfer from the Advance Payment Account to the Collection Account (i) the
portion of any Advance Payment due and owing for a Collection Period and (ii)
the portion of any Security Deposit being applied to a Scheduled Payment or
Final Contract Payment in accordance with the Indenture, in each case, no later
than the related Determination Date.
The Additional Property Funding Account will hold amounts required
to be disbursed upon the instruction of the Issuer, as stated in the Receivables
Transfer Agreement, pending the pledge of Additional Property to the Trustee,
for the benefit of the Noteholders. The amount on deposit in the Additional
Property Funding Account may not exceed [$2,000,000]. The purpose of the
Additional Property Funding Account is to prevent a temporary shortfall in the
supply of Additional Property from becoming a Required Amortization Event. If a
Required Amortization Event occurs, then no further pledges of Additional
Property shall occur, and all amounts that would otherwise have been paid in
consideration of such pledges will be transferred to the Collection Account and
distributed in accordance with the Indenture on the immediately following
Payment Date.
The Pre-Funding Account will hold $_________ to be used by the
Trustee to purchase from the Sponsor Additional Contracts and Additional
Equipment which have Aggregate Contract Balances (as of the related Cut-Off
Date) equal to the Pre-Funding Contract Balance. During the period from the
Closing Date until the earliest of (i) the date on which the amount on deposit
in the Pre-Funding Account is less than $100,000, (ii) the date on which a
Required Amortization Event has occurred and is continuing or (iii) the close of
business on _________________ (such earliest date, the "Funding Termination
Date"), the Issuers may deliver the Additional Property to the Trustee in
exchange for a corresponding release of money from the Pre-Funding Account in an
amount equal to __% of the Contract Balances (as of the related Cut-Off Date) of
such Additional Property (the Aggregate Contract Balance of the Contracts which
can be purchased based on the Initial Pre-Funded Amount, the "Pre-Funding
Contract Balance"); provided, that no amounts shall be released from the
Pre-Funding Account on any date unless the balance of the Additional Property
Account is equal to zero on such date. Any amount remaining on deposit in the
Pre-Funding Account on the Funding Termination Date will be used on the Payment
Date immediately following the Funding Termination Date to prepay the Notes, the
Class A Notes receiving ____% (the "Class A Pre-Funding Percentage"), the Class
M Notes receiving ___% (the "Class M Pre-Funding Percentage") and the Class B
Notes receiving ____ (the "Class B Pre-Funding Percentage") of such remaining
amount; provided, that if such remaining amount is less than $100,000 and, as of
such Payment Date, the Interest-Only Period has not ended such remaining amount
will be deposited in the Additional Property Funding Account.
The Capitalized Interest Account will hold amounts to be used, as
necessary, by the Trustee, on each Payment Date occurring during the Pre-Funding
Period only, to fund the aggregate amount of interest accruing
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at the weighted average of the Class A-1 Interest Rate, the Class A-2 Interest
Rate, the Class A-3 Interest Rate, the Class M Interest Rate and the Class B
Interest Rate on the amount on deposit in the Pre-Funding Account, less
projected investment earnings on the Pre-Funding Account, as of the related
Payment Date. Any amounts on deposit in the Capitalized Interest Account on the
Payment Date immediately following the Funding Termination Date (after taking
into account any transfers from the Capitalized Interest Account to the
Collection Account on such Payment Date) will be released from the Trust Estate
and paid to the Issuer.
The Indenture permits the Servicer to direct the investment of
amounts in the Accounts in "Eligible Investments" as defined in the Indenture
that mature not later than the Business Day prior to the next succeeding Payment
Date. Any income from such investments will be included in Available Funds.
The Servicer may deduct from amounts otherwise payable to the
Collection Account with respect to a Collection Period an amount equal to
amounts previously deposited by the Servicer into the Collection Account but (i)
subsequently uncollectible as a result of dishonor of the instrument of payment
for or on behalf of the User or (ii) later determined to have resulted from
mistaken deposits.
ADVANCES
In the event that any User fails to remit its full Scheduled
Payment or Final Contract Payment by the Calculation Date, the Servicer is
required to make an advance, no later than the related Determination Date, from
its own funds of an amount equal to such unpaid Scheduled Payment (a "Servicer
Advance") if the Servicer, in its sole discretion, determines that eventual
repayment of such Servicer Advance is likely from collections from or on behalf
of the related User. The Indenture provides for the reimbursement of the
Servicer for such Servicer Advances from funds available for distribution in the
Collection Account on each Payment Date before the payments to Noteholders have
been made as set forth below in "Flow of Funds."
WITHHOLDING
The Trustee is required to comply with all applicable federal
income tax withholding requirements respecting payments of interest with respect
to the Notes. The consent of Noteholders will not be required for such
withholding. In the event that the Trustee does withhold or causes to be
withheld any amount from interest payments or advances thereof to any
Noteholders pursuant to federal income tax withholding requirements, the Trustee
shall indicate the amount withheld annually to such Noteholders.
REPORTS TO NOTEHOLDERS
On each Payment Date, the Trustee will forward with each payment
to the Noteholders, a statement prepared by the Servicer setting forth the
following information (per $1,000 of Initial Note Principal Amount as to (a) and
(b) below):
(a) The amount of such payment allocable to such Noteholder's
Percentage Interest of the Class A Principal Payment, the Class M
Principal Payment or the Class B Principal Payment, as applicable, and
Class A Overdue Principal, the Class M Overdue Principal or Class B
Overdue Principal, as applicable, and the amount of principal paid to
each Class as a result to utilize fully the Pre-Funding Account;
(b) The amount of such payment allocable to such Noteholder's
Percentage Interest of Class A Note Interest, Class M Note Interest or
Class B Note Interest, Class A Overdue Interest, Class M Overdue
Interest or Class B Overdue Interest, as applicable;
(c) The aggregate amount of fees and compensation received by the
Servicer pursuant to the Indenture for the Collection Period;
(d) The aggregate Class A Note Principal Balance, the aggregate
Class B Note Principal Balance, the Class A Note Factor, the Class B
Note Factor, the Class M Note Factor, the Aggregate Contract Balance
and the Collateral Factor, after taking into account all distributions
made on such Payment Date;
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<PAGE> 40
(e) The total unreimbursed Servicer Advances with respect to the
related Collection Period;
(f) The Aggregate Contract Balance for all Contracts that became
Defaulted Contracts during the related Collection Period, and, in the
case of the Initial Period, continue to be Defaulted Contracts,
calculated immediately prior to the time such Contracts became
Defaulted Contracts; and
(g) The Aggregate Contract Balance (calculated as of the related
Cut-Off Date) of the Additional Property, if any; and
(h) The amount on deposit in the Pre-Funding Account.
The "Class A-1 Note Factor" is the seven digit decimal number that
the Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class A-1 Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Class A-1 Initial Principal Balance.
The "Class A-2 Note Factor" is the seven digit decimal number that
the Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class A-2 Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Class A-2 Initial Principal Balance.
The "Class A-3 Note Factor" is the seven digit decimal number that
the Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class A-3 Principal Balance which will be outstanding on the next
Payment Date (after taking into account all distributions to be made on such
Payment Date) to (y) the Class A-3 Initial Principal Balance.
The "Class M Note Factor" is the seven digit decimal number that
the Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class M Principal Balance which will be outstanding on the next Payment
Date (after taking into account all distributions to be made on such Payment
Date) to (y) the Class M Initial Principal Balance.
The "Class B Note Factor" is the seven digit decimal number that
the Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Class B Principal Balance which will be outstanding on the next Payment
Date (after taking into account all distributions to be made on such Payment
Date) to (y) the Class B Note Initial Principal Balance.
The "Collateral Factor" is the seven digit decimal number that the
Servicer will compute or cause to be computed for each Collection Period and
will make available on the related Determination Date representing the ratio of
(x) the Aggregate Contract Balance as of the immediately preceding Calculation
Date to (y) the Maximum Collateral Amount.
In addition, by January 31 of each calendar year following any
year during which the Notes are outstanding, commencing January 31, 1999, the
Trustee will furnish to each Noteholder of record at any time during such
preceding calendar year, information as to the aggregate of amounts reported
pursuant to items (a) and (b) above for such calendar year to enable Noteholders
to prepare their federal income tax returns.
OPTIONAL REDEMPTION
The Indenture will provide that on any Payment Date following the
Record Date on which the Aggregate Contract Balance is 10% or less of the
Maximum Collateral Amount, the Issuers will have the option to receive all
rights, title and interest in all, but not less than all, of the Trust Estate,
by paying to the Trustee for redemption of the Notes an amount equal to the sum
of the aggregate outstanding Class A, Class M and Class B Note Principal
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<PAGE> 41
Balance and all other amounts due to the Class A, Class M and Class B
Noteholders and all amounts owing to the Trustee.
REMITTANCE AND OTHER SERVICING PROCEDURES
The Servicer has agreed to manage, administer and service the
Receivables and to enforce and make collections on the Receivables and any
insurance policies, exercising the degree of skill and care consistent with that
which the Servicer customarily exercises with respect to similar property owned,
managed or serviced by it.
The Servicer may grant to a User any rebate, refund or adjustment
that the Servicer in good faith believes is required, because of Prepayment in
full of a Contract. The Servicer may deduct the amount of any such rebate,
refund or adjustment from the amount otherwise payable by the Servicer into the
Collection Account; provided, however, that the Servicer will not permit any
rescission or cancellation of any Contract which would materially impair the
rights of the Trustee or the Noteholders in the Contracts or the proceeds
thereof, nor will the prepayment price after giving effect to any such rebate,
refund or adjustment (and without any adjustment for any Security Deposit
previously paid by the User) be less than the Prepayment Amount. The Servicer
may waive, modify or vary any term of a Contract if the Servicer, in its
reasonable and prudent judgment, determines that it will not be materially
adverse to the Noteholders. However, the Servicer will covenant in the Indenture
that (i) it will not forgive any payment of rent, principal or interest (except
for certain offsets for Security Deposits which offsets are only permitted after
the Servicer has deposited in the Collection Account an amount equal to such
offset), (ii) unless a User is in default, it will not permit any modification
with respect to a Contract which would reduce or increase the Contract Balance
of the Contract; provided, however, that no change in the final maturity date of
any Contract shall be permitted under any circumstances if such new maturity
date is later than the latest maturity date of any other Contract then pledged
to the Trustee, and (iii) the Servicer may accept Prepayment in part or in full;
provided, however that (1) in the event of Prepayment in full, the Servicer may
consent to such Prepayment only in an amount not less than the Prepayment Amount
and (2) in the event of a partial Prepayment, the Servicer may consent to such
partial Prepayment only if (x) following such partial Prepayment there are no
delinquent amounts then due from the User and (y) such partial Prepayment will
not reduce the Contract Balance by more than an amount equal to (I) the amount
of such partial Prepayment, minus (II) unpaid interest at the Actual Discount
Rate, accrued through the Payment Date immediately following such partial
Prepayment on the outstanding Contract Balance prior to such partial Prepayment.
In the case of a partial Prepayment, the Servicer is required to accurately
recalculate the Contract Balance, and the allocation of Scheduled Payments to
principal and interest.
Notwithstanding the foregoing, the Indenture permits the Servicer,
subject to certain requirements, to make substitutions in replacement of
Defaulted Contracts or modify Contracts; provided, that (x) the Substitute
Contract, or the Contract as modified, has a Contract Balance not lower than the
Contract Balance of the substituted Contract, or the Contract prior to such
modification, as the case may be, and (y) the aggregate, cumulative Contract
Balance of such substituted or modified Contracts may not exceed 10% of the
Maximum Collateral Amount.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For its servicing of the Contracts, the Servicer will receive
servicing compensation equal to the monthly Servicer Fee for each Collection
Period (payable on the next succeeding Payment Date). For so long as ABS is the
Servicer, the payment of the Servicing Fee will be subordinate to payments on
the Notes.
The servicing compensation will compensate the Servicer for
customary equipment contract servicing activities to be performed by the
Servicer for the Trustee for the benefit of the Noteholders, additional
administrative services performed by the Servicer on behalf of the Trustee for
the benefit of the Noteholders and expenses paid by the Servicer on behalf of
the Trustee for the benefit of the Noteholders.
The Servicer, on behalf of the Trustee for the benefit of the
Noteholders, will be responsible for the managing, servicing and administering
the Receivables and enforcing and making collections on the Contracts and any
insurance policies and for the enforcing of any security interest in any item of
Equipment, all as set forth in the Indenture. The Servicer's responsibilities
will include collecting and posting of all payments, responding to inquiries of
Users, investigating delinquencies, accounting for collections, furnishing
monthly and annual statements to the Trustee with respect to distributions,
providing appropriate federal income tax information for use in
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<PAGE> 42
providing information to Noteholders, collecting and remitting sales and
property taxes on behalf of taxing authorities, maintaining the perfected
security interest of the Trustee in the Equipment and the Contracts.
EVIDENCE AS TO COMPLIANCE
The Indenture requires that the Servicer cause an independent
accountant (who may also render other services to the Servicer) to prepare a
statement to the Trustee and the Rating Agency with respect to the fiscal year
ending in 1998, and annually as of the same month and day thereafter, to the
effect that the independent accountant has examined the servicing procedures,
manuals, guides and records of the Servicer and the accounts and records of the
Servicer relating to the Receivables and the Contract Files (which procedures,
manuals, guides and records shall be described in one or more schedules to such
statement), that such firm has compared the information contained in the
Servicer's Reports delivered in the relevant period with information contained
in the accounts and records for such period and that, on the basis of such
examination and comparison, nothing has come to the independent accountant's
attention to indicate that the Servicer has not, during the relevant period,
serviced the Receivables in compliance with such servicing procedures, manuals
and guides and in the same manner required by the Servicer's standards and with
the same degree of skill and care consistent with that which the Servicer
customarily exercises with respect to similar property owned by it, that such
accounts and records have not been maintained in accordance with the Indenture,
that the information contained in the Servicer's Reports does not reconcile with
the information contained in the accounts and records or that such certificates,
accounts and records have not been properly prepared and maintained in all
material respects, except in each case for (a) such exceptions as the
independent accountant shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement. On or before 90 days
following the end of each fiscal year, commencing 90 days from the end of the
fiscal year ending in 1998, the Servicer shall deliver to the Trustee and each
Rating Agency a copy of such statement.
The Indenture will also provide for annual delivery of a report
(the "Supplementary Report") by the Servicer to the Trustee not later than 90
days after the end of each fiscal year, signed by a Servicing Officer on behalf
of the Servicer and dated as of the last day of such fiscal year, stating that
(a) a review of the activities of the Servicer and the Servicer's performance
under the Indenture for the previous 12-month period has been made under such
Servicing Officer's supervision and (b) nothing has come to such Servicing
Officer's attention to indicate that the Servicer could be terminated as such
under the terms of the Receivables Transfer Agreement or, if such Event of
Servicing Termination has so occurred and is continuing, specifying each such
event known to the officer, the nature and status thereof and the steps
necessary to remedy such event.
The Servicer is also required to furnish to the Trustee, and the
Trustee is required to furnish to the Noteholders, copies of the Servicer's
annual audited and quarterly unaudited financial statements.
The Indenture will provide that the Servicer, upon request of the
Trustee, will furnish to the Trustee such underlying data necessary for
performing the Trustee's duties under the Indenture or for enforcement actions
as can be generated by the Servicer's existing data processing system.
SERVICER NOT TO RESIGN
The Indenture will provide that the Servicer may not resign from
its obligations and duties as Servicer thereunder, except upon a determination
that the Servicer's performance of such duties is no longer permissible under
applicable law. The Servicer can only be removed pursuant to an Event of
Servicing Termination as discussed below.
EVENTS OF DEFAULT AND NOTICE THEREOF.
The following events will be defined in the Indenture as "Events
of Default":
(a) default in making Principal Payments or Interest Payments when
such become due and payable;
(b) default in the performance, or breach, by either Issuer of
certain negative covenants limiting its actions;
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<PAGE> 43
(c) default in the performance, or breach, of any other covenant
of either Issuer in the Indenture, and continuance of such default or
breach for a period of 30 days after the earliest of (i) any officer of
the Issuer first acquiring the knowledge thereof, (ii) the Trustee's
giving written notice thereof to the Issuer or (iii) the holders of a
majority of the then Outstanding Principal Balance of the Notes giving
written notice thereof to the Issuers and the Trustee;
(d) if any representation or warranty of either Issuer made in the
Indenture or the Receivables Transfer Agreement or any other writing
provided to the holders of the Notes proves to be incorrect in any
material respect as of the time when the same has been made; provided,
however, that the breach of any representation or warranty made by
either Issuer will be deemed to be "material" only if it negatively
affects the Noteholders, the enforceability of the Indenture or of the
Notes; or
(e) insolvency or bankruptcy events relating to either Issuer.
The Indenture will provide that the Trustee shall give the
Noteholders notice of all uncured defaults known to it (the term "default" to
include the events specified above without grace periods).
If an Event of Default under an Indenture of the kind specified in
clause (e) above occurs, the unpaid principal amount of the related Notes shall
automatically become due and payable together with all accrued and unpaid
interest thereon. If any other Event of Default occurs and is continuing, then
the Trustee will, if so directed by the holders of 66 2/3% (33 1/3% in the case
of a payment default) of the then Outstanding Principal Balance of the Notes, or
the holders of such percentages of the then Outstanding Principal Balance of
such Notes may declare the unpaid principal amount of all the Notes to be due
and payable immediately, together with all accrued and unpaid interest thereon.
The Trustee may, however, if the Event of Default involves other than
non-payment of principal or interest on the Notes, not sell the Trust Estate
unless such sale is for an amount greater than or equal to the Outstanding
Principal Balance of the Notes unless directed to do so by the holders of 66
2/3% (33 1/3% in the case of a payment default) of the then Outstanding
Principal Balance of the Notes.
Subsequent to an Event of Default and following any acceleration
of the Notes pursuant to the Indenture, any moneys that may then be held or
thereafter received by the Trustee shall be applied in the following order of
priority, at the date or dates fixed by the Trustee and, in case of the
distribution of the entire amount due on account of principal or interest, upon
presentation of the Notes and surrender thereof:
First to the payment of all costs and expenses of collection
incurred by the Trustee and the Noteholders (including the reasonable
fees and expenses of any counsel to the Trustee and the Noteholders);
Second to the payment of all Servicer's Fees then due to such
person;
Third first, to the payment of all accrued and unpaid interest on
the Outstanding Principal Balance of the Class A-1 Notes, Class A-2
Notes, and Class A-3 Notes pro-rata to the date of payment thereof,
including (to the extent permitted by applicable law) interest on any
overdue installment of interest and principal from the maturity of such
installment to the date of payment thereof at the rate per annum equal
to the Class A-1 Interest Rate, Class A-2 Interest Rate and Class A-3
Interest Rate, respectively, second to the payment of all accrued and
unpaid interest on the Outstanding Principal Balance of the Class M
Notes to the date of payment thereof, including (to the extent
permitted by applicable law) interest on any overdue installment of
interest and principal from the maturity of such installment to the
date of payment thereof at the rate per annum equal to the Class M
Interest Rate, third, to the payment of all accrued and unpaid interest
on the Outstanding Principal Balance of the Class B Notes to the date
of payment thereof, including (to the extent permitted by applicable
law) interest on any overdue installment of interest and principal from
the maturity of such installment to the date of payment thereof at the
rate per annum equal to the Class B Interest Rate, fourth, to the
payment of the Outstanding Principal Balance of the Class A Notes,
pro-rata, to the date of payment thereof, fifth, to the payment of the
Outstanding Principal Balance of the Class M Notes to the date of
payment thereof, and sixth, to the payment of the Outstanding Principal
Balance of the Class B Notes; provided, that the Noteholders may
allocate such payments for interest, principal and premium at their own
discretion, except that no such allocation shall affect the allocation
of such amounts or future payments received by any other Noteholder;
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Fourth to the payment of amounts then due to the Trustee under the
Indenture and not paid pursuant to clause First above; and
Fifth to the payment of the remainder, if any, to the Issuers or
any other Person legally entitled thereto.
The Issuers will be required to furnish annually to the Trustee, a
statement of certain officers of the Issuers to the effect that to the best of
their knowledge the Issuer is not in default in the performance and observance
of the terms of the Indenture or, if the Issuer is in default, specifying such
default.
The Indenture will provide that the holders of 66-2/3 % in
aggregate principal amount of the Notes will have the right to waive certain
defaults and, subject to certain limitations, to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. The Indenture will
provide that in case an Event of Default shall occur (which shall not have been
cured or waived), the Trustee will be required to exercise such of its rights
and powers under such Indenture and to use the degree of care and skill in their
exercise that a prudent man would exercise or use in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under such Indenture at the request of any
of the Noteholders unless they shall have offered to the Trustee reasonable
security or indemnity.
MODIFICATION OF THE INDENTURE. With certain exceptions, under the
Indenture, the rights and obligations of the Issuer and the rights of the
Noteholders may be modified by the Issuer with the consent of the holders of not
less than 66 2/3% in Outstanding Principal Balance of the Notes; but no such
modification may be made which would (a) extend the fixed maturity of any Note,
or reduce the principal amount thereof, or reduce the rate or extend the time of
payment of principal or interest thereon, without the consent of the holder of
each Note so affected or (b) reduce the above-stated percentage of Notes,
without the consent of the holders of all Notes then outstanding under such
Indenture.
SERVICER EVENTS OF DEFAULT. The following events and conditions
shall be defined in the Sales and Servicing Agreement as "Servicer Events of
Default":
(a) failure on the part of the Servicer to remit to the Trustee
within _____ Business Days following the receipt thereof any monies
received by the Servicer required to be remitted to the Trustee under
the Indenture;
(b) so long as Advanta Business Services Corp. is the Servicer,
failure on the part of Advanta Business Services Corp. to pay to the
Trustee on the date when due, any payment required to be made by
Advanta Business Services Corp. pursuant to the Indenture or the
Receivables Transfer Agreement;
(c) default on the part of either the Servicer or (so long as
Advanta Business Services Corp. is the Servicer) Advanta Business
Services Corp. in its observance or performance in any material respect
of certain covenants or agreements in the Receivables Transfer
Agreement or in the Indenture;
(d) if any representation or warranty of Advanta Business Services
Corp. made in the Receivables Transfer Agreement shall prove to be
incorrect in any material respect as of the time made; provided,
however, that the breach of any representation or warranty made by
Advanta Business Services Corp. in such Receivables Transfer Agreement
will be deemed to be "material" only if it affects the Noteholders, the
enforceability of the Indenture or of the Notes; and provided, further,
that such material breach of any representation or warranty made by
Advanta Business Services Corp. in the Receivables Transfer Agreement
with respect to any of the Contracts or the Equipment subject thereto
will not constitute a Servicer Event of Default if Advanta Business
Services Corp. repurchases such Contract and Equipment in accordance
with the Receivables Transfer Agreement to the extent provided therein;
(e) certain insolvency or bankruptcy events relating to the
Servicer;
(f) the failure of the Servicer to make one or more payments due
with respect to aggregate recourse debt or other obligations exceeding
$1,000,000, or the occurrence of any event or the existence of
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any condition, the effect of which event or condition is to cause (or
permit one or more persons to cause) more than $1,000,000 of aggregate
recourse debt or other obligations of the Servicer to become due before
its (or their) stated maturity or before its (or their) regularly
scheduled dates of payment so long as such failure, event or condition
shall be continuing and shall not have been waived by the Person or
Persons entitled to performance;
(g) a final judgment or judgments (or decrees or orders) for the
payment of money aggregating in excess of $1,000,000 and any one of
such judgments (or decrees or orders) has remained unsatisfied and in
effect for any period of 60 consecutive days without a stay of
execution.
SERVICER TERMINATION. So long as a Servicer Event of Default under
the Sales and Servicing Agreement is continuing, the Trustee shall, upon the
instructions of the holders of 66-2/3% in Outstanding Principal Balance of the
Notes, by notice in writing to the Servicer terminate all of the rights and
obligations of the Servicer (but the Servicer's obligations which shall survive
any such termination) under Indenture. On the receipt by the Servicer of such
written notice, all authority and power of the Servicer under the Indenture to
take any action with respect to any Contract or Equipment will cease and the
same will pass to and be vested in the Trustee pursuant to and under the
Indenture.
PREPAYMENT AND YIELD CONSIDERATIONS
On each Payment Date prior to the Amortization Date, all amounts
remaining on deposit in the Collection Account after making certain payments as
described herein and amounts on deposit in the Additional Property Funding
Account will be disbursed by the Trustee in consideration of the pledge of
Additional Property relating to Contracts having an Aggregate Contract Balance
on such Payment Date equal as nearly as practicable to such amounts. Beginning
with the Amortization Date, to the extent of Available Funds, an amount equal to
Class A Principal Payment, the Class M Principal Payment and the Class B
Principal Payment shall be due as principal to the holders of the Class A Notes,
the Class M Notes and the Class B Notes as described herein.
Following the Interest-Only Period, the rate of principal payments
on the Notes will be directly related to the rate of principal payments on the
underlying Contracts. If purchased at a price other than par, the yield to
maturity will also be affected by the rate of principal payments. The principal
payments on such Contracts may be in the form of scheduled principal payments or
liquidations due to default, casualty and the like. Any such payments will
result in distributions to Noteholders of amounts which would otherwise have
been distributed over the remaining term of the Contracts. In general, the rate
of such payments may be influenced by a number of other factors, including
general economic conditions. The rate of payment of principal may also be
affected by any removal of the Contracts from the pool and the deposit of the
related Prepayment Amount into the Collection Account.
The Contracts which are leases in form generally do not provide
for the right of the User to prepay. Under the Indenture, the Servicer will be
permitted to allow such Prepayments in full or in part, provided that no
Prepayment of a Contract will be allowed in an amount less than the Prepayment
Amount.
The effective yield to Noteholders will depend upon, among other
things, the price at which the Notes are purchased, and the amount of and rate
at which principal, including both scheduled and nonscheduled payments thereof,
is paid to the Noteholders. The yield to Noteholders will be affected by lags
between the time interest accrues to Noteholders and the time the related
interest income is received by the Noteholders. See "Risk Factors - Maturity and
Prepayment Considerations" herein.
The following chart sets forth the percentage of the Initial
Principal Balance of the Class A, Class M and Class B Notes which would be
outstanding on the Payment Dates set forth below assuming a CPR of __% and __%,
respectively and were calculated using the Statistical Discount Rate. Such
information is hypothetical and is set forth for illustrative purposes only. The
CPR ("Conditional Payment Rate") assumes that a fraction of the Aggregate
Contract Balance is prepaid on each Calculation Date, which implies that each
Contract is equally likely to prepay. This fraction, expressed as a percentage,
is annualized to arrive at the Conditional Payment Rate for the Contract pool.
The CPR measures prepayments based on the outstanding discounted present value
of the Contracts, after the payment of all Scheduled Payments on the Contracts
during such Collection Period. The
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CPR further assumes that all Contracts are the same size and amortize at the
same rate and that each Contract will be either paid as scheduled or prepaid in
full. The amounts set forth below are based upon the timely receipt of Scheduled
Payments as of the Cut-Off Date, assumes that the Issuers do not exercise its
option to redeem the Notes and assumes the Closing Date is _____________, the
first Payment Date is ______________, all Pre-Funding Account moneys are used
and no Required Amortization Event occurs.
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PERCENTAGE OF THE INITIAL CLASS A-1, A-2, A-3, CLASS M AND CLASS B
OUTSTANDING AT THE RESPECTIVE CPR SET FORTH BELOW
<TABLE>
<CAPTION>
===============================================================================================================================
Payment 0% CPR 12% CPR
Date
------------------------------------------------------------------------------------------------------------
Class A-1 Class A-2 Class A-3 Class M Class B Class A-1 Class A-2 Class A-3 Class M Class B
------------------------------------------------------------------------------------------------------------
% % % % % % % % % %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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Closing Date
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January, 1998
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February, 1998
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March, 1998
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April, 1998
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May, 1998
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June, 1998
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July, 1998
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August, 1998
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September, 1998
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October, 1998
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November, 1998
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December, 1998
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January, 1999
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February, 1999
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March, 1999
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April, 1999
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May, 1999
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June, 1999
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July, 1999
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August, 1999
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September, 1999
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October, 1999
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November, 1999
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December, 1999
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January, 2000
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February, 2000
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March, 2000
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April, 2000
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May, 2000
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June, 2000
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July, 2000
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August, 2000
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September, 2000
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October, 2000
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November, 2000
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December, 2000
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January, 2001
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February, 2001
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March, 2001
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April, 2001
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May, 2001
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June, 2001
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July, 2001
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August, 2001
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September, 2001
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October, 2001
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November, 2001
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December, 2001
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January, 2002
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February, 2002
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March, 2002
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April, 2002
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May, 2002
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 48
PERCENTAGE OF THE INITIAL CLASS A-1, A-2, A-3, CLASS M AND CLASS B
OUTSTANDING AT THE RESPECTIVE CPR SET FORTH BELOW
<TABLE>
<CAPTION>
===============================================================================================================================
Payment 0% CPR 12% CPR
Date
------------------------------------------------------------------------------------------------------------
Class A-1 Class A-2 Class A-3 Class M Class B Class A-1 Class A-2 Class A-3 Class M Class B
------------------------------------------------------------------------------------------------------------
% % % % % % % % % %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
June, 2002
- -------------------------------------------------------------------------------------------------------------------------------
July, 2002
- -------------------------------------------------------------------------------------------------------------------------------
August, 2002
- -------------------------------------------------------------------------------------------------------------------------------
September, 2002
- -------------------------------------------------------------------------------------------------------------------------------
October, 2002
- -------------------------------------------------------------------------------------------------------------------------------
November, 2002
- -------------------------------------------------------------------------------------------------------------------------------
December, 2002
- -------------------------------------------------------------------------------------------------------------------------------
January, 2003
- -------------------------------------------------------------------------------------------------------------------------------
February, 2003
- -------------------------------------------------------------------------------------------------------------------------------
March, 2003
- -------------------------------------------------------------------------------------------------------------------------------
April, 2003
- -------------------------------------------------------------------------------------------------------------------------------
May, 2003
- -------------------------------------------------------------------------------------------------------------------------------
June, 2003
- -------------------------------------------------------------------------------------------------------------------------------
July, 2003
- -------------------------------------------------------------------------------------------------------------------------------
August, 2003
- -------------------------------------------------------------------------------------------------------------------------------
September, 2003
- -------------------------------------------------------------------------------------------------------------------------------
October, 2003
- -------------------------------------------------------------------------------------------------------------------------------
November, 2003
- -------------------------------------------------------------------------------------------------------------------------------
December, 2003
- -------------------------------------------------------------------------------------------------------------------------------
January, 2004
- -------------------------------------------------------------------------------------------------------------------------------
February, 2004
- -------------------------------------------------------------------------------------------------------------------------------
March, 2004
- -------------------------------------------------------------------------------------------------------------------------------
April, 2004
- -------------------------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
LIFE(1)(YEARS)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------
(1) The weighted average life of a Note is determined by (a) multiplying the
amount of cash distributions in reduction of the Outstanding Principal
Balance of the respective Note by the number of years from the Closing Date
to such Payment Date, (b) adding the results, and (c) dividing the sum by
the respective Initial Principal Balance.
For the 0% CPR and 12% CPR scenarios, if the Issuer exercises its
option to redeem the Notes, the average life of the Class A-1 Notes; Class A-2
Notes; Class A-3 Notes; Class M Notes and Class B Notes would be ___ years and
___ years; ___ years and ___ years; ___ years and ___ years; ___ years and ___
years and ___ years and ___ years, respectively.
The Trustee may resign at any time, in which event the Issuer will
be obligated to appoint a successor Trustee. The Issuers may also remove each
Trustee if such Trustee ceases to be eligible to continue as such under the
Indenture, fails to perform in any material respect its obligations under such
Indenture, or becomes insolvent. In such circumstances, the Issuers will be
obligated to appoint a successor Trustee.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of material federal income
tax consequences to the original purchasers of the Notes of the purchase,
ownership and disposition of the Notes. It does not purport to discuss all
federal income tax consequences that may be applicable to investment in the
Notes or to particular categories of investors, some of which may be subject to
special rules. In particular, this discussion applies only to institutional
investors that purchase Notes directly from the Issuer and hold the Notes as
capital assets.
The discussion that follows, and the opinion set forth below of
Dewey Ballantine LLP, special tax counsel to the Issuer ("Federal Tax Counsel"),
are based on the provisions of the Internal Revenue Code of 1986, as amended
(the "Code") and treasury regulations promulgated thereunder as in effect on the
date hereof and on existing judicial and administrative interpretations thereof.
These authorities are subject to change and to differing
48
<PAGE> 49
interpretations, which could apply retroactively. The opinion of Federal Tax
Counsel is not binding on the courts or the Internal Revenue Service (the
"IRS"). Potential investors are urged to consult their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences to
them of the purchase, ownership and disposition of the Notes.
Federal Tax Counsel has prepared the following discussion and is
of the opinion that such discussion is correct in all material respects.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS. In the opinion of
Federal Tax Counsel, although no transaction closely comparable to that
contemplated herein has been the subject of any treasury regulation, revenue
ruling or judicial decision, based on the application of existing law to the
facts as set forth in the applicable agreements, the proper treatment of the
Notes is as indebtedness for federal income tax purposes.
Although it is the opinion of Federal Tax Counsel that the Notes
are properly characterized as indebtedness for federal income tax purposes, no
assurance can be given that such characterization of the Notes will prevail. If
the Notes were treated as an ownership interest in the Leases, all income on
such Leases would be income to the holders of the Notes, and related fees and
expenses would generally be deductible (subject to certain limitations on the
deductibility of miscellaneous itemized deductions by individuals) and certain
market discount and premium provisions of the Code might apply to a purchase of
the Notes.
If, alternatively, the Notes were treated as an equity interest in
the Issuer, distributions on the Notes probably would not be deductible in
computing the taxable income of the Issuer and all or a part of distributions to
the holders of the Notes probably would be treated as dividend income to those
holders. Such an Issuer-level tax could result in a reduced amount of cash
available for distributions to the holders of the Notes.
TAXATION OF INTEREST INCOME OF NOTEHOLDERS. If characterized as
indebtedness, interest on the Notes will be taxable as ordinary income for
federal income tax purposes when received by Noteholders using the cash method
of accounting and when accrued by Noteholders using the accrual method of
accounting. Interest received on the Notes also may constitute "investment
income" for purposes of certain limitations of the Code concerning the
deductibility of investment interest expense.
Original Issue Discount. It is not anticipated that the Notes will
have any original issue discount ("OID") other than possibly OID within a de
minimis exception and that accordingly the provisions of sections 1271 through
1273 and 1275 of the Code generally will not apply to the Notes. OID will be
considered de minimis if it is less than 0.25% of the principal amount of Note
multiplied by its expected weighted average life.
Market Discount. A subsequent purchaser who buys a Note for less
than its principal amount may be subject to the "market discount" rules of
Sections 1276 through 1278 of the Code. If a subsequent purchaser of a Note
disposes of such Note (including certain nontaxable dispositions such as a
gift), or receives a principal payment, any gain upon such sale or other
disposition will be recognized, or the amount of such principal payment will be
treated, as ordinary income to the extent of any "market discount" accrued for
the period that such purchaser holds the Note. Such holder may instead elect to
include market discount in income as it accrues with respect to all debt
instruments acquired in the year of acquisition of the Notes and thereafter.
Market discount generally will equal the excess, if any, of the then-current
unpaid principal balance of the Note over the purchaser's basis in the Note
immediately after such purchaser acquired the Note. In general, market discount
on a Note will be treated as accruing over the term of such Note in the ratio of
interest for the current period over the sum of such current interest and the
expected amount of all remaining interest payments, or at the election of the
holder, under a constant yield method. At the request of a holder of a Note,
information will be made available that will allow the holder to compute the
accrual of market discount under the first method described in the preceding
sentence.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if it is less than a de minimis amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is de minimis, the actual
amount of discount
49
<PAGE> 50
must be allocated to the remaining principal distributions on the Note and, when
each such distribution is received, capital gain equal to the discount allocated
to such distribution will be recognized.
Market Premium. A subsequent purchaser who buys a Note for more
than its principal amount generally will be considered to have purchased the
Note at a premium. Such holder may amortize such premium, using a constant yield
method, over the remaining term of the Note and, except as future regulations
may otherwise provide, may apply such amortized amounts to reduce the amount of
interest income reportable with respect to such Note over the period from the
purchase date to the date of maturity of the Note. Legislative history to the
Tax Reform Act of 1986 indicates that the amortization of such premium on an
obligation that provides for partial principal payments prior to maturity should
be governed by the methods for accrual of market discount on such an obligation
(described above). A holder that elects to amortize such premium must reduce tax
basis in the related obligation by the amount of the aggregate deductions (or
interest offsets) allowable for amortizable premium. If a debt instrument
purchased at a premium is redeemed in full prior to its maturity, a purchaser
who has elected to amortize premium should be entitled to a deduction for any
remaining unamortized premium in the taxable year of redemption.
SALE OR EXCHANGE OF NOTES. If a Note is sold or exchanged, the
seller of the Note will recognize gain or loss equal to the difference between
the amount realized on the sale or exchange and the adjusted basis of the Note.
The adjusted basis of a Note will generally equal its cost, increased by any OID
or market discount includible in income with respect to the Note through the
date of sale and reduced by any principal payments previously received with
respect to the Note, any payments allocable to previously accrued OID or market
discount and any amortized market premium. Subject to the market discount rules,
gain or loss will generally be capital gain or loss if the Note was held as a
capital asset. Capital losses generally may be used only to offset capital
gains.
BACKUP WITHHOLDING WITH RESPECT TO NOTES. Payments of interest and
principal, together with payments of proceeds from the sale of Notes, may be
subject to the "backup withholding tax" under Section 3406 of the Code at a rate
of 31% if recipients of such payments fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a payment to a recipient would be allowed as a credit against such recipient's
federal income tax. Furthermore, certain penalties may be imposed by the IRS on
a recipient of payments that is required to supply information but that does not
do so in the proper manner.
FOREIGN INVESTORS IN NOTES. Certain U.S. Federal Income Tax
Documentation Requirements. A beneficial owner of Notes holding securities
through CEDEL of Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i)each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of
Notes that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income
(Form 4224). A Non-U.S. Person (as defined below), including a non-U.S.
corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
50
<PAGE> 51
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The owner of a Note
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
On April 22, 1996 the IRS issued proposed regulations relating to
withholding, backup withholding and information reporting that, if adopted in
their current form would, among other things, unify current certification
procedures and forms and clarify certain reliance standards. The regulations are
proposed to be effective for payments made after December 31, 1997 but provide
that certificates issued on or before the date that is 60 days after the
proposed regulations are made final will continue to be valid until they expire.
Proposed regulations, however, are subject to change prior to their adoption in
final form.
The term "U.S. Person" means (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision thereof, (iii)
an estate that is subject to U.S. federal income tax regardless of the source of
its income. The term "Non-U.S. Person" means any person who is not a U.S. Person
or (iv) a trust if a court within the United States can exercise primary
supervision over its administration and at least one United States fiduciary has
the authority to control all substantial decisions of the trust. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Notes. Investors are advised to consult
their own tax advisors for specific tax advice concerning their holding and
disposing of the Notes.
STATE, LOCAL AND OTHER TAXES. Investors are urged to consult their
own tax advisors regarding whether the purchase of the Notes, either alone or in
conjunction with an investor's other activities, may subject an investor to any
state or local taxes based on an assertion that the investor is either "doing
business" in, or deriving income from a source located in, any state or local
jurisdiction. Additionally, potential investors should consider the state, local
and other tax consequences of purchasing, owning or disposing of a Note. State
and local tax laws may differ substantially from the corresponding federal tax
law, and the foregoing discussion does not purport to describe any aspect of the
tax laws of any state or other jurisdiction. Accordingly, potential investors
should consult their own tax advisors with regard to such matters.
THE FEDERAL AND STATE INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS OR IN THE INTERPRETATIONS THEREOF.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements and restrictions on those pension and
other employee benefits plans to which it applies and on those persons who are
fiduciaries with respect to such plans. In accordance with ERISA's fiduciary
standards, before purchasing the Notes, a fiduciary should determine whether
such an investment is permitted under the documents and instruments governing
the plan and is appropriate for the plan in view of its overall investment
policy and the composition of its portfolio.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of certain plans subject thereto (each
"Benefit Plan") and persons who are "parties in interest," within the meaning of
ERISA, or "disqualified persons," within the meaning of the Code. Certain
transactions involving the purchase, holding or transfer of the Notes might be
deemed to constitute prohibited transactions under ERISA and the Code if assets
of the Issuer were deemed to be assets of a Benefit Plan. Under regulations
issued by the United States Department of Labor set forth in 29 C.F.R.
Section 2510.3101 (the "Plan Asset Regulations"), the assets of the
51
<PAGE> 52
Issuer would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquires an "Equity Interest" in the
Issuer and none of the exceptions contained in the Plan Asset Regulations is
applicable. An Equity Interest is defined under the Plan Asset Regulations as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. It is
anticipated that the Notes should be treated as indebtedness without substantial
equity features for purposes of the Plan Asset Regulations. However, even if the
Notes are treated as indebtedness for such purposes, the acquisition or holding
of Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Issuer, the Trustee, the Underwriter or any of
their respective affiliates is or becomes a party in interest or disqualified
person with respect to such Benefit Plan. In this event, certain exemptions from
the prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 91-38 regarding investments by bank collective investment funds;
PTCE 84-14, regarding transactions effected by "qualified professional asset
managers," PTCE 95-60, regarding investments by insurance company general
accounts and PTCE 96-23 regarding transactions effected by In-House Asset
Managers. Each investor using assets of a Benefit Plan which acquires the Notes,
or to whom the Notes are transferred, will be deemed to have represented that
the acquisition and continued holding of the Notes will be covered by one of the
exemptions listed above or another Department of Labor class exemption.
Insurance companies considering the purchase of the Notes should
also consult their own counsel as to the application of the recent decision by
the United States Supreme Court in John Hancock Mutual Life Insurance Co. v.
Harris Trust and Savings Bank (114 S.Ct. 517 (1993)) to such a purchase. Under
that decision, assets held in an insurance company's general account may be
deemed assets of ERISA plans under certain circumstances.
Due to the complexity of these rules and the penalties imposed
upon persons involved in prohibited transactions, it is particularly important
that a fiduciary investing assets of an ERISA plan consult with counsel
regarding the consequences under ERISA of the acquisition and holding of Notes,
including the availability of any administrative exemptions from the prohibited
transaction rules.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
underwriting agreement (the "Underwriting Agreement") for the sale of the Notes,
the Sponsor and the Issuers have agreed to sell and Salomon Brothers Inc (the
"Underwriter") has agreed to purchase the Notes.
The Issuers have been advised by the Underwriter, that the
Underwriter proposes initially to offer the Notes to the public at the
respective public offering prices set forth on the cover page of this Prospectus
Supplement, and to certain dealers at such price, less a concession not in
excess of ___% per Class A-1 Note, ___% per Class A-2 Note, ___% per Class A-3
Note, ___% per Class M Note and ___% per Class B Note. The Underwriter may allow
and such dealers may reallow to other dealers a discount not in excess of ____%
per Class A-1 Note, ___% per Class A-2 Note, ___% per Class A-3 Note, ___% per
Class M Note and ___% per Class B Note. After the initial public offering, the
public offering price may be changed.
The Underwriter will represent and agree that:
(a) it has not offered or sold, and, prior to the expiry of six
months from the Closing Date, will not offer or sell, any Notes to
persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for purposes of their business, or
otherwise in circumstances which have not resulted and will not result
in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995;
(b) it has complied and will comply with all applicable provisions
of the Financial Services Act 1986 with respect to anything done by it
in relation to the Notes in, from or otherwise involving the United
Kingdom; and
52
<PAGE> 53
(c) it has only issued or passed on and will only issue or pass on
in the United Kingdom any document received by it in connection with
the issue of the Notes to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or persons to whom such
document may otherwise lawfully be issued, distributed or passed on.
The Sponsor has agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Issuers have been advised by the Underwriter that the
Underwriter presently intends to make a market in the Notes, as permitted by
applicable laws and regulations. The Underwriter is not obligated, however, to
make a market in the Notes and any such market making may be discontinued at any
time at the sole discretion of the Underwriter. Accordingly, no assurance can be
given as to the liquidity of, or trading markets for, the Notes.
In connection with the offering of the Notes, the Underwriter and
selling group members and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Notes. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such person may bid for or purchase
the Notes for the purpose of stabilizing its market price.
RATINGS OF THE NOTES
It is a condition to the issuance of the Notes that the Class A
Notes be rated at least "___," that the Class M Notes be rated at least "____"
and that the Class B Notes be rated at least "___" by Standard & Poor's Ratings
Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") and Fitch Investors
Service, L.P. ("Fitch"), respectively (each a "Rating Agency").
Each such rating, will reflect only the views of the related
Rating Agency and will be based primarily on the amount of subordination, the
availability of funds on deposit in the Reserve Account and the value of the
Trust Estate. The ratings are not a recommendation to purchase, hold or sell the
related Notes, inasmuch as such ratings do not comment as to market price or
suitability for a particular investor. There is no assurance that any such
rating will continue for any period of time or that it will not be lowered or
withdrawn entirely by the Rating Agency if, in its judgment, circumstances so
warrant. A revision or withdrawal of such rating may have an adverse affect on
the market price of the Notes. The rating of the Notes addresses the likelihood
of the timely payment of interest and the ultimate payment of principal on the
Notes by the Stated Maturity Date. The rating does not address the rate of
Prepayments that may be experienced on the Contracts and, therefore, does not
address the effect of the rate of Contract Prepayments on the return of
principal to the Noteholders.
53
<PAGE> 54
INDEX OF TERMS
TERM(S) PAGE(S)
- ------- -------
ABR LLC 1,4,23
ABS 1,6
Account 38
Actual Discount Rate 5
Additional Contracts 2
Additional Equipment 2
Additional Property 2
Additional Property Funding Account 38
Advance Payment Account 38
Advance Payments 38
Advances 19
Affirmative Covenants 13
Aggregate Contract Balance 6
Aggregate Net Cumulative Contract Balance Decline Amount 34
ALRC III 1,4,23
Amortization Date 2
Amortization Period 15
Asset-Backed Debt 6
Available Additional Property Funding Amount 14,32
Available Funds 17,35
Available Reserve Amount 18,36
Benefit Plan 51
Business Day 4
Calculation Date 4
Capitalized Interest Account 8,38
Cede 3
CEDEL 3
Class 1
Class A Initial Principal Balance 5
Class A Note Interest 9
Class A Noteholders 2
Class A Notes 1,4
Class A Overdue Interest 9
Class A Overdue Principal 18
Class A Percentage 11
Class A Pre-Funding Percentage 8
Class A Principal Balance 5
Class A Principal Payment 10
Class A Target Investor Principal Amount 10
Class A-1 Initial Principal Balance 5
Class A-1 Interest Rate 5
Class A-1 Note Factor 40
Class A-1 Notes 1,4
Class A-1 Overdue Principal 10
Class A-1 Principal Balance 5
Class A-2 Initial Principal Balance 5
Class A-2 Interest Rate 5
Class A-2 Note Factor 40
Class A-2 Notes 1,4
Class A-2 Overdue Principal 10
Class A-2 Principal Balance 5
Class A-3 Initial Principal Balance 5
Class A-3 Interest Rate 5
Class A-3 Note Factor 40
i
<PAGE> 55
Class A-3 Notes 1,4
Class A-3 Overdue Principal 10
Class A-3 Principal Balance 5
Class B Floor 11
Class B Initial Principal Balance 5
Class B Interest Rate 5
Class B Note Factor 40
Class B Note Interest 9
Class B Noteholders 2
Class B Notes 1,4
Class B Overdue Interest 9
Class B Overdue Principal 10
Class B Percentage 11
Class B Pre-Funding Percentage 8
Class B Principal Balance 5
Class B Principal Payment 10
Class B Target Investor Principal Amount 11
Class M Initial Principal Balance 5
Class M Interest Rate 5
Class M Note Factor 40
Class M Note Interest 9
Class M Noteholders 2
Class M Notes 1,4
Class M Overdue Interest 9
Class M Overdue Principal 10
Class M Percentage 11
Class M Pre-Funding Percentage 8
Class M Principal Balance 5
Class M Principal Payment 10
Class M Target Investor Principal Amount 10
Closing Date 4
Code 48
Collateral Factor 40
Collection Account 14,32
Collection Period 9
Commission 1
Conditional Payment Rate 45
Contract Balance 5
Contract Files 6
Contract Principal 34
Contracts 1,11
Cumulative Loss Amount 11,32
Cut-Off Date 4
Defaulted Contract 11,17
Defaulted Residual Receipts 12,25
Delinquent Contract 19
Denominations 4
Determination Date 9
Discounted Present Value of the Contracts 5
DTC 3
Eligible Investments 39
Equipment 1,11
Equity Interest 52
ERISA 20,51
ERISA Considerations 20
Euroclear 3
Event of Default 8
Event of Servicing Termination 8
Excess Amount 12,24
Exchange Act 3
Expected Maturity 6
Federal Income Tax Considerations 20
Federal Tax Counsel 48
Final Contract Payment 12,24
ii
<PAGE> 56
Fitch 20,53
Flow of Funds 9,14
Funding Termination Date 8,38
Indenture 13
Initial Contracts 6
Initial Period 17,35
Initial Pre-Funded Amount 1,7
Initial Principal Balances 5
Initial Property 6
Interest Accrual Period 9,31
Interest Payments 9,31
Interest Rate 5
Interest-Only Period 2,9
IRS 49
Issuers 1,4
Limited Obligations 6
Material Risks 20
Maximum Collateral Amount 13,34
Modifications 19
Moody's 20,53
Net Residual Value 26
Nonrecoverable Advances 19
Non-U.S. Person 51
Noteholders 2
Notes 1,4
OID 49
Original Aggregate Contract Balance 11,26
Outstanding Principal Balance 9,31
Payment Date 2,9,31
Plan Asset Regulations 51
Predecessor Contract 25
Pre-Funding Account 1,7,38
Pre-Funding Contract Balance 8
Pre-Funding Period 7
Prepayment Amount 12,25
Principal Balance 7
Principal Payments 9,31
Prospectus 2
Prospectus Supplement 2
PTCE 52
Purchase Option Contracts 12,24
Purchase Option Equipment 12,24
Purchase Option Payments 12,24
Rating 20
Rating Agency 20,53
Receivables 1
Receivables Transfer Agreement 7
Record Date 9,31
Redemption 13
Registration Statement 2
Reinstated Contract 35
Release Event 17,35
Required Amortization Event 8
Required Reserve Amount 18,36
Reserve Account 18,36
Residual Interest 7
Residual Receipts 12
S&P 20,53
Scheduled Payments 6
Securities Act 2
Securities Offered 4
Security Deposit 17,35
Senior Subordinates 4
Servicer 6
Servicer Advance 19,39
Servicer Events of Default 44
Servicer Fee 18
Servicer Fee Percentage 18
Servicing 18
iii
<PAGE> 57
Servicing Charges 19
Sponsor 1,6
Stated Amortization Date 2
Stated Maturity 6
Stated Maturity Date 2,6
Statistical Discount Rate 11
Subordination Provisions 16
Substitute Contract 25
Substitution 19
Supplementary Report 42
Trust Estate 1,6
Trustee 1,9
UCC 7
Underwriter 52
Underwriting Agreement 52
U.S. Person 51
User 6
iv
<PAGE> 58
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE SPONSOR OR THE ISSUERS OR ANY AFFILIATE
THEREOF OR THE TRUST ESTATE SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO TO ANYONE TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
AVAILABLE INFORMATION.................................................. 2
REPORTS TO NOTEHOLDERS................................................. 3
SUMMARY OF TERMS....................................................... 4
MATERIAL RISKS......................................................... 21
THE ISSUERS............................................................ 23
USE OF PROCEEDS........................................................ 23
THE TRUSTEE............................................................ 23
THE TRUST ESTATE....................................................... 24
DESCRIPTION OF THE NOTES............................................... 31
PREPAYMENT AND YIELD CONSIDERATIONS.................................... 45
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS....................................................... 48
ERISA CONSIDERATIONS................................................... 51
UNDERWRITING........................................................... 52
RATINGS OF THE NOTES................................................... 53
INDEX OF TERMS......................................................... i
PROSPECTUS
_____________
_____________
_____________
Until _____, _____ (90 days after the date of this Prospectus Supplement), all
dealers effecting transactions in the Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus Supplement. This is
in addition to the obligation of dealers to deliver a Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
$____________________
Advanta Business
Services Corp.
Sponsor
$____________________% Class A-1
Equipment Receivables Asset-Backed Notes, Series
_____
$____________________% Class A-2
Equipment Receivables Asset-Backed Notes, Series
_____
$____________________% Class A-3
Equipment Receivables Asset-Backed Notes, Series
_____
$____________________% Class M
Equipment Receivables Asset-Backed Notes, Series
_____
$____________________% Class B
Equipment Receivables Asset-Backed Notes, Series
_____
PROSPECTUS
SUPPLEMENT
Dated __________, _____
