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PROSPECTUS SUPPLEMENT
(To Prospectus dated March 24, 1997)
$57,602,000
ADVANTA AUTOMOBILE RECEIVABLES TRUST 1998-1
$41,000,000 5.90% Class A-1 Asset Backed Notes
$16,602,000 6.09% Class A-2 Asset Backed Notes
[ADVANTA LOGOS]
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Advanta Automobile Receivables Trust 1998-1 (the 'Trust') will be formed
pursuant to a Trust Agreement to be dated as of June 1, 1998 and entered into
among Advanta Auto Finance Corporation, as the sponsor of the Trust, Advanta
Auto Receivables Corp. I, as seller (the 'Seller'), and Wilmington Trust
Company, as Owner Trustee (the 'Owner Trustee'). The Class A-1 5.90% Asset
Backed Notes (the 'Class A-1 Notes') and the Class A-2 6.09% Asset Backed Notes
(the 'Class A-2 Notes' and, together with the Class A-1 Notes, the 'Notes') will
be issued pursuant to an Indenture to be dated as of June 1, 1998 (the
'Indenture') between the Trust and Norwest Bank Minnesota, National Association,
as indenture trustee and as trust collateral agent (the 'Indenture Trustee' and
the 'Trust Collateral Agent'). The Trust will also issue $16,247,642 aggregate
principal amount of 6.09% Asset Backed Certificates which are not offered hereby
but will initially be retained by the Seller (the 'Certificates' and, together
with the Notes, the 'Securities').
The assets of the Trust will consist primarily of a pool of sub-prime motor
vehicle retail installment sale contracts (the 'Receivables') secured by new and
used automobiles, light trucks and vans financed thereby (the 'Financed
Vehicles'), certain payments made under the Receivables on or after June 12,
1998 (the 'Cut-Off Date'), security interests in the Financed Vehicles and
certain other property, all as more fully described herein.
Full and timely payment of the Scheduled Payments (as defined herein) in
respect of the Notes on each Distribution Date is unconditionally and
irrevocably guaranteed pursuant to a financial guaranty insurance policy (the
'Policy') to be issued by
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SEE 'RISK FACTORS' AT PAGE S-10 HEREIN AND AT PAGE 14 IN THE ACCOMPANYING
PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN THE NOTES OFFERED HEREBY.
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THE NOTES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES REPRESENT INTERESTS IN,
THE TRUST ONLY AND DO NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN THE SELLER,
THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE
SECURITIES NOR THE UNDERLYING RECEIVABLES ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Notes will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of the related sale. Proceeds to the Trust are
anticipated to be approximately $57,346,617.88 from the sale of the Notes.
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 the offer without notice.
It is expected that the Notes will be offered globally and delivered in
book-entry form on or about June 29, 1998 through the facilities of The
Depository Trust Company ('DTC'), CEDEL S.A. ('Cedel') and the Euroclear System
('Euroclear') against payment in immediately available funds.
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SALOMON SMITH BARNEY
June 25, 1998
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT AFFECT THE PRICE OF THE NOTES. SUCH TRANSACTIONS MAY INCLUDE
THE PURCHASE OF NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF
THESE TRANSACTIONS, SEE "UNDERWRITING."
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The information in this Prospectus Supplement is qualified
in its entirety by the more detailed information appearing or incorporated by
reference in the accompanying Prospectus. Prior to making an investment
decision with respect to the Notes offered hereby, prospective investors
should carefully consider the information contained in this Prospectus
Supplement and the Prospectus.
There currently is no secondary market for the Notes. The
Underwriter intends to make a market in the Notes but has no obligation to do
so. There is no assurance that one will develop or, if one does develop, that
it will continue until the Notes are paid in full.
Until 90 days from 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 and
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
AVAILABLE INFORMATION
Advanta Auto Finance Corporation (in its individual
capacity, the "Company") has filed a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with the Securities
and Exchange Commission (the "Commission") on behalf of the Trust with respect
to the Notes offered pursuant to the Prospectus dated March 24, 1997 and this
Prospectus Supplement. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto,
which are available for inspection without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at 7 World Trade Center, 13th Floor, New York, New York 10048, and
at The Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Commission maintains a site on the World Wide Web
containing reports, proxy materials, information statements and other items.
The address is http://www.sec.gov. Copies of the Registration Statement and
amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
REPORTS TO THE NOTEHOLDERS
So long as the Notes are in book-entry form, monthly and
annual reports concerning the Notes and the Trust will be sent to Cede & Co.,
as the nominee of DTC and as registered holder of the Notes pursuant to the
Sale and Servicing Agreement. DTC will supply such reports to beneficial
owners in accordance with its procedures. See "Risk Factors," "Description of
the Securities -- Book-Entry Registration" and " -- Reports to
Securityholders" in the Prospectus. To the extent required by the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Trust will provide
financial information to the registered holder which has been examined and
reported upon, with an opinion expressed by an independent public accountant;
to the extent not so required, such financial information will be unaudited.
The Seller has determined that the financial statements of no entity other
than the Insurer are material to the offering made hereby. The Trust will be
formed to own the Receivables and to issue the Securities. The Trust will have
no assets or obligations prior to issuance of the Securities and will engage
in no activities other than those described herein. Accordingly, no financial
statements with respect to the Trust are included in this Prospectus
Supplement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the Prospectus
under "Incorporation of Certain Documents by Reference," the consolidated
financial statements of Financial Security Assurance Inc. (the "Insurer") and
Subsidiaries included in, or as exhibits to, the Annual Report on Form 10-K
for the year ended December 31, 1997 and the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, which
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have been filed with the Commission by Financial Security Assurance Holdings
Ltd. ("Holdings"), are hereby incorporated by reference in the Registration
Statement (as defined in the Prospectus) of which this Prospectus and
Prospectus Supplement form a part. All financial statements of the Insurer
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Notes shall be
deemed to be incorporated by reference into this Prospectus Supplement and to
be a part hereof from the respective dates of filing of such documents.
The Seller on behalf of the Trust hereby undertakes that,
for purposes of determining any liability under the Securities Act, each
filing of the Trust's annual report pursuant to Section 13(a) or Section 15(d)
of the Exchange Act and each filing of the financial statements of the Insurer
included in or as an exhibit to the annual report of Holdings filed pursuant
to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in the Registration Statement shall be deemed to be a new
registration statement relating to the Notes offered hereby and the offering
of such Notes at that time shall be deemed to be the initial bona fide
offering thereof.
The Company will provide, without charge, to any person to
whom this Prospectus Supplement is delivered, upon oral or written request of
such person, a copy of any or all of the foregoing financial statements
incorporated by reference. Requests for such copies should be sent to Advanta
Auto Finance Corporation, Attention: Law Department, 500 Office Center Drive,
Suite 400, Fort Washington, Pennsylvania 19034, telephone (215) 444-4200.
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SUMMARY
The following summary is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus
Supplement and in the Prospectus. Capitalized terms used are defined elsewhere
in this Prospectus Supplement or in the Prospectus. Reference is made to the
Index of Defined Terms herein and the Index of Terms in the Prospectus for the
definitions of certain capitalized terms.
Issuer.................................. Advanta Automobile Receivables Trust
1998-1 (the "Trust" or the "Issuer").
Seller.................................. Advanta Auto Receivables Corp. I, a
Nevada corporation. The principal
executive offices of the Seller are
located at 1325 Airmotive Way, Suite
130, Reno, Nevada 89502, and the
telephone number of the Seller is
(800) 851-5215.
Company and Master Servicer ............ Advanta Auto Finance Corporation (in
its individual capacity, the "Company"
and, as master servicer, the "Master
Servicer"), a Nevada corporation. The
principal executive offices of the
Master Servicer are located at 500
Office Center Drive, Suite 400, Fort
Washington, Pennsylvania 19034, and
the telephone number of the Master
Servicer is (215) 444-4200.
Insurer . .............................. Financial Security Assurance Inc. (the
"Insurer"), a financial guaranty
insurance company incorporated under
the laws of the State of New York.
Indenture Trustee, Collateral
Agent and Trust Collateral Agent........ Norwest Bank Minnesota, National
Association (the "Indenture Trustee,"
the "Collateral Agent" and the "Trust
Collateral Agent"), a national banking
association formed under the laws of
the United States. The corporate trust
offices of the Indenture Trustee are
located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota
55479-0070, and the telephone number
of the Indenture Trustee is (612)
667-1234.
Owner Trustee .......................... Wilmington Trust Company (the "Owner
Trustee"), a Delaware banking
corporation, acting not in its
individual capacity but solely as
trustee under the Trust Agreement. The
corporate trust offices of the Owner
Trustee are located at Rodney Square
North, 1100 North Market Street,
Wilmington, Delaware, 19890-0001,
Attention: Corporate Trust
Administration, and the telephone
number of the Owner Trustee is (302)
651-1000.
Cut-Off Date............................ The opening of business on June 12,
1998.
Closing Date............................ On or about June 29, 1998.
The Trust .............................. The Trust will be a business trust
established under the laws of the
State of Delaware. The activities of
the Trust are limited by the terms of
the Trust Agreement, dated as of June
1, 1998, between the Seller and the
Owner Trustee (the "Trust Agreement").
The Trust will issue the Class A-1
Notes in the aggregate original
principal amount of $41,000,000 and
the Class A-2 Notes in the aggregate
original principal amount of
$16,602,000. The Trust will
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also issue the Certificates, which are
not offered hereby but will initially
be retained by the Seller. The Notes
will be issued pursuant to an
Indenture, dated as of June 1, 1998,
between the Issuer and the Indenture
Trustee (the "Indenture"). The Notes
will be offered for purchase in
denominations of $100,000 and integral
multiples of $1,000 in excess thereof,
in book-entry form only. See
"Description of the Securities --
Book-Entry Registration" in the
Prospectus.
The Notes will be secured by the
assets of the Trust pursuant to the
Indenture.
Trust Property.......................... The assets of the Trust (the "Trust
Property") will include (i) the
Receivables, (ii) all monies received
on or after the Cut-Off Date with
respect to the Receivables, (iii) the
security interests in the Financed
Vehicles, (iv) all rights to proceeds
from claims on physical damage, credit
life and disability insurance
policies, if any, covering the
Financed Vehicles or the Obligors, as
the case may be, (v) all of the
Seller's rights of recourse against
Dealers or any Unaffiliated
Originators (as defined herein)
relating to the Receivables, (vi) all
of the Seller's rights to all
documents contained in the Receivables
Files, (vii) all rights to liquidation
proceeds from the sale of repossessed
Financed Vehicles, (viii) such amounts
as from time to time may be held in
one or more accounts (other than the
Spread Account) established and
maintained by the Trust Collateral
Agent pursuant to the Sale and
Servicing Agreement, dated as of June
1, 1998, among the Issuer, the Seller,
the Master Servicer and the Trust
Collateral Agent (the "Sale and
Servicing Agreement"), (ix) all of
Seller's rights and benefits under the
Purchase Agreement, (x) all proceeds
of the foregoing and (xi) certain
other property, as more fully
described herein.
The Receivables will be purchased by
the Seller from the Company pursuant
to a purchase agreement (the "Purchase
Agreement") between the Seller and the
Company on or prior to the date of
issuance of the Securities.
Receivables............................. The Receivables primarily consist of
sub-prime motor vehicle retail
installment sale contracts between
dealers and retail purchasers which
are secured by new and used
automobiles, light duty trucks and
vans financed thereby. Each Obligor's
obligation under its Receivable is a
full recourse obligation. The
"Obligor" refers to the obligor or
obligors under each Receivable,
including any guarantor. The
Receivables contain provisions which
unconditionally obligate the Obligor
to make all payments under the related
Receivable. See "The Receivables Pool"
herein.
Unless otherwise noted, all
statistical percentages in this
Prospectus Supplement are measured by
the aggregate principal balance of the
Receivables as of the Cut-Off Date.
The statistical information in this
Prospectus Supplement reflects the
statistical characteristics of the
pool of Receivables as of the Cut-Off
Date. Between the Cut-Off Date and the
Closing Date, some Receivables may be
deleted from the pool as it stood on
the Cut-Off Date. As a result of the
foregoing, the statistical
distribution of such characteristics
of the final pool as of the Closing
Date will vary
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somewhat from the Cut-Off Date pool,
although such variance will not be
material.
The Receivables have, as of the
Cut-Off Date, a weighted average
annual percentage rate ("APR") of
approximately 19.86%, a weighted
average original maturity of
approximately 56.5 months and a
weighted average remaining maturity of
approximately 49.3 months. Each
Receivable provides for the allocation
of payments according to (i) the
simple interest method, (ii) the "Rule
of 78's" method or (iii) the actuarial
method. See "The Receivables Pool"
herein for more statistical
information relating to the pool of
Receivables. See also "The Receivables
-- The Contracts" in the Prospectus
for more information.
Terms of the Notes...................... The principal terms of the Notes will
be as described below:
A. Distribution Dates ................ Payments of interest on and principal
of the Notes will be made on the 15th
day of each month or, if the 15th day
is not a Business Day, on the next
following Business Day (each, a
"Distribution Date") commencing July
15, 1998. Each reference to a "Payment
Date" in the accompanying Prospectus
shall refer to a Distribution Date.
Payments will be made to holders of
record of the Notes (the
"Noteholders") as of the close of
business on the Business Day
immediately preceding such
Distribution Date (a "Record Date"). A
"Business Day" is a day other than a
Saturday, Sunday or other day on which
commercial banks located in the State
of Delaware, Nevada, Minnesota,
Pennsylvania or New York are
authorized or obligated to be closed.
B. Final Scheduled
Distribution Dates ............... For the Class A-1 Notes, October 15,
2001. For the Class A-2 Notes,
December 15, 2003.
C. Interest Rates .................... The Class A-1 Notes and the Class A-2
Notes will bear interest at the fixed
per annum rates shown on the cover
page hereof (with respect to the Class
A-1 Notes, the "Class A-1 Note
Interest Rate," and with respect to
the Class A-2 Notes, the "Class A-2
Note Interest Rate"). Each such
interest rate for a Class of Notes is
referred to as an "Interest Rate."
D. Interest .......................... Interest on the principal amount of
the Class A-1 Notes and the Class A-2
Notes outstanding immediately prior to
a Distribution Date will accrue at the
applicable Interest Rate from and
including the 15th day of the
preceding calendar month (or, in the
case of the first Distribution Date,
from and including the Closing Date)
to, but excluding, the 15th day of the
calendar month in which such
Distribution Date occurs (each such
period, an "Interest Period").
Interest on the Class A-1 Notes and
the Class A-2 Notes will be calculated
on the basis of a 360-day year
consisting of twelve 30-day months.
Interest on the Notes for any
Distribution Date due but not paid on
such Distribution Date will be due on
the next Distribution Date together
with, to the extent permitted by law,
interest on such amount at the
applicable Interest Rate. The amount
of interest distributable on the Notes
on each Distribution Date will equal
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interest accrued during the related
Interest Period, plus any such
shortfall amount carried forward. See
"Description of the Notes -- Payments
of Interest" herein.
E. Principal.......................... Principal of the Notes will be payable
to the Noteholders on each
Distribution Date in an amount equal
to the Noteholders' Principal
Distributable Amount for the calendar
month (the "Monthly Period") preceding
such Distribution Date. The
Noteholders' Principal Distributable
Amount will be an amount equal to the
sum of (x) the Noteholders' Percentage
(as defined herein) of the Principal
Distributable Amount and (y) any
unpaid portion of the amount described
in clause (x) with respect to a prior
Distribution Date.
The "Principal Distributable Amount"
with respect to any Distribution Date
will be an amount equal to the sum of
the following amounts with respect to
the related Monthly Period: (i)
collections on Receivables (other than
Liquidated and Purchased Receivables
(as defined herein)) allocable to
principal, including full and partial
principal prepayments; (ii) the
principal balance of all Receivables
(other than Purchased Receivables)
that became Liquidated Receivables
during the related Monthly Period;
(iii) the portion of the Purchase
Amount allocable to principal of all
Receivables that became Purchased
Receivables with respect to the
related Monthly Period; (iv) at the
option of the Insurer, the outstanding
principal balance of those Receivables
that were required to be repurchased
by the Seller and/or the Company
during such Monthly Period but were
not so repurchased; and (v) the
aggregate amount of Cram Down Losses
(as defined herein) during such
Monthly Period. See "Description of
the Trust Documents --Distributions"
herein.
"Purchase Amount" means the Principal
Balance and all accrued and unpaid
interest on a Receivable as of the
date of repurchase after giving effect
to receipt of monies collected from
all sources on such Receivable.
The Noteholders' Percentage will be
approximately 78% until the Class A-2
Notes have been paid in full and,
thereafter, will be zero. Principal
payments on the Notes will be applied
on each Distribution Date sequentially
to the Class A-1 Notes and the Class
A-2 Notes, in that order, until the
respective principal amount of each
such Class of Notes has been paid in
full. No principal of the Class A-2
Notes will be paid until the
outstanding principal amount of the
Class A-1 Notes has been paid in full.
In addition, the outstanding principal
amount of the Notes of any Class, to
the extent not previously paid, will
be payable on the respective Final
Scheduled Distribution Date for such
Class.
F. Optional Redemption................ The Class A-2 Notes, to the extent
still outstanding, may be redeemed in
whole, but not in part, on any
Distribution Date on which the Seller
or the Master Servicer exercises its
option to purchase the Receivables
(with the prior written consent of the
Insurer if a claim has been made under
the Policy or if such redemption would
result in a claim under the Policy or
if such redemption would result in any
amount owing to the Insurer remaining
unpaid), which subject to certain
requirements, can occur after the Pool
Balance declines to 10% or less of the
Original Pool
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Balance, at a redemption price equal
to the unpaid principal amount of such
Class of Notes plus accrued and unpaid
interest thereon. See "Description of
the Notes -- Optional Redemption"
herein. The Original Pool Balance will
equal the aggregate principal balance
of the Receivables as of the Cut-Off
Date (the "Original Pool Balance").
G. Events of Default.................. The Notes may be accelerated and
subject to immediate payment at par
upon the occurrence of an Event of
Default under the Indenture. So long
as no Insurer Default shall have
occurred and be continuing, an Event
of Default under the Indenture will
occur only upon delivery by the
Insurer to the Indenture Trustee of
notice of the occurrence of certain
events of default under the Insurance
and Indemnity Agreement, dated as of
June 1, 1998 (the "Insurance
Agreement"), among the Insurer, the
Trust, the Company and the Seller. In
the case of such an Event of Default,
the Notes will automatically be
accelerated and subject to immediate
payment at par. See "Description of
the Notes -- Events of Default"
herein.
The Policy does not guarantee payment
of any amounts that become due on an
accelerated basis, unless the Insurer
elects, in its sole discretion, to pay
such amounts in whole or in part. See
"The Policy" herein.
Credit Enhancement...................... The credit enhancement available for
the benefit of the Noteholders will
primarily consist of the Policy,
subordination of the Certificates and,
to the extent available, the Spread
Account. See "Credit Enhancement --
Spread Account" herein.
A. The Policy........................ On the Closing Date, the Insurer will
issue to the Trust Collateral Agent,
as agent for the Indenture Trustee, a
financial guaranty insurance policy
(the "Policy"). Pursuant to the
Policy, the Insurer will
unconditionally and irrevocably
guarantee to the Noteholders payment
of the Noteholders' Interest
Distributable Amount and the
Noteholders' Principal Distributable
Amount for each Distribution Date,
subject to the further provisions of
the Policy as described under "THE
POLICY" herein. See "The Policy" and
"Description of the Trust Documents --
Distributions" herein.
B. Subordination of
Certificates.................... The Certificates will not receive any
distribution with respect to a
Distribution Date until the full
amount of the Noteholders'
Distributable Amount with respect to
such Distribution Date has been
deposited in the Note Distribution
Account and until certain collateral
accounts established for the benefit
of the Noteholders have been fully
funded and certain amounts owed to the
Insurer have been paid. This
subordination is intended to enhance
the likelihood of timely receipt by
the Noteholders of the full amount of
interest and principal distributable
to them on each Distribution Date and
to afford the Noteholders limited
protection against losses in respect
of the Receivables.
C. Spread Account.................... On the Closing Date, the Seller will
establish a separate collateral
account (the "Spread Account") with
the Collateral Agent pursuant to the
Spread Account Agreement dated the
Closing Date (the
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"Spread Account Agreement"). The
Spread Account will not be property of
the Trust, but will be held by the
Collateral Agent and pledged to the
Indenture Trustee for the benefit of
the Noteholders and the Insurer. The
amount required to be on deposit in
the Spread Account may increase or
decrease without Noteholder consent
and there can be no assurance that the
amounts on deposit in the Spread
Account will reach the Specified
Spread Account Requirement (as defined
herein) or be available to make
payments with respect to the Notes
because the Spread Account Agreement
may be amended or terminated by the
Insurer without Noteholder consent.
Amounts on deposit or to be deposited
in the Spread Account may be
distributed to persons other than the
Insurer or the Noteholders without the
consent of the Noteholders.
Consequently, the Noteholders should
not rely on amounts on deposit in or
to be deposited to the Spread Account
in evaluating the likelihood of
receiving repayment of the Notes.
Tax Status.............................. In the opinion of Dewey Ballantine
LLP, special federal tax counsel to
the Trust, for federal income tax
purposes, the Notes will be
characterized as debt, and the Trust
will not be characterized as an
association (or a publicly traded
partnership) taxable as a corporation.
Each Noteholder, by the acceptance of
a Note, will agree to treat the Notes
as debt. See "Certain Federal Income
Tax Consequences" herein.
ERISA Considerations.................... Subject to the conditions and
considerations discussed under "ERISA
Considerations," the Notes are
eligible for purchase by pension,
profit-sharing or other employee
benefit plans as well as individual
retirement accounts and certain types
of Keogh Plans (each, a "Benefit
Plan"). See "ERISA Considerations"
herein.
Ratings................................. It is a condition to issuance that the
Class A-1 Notes and the Class A-2
Notes be rated "AAA" by Standard &
Poor's Ratings Group, a division of
The McGraw-Hill Companies, Inc.
("S&P") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's" and, together
with S&P, the "Rating Agencies"). The
ratings by the Rating Agencies of the
Notes will be based on the Policy.
There is no assurance that the ratings
initially assigned to the Notes will
not subsequently be lowered or
withdrawn by the Rating Agencies. See
"Risk Factors -- Ratings on the Notes"
herein.
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RISK FACTORS
Prospective Noteholders should consider, in addition to the
factors described under "Risk Factors" in the Prospectus, the following risk
factors in connection with the purchase of the Notes.
Subprime Lending. The Company's underwriting guidelines relate to a category
of lending commonly known as "subprime," in which loans may be made to
applicants who have experienced certain adverse credit events but who meet
certain other creditworthiness tests. Such "subprime" loans may experience
higher rates of delinquencies, repossessions and losses, especially under
adverse economic conditions, as compared with loans originated pursuant to a
traditional lending program. See "Risk Factors" in the Prospectus.
Yield and Prepayment Considerations. The weighted average life of the Notes
will be reduced by full or partial prepayments on the Receivables. The
Receivables will generally be prepayable at any time without penalty.
Prepayments may result from payments by Obligors, liquidations due to default,
the receipt of proceeds from physical damage, credit life and/or credit
disability insurance, repurchases by the Seller as a result of certain uncured
breaches of representations and warranties made with respect to the
Receivables, repurchases by the Company as a result of certain uncured
breaches of the covenants made by it with respect to the Receivables,
repurchases by the Company as a result of certain Obligor payment failures
with respect to Receivables purchased under Pool Purchase Agreements or the
exercise by the Master Servicer or the Seller of its optional right to redeem
the Notes as set forth herein.
The Seller has limited historical experience with respect to
prepayments, has not as of the date hereof prepared data on prepayment rates,
and is not aware of publicly available industry statistics that set forth
principal prepayment experience for retail installment sales contracts similar
to the Receivables. The Seller can make no prediction as to the actual
prepayment rates that will be experienced on the Receivables. It is likely
that the actual rate of prepayments will result in a substantially shorter
weighted average life than the scheduled weighted average life of the
Receivables as set forth in the related contracts.
Book-Entry Registration. Issuance of the Notes in book-entry form may reduce
the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Notes for which they cannot obtain
definitive physical securities representing such Noteholders' interests,
except in certain circumstances described herein.
Noteholders may experience some delay in their receipt of
distributions of interest on and principal of the Notes since distributions may
be required to be forwarded by the Trustee to DTC, Cedel or Euroclear and, in
such case, DTC, Cedel or Euroclear, as the case may be, will be required to
credit such distributions to the accounts of its participating organization,
which thereafter will be required to credit them to the accounts of the
Noteholders either directly or indirectly through indirect participants. See
"Risk Factors" and "Description of the Securities -- Book-Entry Registration" in
the Prospectus.
Geographic Concentration. As of the Cut-Off Date, based on address information
provided to the Seller, the Obligors resided in 48 states and the District of
Columbia, with the largest concentration in Texas and Georgia, which account
for 17.07% and 11.33%, respectively, of the aggregate principal balance of the
Receivables in the Trust as of the Cut-Off Date. Adverse economic conditions
in Texas and Georgia could adversely affect the delinquency, loan loss or
repossession experience of the Trust with respect to the Receivables.
Limited Assets. The Trust does not have, nor is it permitted or expected to
have, any significant assets or sources of funds other than the Receivables,
amounts on deposit in the Collection Account, the Note Distribution Account,
the Certificate Distribution Account, and, with respect to the Notes only, the
right to receive payments of claims made under the Policy. The Notes represent
obligations of the Trust and are not obligations of, and will not be insured
or guaranteed by, the Seller, the Master Servicer or any of its affiliates, or
any other person or entity other than the Insurer to the extent described
herein. See "The Policy" herein. Consequently, the Noteholders must rely upon
payments on the Receivables and payments
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<PAGE>
of claims made under the Policy and amounts, if any, available therefor in
certain collateral accounts maintained for the benefit of the Insurer to make
payments on the Notes.
Ratings on the Notes. It is a condition to the issuance of the Notes that they
be rated in the highest rating category by each of the Rating Agencies. The
rating of the Notes will depend primarily on an assessment by the Rating
Agencies of the claims-paying ability of the Insurer. Any reduction in the
rating assigned to the claims-paying ability of the Insurer below the rating
in effect when the Notes were initially rated would likely result in a
reduction of the rating of the Notes. The rating by a Rating Agency of the
Notes is not a recommendation to purchase, hold or sell the Notes inasmuch as
such rating does not comment as to market price or suitability for a
particular investor but addresses the likelihood of the payment of principal
of and interest on the Notes pursuant to their terms. There is no assurance
that a rating will remain in effect for any given period of time or that
ratings will not be reduced, suspended or withdrawn by the Rating Agencies.
Events of Default Under the Indenture. So long as no Insurer Default shall
have occurred and be continuing, neither the Indenture Trustee nor the
Noteholders may declare an Event of Default under the Indenture and an Event
of Default will occur only upon delivery by the Insurer to the Indenture
Trustee of notice of the occurrence of certain events of default under the
Insurance Agreement. Upon the occurrence of an Event of Default under the
Indenture (so long as an Insurer Default shall not have occurred and be
continuing), the Insurer will have the right, but not the obligation, to cause
the liquidation, in whole or in part, of the Trust Property, which will result
in redemption, in whole or in part, of the Notes. Following the occurrence of
an Event of Default, the Indenture Trustee will continue to submit claims
under the Policy as necessary to enable the Trust to continue to make payments
of the Noteholders' Distributable Amount in accordance with the terms of the
Indenture on each Distribution Date. Following the occurrence of an Event of
Default, however, the Insurer may elect, in its sole discretion, to pay all or
any portion of the outstanding amount of the Notes, plus accrued interest
thereon.
FORMATION OF THE TRUST
General
The Issuer, Advanta Automobile Receivables Trust 1998-1, is
a business trust formed under the laws of the State of Delaware pursuant to
the Trust Agreement. Prior to the Trust's acquisition of the Receivables, the
Trust will have no assets or obligations or any operating history. The Trust
will not engage in any business other than (i) acquiring, holding and managing
the Receivables, the other assets of the Trust and any proceeds therefrom,
(ii) issuing the Notes and the Certificates, (iii) making payments on the
Notes and the Certificates, and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto.
The Seller, immediately prior to its transfer of the
Receivables to the Trust, will acquire the Receivables from the Company.
Immediately prior to the delivery of the Receivables to the Trust, the Company
will cause the Receivables to be segregated and identified as an asset that
has been sold and assigned to the Trust. The Company will not seek to have
amended or reissued the certificates of title of the vehicles (the "Financed
Vehicles"). In the absence of amendments to the certificates of title, the
Trust may not have perfected security interests in the Financed Vehicles
securing the Receivables originated in some states. See "Risk Factors" in the
Prospectus.
The Trust will initially be capitalized with equity equal to
$16,247,642, and Certificates equal to such amount will be sold to the Seller.
The equity of the Trust, together with the proceeds of the initial sale of the
Notes, will be used by the Trust to purchase the Receivables from the Seller
and to fund the deposits in certain collateral accounts maintained for the
benefit of the Insurer.
The Trust will not acquire any assets other than the Trust
Property, and it is not anticipated that the Trust will have any need for
additional capital resources. Because the Trust will have no operating history
upon its establishment and will not engage in any business other than the
duties described above, no
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<PAGE>
historical or pro forma financial statements or ratios of earnings to fixed
charges with respect to the Trust have been included herein.
The Owner Trustee
Wilmington Trust Company, acting not in its individual
capacity but solely as the Owner Trustee under the Trust Agreement, is a
Delaware banking corporation and its principal offices are located at Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration. The Owner Trustee will perform
limited administrative functions under the Trust Agreement. The Owner
Trustee's duties in connection with the issuance and sale of the Certificates
and the Notes is limited solely to the express obligations of the Owner
Trustee set forth in the Trust Agreement and the Sale and Servicing Agreement.
The Trust Collateral Agent and the Indenture Trustee
Norwest Bank Minnesota, National Association is the Trust
Collateral Agent under the Sale and Servicing Agreement and the Indenture
Trustee under the Indenture. Norwest Bank Minnesota, National Association is a
national banking association organized under the laws of the United States,
the principal offices of which are located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479-0070. The Trust Collateral Agent's duties
in connection with the Notes and the Trust Property is limited solely to its
express obligations under the Indenture and the Sale and Servicing Agreement.
The Indenture Trustee's duties in connection with the Notes is limited solely
to its express obligations under the Indenture and the Sale and Servicing
Agreement.
THE TRUST PROPERTY
The Trust Property will include (i) the Receivables, (ii)
all monies received on or after the Cut-Off Date with respect to the
Receivables, (iii) all of the Seller's security interests in the Financed
Vehicles, (iv) all of the Seller's rights to receive proceeds from claims on
physical damage, credit life and disability insurance policies covering the
Financed Vehicles or the Obligors, as the case may be, to the extent that such
insurance policies relate to the Receivables, (v) all of the Seller's rights
of recourse against Dealers or any Unaffiliated Originators relating to the
Receivables, (vi) all rights under any service contracts relating to the
Financed Vehicles, (vii) all of the Seller's rights in any original
agreements, certificates of title, lien certificates and other documents
relating to the Receivables and/or the Financed Vehicles (the "Receivables
Files"), (viii) all property (including the right to receive future Net
Liquidation Proceeds and recoveries) that secures a Receivable and that shall
have been acquired by or on behalf of the Trust, (viii) all amounts and
property from time to time held in or credited to the Collection Account
(excluding any investment earnings thereon), the Note Distribution Account and
the Certificate Distribution Account, (ix) all rights of the Seller under the
Purchase Agreement, (x) all proceeds of the foregoing and (xi) certain other
property. The Trust Collateral Agent will hold the Policy with respect to all
amounts payable to the Noteholders.
The "Pool Balance" at any time represents the aggregate
principal balance of the Receivables at the end of the preceding Monthly
Period, after giving effect to all payments received from Obligors and any
Purchase Amounts to be remitted by the Company or the Seller, for such Monthly
Period and all losses, including Cram Down Losses, realized on Receivables
liquidated during such Monthly Period.
USE OF PROCEEDS
The net proceeds to be received by the Trust from the sale
of the Notes will be used by the Seller to purchase the Receivables from the
Company and to make an initial deposit to the Spread Account.
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<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
Holders of the Class A-2 Notes will not receive any
principal payments until the Class A-1 Notes have been paid in full.
Additionally, the Holders of the Notes and the Holders of the Certificates
will receive their respective percentage of the principal payments as more
fully described herein. The rate of payment on the Notes will depend on the
rate of payment of the principal balance of the Receivables and will be
affected by the allocation of principal payments between the Notes and the
Certificates. See "Description of the Trust Documents -- Certain Allocations"
herein.
All of the Receivables are prepayable at any time. If
prepayments are received on the Receivables, the actual weighted average life
of the Receivables may be shorter than the scheduled weighted average life.
The weighted average life is the average amount of time during which each
dollar of principal with respect to a Receivable is outstanding. The rate of
prepayments on the Receivables may be influenced by a variety of economic,
social and other factors. The principal payments on such Receivables 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 the
Noteholders of amounts which would otherwise have been distributed over the
remaining term of the Receivables. It is likely that the actual rate of
prepayments will result in a substantially shorter weighted average life than
the scheduled weighted average life of the Receivables as set forth in the
contracts. Any reinvestment risks resulting from a faster or slower incidence
of prepayment of Receivables will be borne by the Noteholders.
Prepayments on automobile receivables can be measured
relative to a prepayment standard or model. The model used in this Prospectus
Supplement, the Absolute Prepayment Model ("ABS"), represents an assumed rate
of prepayment each month relative to the original number of receivables. ABS
further assumes that all the receivables are the same size and amortize at the
same rate and that each receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate
of prepayment of any pool of receivables, including the Receivables.
The table captioned "Percent of Initial Note Principal
Balance at Various ABS Percentages" (the "ABS Table") has been prepared on the
basis of the following assumptions: (i) the Trust includes a pool of
Receivables with the characteristics set forth in the following table; (ii)
the Receivables prepay in full at the specified constant percentage of ABS
monthly, with no defaults, losses or repurchases; (iii) each month has 30
days; (iv) the initial principal amount of each Class of Notes is as set forth
on the cover page hereof; (v) payments on the Notes are made on the 15th day
of each month whether or not a Business Day; (vi) the Notes are purchased on
the Closing Date; (vii) the scheduled monthly payment for each Receivable has
been calculated on the basis of the assumed characteristics in the following
table such that each Receivable will amortize in amounts sufficient to repay
the principal balance of such Receivable by its indicated remaining term to
maturity; (viii) the first due date for each Receivable is in the month of the
assumed cutoff date for such Receivable as set forth in the following table;
and (ix) either the Seller or the Master Servicer exercises its option to
purchase the Receivables.
Original Term Remaining Term
Aggregate Principal Assumed Cutoff to Maturity to Maturity
Pool Balance APR Date (in Months) (in Months)
- ---- ------- --- ---- ----------- ----------
1 $73,849,642 19.858% 6/11/98 56 49
The ABS Table indicates, based on the assumptions set forth
above, the percentages of the initial principal amount of each Class of Notes
that would be outstanding after each of the Distribution Dates shown at
various percentages of ABS and the corresponding weighted average lives of
such Notes. The actual characteristics and performance of the Receivables will
differ from the assumptions used in constructing the ABS Table. The
assumptions used are hypothetical and have been provided only to give a
general sense of how the principal cash flows might behave under varying
prepayment scenarios. For
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<PAGE>
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity or that all of the Receivables will prepay at the
same level of ABS. Moreover, the diverse terms of Receivables could produce
slower or faster principal distributions than indicated in the ABS Table at the
various constant percentages of ABS specified, even if the original and
remaining terms to maturity of the Receivables are as assumed. Any difference
between such assumptions and the actual characteristics and performance of the
Receivables, or actual prepayment experience, will affect the percentages of
initial balances outstanding over time and the weighted average lives of each
Class of Notes.
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<PAGE>
Percent of Initial Note Principal Balance
At Various ABS Percentages
<TABLE>
<CAPTION>
Class A-1 Notes Class A-2 Notes
------------------------------------- -------------------------------------
Distribution Date 0.0% 1.0% 1.7% 2.5% 0.0% 1.0% 1.7% 2.5%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date 100 100 100 100 100 100 100 100
07/15/98 98 97 95 94 100 100 100 100
08/15/98 96 93 91 88 100 100 100 100
09/15/98 94 90 86 82 100 100 100 100
10/15/98 92 87 82 76 100 100 100 100
11/15/98 90 83 78 70 100 100 100 100
12/15/98 88 80 73 65 100 100 100 100
01/15/99 86 77 69 59 100 100 100 100
02/15/99 84 73 65 54 100 100 100 100
03/15/99 82 70 61 49 100 100 100 100
04/15/99 80 67 57 43 100 100 100 100
05/15/99 77 64 52 38 100 100 100 100
06/15/99 75 60 48 33 100 100 100 100
07/15/99 73 57 44 28 100 100 100 100
08/15/99 71 54 41 23 100 100 100 100
09/15/99 68 51 37 19 100 100 100 100
10/15/99 66 48 33 14 100 100 100 100
11/15/99 63 44 29 10 100 100 100 100
12/15/99 61 41 26 6 100 100 100 100
01/15/00 58 38 22 1 100 100 100 100
02/15/00 56 35 19 0 100 100 100 94
03/15/00 53 32 15 0 100 100 100 84
04/15/00 51 29 12 0 100 100 100 75
05/15/00 48 26 9 0 100 100 100 66
06/15/00 45 23 5 0 100 100 100 58
07/15/00 42 20 2 0 100 100 100 50
08/15/00 39 17 0 0 100 100 98 42
09/15/00 37 14 0 0 100 100 91 35
10/15/00 34 11 0 0 100 100 84 28
11/15/00 31 8 0 0 100 100 77 21
12/15/00 28 6 0 0 100 100 71 15
01/15/01 25 3 0 0 100 100 65 10
02/15/01 21 0 0 0 100 100 58 5
03/15/01 18 0 0 0 100 94 53 0
04/15/01 15 0 0 0 100 87 47 0
05/15/01 12 0 0 0 100 80 42 0
06/15/01 8 0 0 0 100 74 37 0
07/15/01 5 0 0 0 100 68 32 0
08/15/01 2 0 0 0 100 61 28 0
09/15/01 0 0 0 0 95 55 24 0
10/15/01 0 0 0 0 86 49 20 0
11/15/01 0 0 0 0 77 43 16 0
12/15/01 0 0 0 0 68 37 13 0
01/15/02 0 0 0 0 59 32 10 0
02/15/02 0 0 0 0 49 26 7 0
03/15/02 0 0 0 0 40 21 5 0
04/15/02 0 0 0 0 30 15 3 0
05/15/02 0 0 0 0 20 10 2 0
06/15/02 0 0 0 0 10 5 1 0
07/15/02 0 0 0 0 0 0 0 0
Weighted Average Life:
(years)(1) 1.77 1.29 1.00 0.76 3.66 3.34 2.86 2.11
</TABLE>
- -----------------------------
(1) The weighted average life of a Note is determined by (i) multiplying
the amount of each principal payment on a Note by the number of years
from the date of the issuance of the Note to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the
related initial principal amount of the Note.
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<PAGE>
THE RECEIVABLES POOL
General
Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the aggregate principal balance of the
Receivables as of the Cut-Off Date. The statistical information in this
Prospectus Supplement reflects the statistical characteristics of the pool of
Receivables as of the Cut-Off Date. Between the Cut-Off Date and the Closing
Date, some Receivables may be deleted from the pool as of the Cut-Off Date. As
a result of the foregoing, the statistical distribution of such
characteristics of the final pool as of the Closing Date will vary somewhat
from the Cut-Off Date pool, although such variance will not be material.
The Receivables in the pool were purchased by the Company
from certain unaffiliated originators and owners (the "Unaffiliated
Originators") pursuant to certain flow purchase agreements (the "Flow Purchase
Agreements") or certain pool purchase agreements (the "Pool Purchase
Agreements" and, together with the Flow Purchase Agreements, the "Unaffiliated
Originator Agreements").
All Receivables are secured by either a new or used vehicle.
As of the Cut-Off Date, approximately 87.44% of the Receivables, by aggregate
principal balance, represented indirect financing of used vehicles and
approximately 12.56% of the Receivables, by aggregate principal balance,
represented indirect financing of new vehicles.
As of the Cut-Off Date, the Trust did not contain
Receivables which are 30 or more days delinquent.
Underwriting Procedures
The following description of the Company's underwriting
procedures supplements and, to the extent inconsistent therewith, replaces,
the description of the Company's underwriting procedures set forth in the
accompanying Prospectus.
For Receivables purchased under Flow Purchase Agreements,
the Unaffiliated Originators either originate or purchase such Receivables in
accordance with the Company's established underwriting guidelines. Any
Receivables which do not meet the Company's underwriting guidelines are not
purchased by the Company unless the Receivables possess certain creditworthy
compensating factors. The Unaffiliated Originators primarily originate or
purchase the Receivables from dealers ("Dealers") pursuant to dealer
agreements ("Dealer Agreements"). Dealer Agreements may provide for repurchase
or recourse against the Dealer in case of a breach of a representation or
warranty by the Dealer under a Dealer Agreement. Similarly, the Unaffiliated
Originator Agreements may provide for repurchase or recourse against the
Unaffiliated Originator in case of a breach of a representation or warranty by
the Unaffiliated Originator therein.
The Company also purchases Receivables from time to time
from Unaffiliated Originators pursuant to Pool Purchase Agreements. Such
Receivables may be originated or purchased by a variety of Unaffiliated
Originators under several discrete underwriting guidelines which may or may
not coincide with the Company's underwriting guidelines. Prior to each pool
acquisition, the Company reviews the Unaffiliated Originators' underwriting
guidelines to determine if such guidelines utilize satisfactory methods and
analysis to thoroughly assess prospective credit applicants. Upon purchase of
a pool portfolio, the Company generally causes the automobile receivables to
be reviewed on a sample basis. The Company has the ability to select specific
pool assets for purchase and is generally not obligated to purchase an entire
portfolio.
The Company's underwriting guidelines relate to a category
of lending commonly known as "subprime," in which loans may be made to
applicants who have experienced certain adverse credit events but who meet
certain other creditworthiness tests. Such "subprime" loans may experience
higher rates of delinquencies, repossessions and losses, especially under
adverse economic conditions, as compared with loans originated pursuant to a
traditional lending program. The Company's underwriting guidelines are
reviewed and revised continuously based upon opportunities and prevailing
conditions in the nonconforming auto market.
Typical Receivables characteristics may include: vehicle age
ranging from current year to five years of age, maximum loan amount of
$30,000, mileage at the end of the contract term cannot exceed 110,000
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<PAGE>
miles, maximum term of 66 months, minimum downpayment of 10% of vehicle selling
price, maximum advance rate of 110% of NADA trade, Kelley wholesale or the
Dealer's invoice plus extras, debt to income ratio not to exceed 45% and minimum
credit bureau risk scores. A credit report is required for all flow applicants.
The credit report can be generated by either Equifax (BEACON score), TransUnion
(EMPIRICA score) or TRW (FICO score).
The Company's flow underwriting process includes the
evaluation of residence stability, employment history, credit history, ability
to pay, amount of income, debt ratio, credit bureau score and the value of the
collateral. As a result, the existing Unaffiliated Originator's applications,
which are written on the existing Unaffiliated Originator's documents, are
underwritten to the Company's established underwriting guidelines, which are
generally consistent for the auto finance contracts delivered on a flow basis.
For flow originations, the Company generally funds the existing Unaffiliated
Originator's closed contracts within three months of origination.
Receivables which are delivered on a pool basis may be
originated by a variety of originators under differing underwriting
guidelines. When reviewing potential pool acquisitions, the existing
Unaffiliated Originator underwriting guidelines are reviewed and either deemed
acceptable or unacceptable to the Company. If deemed acceptable, the Company
will generally cause the Receivables acquired on a pool basis to be reviewed
on a sample basis. Such review may be performed by the Company or by a third
party acting at the direction of the Company. In addition to reviewing the
underwriting guidelines, the Company will generally request the following
contract-specific information: the vehicle identification number, the type of
Receivable (i.e., Rule of 78's, Actuarial, Simple Interest or fixed rate), the
vehicle make, model and year, the vehicle mileage, the debt-to-income ratio,
the credit bureau risk score, the monthly income, the time at current/prior
residence, the time at current/prior employer and the downpayment percentage.
Pool originators are typically reviewed to verify that all applicable state
laws including required licensing are adhered to. A quality control compliance
review as well as an operational review may also be performed.
Selection Criteria
The Receivables were selected from the Company's portfolios
on the basis of a number of criteria, including the following: each Receivable
(i) has an original term to maturity of 24 to 66 months, (ii) has a maturity
of not later than June 15, 2003, (iii) provides for level monthly payments
that fully amortize the amount financed over the original term, (iv) has an
unpaid principal balance of not less than $800, (v) has an original Amount
Financed not greater than $30,000 and (vi) has an APR of not less than 10%.
The weighted average remaining term (number of payments) of the Receivables
was approximately 49.3 months as of the Cut-Off Date.
The Receivables are installment sales contracts and
installment loans which generally provide for equal monthly payments. Each
Receivable provides for allocation of payments according to (i) the "sum of
periodic balances" or "sum of monthly payments" method (each a "Rule of 78's
Receivable"), (ii) the actuarial method (each, an "Actuarial Receivable") or
(iii) the simple interest method (each, a "Simple Interest Receivable"). Rule
of 78's Receivables and Actuarial Receivables are sometimes referred to in
this section as "Pre-Computed Receivables."
As payments are received under a Simple Interest Receivable,
interest accrued to date is paid first and the remaining payment is applied to
reduce the unpaid principal balance. Accordingly, if an Obligor pays a fixed
monthly installment before its due date, the portion of the payment allocable
to interest for the period since the preceding payment will be less than it
would have been had the payment been made on the due date, and the portion of
the payment applied to reduce the principal balance will be correspondingly
greater. Conversely, if an Obligor pays a fixed monthly installment after its
due date, the portion of the payment allocable to interest for the period
since the preceding payment will be greater than it would have been had the
payment been made on the due date, and the portion of the payment applied to
reduce the principal balance will be correspondingly less, in which case a
larger portion of the principal balance will be due on the final scheduled
payment date. In the case of a liquidation or repossession, amounts recovered
are applied first to the expenses of repossession, then to unpaid interest and
finally to unpaid principal.
With respect to Rule of 78's Receivables, the rate at which
the amount of finance charges is earned and, correspondingly, the amount of
each scheduled monthly payment which is allocated to the reduction of the
outstanding principal balance of the related Receivable are calculated in
accordance with the "Rule of 78's." Under the Rule of 78's, the portion of a
payment allocable to interest is determined by multiplying the total amount of
add-on interest payable over the term of the Receivable by a fraction as
described below.
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<PAGE>
The fraction used in the calculation of add-on interest
earned each month under a Rule of 78's Receivable has (i) as its denominator,
the sum of a series of numbers beginning with one and ending with the number
of scheduled monthly payments due under such Receivable and (ii) as its
numerator, the number of payments remaining under such Receivable before
giving effect to the payment to which the fraction is being applied. The
applicable fraction is then multiplied by the total add-on interest payable
over the term of the Receivable to determine the amount of interest earned
during that month. The difference between the amount of the scheduled monthly
payment made by the Obligor and the amount of earned add-on interest
calculated for the month is applied to principal reduction.
An "Actuarial Receivable" provides for the amortization of
the Receivable over a series of fixed level monthly payments. Each Actuarial
Receivable provides for the payment by the Obligor of a specified total number
of payments, payable in monthly installments on the related due date, which
total represents the principal amount financed and finance charges in an
amount calculated on the basis of a stated APR for the term of such
Receivable. The rate at which such amount of finance charges is earned and,
correspondingly, the amount of each fixed monthly payment allocated to
reduction of the outstanding principal balance of the related Receivable are
calculated in accordance with the actuarial method. Each scheduled monthly
payment is deemed to consist of an amount of interest equal to one-twelfth of
the stated APR of the Receivable multiplied by the outstanding principal
balance of the Receivable and an amount of principal equal to the remainder of
such scheduled monthly payment.
All payments received by the Master Servicer on or in
respect of Pre-Computed Receivables, including the final scheduled payment,
will be allocated pursuant to the Sale and Servicing Agreement on an actuarial
basis. No adjustment will be made in the event of early or late payments,
although in the latter case the Obligor may be subject to a late charge.
The composition, geographical distribution and distribution
by APR, remaining principal balance and remaining term of the Receivables as
of the Cut-Off Date are as set forth in the following tables.
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<PAGE>
Composition of the Receivables as of the Cut-Off Date
<TABLE>
<CAPTION>
New Used Total
------------------ ------------------ ------------------
<S> <C> <C> <C>
Initial Aggregate Principal Balance $9,274,948 $64,574,694 $73,849,642
Number of Receivables 617 5,694 6,311
Average Original Principal Balance $16,475 $12,507 $12,895
Range of Original Principal Balances $7,989 to $28,442 $3,307 to $29,728 $3,307 to $29,728
Average Remaining Principal Balance $15,032 $11,341 $11,702
Range of Remaining Principal Balances $996 to $27,096 $882 to $29,380 $882 to $29,380
Weighted Average APR 18.81% 20.01% 19.86%
Range of APRs 10.00% to 25.00% 10.00% to 29.00% 10.00% to 29.00%
Weighted Average Original Terms 60.1 months 56.0 months 56.5 months
Range of Original Terms 42 to 66 months 24 to 66 months 24 to 66 months
Weighted Average Remaining Terms 52.3 months 48.8 months 49.3 months
Range of Remaining Terms 9 to 60 months 8 to 60 months 8 to 60 months
</TABLE>
Distribution of the Receivables by APR as of the Cut-Off Date
<TABLE>
<CAPTION>
Percentage of Percentage of
Number of Number of Aggregate Aggregate Principal
Range of APRs Receivables Receivables Principal Balance Balance
- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
10.000% to 11.999% 25 0.40% $ 325,735 0.44%
12.000% to 13.999% 25 0.40 264,955 0.36
14.000% to 15.999% 132 2.09 1,735,298 2.35
16.000% to 17.999% 606 9.60 7,611,900 10.31
18.000% to 19.999% 2,226 35.27 27,621,857 37.40
20.000% to 21.999% 1,996 31.63 22,338,680 30.25
22.000% to 23.999% 928 14.70 10,523,853 14.25
24.000% to 25.999% 353 5.59 3,269,565 4.43
26.000% to 27.999% 12 0.19 105,631 0.14
28.000% to 29.999% 8 0.13 52,168 0.07
--------------- --------------- --------------- ---------------
Total 6,311 100.00%(1) $ 73,849,642 100.00%(1)
</TABLE>
- ----------
(1) May not add up to 100% due to rounding.
Distribution of the Receivables by Remaining Principal Balance
as of the Cut-Off Date
<TABLE>
<CAPTION>
Range of Percentage of Percentage of
Remaining Number of Number of Aggregate Aggregate Principal
Principal Balances Receivables Receivables Principal Balance Balance
- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
$ 0 to $4,999 106 1.68% $ 431,191 0.58%
5,000 to 9,999 2,114 33.50 17,017,965 23.04
10,000 to 14,999 2,973 47.11 36,467,531 49.38
15,000 to 19,999 908 14.39 15,315,436 20.74
20,000 to 24,999 197 3.12 4,269,015 5.78
25,000 to 29,999 13 0.21 348,504 0.47
--------------- --------------- --------------- ---------------
Total 6,311 100.00%(1) $ 73,849,642 100.00%(1)
</TABLE>
- ----------
(1) May not add up to 100.00% due to rounding.
S-19
<PAGE>
Geographical Distribution of the Receivables as of the Cut-Off Date
<TABLE>
<CAPTION>
Percentage of Percentage of
Number of Number of Aggregate Principal Aggregate
State(1) Receivables Receivables Balance Principal Balance
- --------- ----------- ----------- ------- -----------------
<S> <C> <C> <C> <C>
Texas 995 15.77% $ 12,603,188 17.07%
Georgia 649 10.28 8,369,728 11.33
California 466 7.38 6,355,641 8.61
Louisiana 436 6.91 5,750,675 7.79
Florida 359 5.69 3,822,116 5.18
North Carolina 301 4.77 3,683,459 4.99
Tennessee 291 4.61 3,634,152 4.92
Mississippi 228 3.61 2,860,821 3.87
Connecticut 292 4.63 2,770,098 3.75
Nevada 193 3.06 2,652,182 3.59
New Jersey 267 4.23 2,520,480 3.41
Massachusetts 286 4.53 2,500,136 3.39
Arizona 181 2.87 2,425,837 3.28
Other 1,367 21.66 13,901,130 18.82
----------- ----------- ---------- -----------
Total 6,311 100.00%(2) $ 73,849,642 100.00%(2)
</TABLE>
- ----------
(1) Based upon the billing addresses of the Obligors.
(2) May not add up to 100.00% due to rounding.
Distribution of the Receivables by Remaining Terms to Maturity
as of the Cut-Off Date
<TABLE>
<CAPTION>
Percentage of
Range of Remaining Number of Percentage of Number Aggregate Aggregate
Terms to Maturity Receivables of Receivables Principal Balance Principal Balance
- ----------------- ----------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
6 to 11 8 0.13% $ 26,201 0.04%
12 to 17 31 0.49 127,973 0.17
18 to 23 92 1.46 502,906 0.68
24 to 29 241 3.82 1,646,164 2.23
30 to 35 445 7.05 3,501,902 4.74
36 to 41 713 11.30 6,742,025 9.13
42 to 47 1,209 19.16 13,368,196 18.10
48 to 53 1,498 23.74 18,782,904 25.43
54 to 59 1,898 30.07 26,579,296 35.99
60 to 65 176 2.79 2,572,074 3.48
----------- -------------- ----------------- -----------------
Total 6,311 100.00%(1) $73,849,642 100.00%(1)
</TABLE>
- ----------
(1) May not add up to 100.00% due to rounding.
S-20
<PAGE>
THE SELLER AND ADVANTA CORP.
The Seller is a Nevada corporation which is a direct
subsidiary of Advanta Auto Finance Corporation, the Company and the Master
Servicer, and is an indirect subsidiary of Advanta Corp., a Delaware
corporation ("Advanta Corp."), a publicly-traded company based in Springhouse,
Pennsylvania with assets as of March 31, 1998 in excess of $3.5 billion.
Advanta Corp., through its subsidiaries (including the Master Servicer),
managed assets (including auto loans) in excess of $9.9 billion as of March
31, 1998.
On October 28, 1997, Advanta Corp. announced that it had
reached a definitive agreement under which Fleet Financial Group, Inc.
("Fleet") would acquire Advanta Corp.'s consumer credit card business and
would combine it with Fleet's consumer credit card business (the
"Transaction"). On February 20, 1998, a special meeting of stockholders of
Advanta Corp. was held whereby the stockholders approved the Transaction with
Fleet. The Transaction was completed on the same day. In addition, Advanta
Corp. completed its cash tender offer (the "Tender Offer") to purchase
approximately $850 million of its Class A and Class B common stock at $40 per
share net, and its Stock Appreciation Income Linked Securities Depositary
shares at $32.80 per share net. The Tender Offer commenced on January 20, 1998
and expired at 12:00 midnight, New York City time on February 20, 1998.
Advanta Corp. continues to operate its mortgage, auto loan and business
services companies, including the Seller and the Master Servicer.
The Seller is organized for the limited purpose of
purchasing Receivables from the Company and transferring such Receivables to
third parties (such as the Trust) and any activities incidental to and
necessary to the accomplishment of such purpose. The Seller's principal
offices are located at 1325 Airmotive Way, Suite 130, Reno, Nevada 89502, and
the Seller's telephone number is (800) 851-5215.
THE COMPANY AND THE MASTER SERVICER
Advanta Auto Finance Corporation, a Nevada corporation, acts
as the master servicer for the Receivables pool (Advanta Auto Finance
Corporation, in such capacity, the "Master Servicer," and in its individual
capacity, the "Company").
The Master Servicer
The Master Servicer is a wholly-owned subsidiary of Advanta
Mortgage Holding Company and an indirect subsidiary of Advanta Corp. The
Master Servicer was incorporated in Nevada on October 20, 1995. The Master
Servicer purchases and causes to be serviced automobile loans and installment
sale contracts which are originated directly or indirectly by Unaffiliated
Originators, and directly or indirectly by Dealers, and assigned to the Master
Servicer. The Master Servicer's executive offices are located at 500 Office
Center Drive, Suite 400, Fort Washington, Pennsylvania 19034; and its
telephone number is (215) 444-4200.
The Master Servicer will service the Receivables in
accordance with the terms set forth in the Sale and Servicing Agreement. The
Master Servicer may perform its obligations under the Sale and Servicing
Agreement through one or more subservicers subject generally to the prior
written consent of the Insurer. The Master Servicer has entered into a
sub-servicing agreement (the "Sub-servicing Agreement") with Nuvell Financial
Services Corp., which provides for the servicing and administration of the
Receivables. Notwithstanding any such subservicing arrangements, the Master
Servicer will remain liable for its servicing duties and obligations under the
Sale and Servicing Agreement as if the Master Servicer alone were servicing
the Receivables.
Upon the occurrence and continuance of a Master Servicer
Termination Event, the Trust Collateral Agent may, with the prior written
consent of the Insurer (so long as an Insurer Default shall not have occurred
and be continuing) or shall, at the direction of the Insurer (or, if an
Insurer Default shall have occurred and be continuing, at the direction of a
majority of the Noteholders (the "Note Majority")), terminate the Master
Servicer and appoint a successor servicer acceptable to the Insurer or to the
Note Majority, as the case may be. The Insurer may remove the Master Servicer,
and the Master Servicer may resign only in accordance with the terms of the
Sale and Servicing Agreement. No removal or resignation shall become effective
until a successor servicer acceptable to the Insurer shall have assumed the
Master Servicer's responsibilities and obligations in accordance therewith.
See "Description of the Trust Documents -- Master Servicer Termination Event"
herein.
S-21
<PAGE>
The Master Servicer may not delegate its obligations under
the Sale and Servicing Agreement, in whole or in part, to any third party
unless the Master Servicer shall have first obtained the prior written consent
of the Insurer (so long as an Insurer Default shall not have occurred and be
continuing) and the Trust Collateral Agent; provided, however, that any such
third party must meet certain eligibility requirements set forth in the Sale
and Servicing Agreement.
The Notes will not represent an interest in or obligation
of, nor are the Receivables guaranteed by, the Seller, the Master Servicer,
the Company, or any of their affiliates.
The Sub-Servicer
Nuvell Financial Services Corp. ("Nuvell") is a third-party
servicing company which provides servicing for loans, retail installment
contracts and certain types of leases, including subprime motor vehicle
installment sales contracts. Nuvell's corporate offices are located at 17500
Chenal Parkway, Suite 200, Little Rock, Arkansas 72211.
Ability to Terminate Sub-Servicing Agreement
The Sale and Servicing Agreement and the sub-servicing
agreement both permit the Master Servicer to terminate the sub-servicing
agreement with Nuvell and to assume directly the servicing of the Receivables
at any time. Such termination and assumption are subject to the prior consent
of the Insurer (in its sole discretion) but does not require the prior consent
of the Noteholders.
Any such termination of the sub-servicing agreement and
direct assumption of servicing by the Master Servicer would result in what is
commonly referred to as a "servicing transfer." A "servicing transfer" will
result in a transfer of the day-to-day responsibility of posting payments,
collections and loan enforcement from one entity to another. Industry
experience has shown that servicing transfers, however well planned, may
result in a temporary increase in delinquencies and losses, due to system
conversions, changes in personnel and other factors associated with the
transfer.
Delinquency and Default Experience
Because the Company's subprime automobile financing program
began in May, 1996, the Company has limited experience with delinquency and
losses with respect to its Receivables. There can be no assurance that the
levels of delinquency and loss experience reflected in Table 1 and Table 2,
below, are indicative of the performance of the Receivables included in the
Trust.
S-22
<PAGE>
Table 1
DELINQUENCY EXPERIENCE(4)
<TABLE>
<CAPTION>
As of As of As of
December 31, 1996 December 31, 1997 March 31, 1998
-----------------------------------------------------------------------------
Dollar Dollar Dollar
Number of Amount Number of Amount Number of Amount
Loans (000) Loans (000) Loans (000)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Seller Portfolio(1) 10,914 $101,976 22,381 $231,746 21,757 $219,651
Delinquency Percentage:(2)(3)
30-59 Days 10.43% 9.95% 5.36% 4.65% 5.81% 5.82%
60-89 Days 1.29% 1.28% 1.06% 1.05% 1.65% 1.68%
90+ Days 0.02% 0.03% 0.59% 0.62% 1.07% 1.11%
-----------------------------------------------------------------------------
Total Delinquencies 11.74% 11.26% 7.01% 6.32% 8.53% 8.61%
</TABLE>
- ----------
(1) "Total Seller Portfolio" is the net remaining principal balance.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
(3) Includes repossessions in inventory.
(4) The indicated periods of delinquency (30-59, 60-89, and 90+) are based on
the number of days past due on a contractual basis, based on a 30-day
month. No Receivable is considered delinquent for these purposes until the
monthly anniversary of its contractual due date (e.g., a Receivable with a
payment due on January 1 would be considered 31-59 days delinquent if the
January 1 payment has not been received on or prior to February 1).
Table 2
LOSS EXPERIENCE
<TABLE>
<CAPTION>
For the Year Ending For the Year Ending For the Three Months
December 31, 1996 December 31, 1997 Ending March 31, 1998
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
------------------------------------------------------------------------
<S> <C> <C> <C>
Average Receivables Outstanding (1) $ 8,756 $ 140,886 $ 224,098
Gross Charge-offs (2) 14 12,937 6,425
Gross Recoveries (3) 3 2,587 1,564
------------------------------------------------------------------------
Net Charge-offs (4) $ 11 $ 10,350 $ 4,861
Net Charge-offs as a Percentage of
Average Receivables Outstanding (5) 0.13% 7.35% 8.68%
</TABLE>
- ----------
(1) Equals the arithmetic average of the month-end balances.
(2) "Gross Charge-offs" represent the excess of the outstanding loan balance
over net liquidation proceeds, where net liquidation proceeds are the
excess of liquidation proceeds over the sum of repossession, liquidation
and other related expenses.
(3) Includes current post-disposition recoveries on receivables previously
charged off.
(4) "Net Charge-offs" represent "Gross Charge-offs" minus "Recoveries."
(5) March 31, 1998 percentage has been based on annualized net losses.
S-23
<PAGE>
THE INSURER
The following information has been obtained from Financial
Security Assurance Inc. (hereinafter in this section, "Financial Security")
and has not been verified by the Seller or the Underwriter. No representation
or warranty is made by the Seller or the Underwriter with respect thereto.
General
Financial Security is a monoline insurance company
incorporated in 1984 under the laws of the State of New York. Financial
Security is licensed to engage in the financial guaranty insurance business in
all 50 states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities - thereby enhancing the credit rating of those
securities - in consideration for the payment of a premium to the insurer.
Financial Security and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. Financial Security insures both newly issued securities
sold in the primary market and outstanding securities sold in the secondary
market that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly-owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include Fund American Enterprises
Holdings, Inc., U S WEST Capital Corporation and The Tokio Marine and Fire
Insurance Co., Ltd. No shareholder of Holdings is obligated to pay any debt of
Financial Security or any claim under any insurance policy issued by Financial
Security or to make any additional contribution to the capital of Financial
Security.
The principal executive offices of Financial Security are
located at 350 Park Avenue, New York, New York 10022, and its telephone number
at that location is (212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by
Financial Security or any of its domestic operating insurance company
subsidiaries are reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, Financial
Security reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is utilized
by Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
Rating of Claims-Paying Ability
Financial Security's claims-paying ability is rated "Aaa" by
Moody's and "AAA" by S&P, Fitch IBCA, Inc., Japan Rating and Investment
Information, Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies. See "Risk Factors--Ratings on
the Notes" herein.
Capitalization
The following table sets forth the capitalization of
Financial Security and its wholly-owned subsidiaries on the basis of generally
accepted accounting principles as of March 31, 1998 (in thousands):
S-24
<PAGE>
March 31, 1998
----------
(Unaudited)
Deferred Premium Revenue
(net of prepaid reinsurance premiums)........................ $428,157
----------
Shareholder's Equity:
Common Stock............................................. 15,000
Additional Paid-In Capital............................... 618,317
Accumulated other comprehensive income
(net of deferred income taxes)......................... 24,700
Accumulated Earnings..................................... 265,030
----------
Total Shareholder's Equity................................... 923,047
----------
Total Deferred Premium Revenue and Shareholder's Equity...... $1,351,204
==========
For further information concerning Financial Security, see
the Consolidated Financial Statements of Financial Security and Subsidiaries,
and the notes thereto, incorporated by reference herein. Copies of the
statutory quarterly and annual statements filed with the State of New York
Insurance Department by Financial Security are available upon request to the
State of New York Insurance Department.
Insurance Regulation
Financial Security is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York,
Financial Security is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liabilities
for borrowings.
The Policy is not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New York Insurance Law.
DESCRIPTION OF THE NOTES
General
The Notes will be issued pursuant to the terms of the
Indenture, a form of which has been filed as an exhibit to the Registration
Statement. The following summary describes certain terms of the Notes and the
Indenture. The summary does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all the provisions of the Notes
and the Indenture. The following summary supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Notes of any given series and the related Indenture set
forth in the accompanying Prospectus.
The Notes will be offered for purchase in denominations of
$100,000 and integral multiples of $1,000 in excess thereof, in book-entry
form only. Persons acquiring beneficial interests in the Notes will hold their
interests through DTC in the United States or Cedel or Euroclear in Europe.
See "Description of the Securities --Book-Entry Registration" in the
Prospectus and Annex I to the Prospectus.
S-25
<PAGE>
Payments of Interest
Interest on the principal amount of the Class A-1 Notes and
of the Class A-2 Notes outstanding immediately prior to a Distribution Date
will accrue at the applicable Interest Rate from and including the 15th day of
the preceding calendar month (or, in the case of the first Distribution Date,
from and including the Closing Date) to, but excluding, the 15th day of the
calendar month in which such Distribution Date occurs (each such period, an
"Interest Period"). Interest on the Class A-1 Notes and the Class A-2 Notes
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months. Interest on the Notes for any Distribution Date which is due but not
paid on such Distribution Date will be due on the next Distribution Date
together with, to the extent permitted by law, interest on such amount at the
applicable Interest Rate. The amount of interest distributable on the Notes on
each Distribution Date will equal interest accrued during the related Interest
Period, plus any such shortfall amount carried-forward. Interest payments on
the Notes will be made from the Distribution Amount (as defined herein) after
payment of the Servicing Fees (as defined herein) to the Master Servicer and
payment of accrued and unpaid trustees' fees and other administrative fees of
the Trust. See "Description of the Trust Documents -- Distributions" herein.
Payments of Principal
Principal payments will be made to the Noteholders on each
Distribution Date in an amount equal to the Noteholders' Principal
Distributable Amount for the calendar month (the "Monthly Period") preceding
such Distribution Date. The Noteholders' Principal Distributable Amount will
be an amount equal to the sum of (x) the Noteholders' Percentage of the
Principal Distributable Amount and (y) any unpaid portion of the amount
described in clause (x) with respect to a prior Distribution Date. The
"Principal Distributable Amount" with respect to any Distribution Date will be
an amount equal to the sum of the following amounts with respect to the
related Monthly Period: (i) collections on Receivables (other than Liquidated
and Purchased Receivables) allocable to principal, including full and partial
principal prepayments, (ii) the principal balance of all Receivables (other
than Purchased Receivables) that became Liquidated Receivables during the
related Monthly Period, (iii) the portion of the Purchase Amount allocable to
principal of all Receivables that became Purchased Receivables with respect to
the related Monthly Period, (iv) at the option of the Insurer, the outstanding
principal balance of those Receivables that were required to be repurchased by
the Seller and/or the Company during such Monthly Period but were not so
repurchased and (v) the aggregate amount of Cram Down Losses during such
Monthly Period. Principal payments on the Notes will be made from the
Distribution Amount after payment of the Servicing Fee, payment of accrued and
unpaid trustees' fees and other administrative fees of the Trust and
distribution of the Noteholders' Interest Distributable Amount. See
"Description of the Trust Documents -- Distributions" herein.
The Noteholders' Percentage will be approximately 78%, for
each Distribution Date until the Class A-2 Notes have been paid in full and
thereafter will be zero. Principal payments on the Notes will be applied on
each Distribution Date sequentially, to the Class A-1 Notes and the Class A-2
Notes, in that order, so that no principal will be paid on the Class A-2 Notes
until the outstanding principal amount of the Class A-1 Notes has been paid in
full. In addition, the outstanding principal amount of the Notes of any Class,
to the extent not previously paid, will be payable on the respective Final
Scheduled Distribution Date for such Class. The actual date on which the
aggregate outstanding principal amount of any Class of Notes is paid may be
earlier than the Final Scheduled Distribution Date for such Class, depending
on a variety of factors.
Optional Redemption
The Class A-2 Notes, to the extent still outstanding, may be
redeemed in whole, but not in part, on any Distribution Date on which the
Seller or the Master Servicer exercises its option to purchase the Receivables
(with the prior written consent of the Insurer, if a claim has previously been
made under the Policy or if such redemption would result in a claim under the
Policy, or if such redemption would result in any amount owing to the Insurer
remaining unpaid). The Seller or the Master Servicer may purchase the
Receivables when the Pool Balance has declined to 10% or less of the Original
Pool Balance, as described in the accompanying Prospectus under "Description
of the Trust Agreements -- Termination." Such redemption will effect early
retirement of the Notes of such Class. The redemption price will be equal to
the unpaid principal amount of the Notes of such Class, plus accrued and
unpaid interest thereon (the "Redemption Price").
S-26
<PAGE>
Events of Default
Unless an Insurer Default shall have occurred and be
continuing, "Events of Default" under the Indenture will consist of those
events defined in the Insurance Agreement as Insurance Agreement Indenture
Cross Defaults, and will constitute an Event of Default under the Indenture
only if the Insurer shall have delivered to the Indenture Trustee a written
notice specifying that any such Insurance Agreement Indenture Cross Default
constitutes an Event of Default under the Indenture. An "Insurance Agreement
Indenture Cross Default" may result from: (i) a demand for payment under the
Policy; (ii) an Insolvency Event (as defined herein) with respect to the
Seller, the Trust or the Master Servicer; (iii) the Trust becomes taxable as
an association (or publicly traded partnership) taxable as a corporation for
federal or state income tax purposes; (iv) the Notes not being treated as
indebtedness for federal or applicable state income tax purposes and such
characterization having a material adverse effect on the Trust, the
Noteholders or the Insurer; (v) the sum of the Available Funds with respect to
any Distribution Date plus the amount (if any) available from certain
collateral accounts maintained for the benefit of the Insurer is less than the
sum of the amounts described in clauses 1-5 under "Description of the Trust
Documents -- Distributions" herein; and (vi) any failure to observe or perform
in any material respect any other covenants, representation, warranty or
agreements of the Trust in the Indenture, any certificate or other writing
delivered in connection therewith, and such failure continues for 30 days
after written notice of such failure or incorrect representation or warranty
has been given to the Trust and the Indenture Trustee by the Insurer.
Upon the occurrence of an Event of Default, and so long as
an Insurer Default shall not have occurred and be continuing, the Insurer will
have the right, but not the obligation, to cause the Trust Collateral Agent to
liquidate the Trust Property, in whole or in part, on any date or dates
following the acceleration of the Notes due to such Event of Default as the
Insurer, in its sole discretion, shall elect, and to deliver the proceeds of
such liquidation to the Indenture Trustee for distribution in accordance with
the terms of the Indenture. The Insurer may not, however, cause the Trust
Collateral Agent to liquidate the Trust Property, in whole or in part, if the
proceeds of such liquidation would not be sufficient to pay all outstanding
principal and accrued interest on the Notes, unless such Event of Default
arose from a claim being made on the Policy or from certain events of
bankruptcy, insolvency, receivership or liquidation of the Trust or the
Seller. Following the occurrence of any Event of Default, the Indenture
Trustee will continue to submit claims as necessary under the Policy for any
shortfalls in the Scheduled Payments on the Notes, except that the Insurer, in
its sole discretion, may elect to pay all or any portion of the outstanding
amount of the Notes, plus accrued interest thereon. See "The Policy" herein.
DESCRIPTION OF THE TRUST DOCUMENTS
The following summary describes certain terms of the
Purchase Agreement, the Sale and Servicing Agreement, the Indenture and the
Trust Agreement (together, the "Trust Documents"). Forms of the Trust
Documents have been filed as exhibits to the Registration Statement. The
summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, all the provisions of the Trust Documents. The
following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Trust
Documents set forth in the Prospectus.
Sale and Assignment of Receivables
On or prior to the Closing Date, the Company will enter into
a Purchase Agreement with the Seller pursuant to which the Company will, on or
prior to such Closing Date, sell and assign to the Seller, without recourse,
its entire interest in and to the Receivables. Pursuant to the Purchase
Agreement, the Company will agree that, upon the occurrence of a breach of a
representation or warranty under the Trust Documents with respect to any of
the Receivables which causes the Seller to be obligated to repurchase a
Receivable, the Trust will be entitled to require the Company to repurchase
such Receivables from the Trust. Such rights of the Trust under the Purchase
Agreement will constitute part of the property of the Trust and may be
enforced directly by the Owner Trustee and the Insurer. In addition, the Trust
will pledge such rights to the Indenture Trustee as collateral for the Notes
and such rights may be enforced directly by the Indenture Trustee.
On the Closing Date, the Seller will sell and assign to the
Trust, without recourse, the Seller's entire interest in the Receivables and
the proceeds thereof. Each Receivable transferred by the Seller to the Trust
will be identified in a schedule appearing as an exhibit to the Trust
Documents (the "Schedule of Receivables"). The Receivables will be held by the
Trust Collateral Agent.
S-27
<PAGE>
Accounts
The Issuer will establish and maintain with the Trust
Collateral Agent one or more accounts (the "Collection Account"), in the name
of the Trust Collateral Agent on behalf of the Noteholders and the Insurer,
into which all amounts collected with respect to the Receivables will be
transferred. The Collection Account will be maintained with the Trust
Collateral Agent so long as the Trust Collateral Agent's deposits have a
rating acceptable to the Insurer and the Rating Agencies. If the deposits of
the Trust Collateral Agent or its corporate parent no longer have such
acceptable rating, the Master Servicer shall, with the Trust Collateral
Agent's assistance as necessary, cause such Accounts to be moved within 30
days to an Eligible Bank.
The Master Servicer will also establish and maintain an
account, in the name of the Trust Collateral Agent, for the benefit of the
Indenture Trustee, on behalf of the Noteholders, and the Insurer, in which
amounts released from the Collection Account for distribution to Noteholders
will be deposited and from which all distributions to Noteholders will be made
(the "Note Distribution Account"). A separate account, the "Certificate
Distribution Account," will be maintained for the purpose of making
distributions of Certificateholders.
All such Accounts shall be Eligible Deposit Accounts.
Servicing Compensation and Trustees' Fees
The Master Servicer will be entitled to receive the Base
Servicing Fee on each Distribution Date, equal to the product of one-twelfth
times 2.50% of the aggregate principal balance of the Receivables as of the
close of business on the last day of the preceding Monthly Period (the "Base
Servicing Fee"). The Master Servicer will also collect and retain any late
fees, prepayment charges and other administrative fees or similar charges
allowed by applicable law with respect to the Receivables and certain
investment earnings from the Trust Accounts (the "Supplemental Servicing Fees"
and, together with the Base Servicing Fee, the "Servicing Fees"). Payments by
or on behalf of Obligors will be allocated to scheduled payments, late fees
and other charges and principal and interest in accordance with the Master
Servicer's normal practices and procedures.
The Base Servicing Fee will compensate the Master Servicer
for the performance of the functions of a third party servicer of automotive
receivables and as an agent for their beneficial owner, including collecting
and posting all payments, responding to inquiries of Obligors on the
Receivables, investigating delinquencies, reporting tax information to
Obligors, paying costs related to disposition of defaulted accounts, and
policing the collateral. The Base Servicing Fee also will compensate the
Master Servicer for administering the Receivables, including accounting for
collections and furnishing monthly and annual statements to the Issuer and the
Insurer with respect to distributions and generating federal income tax
information. The Base Servicing Fee also will be used to pay for certain
taxes, accounting fees, outside auditor fees, data processing costs and other
costs incurred in connection with administering the Receivables. The Base
Servicing Fee includes any fees required to be paid to a Sub-servicer.
On each Distribution Date, the Indenture Trustee is entitled
to receive a fee for its services as Indenture Trustee and Trust Collateral
Agent during the prior Monthly Period in an amount agreed upon by the
Indenture Trustee and the Master Servicer. On each Distribution Date, the
Owner Trustee is entitled to receive a fee for its services as Owner Trustee
during the prior Monthly Period in an amount agreed upon by the Owner Trustee
and the Master Servicer.
All such fees will be paid from the Collection Account.
Certain Allocations
On each Determination Date the Master Servicer shall cause
to be delivered a certificate (the "Master Servicer's Certificate") to the
Trust Collateral Agent, the Indenture Trustee, the Owner Trustee and the
Insurer specifying, among other things, the amount of aggregate collections on
the Receivables and the aggregate Purchase Amount of Receivables to be
purchased by the Seller, or the Company, all with respect to the preceding
Monthly Period.
Not later than the fourth Business Day prior to each Payment
Date (each such day, a "Deficiency Claim Date"), the Trust Collateral Agent
will, based solely on the information contained in the Master Servicer's
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Certificate delivered on the related Determination Date, deliver to the Trust
Collateral Agent, the Owner Trustee, the Insurer and the Master Servicer a
Deficiency Notice specifying the Deficiency Claim Amount set forth in such
certificate, if any, for such Distribution Date. Such Deficiency Notice will
direct the Trust Collateral Agent to transfer such Deficiency Claim Amount
from amounts on deposit in the Spread Account for deposit in the Collection
Account.
Distributions
On each Distribution Date, the Master Servicer is required
to instruct the Trust Collateral Agent to make the following distributions in
the following order of priority:
1. From the Distribution Amount, to the Master Servicer, the Base
Servicing Fee for the related Monthly Period, any Supplemental
Servicing Fees for such month and certain other amounts relating to
mistaken deposits, postings or checks returned for insufficient
funds to the extent the Master Servicer has not reimbursed itself in
respect of such amount or to the extent not retained by the Master
Servicer.
2. From the Distribution Amount, to the Indenture Trustee and the Owner
Trustee, any accrued and unpaid trustees' fees, and any accrued and
unpaid fees of the Trust Collateral Agent (in each case, to the
extent such fees have not been previously paid by the Master
Servicer).
3. From the Distribution Amount and the related portion of any Policy
Claim Amount, if any, to the Note Distribution Account, the
Noteholders' Interest Distributable Amount.
4. From the Distribution Amount and the related portion of any Policy
Claim Amount, if any, to the Note Distribution Account, the
Noteholders' Principal Distributable Amount, to be distributed as
described under "Description of the Notes -- Payments of Principal."
5. From the Distribution Amount, to the Insurer, any amounts owing to
the Insurer under the Insurance Agreement and not paid.
6. From Available Funds, to the Spread Account, all Available Funds
remaining after the distributions pursuant to clauses 1 through 5
above.
7. From amounts, if any, released from the Spread Account on such
Distribution Date due to an excess of the amount on deposit in the
Spread Account over the Specified Spread Account Requirement, to the
Certificate Distribution Account, the Certificateholders' Interest
Distributable Amount.
8. From amounts (as reduced by the distribution pursuant to clause 7
above), if any released from the Spread Account on such Distribution
Date due to an excess of the amount on deposit in the Spread Account
over the Specified Spread Account Requirement, to the Certificate
Distribution Account the Certificateholders' Principal Distributable
Amount.
9. From amounts (as reduced by the distribution pursuant to clauses 7
and 8 above), if any, released from the Spread Account on such
Distribution Date due to an excess of the amount on deposit in the
Spread Account over the Specified Spread Account Requirement, to the
Seller, or as otherwise specified in the Trust Documents, any
remaining funds.
If the Notes are accelerated following an Event of Default
under the Indenture, amounts collected will be distributed in the order
described above.
In the event that the Master Servicer's Certificate
indicates that the Distribution Amount will be insufficient on any
Distribution Date to cover the distributions required pursuant to clauses 1
through 4 above on such Distribution Date, the Trust Collateral Agent shall
furnish to the Insurer no later than 12:00 noon, New York City time on the
related Draw Date a notice of claim in the amount of the Policy Claim Amount.
Amounts paid by the Insurer pursuant to any such notice of claim shall be
deposited by the Insurer into the Note Distribution Account for payment to
Noteholders on the related Distribution Date.
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For the purposes hereof, the following terms shall have the
following meanings:
"Amount Financed" means, with respect to a Receivable, the
aggregate amount advanced under such Receivable toward the purchase price of
the Financed Vehicle and any related costs, including amounts advanced in
respect of accessories, insurance premiums, service, car club and warranty
contracts, other items customarily financed as part of retail automobile
installment sale contracts or promissory notes, and related costs.
"Available Funds" means, with respect to any Determination
Date, the sum of (i) the Collected Funds for such Determination Date plus (ii)
all Purchase Amounts deposited in the Collection Account during the related
Monthly Period.
"Certificateholders' Interest Distributable Amount" means
the amount as specified in the related Trust Documents.
"Certificateholders' Principal Distributable Amount" means
the amount as specified in the related Trust Documents.
"Collected Funds" means, with respect to any Determination
Date, the amount of funds in the Collection Account representing collections
on the Receivables during the related Monthly Period, including all Net
Liquidation Proceeds collected during the related Monthly Period (but
excluding any Purchase Amounts).
"Cram Down Loss" means, with respect to a Receivable if a
court of appropriate jurisdiction in an insolvency proceeding shall have
issued an order reducing the amount owed on such Receivable or otherwise
modifying or restructuring the scheduled payments to be made on such
Receivable, an amount equal to (i) the excess of the principal balance of such
Receivable immediately prior to such order over the principal balance of such
Receivable as so reduced and/or (ii) if such court shall have issued an order
reducing the effective rate of interest on such Receivable, the net present
value (using as the discount rate the higher of the APR on such Receivable or
the rate of interest, if any, specified by the court in such order) of the
scheduled payments as so modified or restructured. A "Cram Down Loss" shall be
deemed to have occurred on the date of issuance of such order.
"Deficiency Claim Amount" means, with respect to any
Determination Date, the excess, if any, of the sum of the amounts payable on
the related Distribution Date pursuant to clauses 1 through 5 under
"Distributions" over the amount of Available Funds.
"Deficiency Notice" means a written notice delivered by the
Trust Collateral Agent to the Insurer, the Master Servicer and the fiscal
agent, if necessary, specifying the Deficiency Claim Amount for such
Distribution Date.
"Determination Date" means, with respect to any Monthly
Period, the earlier of (i) the fifth Business Day preceding the Distribution
Date in the next calendar month, and (ii) the 8th day of the next calendar
month, or if such 8th day is not a Business Day, the next succeeding Business
Day.
"Distribution Amount" means, with respect to any
Distribution Date the sum of (i) the Available Funds for the immediately
preceding Determination Date plus (ii) the Deficiency Claim Amount, if any,
received by the Trust Collateral Agent with respect to such Distribution Date.
"Draw Date" means, with respect to any Distribution Date,
the third Business Day (as defined in the Policy) immediately preceding such
Distribution Date.
"Liquidated Receivable" means, with respect to any
Determination Date, a Receivable as to which, as of the last day of the
related Monthly Period, (i) such Receivable has been liquidated by the Master
Servicer through the sale of the Financed Vehicles, (ii) 60 days have elapsed
since the Master Servicer repossessed the Financed Vehicle, (iii) proceeds
have been received in respect of such Receivable which, in the Master
Servicer's reasonable judgment, constitute the final amounts recoverable in
respect of such Receivable, (iv) 5% or more of a scheduled payment shall have
become 120 or more days delinquent (or in the case where the related Obligor
has filed for bankruptcy, 5% or more of a scheduled payment shall have become
180 days or more delinquent) except
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in the case of repossessed Financed Vehicles or (v) the Financed Vehicle has
been sold and the proceeds received.
"Net Liquidation Proceeds" means, with respect to Liquidated
Receivables, (i) proceeds from the disposition of the underlying Financed
Vehicle securing the Liquidated Receivables, less the Master Servicer's
reasonable out-of-pocket costs, including repossession and resale expenses not
already deducted from such proceeds, and any amounts required by law to be
remitted to the Obligor, (ii) any insurance proceeds, or (iii) other monies
received from the Obligor or otherwise.
"Noteholders' Distributable Amount" means, with respect to
any Distribution Date, the sum of the Noteholders' Principal Distributable
Amount and the Noteholders' Interest Distributable Amount.
"Noteholders' Interest Carryover Shortfall" means, with
respect to any Distribution Date and a Class of Notes, the excess of the
Noteholders' Interest Distributable Amount for such Class for the preceding
Distribution Date, over the amount in respect of interest that was actually
deposited in the Note Distribution Account with respect to such Class on such
preceding Distribution Date, plus interest on the amount of interest due but
not paid to Noteholders of such Class on the preceding Distribution Date, to
the extent permitted by law, at the Interest Rate borne by such Class of Notes
from such preceding Distribution Date to but excluding the current
Distribution Date.
"Noteholders' Interest Distributable Amount" means, with
respect to any Distribution Date, the sum of the Noteholders' Monthly Interest
Distributable Amount for each Class of Notes for such Distribution Date and
the Noteholders' Interest Carryover Shortfall for each Class of Notes for such
Distribution Date.
"Noteholders' Monthly Interest Distributable Amount" means
(i) with respect to any Distribution Date and the Class A-1 Notes, interest
accrued during the Class A-1 Interest Period at the Interest Rate borne by the
Class A-1 Notes on the outstanding principal amount of such Class immediately
prior to such Distribution Date and (ii) with respect to any Distribution Date
and the Class A-2 Notes, interest accrued during the Class A-2 Interest Period
at the Interest Rate borne by the Class A-2 Notes on the outstanding principal
amount of such Class immediately prior to such Distribution Date.
"Noteholders' Monthly Principal Distributable Amount" means,
with respect to any Distribution Date, the Noteholders' Percentage of the
Principal Distributable Amount.
"Noteholders' Percentage" means (i) for each Distribution
Date until the Distribution Date on which the Class A-2 Notes are paid in
full, approximately 78%, (ii) on the Distribution Date on which the Class A-2
Notes are paid in full, the lesser of (x) approximately 78% and (y) the
percentage necessary to reduce the principal amount on the Class A-2 Notes to
zero, and (iii) for any Distribution Date thereafter, zero.
"Noteholders' Principal Carryover Shortfall" means, as of
the close of any Distribution Date, the excess of the Noteholders' Principal
Distributable Amount and any outstanding Noteholders' Principal Carryover
Shortfall from for the preceding Distribution Date over the amount in respect
of principal that was actually deposited in the Note Distribution Account on
such Distribution Date.
"Noteholders' Principal Distributable Amount" means, with
respect to any Distribution Date (other than the Final Scheduled Distribution
Date for any Class of Notes), the sum of the Noteholders' Monthly Principal
Distributable Amount for such Distribution Date and the Noteholders' Principal
Carryover Shortfall as of the close of the preceding Distribution Date. The
Noteholders' Principal Distributable Amount on the Final Scheduled
Distribution Date for any Class of Notes will equal the sum of (i) the
Noteholders' Monthly Principal Distributable Amount for such Distribution
Date, (ii) the Noteholders' Principal Carryover Shortfall as of the close of
the preceding Distribution Date, and (iii) the excess of the outstanding
principal amount of such Class of Notes, if any, over the amounts described in
the foregoing clauses (i) and (ii).
"Policy Claim Amount" for any Distribution Date, shall equal
the lesser of (i) the sum of the Scheduled Payments on the Notes for such
Distribution Date and (ii) the excess, if any, of (x) the amount required to
be distributed pursuant to clauses 1 through 4 under "Distributions" over (y)
the Distribution Amount with respect to such Distribution Date.
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"Principal Balance" means, with respect to any Receivable,
as of any date, the Amount Financed minus (i) that portion of all amounts
received on or prior to such date and allocable to principal in accordance
with the terms of the Receivable, and (ii) any Cram Down Loss in respect of
such Receivable.
"Principal Distributable Amount" means, with respect to any
Distribution Date, the amount equal to the sum of the following amounts with
respect to the related Monthly Period: (i) collections on Receivables (other
than Liquidated and Purchased Receivables) allocable to principal, including
full and partial principal prepayments, (ii) the principal balance of all
Receivables (other than Purchased Receivables) that became Liquidated
Receivables during the related Monthly Period, (iii) (A) the portion of the
Purchase Amount allocable to principal of all Receivables that became
Purchased Receivables as of the immediately preceding Record Date and (B) at
the option of the Insurer, the outstanding principal balance of those
Receivables that were required to be repurchased by the Seller and/or the
Company during such Monthly Period but were not so repurchased and (iv) the
aggregate amount of Cram Down Losses during such Monthly Period.
"Purchased Receivable" means a Receivable purchased as of
the close of business on the last day of a Monthly Period by the Master
Servicer, the Seller or the Company pursuant to the terms of the Sale and
Servicing Agreement.
Statements to Noteholders
On or prior to each Distribution Date, the Trust Collateral
Agent will be required to forward a statement to the Noteholders provided to
it by the Master Servicer. Such statements will be based on the information in
the related Master Servicer's Certificate setting forth certain information
required under the Trust Documents. Each such statement to be delivered to
Noteholders will include the following information as to the Notes with
respect to such Distribution Date or the period since the previous
Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest
with respect to the Notes;
(ii) the amount of the distribution allocable to principal
with respect to the Notes;
(iii) the amount of the distribution payable pursuant to a
claim on the Policy;
(iv) the aggregate outstanding principal amount for each
Class of Notes, in each case, after giving effect to
all payments reported under (ii) above on such date;
(v) the Noteholders' Interest Carryover Shortfall, the
Noteholders' Principal Carryover Shortfall, if any,
and the change in such amounts from the preceding
statement; and
(vi) the amount of the Servicing Fee paid to the Master
Servicer with respect to the related Monthly Period.
Each amount set forth pursuant to subclauses (i) through
(vi) with respect to the Notes will be expressed as a dollar amount per $1,000
of the initial principal amount of the Notes of each Class, as applicable.
Unless and until Definitive Notes are issued, such reports
will be sent on behalf of the Trust to Cede & Co., as registered holder of the
Notes and the nominee of DTC. See "Reports to Securityholders" and
"Description of the Securities" in the Prospectus.
Within the required period of time after the end of each
calendar year, the Trust Collateral Agent will furnish to each person who at
any time during such calendar year was a Noteholder, a statement as to the
aggregate amounts of interest and principal paid to such Noteholder,
information regarding the amount of servicing compensation received by the
Master Servicer and such other information as the Seller deems reasonably
necessary to enable such Noteholder to prepare its tax returns.
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Master Servicer Termination Event
Any of the following events will constitute a "Master
Servicer Termination Event" under the Sale and Servicing Agreement: (i) any
failure by the Master Servicer to deliver, or cause the Sub-servicer to
deliver, to the Trust Collateral Agent, for distribution to the
Securityholders, any required payment, which failure continues unremedied for
two Business Days (or one Business Day with respect to payment of Purchase
Amounts), or any failure to deliver to the Insurer or the Trust Collateral
Agent, the Master Servicer's Certificate by the related Determination Date;
(ii) any failure by the Master Servicer duly to observe or perform in any
material respect any other covenant or agreement under the Sale and Servicing
Agreement which failure materially and adversely affects the rights of the
related Securityholders (determined without regard to the availability of
funds from the Policy) or the Insurer and which continues unremedied for 60
days after the giving of written notice of such failure (1) to the Master
Servicer by the Insurer or the Trust Collateral Agent, or (2) if an Insurer
Default has occurred and is continuing, to the Master Servicer by Noteholders
evidencing not less than 25% of the principal balance of the Notes; (iii) any
Insolvency Event; (iv) so long as an Insurer Default shall not have occurred
and be continuing an Event of Default under the Insurance Agreement or an
event of default under any other Insurance Agreement relating to any series of
securities shall have occurred; (v) a claim is made under the Policy or (vi)
any representation or warranty shall prove to be incorrect in any material
respect and such incorrectness shall have a material adverse effect on the
interest of the Trust, the Noteholders or the Insurer in the Receivables which
has not been cured within 30 days. An "Insolvency Event" shall mean financial
insolvency, readjustment of debt, marshalling of assets and liabilities, or
similar proceedings with respect to the Master Servicer or, for so long as
Advanta Auto Finance Corporation is the Master Servicer, the Seller indicating
its insolvency or inability to pay its obligations and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations.
"Insurer Default" shall mean the occurrence and continuance of
any of the following events:
(a) the Insurer shall have failed to make a payment required
under the Policy in accordance with its terms;
(b) the Insurer shall have (i) filed a petition or
commenced any case or proceeding under any provision or chapter of
the United States Bankruptcy Code or any other similar federal or
state law relating to insolvency, bankruptcy, rehabilitation,
liquidation or reorganization, (ii) made a general assignment for the
benefit of its creditors, or (iii) had an order for relief entered
against it under the United States Bankruptcy Code or any other
similar federal or state law relating to insolvency, bankruptcy,
rehabilitation, liquidation or reorganization which is final and
nonappealable; or
(c) a court of competent jurisdiction, the New York
Department of Insurance or other competent regulatory authority shall
have entered a final and nonappealable order, judgment or decree (i)
appointing a custodian, trustee, agent or receiver for the Insurer or
for all or any material portion of its property or (ii) authorizing
the taking of possession by a custodian, trustee, agent or receiver
of the Insurer (or the taking of possession of all or any material
portion of the property of the Insurer).
Rights Upon Master Servicer Termination Event
Upon the occurrence and continuance of a Master Servicer
Termination Event, the Trust Collateral Agent may, with the prior written
consent of the Insurer (so long as an Insurer Default shall not have occurred
and be continuing) or shall, at the direction of the Insurer (or, if an
Insurer Default shall have occurred and be continuing, at the direction of the
Note Majority), terminate the Master Servicer and appoint a successor servicer
acceptable to the Insurer or to the Note Majority, as the case may be. The
Insurer may remove the Master Servicer and the Master Servicer may resign only
in accordance with the terms of the Sale and Servicing Agreement. On and after
the time the Master Servicer receives a notice of termination, the Trust
Collateral Agent shall be the successor in all respects to the Master Servicer
in its capacity as servicer of the Receivables under the Sale and Servicing
Agreement. The Trust Collateral Agent shall, if the performance of its duties
under the Sale and Servicing Agreement shall no longer be permissible under
applicable law, appoint a successor servicer acceptable to the Insurer or
petition a court of competent jurisdiction for the appointment of a successor
servicer to act as successor to the outgoing servicer under the Sale and
Servicing Agreement.
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Waiver of Past Defaults
The Insurer, or if an Insurer Default shall have occurred
and be continuing, the Note Majority, may waive certain defaults by the Master
Servicer in the performance of its obligations under the Sale and Servicing
Agreement. No such waiver shall impair the Insurer's or the Noteholders'
rights with respect to subsequent defaults.
Amendment
Notwithstanding anything to the contrary set forth under
"Description of the Trust Agreements --Amendment" in the Prospectus, the Sale
and Servicing Agreement may be amended by the Seller, the Master Servicer and
the Trust with the consent of the Trust Collateral Agent, (which consent may
not be unreasonably withheld) and with the prior written consent of the
Insurer (so long as no Insurer Default has occurred and is continuing), but
without the consent of the Securityholders, to cure any ambiguity, or to
correct or supplement any provision therein which may be inconsistent with any
other provision therein; provided that such action shall not adversely affect
in any material respect the interests of any Securityholder; provided,
further, that if an Insurer Default has occurred and is continuing, such
action shall not materially adversely affect the interests of the Insurer. The
Seller, the Master Servicer and the Trust may also amend the Sale and
Servicing Agreement with the prior written consent of the Insurer, the consent
of the Trust Collateral Agent, the consent of Noteholders holding a majority
of the principal amount of the Notes and the consent of Certificateholders
holding a majority of the principal amount of Certificates outstanding to add,
change or eliminate any other provisions with respect to matters or questions
arising under such Agreement or affecting the rights of the Noteholders or the
Certificateholders; provided that such action will not (i) increase or reduce
in any manner the amount of, or accelerate or delay the timing of, collections
of payments on Receivables or distributions that are required to be made for
the benefit of the Noteholders or Certificateholders or (ii) reduce the
aforesaid percentage of the Noteholders or Certificateholders required to
consent to any such amendment, without, in either case, the consent of the
holders of all Notes and Certificates outstanding; provided, further, that if
an Insurer Default has occurred and is continuing, such action shall not
materially adversely affect the interest of the Insurer. The Seller and Master
Servicer must deliver to the Trust, the Trust Collateral Agent and the Insurer
upon the execution and delivery of the Sale and Servicing Agreement and any
amendment thereto an opinion of counsel, satisfactory to the Trust Collateral
Agent, that all financing statements and continuation statements have been
filed that are necessary to fully protect and preserve the Indenture Trustee's
interest in the Receivables.
CREDIT ENHANCEMENT
The Policy
Concurrently with the issuance of the Securities, the
Insurer will issue the Policy to the Trust Collateral Agent as agent of the
Indenture Trustee for the benefit of the Noteholders. Under the Policy, the
Insurer will unconditionally and irrevocably guarantee the full, complete and
timely payment of the Scheduled Payments. See "The Policy" herein.
Subordination of the Certificates
No distribution of interest will be made to
Certificateholders on any Distribution Date until the Class A-1 Notes and the
Class A-2 Notes have been paid the Noteholders' Interest Distributable Amount
and the Noteholders' Principal Distributable Amount for such Distribution
Date, and the Certificateholders will not receive any distribution on any
Distribution Date unless and until the Noteholders' Distributable Amount has
been deposited in the Note Distribution Account and unless and until the
Spread Account is funded to the level of the Specified Spread Account
Requirement. This subordination is intended to enhance the likelihood of
timely receipt by the Noteholders of the full amount of interest and principal
distributable to them on each Distribution Date and to afford the Noteholders
limited protection against losses in respect of the Receivables.
Spread Account
On the Closing Date, the Seller will establish the Spread
Account with the Trust Collateral Agent for the benefit of the Indenture
Trustee on behalf of the Noteholders and the Insurer pursuant to the Spread
Account Agreement. The Spread Account will not be property of the Trust. On
each Distribution Date, the Trust Collateral
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Agent will be required to deposit additional amounts into the Spread Account
from payments on the Receivables as described under "Description of the Notes --
Distributions." Amounts, if any, on deposit in the Spread Account will be
available to the extent provided in the Spread Account Agreement to fund any
Deficiency Claim Amount otherwise required to be made on a Distribution Date.
The aggregate amount required to be on deposit at any time in the Spread Account
(the "Specified Spread Account Requirement") will be determined in accordance
with the Insurance Agreement and the Spread Account Agreement. The Specified
Spread Account Requirement may increase or decrease over time as a result of
floors, caps and triggers set forth in the Insurance Agreement or the Spread
Account Agreement, even if no withdrawals are made from the Spread Account.
Amounts on deposit in the Spread Account on any Distribution Date (after giving
effect to all distributions made on such Distribution Date) in excess of the
Specified Spread Account Requirement for such Distribution Date will be released
to the Certificateholders and the Seller. Amounts on deposit or to be deposited
in the Spread Account may be distributed to persons other than the Insurer or
the Noteholders without the consent of the Noteholders.
Amounts held from time to time in the Spread Account will
continue to be held for the benefit of the Noteholders and the Insurer.
In addition, the Seller, the Insurer, and the Trust
Collateral Agent may amend or terminate the Spread Account Agreement (and any
provision in the Insurance Agreement relating to the Spread Account) in any
respect (including, without limitation, reducing or eliminating the Specified
Spread Account Requirement and/or reducing or eliminating the funding
requirements of the Spread Account or permitting such funds to be used for the
benefit of persons other than the Noteholders) without the consent of, or
notice to, the Indenture Trustee, the Owner Trustee, or the Noteholders.
Notwithstanding any reduction in or elimination of the funding requirements of
the Spread Account or the depletion thereof, the Insurer will be obligated on
each Distribution Date to fund for the benefit of the Noteholders, the full
amount of each Scheduled Payment otherwise required to be made on such
Distribution Date in accordance with the terms of the Policy. If the Insurer
breaches its obligations, any losses on the Receivables will be borne by such
Noteholders.
The amount required to be on deposit in the Spread Account
may increase or decrease without Noteholders' consent and there can be no
assurance that the amounts on deposit in the Spread Account will reach the
Specified Spread Account Requirement since the Spread Account Agreement may be
amended or terminated by the Insurer without the Noteholders' consent.
Consequently, the Noteholders' should not rely on amounts on deposit in or to
be deposited to the Spread Account in evaluating the likelihood of receiving
repayment of the Notes.
THE POLICY
Simultaneously with the issuance of the Notes, the Insurer
will deliver the Policy to the Trust Collateral Agent as agent for the
Indenture Trustee for the benefit of each Noteholder. Under the Policy, the
Insurer will unconditionally and irrevocably guarantee to the Trust Collateral
Agent for the benefit of each Noteholder the full and complete payment of (i)
Scheduled Payments (as defined below) on the Notes and (ii) the amount of any
Scheduled Payment which subsequently is avoided in whole or in part as a
preference payment under applicable law.
"Scheduled Payments" means payments which are scheduled to
be made on the Notes during the term of the Policy in accordance with the
original terms of the Notes when issued and without regard to any subsequent
amendment or modification of the Notes, the Indenture or the Sale and
Servicing Agreement that has not been consented to by the Insurer, which
"Scheduled Payments" are (i) the Noteholders' Interest Distributable Amount
and (ii) the Noteholders' Principal Distributable Amount, in each case, with
respect to a Distribution Date; Scheduled Payments do not include payments
which become due on an accelerated basis as a result of (a) a default by the
Trust, (b) an election by the Trust to pay principal on an accelerated basis,
(c) the occurrence of an Event of Default under the Indenture or (d) any other
cause, unless the Insurer elects, in its sole discretion, to pay in whole or
in part such principal due upon acceleration, together with any accrued
interest to the date of acceleration. In the event the Insurer does not so
elect, the Policy will continue to guarantee Scheduled Payments due on the
Notes in accordance with its original terms. Scheduled Payments shall not
include (x) any portion of a Noteholders' Interest Distributable Amount due to
Noteholders because the appropriate notice and certificate for payment in
proper form was not timely Received (as defined below) by the Insurer or (y)
any portion of a Noteholders' Interest Distributable Amount due to Noteholders
representing interest on any Noteholders' Interest Carryover Shortfall unless,
in each case, the Insurer elects, in its sole discretion, to pay such amount
in whole or in part. Scheduled Payments shall not include any amounts due in
respect of the Notes attributable to any increase in
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<PAGE>
interest rate, penalty or other sum payable by the Trust by reason of any
default or event of default in respect of the Notes or by reason of any
deterioration of the creditworthiness of the Trust nor shall Scheduled Payments
include, nor shall coverage be provided under the Policy in respect of, any
taxes, withholding or other charge imposed by any governmental authority due in
connection with the payment of any Scheduled Payment to a Noteholder.
Payment of claims on the Policy made in respect of Scheduled
Payments will be made by the Insurer following Receipt by the Insurer of the
appropriate notice for payment on the later to occur of (i) 12:00 noon, New
York City time, on the third Business Day (as defined below) following Receipt
of such notice for payment, and (ii) 12:00 noon, New York City time, on the
date on which such payment was due on the Notes.
If payment of any amount avoided as a preference under
applicable bankruptcy, insolvency, receivership or similar law is required to
be made under the Policy, the Insurer shall cause such payment to be made on
the later of (a) the date when due to be paid pursuant to the Order (as
defined below) or (b) the first to occur of (i) the fourth Business Day
following Receipt by the Insurer from the Trust Collateral Agent of (A) a
certified copy of the order (the "Order") of the court or other governmental
body which exercised jurisdiction to the effect that the Noteholder is
required to return principal or interest paid on the Notes during the term of
the Policy because such payments were avoidable as preference payments under
applicable bankruptcy law, (B) a certificate of the Noteholder that the Order
has been entered and is not subject to any stay and (C) an assignment duly
executed and delivered by the Noteholder, in such form as is reasonably
required by the Insurer and provided to the Noteholder by the Insurer,
irrevocably assigning to the Insurer all rights and claims of the Noteholder
relating to or arising under the Notes against the debtor that made such
preference payment or otherwise with respect to such preference payment, or
(ii) the date of Receipt by the Insurer from the Trust Collateral Agent of the
items referred to in clauses (A), (B) and (C) above if, at least four Business
Days prior to such date of Receipt, the Insurer shall have received written
notice from the Trust Collateral Agent that such items were to be delivered on
such date and such date was specified in such notice. Such payment shall be
disbursed to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order and not to the Trust Collateral Agent or any
Noteholder directly (unless a Noteholder has previously paid such amount to
the receiver, conservator, debtor-in-possession or trustee in bankruptcy named
in the Order, in which case such payment shall be disbursed to the Trust
Collateral Agent for distribution to such Noteholder upon proof of such
payment reasonably satisfactory to the Insurer). In connection with the
foregoing, the Insurer shall have the rights provided in the Sale and
Servicing Agreement.
Other Provisions of the Policy
The terms "Receipt" and "Received" with respect to the
Policy shall mean actual delivery to the Insurer and to its fiscal agent, if
any, prior to 12:00 noon, New York City time, on a Business Day; delivery
either on a day that is not a Business Day or after 12:00 noon, New York City
time, shall be deemed to be Receipt on the next succeeding Business Day. If
any notice or certificate given under the Policy by the Trust Collateral Agent
is not in proper form or is not properly completed, executed or delivered, it
shall be deemed not to have been Received, and the Insurer or its fiscal agent
shall promptly so advise the Trust Collateral Agent, and the Trust Collateral
Agent may submit an amended notice.
Under the Policy, "Business Day" means any day other than
(i) a Saturday or Sunday or (ii) a day on which banking institutions in
Wilmington, Delaware, Minneapolis, Minnesota or the City of New York or any
other location of any successor Master Servicer, successor Owner Trustee or
successor Trust Collateral Agent are authorized or obligated by law, executive
order or governmental decree to be closed.
The Insurer's obligations under the Policy in respect of
Scheduled Payments shall be discharged to the extent funds are transferred to
the Trust Collateral Agent as provided in the Policy whether or not such funds
are properly applied by the Trust Collateral Agent.
The Insurer shall be subrogated to the rights of each
Noteholder to receive payments of principal and interest to the extent of any
payment by the Insurer under the Policy.
Claims under the Policy constitute direct, unsecured and
unsubordinated obligations of the Insurer ranking not less than pari passu
with other unsecured and unsubordinated indebtedness of the Insurer for
borrowed money. Claims against the Insurer under the Policy and claims against
the Insurer under each other financial guaranty insurance policy issued
thereby constitute pari passu claims against the general assets of the
Insurer. The terms of the Policy cannot be modified or altered by any other
agreement or instrument, or by the merger,
S-36
<PAGE>
consolidation or dissolution of the Trust. The Policy may not be canceled or
revoked prior to distribution in full of all Scheduled Payments with respect to
the Notes. The Policy is not covered by the property/casualty insurance security
fund specified in Article 76 of the New York Insurance Law. The Policy is
governed by the laws of the State of New York.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion, when read in conjunction
with the discussion of "Federal Income Tax Consequences" in the Prospectus,
describes certain 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.
The discussion that follows, and the opinions set forth
below of Dewey Ballantine LLP, special tax counsel to the Issuer ("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 interpretations, which could apply retroactively. The opinions of
Tax Counsel are not binding on the courts or the Internal Revenue Service (the
"IRS"). Potential investors should 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.
Characterization of the Notes as Indebtedness. In the
opinion of 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.
Except as described below, interest paid or accrued on a
Note will be treated as ordinary income to the Noteholders and principal
payments on a Note will be treated as a return of capital to the extent of the
Noteholder's basis in the Note allocable thereto. An accrual method taxpayer
will be required to include in income interest on the Notes when earned, even
if not paid, unless it is determined to be uncollectible. It is not
anticipated that the Notes will be issued with original issue discount. See
"Federal Income Tax Consequences --Treatment of the Notes as Indebtedness --
Interest Income on the Notes" in the Prospectus.
Alternative Characterizations of the Notes. Although it is
the opinion of 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 Receivables, all income on such Receivables 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 Trust, the Trust would be treated as a partnership for federal
income tax purposes. As a partnership, the Trust will not be subject to
federal income tax unless treated as a publicly traded partnership taxable as
a corporation. Any such corporate income tax could materially reduce cash
available to make payments on the Notes. Tax Counsel is of the opinion that,
although no transaction closely comparable to that contemplated herein has
been the subject of any Treasury regulation, revenue ruling or judicial
decision and, therefore, is subject to interpretation, the Trust, if treated
as a partnership, will not be treated as a publicly traded partnership taxable
as a corporation. This opinion is based on Tax Counsel's conclusion that the
nature of the income of the Trust exempts it from the rules that certain
publicly traded partnerships are taxable as corporations.
STATE TAX CONSIDERATIONS
Potential Noteholders should consider the state and local
income tax consequences of the purchase, ownership and disposition of the
Notes. State and local income tax laws may differ substantially from the
corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of
S-37
<PAGE>
any state or locality. Therefore, potential Noteholders should consult their own
tax advisors with respect to the various state and local tax consequences of an
investment in the Notes.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and/or Section 4975 of the Code, prohibits a
pension, profit-sharing or other employee benefit plan, as well as individual
retirement accounts and certain types of Keogh Plans (each a "Benefit Plan")
from engaging in certain transactions with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
such Benefit Plan. A violation of these "prohibited transaction" rules may
result in an excise tax or other penalties and liabilities under ERISA and the
Code for such persons. Title I of ERISA also requires that fiduciaries of a
Benefit Plan subject to ERISA make investments that are prudent, diversified
(except if prudent not to do so) and in accordance with governing plan
documents.
Certain transactions involving the Trust might be deemed to
constitute prohibited transactions under ERISA and the Code if assets of the
Trust were deemed to be assets of a Benefit Plan. Under a regulation issued by
the United States Department of Labor (the "Plan Assets Regulation"), the
assets of the Trust 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 Trust and none of the exceptions contained in the Plan Assets
Regulation is applicable. An equity interest is defined under the Plan Assets
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Although there is little guidance on the subject, the Seller
believes that the Notes should be treated as indebtedness without substantial
equity features for purposes of the Plan Assets Regulation. This determination
is based in part upon the traditional debt features of the Notes, including
the reasonable expectation of purchasers of Notes that the Notes will be
repaid when due, as well as the absence of conversion rights, warrants and
other typical equity features. The debt treatment of the Notes for ERISA
purposes could change if the Trust incurred losses. However, even if the Notes
are treated as indebtedness without substantial equity features 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 Trust
or any of its affiliates is or becomes a party in interest or a disqualified
person with respect to such Benefit Plan. In such case, 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 95-60, regarding investments by insurance company
general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 96-23, regarding transactions affected by in-house
asset managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers." Each investor using the 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 by another Department
of Labor Class Exemption.
Employee benefit plans that are governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA) are not subject to ERISA requirements, however, such
plans may be subject to comparable state law restrictions.
A plan fiduciary considering the purchase of Notes should
consult its tax and/or legal advisors regarding whether the assets of the
Trust would be considered plan assets, the possibility of exemptive relief
from the prohibited transaction rules and other issues and their potential
consequences.
RATINGS
It is a condition to issuance that the Class A-1 Notes and
the Class A-2 Notes be rated AAA by S&P and Aaa by Moody's. A security rating
is not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time. The ratings of Rating Agencies assigned to
the Notes addresses the likelihood of the receipt by the Noteholders of all
distributions to which such Noteholders are entitled. The ratings do not
address the timely or ultimate payment of any withholding tax imposed. The
ratings assigned to the Notes do not represent any assessment of the
likelihood that principal prepayments might differ from those originally
anticipated or address the possibility that Noteholders might suffer a lower
than anticipated yield. The ratings by the Rating Agencies of the Notes will
be based on the Policy. There is no assurance that the ratings initially
assigned to the Notes will not subsequently be lowered or withdrawn by the
Rating Agencies.
S-38
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the
Underwriting Agreement, the Seller has agreed to cause the Trust to sell the
Notes to Salomon Brothers Inc (the "Underwriter"), and the Underwriter has
agreed to purchase the Notes.
The Underwriting Agreement provides that the obligations of
the Underwriter is subject to certain conditions precedent and that the
Underwriter will be obligated to purchase all the Notes, if any are purchased.
Distribution of the Notes may be made by the Underwriter
from time to time in one or more negotiated transactions, or otherwise, at
varying prices to be determined at the time of sale. The Underwriter may
effect such transactions by selling the Notes to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the sale
of the Notes, the Underwriter may be deemed to have received compensation from
the Seller in the form of underwriting compensation. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the Notes
may be deemed to be underwriters and any commissions received by them and any
profit on the resale of the Notes positioned by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended (the "Securities Act").
If the Underwriter creates a short position in the Notes in
connection with the offering, i.e., if the Underwriter sells more Notes than
are set forth on the cover page of this Prospectus Supplement, the Underwriter
may reduce that short position by purchasing Notes in the open market.
In general, purchases of a security to reduce a short
position could cause the price of the security to be higher than it might be
in the absence of such purchases.
Neither the Seller nor the Underwriter makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above, if engaged in, may have on the prices
of the Notes. In addition, neither the Seller not the Underwriter makes any
representation that the Underwriter will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Notes are a new issue of securities with no established
trading market. The Underwriter has advised the Seller that it intends to act
as market makers for the Notes. However, the Underwriter is not obligated to
do so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of any trading market for the
Notes.
The Seller has agreed to indemnify the Underwriter against
certain liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriter may be required to make in
respect thereof. The Commission is of the opinion that indemnification for any
securities law violation is contrary to the public policy expressed in the
federal securities laws, and consequently, that such indemnification
provisions are unenforceable.
The Seller has also agreed to reimburse the Underwriter for
certain of the Underwriter's expenses in connection with the offering.
The Underwriter has represented and agreed that (i) it has
not offered or sold and, prior to the expiration of the period of six months
from the Closing Date, will not offer or sell any Notes to persons in the
United Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulation 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Notes in, from or otherwise involving the United
Kingdom; and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
Issue of the Notes to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995, or is a person to whom such document may otherwise lawfully be issued or
passed on.
S-39
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Notes in Canada is being made only
on a private placement basis exempt from the requirement that the Seller
prepare and file a prospectus with the securities regulatory authorities in
each province where trades of the Notes are effected. Accordingly, any resale
of the Notes in Canada must be made in accordance with applicable securities
laws which will vary depending on the relevant jurisdiction, and which may
require resales to be made in accordance with available statutory exemptions
or pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the Notes.
Representations of Purchasers
Each purchaser of a Note in Canada who receives a purchase
confirmation will be deemed to represent to the Seller and the dealer from
whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such Note
without the benefit of a prospectus qualified under such securities laws, (ii)
where required by law, that such purchaser is purchasing as principal and not
as agent and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
Notice to British Columbia Residents
A purchaser of a Note to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Notes acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR # 88/5, a copy of which may be obtained from the Seller. Only one
such report must be filed in respect of the Notes acquired on the same date
and under the same prospectus exemption.
EXPERTS
The consolidated balance sheets of the Insurer and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each
of the three years in the period ended December 31, 1997, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand, L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL OPINIONS
Certain legal matters relating to the validity of the
issuance of the Notes will be passed upon for the Seller and the Underwriter
by Dewey Ballantine LLP, New York, New York.
S-40
<PAGE>
INDEX OF DEFINED TERMS
Page
----
ABS....................................................................S-13
ABS Table..............................................................S-13
Actuarial Receivable...................................................S-17
Advanta Corp...........................................................S-21
Aggregate risks........................................................S-25
Amount Financed........................................................S-30
APR.....................................................................S-6
Available Funds........................................................S-30
Base Servicing Fee.....................................................S-28
Benefit Plan............................................................S-9
Business Day............................................................S-6
Cedel...................................................................S-1
Certificate Distribution Account.......................................S-28
Certificateholders' Interest Distributable Amount......................S-30
Certificateholders' Principal Distributable Amount.....................S-30
Certificates............................................................S-1
Class A-1 Note Interest Rate............................................S-6
Class A-1 Notes.........................................................S-1
Class A-2 Note Interest Rate............................................S-6
Class A-2 Notes.........................................................S-1
Code...................................................................S-37
Collateral Agent........................................................S-4
Collected Funds........................................................S-30
Collection Account.....................................................S-28
Commission..............................................................S-2
Company............................................................S-2, S-4
Cram Down Loss.........................................................S-30
Cut-Off Date............................................................S-1
Dealer Agreements......................................................S-16
Dealers................................................................S-16
Deficiency Claim Amount................................................S-30
Deficiency Claim Date..................................................S-28
Deficiency Notice......................................................S-30
Determination Date.....................................................S-30
Distribution Amount....................................................S-30
Distribution Date.......................................................S-6
Draw Date..............................................................S-30
DTC.....................................................................S-1
Equity Interest........................................................S-38
ERISA..................................................................S-38
Euroclear...............................................................S-1
Events of Default......................................................S-27
Exchange Act............................................................S-2
Financed Vehicles.................................................S-1, S-11
Financial Security.....................................................S-24
Fleet..................................................................S-21
Flow Purchase Agreements...............................................S-16
Holdings..........................................................S-3, S-24
Indenture..........................................................S-1, S-5
Indenture Trustee..................................................S-1, S-4
Insolvency Event.......................................................S-33
Insurance Agreement.....................................................S-8
S-41
<PAGE>
Insurance Agreement Indenture Cross Default............................S-27
Insurer............................................................S-2, S-4
Insurer Default........................................................S-33
Interest Period...................................................S-6, S-26
Interest Rate...........................................................S-6
Issuer..................................................................S-4
Liquidated Receivable..................................................S-30
Master Servicer.........................................................S-4
Master Servicer Termination Event......................................S-21
Master Servicer's Certificate..........................................S-28
Monthly Period..........................................................S-7
Moody's.................................................................S-9
Net Liquidation Proceeds...............................................S-31
Note Distribution Account..............................................S-28
Note Majority..........................................................S-21
Noteholders.............................................................S-6
Noteholders' Distributable Amount......................................S-31
Noteholders' Interest Carryover Shortfall..............................S-31
Noteholders' Interest Distributable Amount.............................S-31
Noteholders' Monthly Interest Distributable Amount.....................S-31
Noteholders' Monthly Principal Distributable Amount....................S-31
Noteholders' Percentage................................................S-31
Noteholders' Principal Carryover Shortfall.............................S-31
Noteholders' Principal Distributable Amount............................S-31
Notes...................................................................S-1
Nuvell.................................................................S-22
Obligor.................................................................S-5
Order..................................................................S-36
Original Pool Balance...................................................S-8
Owner Trustee...........................................................S-1
Payment Date............................................................S-6
Plan Assets Regulation.................................................S-38
Policy.............................................................S-1, S-8
Policy Claim Amount....................................................S-31
Pool Balance...........................................................S-12
Pool Purchase Agreements...............................................S-16
Pre-Computed Receivables...............................................S-17
Principal Balance......................................................S-32
Principal Distributable Amount....................................S-7, S-32
PTCE...................................................................S-38
Purchase Agreement......................................................S-5
Purchase Amount.........................................................S-7
Purchased Receivable...................................................S-32
Rating Agencies.........................................................S-9
Receipt................................................................S-36
Receivables.............................................................S-1
Receivables Files......................................................S-12
Received...............................................................S-36
Record Date.............................................................S-6
Redemption Price.......................................................S-26
Rule of 78's...........................................................S-17
Rule of 78's Receivable................................................S-17
S&P.....................................................................S-9
Sale and Servicing Agreement............................................S-5
Schedule of Receivables................................................S-27
Scheduled Payments.....................................................S-35
Securities..............................................................S-1
Securities Act....................................................S-2, S-39
Seller..................................................................S-1
Servicing Fees.........................................................S-28
Simple Interest Receivable.............................................S-17
S-42
<PAGE>
Single risks...........................................................S-25
Specified Spread Account Requirement...................................S-35
Spread Account..........................................................S-8
Spread Account Agreement................................................S-9
Supplemental Servicing Fees............................................S-28
Tax Counsel............................................................S-37
Tender Offer...........................................................S-21
Transaction............................................................S-21
Trust..............................................................S-1, S-4
Trust Agreement.........................................................S-4
Trust Collateral Agent.............................................S-1, S-4
Trust Documents........................................................S-27
Trust Property..........................................................S-5
Unaffiliated Originator Agreements.....................................S-16
Unaffiliated Originators...............................................S-16
Underwriter............................................................S-39
S-43
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<PAGE>
PROSPECTUS
AUTO RECEIVABLES BACKED SECURITIES ISSUABLE IN SERIES
ADVANTA AUTO FINANCE CORPORATION
This Prospectus describes certain Auto Receivables Backed Notes (the
'Notes') and Auto Receivables 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 Company, a Transferor, or by a trust to be formed by the Company
or a Transferor for the purpose of issuing one or more series of such Securities
(each, a 'Trust'). The Company, a Transferor or a Trust, as appropriate, issuing
Securities as described in this Prospectus and the related Prospectus Supplement
is referred to herein as the 'Issuer.'
Capitalized terms used herein are defined terms having specific meanings. An
'Index of Defined Terms' is set forth at page 61 hereto, which indicates the
page on which such defined terms are defined.
Each class of Securities of any series will evidence beneficial ownership in
a segregated pool of assets (the 'Trust Property') (such Securities,
'Certificates') or will represent indebtedness of the Issuer secured by the
Trust Property (such Securities, 'Notes'), as described under 'Description of
the Securities' herein and in the related Prospectus Supplement. The Trust
Property may consist of any combination of retail installment sales contracts
between manufacturers, dealers or certain other originators and retail
purchasers secured by new and used automobiles and light duty trucks financed
thereby, together with all monies received relating thereto (the 'Contracts').
The Trust Property may also include a security interest in the underlying new
and used automobiles and light duty trucks and property relating thereto,
together with the proceeds thereof (the 'Vehicles' together with the Contracts,
the 'Receivables'). If and to the extent specified in the related Prospectus
Supplement, credit enhancement with respect to the Trust Property 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 Agreements--Credit and
Cash Flow Enhancement.' The Receivables in the Trust Property for a series will
have been originated or purchased by the Company. The Receivables included in a
Trust Fund will be serviced by a servicer (the 'Servicer') described in the
related Prospectus Supplement.
Each series of Securities may 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, order or 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
Receivables, 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 of Receivables) on
the related Receivables. A rate of payment lower or higher than that anticipated
may affect the weighted average life of each Class of Securities in the manner
described under 'Description of the Securities' herein and in the related
Prospectus Supplement.
It is not expected that any Securities described herein will be listed on
any securities exchange. Such lack of exchange listing is likely to result in a
relatively illiquid market for the Securities. It is, however, further expected
that the underwriter(s) of each series of Securities will make a market for such
Securities for so long as they remain outstanding, although such underwriter(s)
will have no obligation to the Company or the related Securityholders so to make
a market.
------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER 'RISK FACTORS'
ON PAGE 14 HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
THE NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT
REPRESENT OBLIGATIONS OF THE COMPANY, ANY SERVICER 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 OFTHE
COMPANY, ANY TRANSFEROR, ANY SERVICER 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 COMPANY, ANY
SERVICER, ANY TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH
IN THE RELATED PROSPECTUS SUPPLEMENT. SEE ALSO 'RISK FACTORS' PAGE 16.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
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 of any series, and
there can be no assurance that a secondary market for the Securities will
develop, or if it does develop, it will continue.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of Securities unless accompanied by a Prospectus Supplement.
------------------------
The date of this Prospectus is March 24, 1997.
<PAGE>
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 Receivables 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 of
Receivables or all or part of the related Securities; (iv) the specified
interest, if any, of each Class of Securities in, and manner and priority of,
the distributions from the Trust Property; (v) information as to the nature and
extent of subordination with respect to such series of Securities, if any; (vi)
the payment date to Securityholders; (vii) information regarding the Servicer(s)
for the related Receivables; (viii) the circumstances, if any, under which the
Trust Property 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 Company 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 maintains a Web site that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the Commission. The address for such Web site is: http://www.sec.gov.
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 Company with respect to the
Registration Statement, either on its own behalf or on behalf of an Issuer,
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 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.
REPORTS TO SECURITYHOLDERS
So long as the Securities are in book-entry form, monthly and annual
reports concerning the related Securities and the related Issuer will be sent by
the Trustee to Cede & Co., as the nominee of DTC and as registered holder of the
Securities pursuant to the related Trust Agreement. DTC will supply such reports
to Securityholders in accordance with its procedures. If such Securities are not
in book-entry form, the Securityholders will receive such reports directly from
the related Trustee, rather than indirectly from DTC. In connection with their
distribution on each Payment Date, the related Securityholders will receive a
statement containing the following
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information, at a minimum: the amount of such distribution relating to interest,
the amount of such distribution relating to principal, the Pool Factor, the
interest rate (for variable rate Securities) and delinquency information with
respect to the related Receivables. To the extent required by the Securities
Exchange Act of 1934, as amended, the related Issuer will provide financial
information to the Securityholders which has been examined and reported upon,
with an opinion expressed by, an independent public accountant; to the extent
not so required, such financial information will be unaudited. The Company has
determined that the financial statements of no entity other than the Security
Insurer are material to the offering made hereby. Each Issuer will be formed to
own the Receivables, hold and administer the Pre-Funding Account, to issue the
Securities and to acquire the Subsequent Receivables, if available. Each Issuer
will have no assets or obligations prior to issuance of the Securities and will
engage in no activities other than the holding of the related Trust Property and
the issuance of the related Securities. Accordingly, no financial statements
with respect to the related Issuer will be included in the related Prospectus
Supplement. The audited financial statements of the Security Insurer will be set
forth in (or incorporated by reference in) the related Prospectus Supplement,
and the unaudited interim financial statements of the Security Insurer will be
set forth in (or incorporated by reference in) the related Prospectus
Supplement. The Company intends to discontinue filing periodic reports at the
beginning of the company's next fiscal year, to the extent permitted by Section
15(d) of the Exchange Act.
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<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used in the summary
are defined elsewhere in the Prospectus on the pages indicated in the 'Index of
Terms,' which appears on page 61 hereof.
Issuer.............. With respect to each series of Securities, either
the Company, a special-purpose finance subsidiary
of the Company which may be organized and
established by the Company with respect to the
Trust Property (each such special-purpose
finance subsidiary, a 'Transferor') or a trust
(each, a 'Trust') to be formed by the Company.
For purposes of this Prospectus, the term
'Company' includes the term 'Transferor'. The
Company, a Transferor or a 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.'
Company............. Advanta Auto Finance Corporation ('Advanta' or,
the 'Company'), a Nevada corporation. The
Receivables will be either (i) originated by
various dealers, which may or may not be
affiliated with one or more manufacturers of
vehicles ('Dealers', and together with such
manufacturers, 'Vendors') or (ii) acquired by
the Company from other originators or owners of
Receivables. The Company's origination business
is one of 'indirect' originations (i.e.,
originations through the Company's network of
unaffiliated originators) rather than 'direct'
originations (in which prospective borrowers,
having decided to purchase a specific Vehicle,
approach the Company directly (or are contacted
directly by the Company, as through a mail
solicitation or telemarketing effort) rather
than through a dealer or a broker). The Company
is not affiliated with any dealers. The
Company's principal executive offices are
located at 300 Welsh Road, Suite 400, Horsham,
Pennsylvania 19044, and its telephone number is
(215) 283-4200. See 'The Company and the
Servicer.'
Servicer............ Advanta Auto Finance Corporation ('Advanta' or, in
its capacity as the servicer, the 'Servicer') or
its designee, as described in the related
Prospectus Supplement. See "Advanta's Automobile
Financing Program--Servicing and Collections."
Trustee............. The Trustee for each series of Securities 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 and the Investment Company Act of 1940.
The Securities...... Each Class of Securities of any series will either
evidence beneficial ownership in a segregated pool
of assets (the 'Trust Property') (such
Securities, 'Certificates') or will represent
indebtedness of the Issuer secured by the Trust
Property (such Securities, 'Notes'), as
described under 'Description of the Securities'
herein and in the related Prospectus Supplement.
The Trust Property may consist of any
combination of retail installment sales
contracts between manufacturers, dealers or
certain other originators and retail purchasers
secured by new and used automobiles and light
duty trucks financed thereby, together with all
monies received relating thereto (the
'Contracts'). The Trust Property also may
include a security interest in the underlying
new and used automobiles and light duty
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<PAGE>
trucks and property relating thereto, together with
the proceeds thereof (the 'Vehicles' and together
with the Contracts, the 'Receivables').
The Trust Property will include Receivables with
respect to which the related Contract or the
related Vehicles is subject to federal or state
registration or titling requirements.
If and to the extent specified in the related
Prospectus Supplement, credit enhancement with
respect to the Trust Property 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. The
Company will originate Receivables or acquire
Receivables from one or more originators on or
prior to the date of issuance of the related
Securities, as described under 'Advanta's
Automobile Financing Program' herein and in the
related Prospectus Supplement.
With respect to Securities issued by a Trust, each
Trust will be established pursuant to an
agreement (each, a 'Pooling Agreement') by and
between the Company and the Trustee named
therein. Each Pooling Agreement will describe
the related pool of Receivables held by the
Trust.
With respect to Securities that represent debt
issued by the Issuer, the Issuer will enter into
an indenture (each, an 'Indenture') by and
between the Issuer and the trustee named on such
Indenture (the 'Indenture Trustee'). Each
Indenture will describe the related pool of
Receivables comprising the Trust Property and
securing the debt issued by the related Issuer.
The Receivables comprising the Trust Property will
be serviced by the Servicer pursuant to a
servicing agreement (each, a 'Servicing
Agreement') by and between the Servicer and the
related Issuer.
In the case of the Trust Property of any class of
Securities, the contractual arrangements
relating to the establishment of a Trust, if
any, the servicing of the related Receivables
and the issuance of the related Securities may
be contained in a single agreement, or in
several agreements which combine certain aspects
of the Pooling Agreement, the Servicing
Agreement and the Indenture described above (for
example, a pooling and servicing agreement, or a
servicing and collateral management agreement).
For purposes of this Prospectus, the term 'Trust
Agreement' as used with respect to Trust
Property 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. The term
'Trustee' means any and all persons acting as a
trustee pursuant to a Trust Agreement.
Securities Will Be Non-Recourse.
The Securities will not be obligations, either
recourse or non-recourse (except for certain
non-recourse debt described under 'Federal
Income Tax Consequences'), of the Company, the
related Servicer 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 Issuer only
and do not represent interests in or obligations
of the Company, the related Servicer or any of
their respective affiliates other than the
related Issuer. In the case of Securities that
represent beneficial
5
<PAGE>
ownership interest in the related Issuer, such
Securities will represent the beneficial
ownership interests in such Issuer and the sole
source of payment will be the assets of such
Issuer. In the case of Securities that represent
debt issued by the related Issuer, such
Securities will be secured by assets in the
related Trust Property. 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.
Additionally, except to the extent provided in the
related Prospectus Supplement, 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 Receivables held by the
related Trust or debt secured by certain assets
of the related Issuer.
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 pool of Receivables. 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.
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<PAGE>
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 Agreement 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 its paying
agent will fix the identity of the Securi-
tyholders 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 tenth, twelfth, fifteenth or
twenty-fifth day of each month (or, in the case
of quarterly-pay Securities, the tenth, twelfth,
fifteenth or twenty-fifth day of every third
month; and in the case of semi-annual pay
Securities, the tenth, twelfth, 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 Agreement will describe a period (each,
a 'Remittance 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
Trust Property during a Remittance Period will
be required to be remitted by the Servicer to
the related 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 Agreement 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 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. Such events which may
result in an early amortization event will
generally consist of (i) the Company's inability
to deliver sufficient, additional Receivables to
maintain the revolving period, (ii) an event of
default by the Company or the Servicer (i.e.,
the Company's or the Servicer's failure to
perform their respective duties under the
related Trust Agreement) and (iii) the
occurrence of a bankruptcy event with respect to
the Company or the Servicer.
In addition, and as may be described in the
related Prospectus Supplement, the related Trust
Agreement 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 to Securityholders.
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<PAGE>
Such retention and temporary investment by the
Trustee of such collected payments may be
required by the related Trust Agreement for the
purpose of (a) slowing the amortization rate of
the related Securities relative to the
installment 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 Company, the related
Servicer, any Trustee, or any of their
affiliates.
No Investment
Companies......... Neither the Company nor any Trust will register as
an 'investment company' under the Investment
Company Act of 1940, as amended (the 'Investment
Company Act').
Risk Factors........ There are material risks associated with an
investment in the Securities offered hereby;
prospective Securityholders should read 'Risk
Factors' herein, as well as the 'Risk Factors'
section of the related Prospectus Supplement.
Securities will not
be listed on any
Exchange.......... It is not expected that any Securities described
herein will be listed on any securities exchange.
Such lack of exchange listing is likely
to result in a relatively illiquid market for
the Securities. It is, however, further expected
that the underwriter(s) of each series of
Securities will make a market for such
Securities for so long as they remain
outstanding, although such underwriter(s) will
have no obligation to the Company or the related
Securityholders so to make a market.
See 'Risk Factors--Limited Liquidity' herein.
The Residual
Interest.......... With respect to each Trust, the 'Residual
Interest' at any time represents the rights to the
related Trust Property in excess of the
Securityholders' interest of all series then
outstanding that were issued by such Trust. The
Residual Interest in any Trust Property will
fluctuate as the aggregate Pool Balance of such
Trust Fund changes from time to time. A portion
of the Residual Interest in any Trust may be
sold separately in one or more public or private
transactions.
Master Trusts;
Issuance of
Additional
Series............ As may be described in the related Prospectus
Supplement, the Company may cause one or more of
the Trusts (such a Trust, a 'Master Trust') to
issue additional series of Securities from time
to time. Under each Trust Agreement relating to
a Master Trust (each, a 'Master Trust
Agreement'), the Company may determine the terms
of any such new series. See 'Description of the
Securities--Master Trusts.'
The Company may cause the related Trustee to offer
any such new series to the public or other
investors, in transactions either registered
under the Securities Act or exempt from
registration thereunder, directly or through one
or more underwriters or placement agents, in
fixed-price offerings or in negotiated
transactions or otherwise.
A new series to be issued by a Master Trust which
has a series outstanding may, only be issued
upon satisfaction of the conditions described
herein
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<PAGE>
under 'Description of the Securities--Master
Trusts'. Securities secured by Receivables held
by a Master Trust shall be entitled to moneys
received relating to such Receivables on a equal
priority basis with other Securities issued
pursuant to the other Trust Agreements by such
Master Trust.
Cross-Collateraliza-
tion............... As described in the related Trust Agreement and
the related Prospectus Supplement, the source of
payment for Securities of each series will be
the assets of the related Trust Property only.
However, as may be described in the related
Prospectus Supplement, a series or class of
Securities may include the right to receive
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 may
be applied to the payment of Securities issued
by any other Trust (except to the limited extent
that certain collections in excess of the
amounts needed to pay the related Securities may
be deposited in a common master reserve account or
an overcollateralization account that provides
credit enhancement for more than one series of
Securities issued pursuant to the related Trust
Agreement).
Trust Property...... As specified in the related Prospectus Supplement,
the Trust Property will consist of the related
Contracts, and may include a security interest
in the related Vehicles. If and to the extent
specified in the related Prospectus Supplement,
credit enhancement with respect to Trust
Property 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 Agreement--Credit and Cash Flow
Enhancement.' The Contracts are obligations for
the purchase of the Vehicles, or evidence
borrowings used to acquire the Vehicles. As
specified in the related Prospectus Supplement,
the Contracts may consist of Rule of 78s
Contracts, or Simple Interest Contracts.
Generally, 'Rule of 78s Contracts' provide for
fixed level monthly payments which will amortize
the full amount of the Contract over its term.
The Rule of 78s Contracts provide for allocation
of payments according to the 'sum of periodic
balances' or 'sum of monthly payments' method
(the 'Rule of 78s'). Each Rule of 78s Contract
provides for the payment by the Obligor of a
specified total amount of payments, payable in
monthly installments on the related due date,
which total represents the principal amount
financed and finance charges in an amount
calculated on the basis of a stated annual
percentage rate ('APR') for the term of such
Contract. The rate at which such amount of
finance charges is earned and, correspondingly,
the amount of each fixed monthly payment
allocated to reduction of the outstanding
principal balance of the related Contract are
calculated in accordance with the Rule of 78s.
Under the Rule of 78s, the portion of each
payment allocable to interest is higher during
the early months of the term of a Contract and
lower during later months than that under a
constant yield method for allocating payments
between interest and principal.
Notwithstanding the foregoing, as specified in the
related Prospectus Supplement, all payments
received by the related Servicer on or in respect
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of the Rule of 78s Contracts may be allocated on an
actuarial or simple interest basis.
'Simple Interest Contracts' provide for the
amortization of the amount financed under the
receivable over a series of fixed level monthly
payments. However, unlike the monthly payment
under Rule of 78s Contracts, each monthly
payment consists of an installment of interest
which is calculated on the basis of the out-
standing principal balance of the receivable
multiplied by the stated APR and further
multiplied by the period elapsed (as a fraction
of a calendar year) since the preceding payment of
interest was made. As payments are received under a
Simple Interest Contract, the amount received is
applied first to interest accrued to the date of
payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if an
Obligor pays a fixed monthly installment before
its scheduled due date, the portion of the
payment allocable to interest for the period
since the preceding payment was made will be
less than it would have been had the payment
been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal
balance will be correspondingly greater.
Conversely, if an Obligor pays a fixed monthly
installment after its scheduled due date, the
portion of the payment allocable to interest for
the period since the preceding payment was made
will be greater than it would have been had the
payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid
principal balance will be correspondingly less.
In either case, the Obligor pays a fixed monthly
installment until the final scheduled payment
date, at which time the amount of the final
installment is increased or decreased as
necessary to repay the then outstanding
principal balance.
If an Obligor elects to prepay a Rule of 78s
Contract in full, it is entitled to a rebate of
the portion of the outstanding balance then due
and payable attributable to unearned finance
charges. If a Simple Interest Contract is
prepaid, rather than receive a rebate, the
Obligor is required to pay interest only to the
date of prepayment. The amount of a rebate under
a Rule of 78s Contract calculated in accordance
with the Rule of 78s will always be less than
had such rebate been calculated on an actuarial
basis and generally will be less than the
remaining scheduled payments of interest that
would be due under a Simple Interest Contract
for which all payments were made on schedule.
Distributions to Securityholders may not be
affected by Rule of 78s rebates under the Rule
of 78s Contracts because pursuant to the related
Prospectus Supplement such distributions may be
determined using the actuarial or simple
interest method.
The related Prospectus Supplement will further
describe the type and characteristics of the
Contracts included in the Trust Property
relating to the Securities offered pursuant to
this Prospectus and the related Prospectus
Supplement.
The Company will either transfer Receivables to a
Trust pursuant to a Pooling Agreement or pledge
the Company's right, title and interest in and
to such Receivables to a Trustee on behalf of
Securityholders pursuant to an Indenture. The
obligations of the Company, the Servicer, the
related Trustee and the related Indenture
Trustee, if any, under the related Trust
Agreement include those specified below and in
the related Prospectus Supplement.
In addition, if so specified in the related
Prospectus Supplement, the Trust Property will
include monies on deposit in a Pre-Funding
Account (the 'Pre-Funding Account') to be
established with the Trustee, which will be
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used to acquire Additional Receivables from time
to time during the 'Pre-Funding Period' specified
in the related Prospectus Supplement. The
Pre-Funding Account, if any, will be reduced
during the related Pre-Funding Period by the
amount thereof used to purchase Additional
Receivables. Any amount remaining in the
Pre-Funding Account at the end of the related
Pre-Funding Period will be distributed to the
related Securityholders, pro rata, on the
Payment Date immediately following the end of
the Pre-Funding Period.
If and to the extent provided in the related
Prospectus Supplement, the Company will be
obligated (subject only to the availability
thereof) to either transfer to a Trust or pledge
to a 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.
Special Payment
Features.......... The Receivables may contain the following special
payment features:
'Balloon' Payments: In a 'balloon' payment
Receivable, the final scheduled payment may be
substantially higher than the preceding
scheduled payments. Such balloon payment
Receivables may have a higher risk of loss than
Receivables that do not contain such a feature,
as borrowers may have difficulty in paying (or
refinancing) the large final payment.
Adjustable Rate Receivables: Certain of the
Receivables may calculate interest on an
adjustable rate basis (an index such as Prime or
LIBOR) rather than on a fixed rate basis. Such
Receivables may be subject to minimum ('floors')
and maximum ('caps') rates of interest. Such
adjustable rate Receivables may have higher risk
of loss than do Receivables with a fixed rate of
interest, as borrowers may have difficulty
paying the higher monthly payments which result
from an increase in rates.
'Pay for Performance' Program: The Company may
offer loans in which the interest rate may
decrease if the borrower maintains a steady
history of timely payment over a specified
period of time. Any such decrease in rate,
although generally indicative of good
performance, may result in decreased cash
received by the related Issuer.
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 Trust Property 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.
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 Agreement--Credit and Cash Flow
Enhancement.'
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Repurchase
Obligations and
the Receivables
Acquisition
Agreement......... As more fully described in the related Prospectus
Supplement, the Company will be obligated to
acquire from the related Trust Property any
Receivable which was transferred pursuant to a
Pooling Agreement 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 Company with respect to such Receivable,
which breach has not been cured. In addition, if
so specified in the related Prospectus
Supplement, the Company may from time to time
reacquire certain Receivables of the Trust
Property, subject to specified conditions set
forth in the related Trust Agreement.
Servicer's
Compensation...... The Servicer shall be entitled to receive a fee
for servicing the Trust Property equal to a
specified percentage of the value of such Trust
Property, as set forth in the related Prospectus
Supplement. See 'Description of the Trust
Agreements--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 Pooling Agreement
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 Company 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 Company may also
warrant that, if the transfer or pledge by it 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 previ-
ously perfected security interests by operation
of law, and, with certain exceptions, in the
proceeds thereof. Similar security interest and
priority representations and warranties, as
described in the related Prospectus Supplement,
may also be made by the Company with respect to
the Vehicles.
Perfection of security interests in automobiles
and light duty trucks is generally governed by
the vehicle registration or titling laws of the
state in which each vehicle is registered or
titled. In most states, a security interest in a
vehicle is perfected by notation of the secured
party's lien on the vehicle's certificate of
title. Each Prospectus Supplement will specify
whether the Company, the Servicer or the
Trustee, in light of the administrative burden
and expense, will amend any certificate of title
to identify the Company or the Trustee as the
new secured party on the certificates of title
relating to the Vehicles. See 'Certain Legal
Aspects of the Receivables.'
Each Prospectus Supplement will specify if the
Company has filed or will be required to file
UCC financing statements identifying
the Vehicles as collateral pledged in favor of
the related Trust or Trustee on behalf of the
Securityholders. In the absence of such filings
any security interest in the Vehicles will not
be perfected in favor of the related Trust or
Trustee. See 'Certain Legal Aspects of the
Receivables.'
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Optional
Termination....... The Servicer, the Company, 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 Agreement--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 declined to a
specified 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 shall be set forth in
the related Prospectus Supplement.
Mandatory
Termination....... The Trustee, the 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 Trust Property or oth-
erwise, under other circumstances and in the
manner specified in 'Description of The Trust
Agreement--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 declined to a
specified 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 shall be set forth in
the related Prospectus Supplement.
Tax
Considerations.... Securities of each series offered hereby will, for
federal income tax purposes, constitute either (i)
interests in a Trust treated as a grantor trust
under applicable provisions of the Code
('Grantor Trust Securities'), (ii) debt issued
by an Issuer or by the Company ('Debt
Securities'), (iii) interests in a Trust which
is treated as a partnership ('Partnership
Interests') or (iv) interests in a Trust which
elects to be treated as a 'financial asset
securitization investment trust' (a 'FASIT').
The tax characterization of any series of
Securities will be described in the related
Prospectus Supplement, and the related Opinion
of tax counsel will be filed as part of a
Current Report 8-K filing in connection with
each issuance.
Investors are advised to consult their tax
advisors and to review 'Federal 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
Exchange Act, and commonly referred to as
'Rating Agencies'. Such ratings will address, in
the opinion of such Rating Agencies, the
likelihood that the Issuer will be able to make
timely payment of all amounts due on the related
Securities in accordance with the terms thereof.
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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RISK FACTORS
Prospective Securityholders should consider, among other things, the
following factors in connection with the purchase of the Securities:
Subprime Lending May Pose Special Risks to Investors in the
Securities. The Company's program is geared primarily to originating and
acquiring Contracts in the so-called 'subprime' automobile lending industry. The
subprime market for credit consists of making loans which may not be made by
traditional sources of credit, which in the automobile finance business is
comprised of insured-deposit taking institutions such as banks, thrifts and
credit unions, and finance companies which are 'captives' (i.e., finance
subsidiaries) of automobile manufacturers.
A loan may be considered 'subprime' primarily for one, or both, of two
reasons: borrower credit considerations, and collateral considerations. It is
also possible that the subprime automobile finance business is more susceptible
to loss than other segments of the subprime lending business generally, such as
subprime mortgage lending, due to the mobility and depreciation of the
collateral.
'Subprime' borrowers are likely to be relatively weak credits who may be
unable (or unwilling) to repay their loans. A borrower may be considered a
'subprime' credit due to limited income, tarnished credit history (e.g., prior
bankruptcy, history of delinquent payments on other types of installment credit)
or a lack of credit history (i.e., a relatively young individual who has not yet
developed a 'credit history profile').
'Subprime' loans may also have less valuable collateral. Collateral
considerations in the subprime market primarily result from the financing, in
many cases, of used vehicles. Although depreciation also affects new
automobiles, the market value of an automobile which is several years old may be
more difficult to ascertain than for a new vehicle, since such value will depend
on mileage and general condition, which may vary substantially for different
vehicles of a similar model year.
As a result of all of the foregoing factors, the performance of a subprime
portfolio may be more susceptible to performance deterioration than a prime
portfolio, since the borrowers, being more marginal credits, are likely to be
disproportionately affected by economic downturns, and since the collateral,
often consisting of older, used vehicles, may be more difficult to value
correctly.
'Subprime' asset-backed offerings are frequently guaranteed by a small
number of Credit Enhancers, whose own credit may be adversely affected by a
downturn in the subprime lending business. Another consideration with respect to
the subprime automobile lending business relates to the degree to which the
industry's asset-backed securities (such as the Securities offered hereby) are
guaranteed, in whole or in part, by Credit Enhancers which themselves have
assumed substantial exposure to this industry. See 'Security Rating may be
highly dependent on the ratings of an external Credit Enhancer' below. Although
such Credit Enhancers typically have a 'AAA' rating, if portfolios of subprime
automobile receivables generally suffer lower than expected levels of
performance, the ratings of such Credit Enhancers as have concentrated on this
industry may be adversely affected, even if a specific receivables pool (such as
one of the Company's pools) has not suffered such a lower than expected level of
performance.
The Company's program has limited historical data available regarding loan
performance. The Company's automobile finance business is relatively new, with
the initial Contracts having been originated or acquired only in May of 1996.
Consequently, the Company has not been able to develop meaningful statistics
relating to the historical performance of its portfolio. As a result, it is
unknown how the Company's portfolio performs relative to the portfolios of other
subprime lenders.
LIMITED LIQUIDITY MAY RESULT IN A SECURITYHOLDER BEING UNABLE TO LIQUIDATE
ITS INVESTMENT. It is not expected that any Securities offered hereby will be
listed on any securities exchange. Such lack of exchange listing is likely to
result in a relatively illiquid market for the Securities.
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.
OWNERSHIP OF CONTRACTS WILL NOT NECESSARILY BE VESTED IN THE RELATED
TRUSTEE, WITH THE RESULT THAT DELAYS AND DISRUPTIONS IN PAYMENTS MAY OCCUR. The
Company will warrant in a Trust Agreement (i) if the Company retains title to
the Contracts, that the Trustee for the benefit of Securityholders has a valid
security interest in such Contracts, or (ii) if the Company transfers such
Contracts to an Issuer, that the transfer of the Contracts to such Issuer is
either a valid assignment, transfer and conveyance of the Contracts to the
Issuer or the Trustee on behalf of the Securityholders has a valid security
interest in such Contracts. As to be described in the
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<PAGE>
related Prospectus Supplement, the related Trust Agreement will provide either
that the Trustee will be required to maintain possession of the original copies
of all Contracts that constitute chattel paper or that the Company or the
Servicer will retain possession of such Contracts; provided that in case the
Company retains possession of the related Contracts, the Servicer may take
possession of such original copies as necessary for the enforcement of any
Contract. If any Contracts remain in the possession of the Company, the related
Prospectus Supplement may describe specific trigger events that will require
delivery to the Trustee. If the Company, the Servicer, the Trustee 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 Acquisition
Agreement or the Trust Agreement, 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 Company, the Servicer 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
Company will be obligated to repurchase any Contract originated by the Company
and currently in the related Trust Property if there is a breach of the
Company's representations and warranties that materially and adversely affects
the interests of the Trust in such Contract and such breach has not been cured.
SECURITY INTERESTS IN BOTH THE RECEIVABLES AND THE UNDERLYING VEHICLES MAY
NOT BE VALID UNDER CERTAIN CIRCUMSTANCES. The transfer of the Receivables by
the Company to the Trustee pursuant to the related Trust Agreement, the
perfection of the security interests in the Receivables and the enforcement of
rights to realize on the Vehicles as collateral for the Receivables are subject
to a number of federal and state laws, including the UCC as in effect in various
states. As specified in each Prospectus Supplement, the Servicer will take such
action as is required to perfect the rights of the Trustee in the Receivables.
If, through inadvertence or otherwise, a third party were to purchase (including
the taking of a security interest in) a Receivable for new value in the ordinary
course of its business, without actual knowledge of the Trustee's interest, and
take possession of a Receivable, the purchaser would acquire an interest in such
Receivable superior to the interest of the Trustee, with the result that such
Receivable would no longer be available as part of the Trust Property for the
related series of Securities. As further specified in each Prospectus
Supplement, no action will be taken to perfect the rights of the Trustee in
proceeds of any insurance policies covering individual Vehicles or Obligors.
Therefore, the rights of a third party with an interest in such proceeds could
prevail against the rights of the Trustee prior to the time such proceeds are
deposited by the Servicer into a Trust Account. See 'Certain Legal Aspects of
the Receivables'.
Except to the extent specified in the related Prospectus Supplement, each
Contract will include a perfected security interest in the related Vehicle in
favor of the Trustee or the Company (and, if perfected in the name of the
Company, assigned pursuant to the related Trust Agreement to the Trustee for the
benefit of the Securityholders). However, to the extent provided in the related
Prospectus Supplement, due to the administrative burden and expense, the
certificates of title of the Vehicles securing certain Contracts which reflect
the security interest of the Company or an unaffiliated originator in such
Vehicles may not be endorsed to reflect the Trustee's interest therein or
delivered to the Trustee. In the absence of such endorsement and delivery, the
Trustee may not have a perfected security interest in such Vehicles. As a
result, a third party buyer of a Vehicle for value from an Obligor may
extinguish the interest of the Trust in the Vehicle, a subsequent perfected
lienholder may obtain a security interest senior in right to that of the Trust,
and a trustee in bankruptcy of the Company may be able to assert successfully
that the Trust did not have a security interest in the Vehicle. In addition,
statutory liens for repairs or unpaid taxes and other liens arising by operation
of law may have priority even over prior perfected security interests in the
name of the Trustee in the Vehicles.
RESTRICTIONS ON RECOVERIES MAY RESULT IN THE RELATED ISSUER RECEIVING
SUBSTANTIALLY LESS THAN THE FACE AMOUNT OF THE RELATED CONTRACT. Unless
specific limitations are described on 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 Obligor may have against the Company or
any other person or entity whatsoever. The Company 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 Company or the Trustee must rely on repossession and
disposition of Vehicles to recover scheduled payments due on defaulted
contracts, i.e., Contracts which are seriously delinquent such as 90 or 120
days, or as to which the related Obligor has affirmatively indicated an
inability or unwillingness to make payment ('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 amendments
to certificates of title relating to the Vehicles had been filed, whether
financing statements to perfect the security interest in the Vehicles had been
filed, depreciation, obsolescence, damage or loss of any Vehicle, and the
application of Federal and state bankruptcy and insolvency
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laws. As a result, the Securityholders may be subject to delays in receiving
payments and suffer loss of their investment in the Securities.
ALTHOUGH THE TRANSACTIONS WILL BE STRUCTURED SO AS TO MINIMIZE THE RISKS
ASSOCIATED WITH THE COMPANY'S BANKRUPTCY, SUCH SAFEGUARDS MAY NOT ELIMINATE ALL
SUCH RISKS. The Company will take steps in structuring the transactions
contemplated hereby that are intended to ensure that the voluntary or
involuntary application for relief by the Company under the United States
Bankruptcy Code or similar applicable state laws ('Insolvency Laws') will not
result in the Trust Property becoming property of the estate of the Company
within the meaning of such Insolvency Laws. Such steps will generally involve
the creation by the Company of one or more separate, limited-purpose
subsidiaries (each, a 'Finance Subsidiary') pursuant to articles of
incorporation containing certain limitations (including restrictions on the
nature of such Finance Subsidiary's business and a restriction on such Finance
Subsidiary'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
Finance Subsidiary would not result in a court's concluding that the assets and
liabilities of such Finance Subsidiary should be consolidated with those of the
Company in a proceeding under any Insolvency Law.
While an originator is the Servicer, cash collections held by such
originator may, subject to certain conditions, be commingled and used for the
benefit of such originator prior to each Payment Date and, in the event of the
bankruptcy of such originator, the Company, a Trust or Trustee may not have a
perfected interest in such collections.
The Company believes that the transfer of the Receivables by the Company to
a Finance Subsidiary should be treated as a valid assignment, transfer and
conveyance of such Receivables. However, in the event of an insolvency of the
Company, a court, among other remedies, could attempt to recharacterize the
transfer of the Receivables by the Company to the Finance Subsidiary as a
borrowing by the Company from the Finance Subsidiary 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 related Trustee for a Trust, in accordance with the Trust
Agreement, 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 of the Vehicles may be entitled to assert against the Company, the
Issuer, or the Trust, if any, claims and defenses which they have against the
Company with respect to the Receivables. The Company 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.
FINANCIAL CONDITION OF THE COMPANY MAY BE RELEVANT EVEN IF THE INTENDED
BANKRUPTCY CHARACTERIZATION IS SUSTAINED. The Company is generally not
obligated to make any payments in respect of the Securities or the
Receivables of a specific Trust. If the Company were to cease acting as
Servicer, delays in processing payments on the Receivables and information in
respect thereof could occur and result in delays in payments to the
Securityholders.
In certain circumstances, the Company will be required to acquire
Receivables from the related Trust Property with respect to which such
representations and warranties have been breached. In the event that the Company
is incapable of complying with its reacquire obligations and no other party is
obligated to perform or satisfy such obligations, Securityholders may be subject
to delays in receiving payments and suffer loss of their investment in the
Securities.
INSURANCE ON VEHICLES WILL GENERALLY BE REQUIRED AT THE TIME OF
ORIGINATION, ALTHOUGH NO ASSURANCE CAN BE GIVEN THAT SUCH INSURANCE WILL BE
MAINTAINED. The Company generally requires that the Obligor insure the related
Vehicle with a physical damage policy naming the Company as loss payee. Although
such insurance on the Vehicle is generally required at the time of the Contract
origination, there can be no assurance that the Obligor will maintain the
appropriate coverage on the Vehicle. Prior to the month of the policy expiration
date, the Servicer will send a notice to the Obligor requesting that the Obligor
notify the Servicer as to the status of the renewed policy. If the Servicer does
not receive a response from the Obligor, the Servicer will send a second
notification and await response from the Obligor regarding the policy status.
The Company does not anticipate
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force placing insurance (i.e., obtaining such insurance coverage without the
consent of the related Obligor) on the related Vehicles. The Company will not
represent and warrant to the related Trustee that each Vehicle is in fact
covered by a physical damage policy, although the Company will represent and
warrant that the procedures described above will be followed with respect to
each Vehicle. As a consequence of the foregoing, the Vehicles may not be covered
by physical damage insurance and losses to Securityholders may result from such
lack of coverage.
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 Company on its
respective loan and vehicle portfolio will be indicative of the performance of
the Contracts included in the related Trust Property 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, the failure to service the
Receivables Pool adequately, or the transfer or relocation of the Servicing from
the Company or any Sub-Servicer to another.
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. Consequently, the risk
of loss on the related Receivables pool may be disproportionately allocated to
the holders of the more subordinate classes, making the return on investment on
such classes highly sensitive to the loss and delinquency levels of the related
pool.
THE COMPANY IS NOT CORPORATELY LIABLE ON THE SECURITIES, AND THE ONLY
SOURCE OF REPAYMENT WILL BE THE RELATED TRUST PROPERTY. Moreover, the Trust
Property will not 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, the related reserve account and
any other credit enhancement. The Securities represent obligations solely of the
related Issuer or debt secured by the related Trust Property, and will not
represent a recourse obligation to other assets of the Company. No Securities of
any series will be insured or guaranteed by the Company, the Servicer, or the
applicable Trustee. Consequently, holders of the Securities of any series must
rely for repayment primarily upon payments on the Receivables and, if and to the
extent available, the reserve account, if any, and any other credit enhancement,
all as specified in the related Prospectus Supplement.
MASTER TRUSTS MAY POSE SPREAD RISKS, SINCE ADDITIONAL SERIES MAY BE ISSUED
WITHOUT THE CONSENT OF THE HOLDERS OF PRIOR SERIES. As may be described in the
related Prospectus Supplement, a Master Trust may issue from time to time more
than one series. While the terms of any additional series will be specified in a
supplement to the related Master Trust Agreement, the provisions of such
supplement and, therefore, the terms of any additional series, will not be
subject to prior review by, or consent of, holders of the Securities of any
series previously issued by such Master Trust. Such terms may include methods
for determining applicable investor percentages and allocating collections,
provisions creating different or additional security or credit enhancements and
any other provisions which are made applicable only to such series. The
obligation of the related Trustee to issue any new series is subject to the
condition, among others, that such issuance will not result in any Rating Agency
reducing or withdrawing its rating of the Securities of any outstanding series
(any such reduction or withdrawal is referred to herein as a 'Ratings Effect').
There can be no assurance, however, that the terms of any series might not have
an impact on the timing or amount of payments received by a Securityholder of
another series issued by the same Master Trust. See 'Description of the
Securities--Master Trusts.'
BOOK-ENTRY REGISTRATION MAY FURTHER REDUCE LIQUIDITY AND MAY LEAD TO
PAYMENT DELAYS. 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 Trustee to DTC and, in such case, DTC will be
required to credit such distributions to the accounts of its Participants which
thereafter will be required to credit them to the accounts of the applicable
class of Securityholders either directly or indirectly through Indirect
Participants. See 'Description of the Securities--Book Entry Registration.'
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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 claims-paying ability of the related
Credit Enhancer to honor 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 PAYMENT ON THE SECURITIES IS UNPREDICTABLE, AND MAY BE HIGHLY
VOLATILE; IF THE ACTUAL PAYMENT RATE DEVIATES FROM AN INVESTOR'S EXPECTATIONS,
SUCH INVESTOR'S YIELD MAY BE REDUCED SUBSTANTIALLY. 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 Servicer or the Company of
Contracts from the related Trust Property on account of a breach of certain
representations and warranties in the related Trust Agreement, payments upon an
optional acquisition by the Servicer or the Company of Contracts from the
related Trust Property (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 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 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.
LIMITATIONS ON INTEREST PAYMENTS AND REPOSSESSIONS MAY RESULT IN REDUCED
AND/OR DELAYED PAYMENTS. Generally, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the 'Relief Act'), or similar
state legislation, an Obligor who enters military service after the origination
of the related Receivable (including an Obligor who is a member of the National
Guard or is in reserve status at the time of the origination of the Receivable
and is later called to active duty) may not be charged interest (including fees
and charges) above an annual rate of 6% during the period of such Obligor's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Receivables. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
(repossess and sell at auction) on an affected Receivable during the Obligor's
period of active duty status. Thus, in the event that such a Receivable goes
into default, there may be delays and losses occasioned by the inability of the
Servicer to realize upon the Financed Vehicle in a timely fashion.
THE TRUST PROPERTY
The Trust Property will include, as specified in the related Prospectus
Supplement, (i) a pool of Receivables, (ii) all monies (including accrued
interest) due thereunder on or after the applicable 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 pursuant to the related Trust Agreement, as described
below and in the related Prospectus Supplement, (iv) the security interests, if
any, in the Vehicles relating to such pool of Receivables, (v) the right to
proceeds from claims on physical damage policies, if any, covering such Vehicles
or the related Obligors, as the case may be, (vi) the proceeds of any
repossessed Vehicles related to such pool of Receivables, (vii) the rights of
the Company under the related Receivables Acquisition Agreement and (viii)
interest earned on certain short-term investments held in such Trust Property,
unless the related Prospectus Supplement specifies that such earnings may be
paid to the Servicer or the Company. The Trust Property will also include, if so
specified in the related Prospectus Supplement, monies on
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deposit in a Pre-Funding Account, which will be used by the Trustee to acquire
or receive a security interest in Additional Receivables from time to time
during the Pre-Funding Period specified in the related Prospectus Supplement.
See 'Description of the Securities--Forward Commitments; Pre-Funding.' In
addition, to the extent specified in the related Prospectus Supplement, some
combination of Credit Enhancements may be issued to or held by the Trustee on
behalf of the related Trust for the benefit of the holders of one or more
classes of Securities.
The Receivables comprising the Trust Property will, as specifically
described in the related Prospectus Supplement, be either (i) originated by the
Company, (ii) originated by various manufacturers and acquired by the Company,
(iii) originated by various Dealers and acquired by the Company or (iv) acquired
by the Company from originators or owners of Receivables.
The Trust Property will include Receivables with respect to which the
related Contract or the related Vehicles is subject to federal or state
registration or titling requirements.
The Receivables included in the Trust Property will be selected from those
Receivables held by the Company based on the criteria specified in the
applicable Trust Agreement and described herein under 'The Receivables' and
'Advanta's Automobile Financing Program' and in the related Prospectus
Supplement.
With respect to each series of Securities, on or prior to the Closing Date
on which the Securities are delivered to Securityholders, the Company or a
Finance Subsidiary will form a Trust by either (i) transferring the related
Receivables into a Trust pursuant to a Trust Agreement between the Company or a
Finance Subsidiary and the Trustee or (ii) entering into an Indenture with an
Indenture Trustee, relating to the issuance of such Securities, secured by the
related Receivables.
The Receivables comprising the Trust Property will generally have been
originated by the Company or acquired by the Company from Dealers in accordance
with the Company's specified underwriting criteria. The underwriting criteria
applicable to the Receivables included in any Trust Property will be described
in all material respects in the related Prospectus Supplement.
THE ISSUERS
With respect to each series of Securities, the Company will either
establish a separate Trust that will issue such Securities, or the Company will
form a Finance Subsidiary that will issue such Securities, in each case pursuant
to the related Trust Agreement. For purposes of this Prospectus and the related
Prospectus Supplement, the Finance Subsidiary, if the Finance Subsidiary issues
the related Securities, or the related Trust, if a Trust issues the related
Securities, shall be referred to as the 'Issuer' with respect to such
Securities.
Upon the issuance of the Securities of a given series, the proceeds from
such issuance will be generally used by the Company to purchase Receivables. The
Servicer will service the related Receivables pursuant to the applicable
Servicing Agreement, 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
and the Company, as may be 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 the reserve account, if any, or any other Credit
Enhancement for such series is insufficient, the Issuer must rely solely on the
payments from the Obligors on the related Contracts, and the proceeds from the
sale of Vehicles which secure the Defaulted Contracts. In such event, the
factors described above under 'Risk Factors--Ownership of Contracts will not
necessarily be vested in the related Trustee, with the result that delays and
disruptions in payments may occur', 'Risk Factors--Security Interests in both
the Receivables and the underlying Vehicles may not be valid under certain
circumstances' and 'Risk Factors--Restrictions on Recoveries may result in the
related Issuer receiving substantially less than the face amount of the related
Contract' and described below under 'Certain Legal Aspects of the Receivables'
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.
THE RECEIVABLES
RECEIVABLES POOLS
Information with respect to the Receivables in the related Trust Property
will be set forth in the related Prospectus Supplement, including, to the extent
appropriate, the composition of such Receivables and the
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distribution of such Receivables by geographic concentration, payment frequency
and current principal balance as of the applicable Cut-off Date.
THE CONTRACTS
As specified in the related Prospectus Supplement, the Contracts may
consist of Rule of 78s Contracts, or Simple Interest Contracts. Generally, 'Rule
of 78s Contracts' provide for fixed level monthly payments which will amortize
the full amount of the Contract over its term. The Rule of 78s Contracts provide
for allocation of payments according to the 'sum of periodic balances' or 'sum
of monthly payments' method (the 'Rule of 78s'). Each Rule of 78s Contract
provides for the payment by the Obligor of a specified total amount of payments,
payable in monthly installments on the related due date, which total represents
the principal amount financed and finance charges in an amount calculated on the
basis of a stated annual percentage rate ('APR') for the term of such Contract.
The rate at which such amount of finance charges is earned and, correspondingly,
the amount of each fixed monthly payment allocated to reduction of the
outstanding principal balance of the related Contract are calculated in
accordance with the Rule of 78s. Under the Rule of 78s, the portion of each
payment allocable to interest is higher during the early months of the term of a
Contract and lower during later months than that under a constant yield method
for allocating payments between interest and principal. Notwithstanding the
foregoing, as specified in the related Prospectus Supplement, all payments
received by the Servicer on or in respect of the Rule of 78s Contracts may be
allocated on an actuarial or simple interest basis so that such payments may be
accounted for, and presented on a basis consistent with, the payments on the
Securities, which will in no case be based on the Rule 78s' method.
'Simple Interest Contracts' provide for the amortization of the amount
financed under the receivable over a series of fixed level monthly payments.
However, unlike the monthly payment under Rule of 78s Contracts, each
monthly payment consists of an installment of interest which is calculated on
the basis of the outstanding principal balance of the receivable multiplied by
the stated APR and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received under a Simple Interest Contract, the amount received is applied first
to interest accrued to the date of payment and the balance is applied to reduce
the unpaid principal balance. Accordingly, if an Obligor pays a fixed monthly
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if an Obligor pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. In either case, the Obligor pays a fixed monthly
installment until the final scheduled payment date, at which time the amount of
the final installment is increased or decreased as necessary to repay the then
outstanding principal balance.
If an Obligor elects to prepay a Rule of 78s Contract in full, it is
entitled to a rebate of the portion of the outstanding balance then due and
payable attributable to unearned finance charges. If a Simple Interest Contract
is prepaid, rather than receive a rebate, the Obligor is required to pay
interest only to the date of prepayment. The amount of a rebate under a Rule of
78s Contract calculated in accordance with the Rule of 78s will always be less
than had such rebate been calculated on an actuarial basis and generally will be
less than the remaining scheduled payments of interest that would be due under a
Simple Interest Contract for which all payments were made on schedule.
Distributions to Security holders may not be affected by Rule of 78s rebates
under the Rule of 78s Contract because pursuant to the related Prospectus
Supplement such distributions may be determined using the actuarial or simple
interest method.
DELINQUENCIES, REPOSSESSIONS, AND LOSSES
Certain information relating to the Company's delinquency, repossession and
loss experience with respect to Contracts it has originated or acquired will be
set forth in each Prospectus Supplement. As of the Cut-Off Date with respect to
any issuance of Securities, the related Trust Property will not contain more
than 5% (by aggregate unpaid principal balance) of Contracts 30-59 days
delinquent. This information may include, among other things, the experience
with respect to all Contracts in the Company's portfolio during certain
specified periods. There can be no assurance that the delinquency, repossession
and loss experience on any Trust Property will be comparable to the Company's
prior experience.
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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 factors, such
as increasing or declining rates of interest, the rate of inflation, an
improvement in the related Obligors' credit standing, and availability of
alternative sources of financing. In addition, under certain circumstances, the
Company will be obligated to acquire Receivables from the related Trust Property
pursuant to the applicable Trust Agreement or Receivables Acquisition 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.
ADVANTA'S AUTOMOBILE FINANCING PROGRAM
OVERVIEW
Advanta Auto Finance, a wholly-owned subsidiary of Advanta Mortgage Holding
Company, was established as an automotive finance company specializing in
non-conforming auto financing. Advanta Auto Finance is engaged in the indirect
financing of automotive purchases by consumers who have experienced credit
problems, who are attempting to re-establish credit, who may not yet have
sufficient credit history or who do not wish to deal with the traditional
sources of financing (i.e., banks).
Typical consumer characteristics include: customer has multiple
delinquencies reported on his credit record, consumer's credit history includes
judgments, charge-offs, bankruptcy or repossession, consumer delinquency due to
health reasons, divorce or unemployment, consumer either a renter or homeowner
or living with relatives, consumer's request for financing turned down by banks
and captives and underlying collateral either a new or used vehicle.
Advanta Auto Finance offers an array of products to existing originators in
order to establish long-term relationships. Advanta's products are marketed to
existing originators through regional business development managers. Advanta
Auto Finance purchases the closed, non-conforming auto finance contracts, which
are originated by the existing originators and subsequently assigned to Advanta
Auto Finance, on a flow/pool and bulk basis.
Product determination criteria typically includes: the type of collateral
(i.e., year, age and mileage), time at residence, time at employer, amount of
gross monthly income, amount of selling price, trade-in value and advance rate
via the National Automobile Dealers Association Book ('NADA') or the Dealer's
Invoice, debt-to-income ratio, car payment-to-income ratio, credit bureau risk
score and prior or current automobile credit.
UNDERWRITING
Advanta Auto Finance has policies and procedures in place to address the
controls needed to analyze prospective credit applicants. Such procedures
include verifying and evaluating the credit bureau report as well as other
credit information obtained by the existing originator and the applicant.
Auto finance contracts which are delivered on a flow/pool basis are
generally underwritten in accordance with Advanta Auto Finance's established
underwriting guidelines. These guidelines are reviewed and revised continuously
based upon opportunities and prevailing conditions in the non-conforming auto
market, as well as the expected market for the resulting securities.
For contracts purchased via flow or pool, the existing originators are
trained to underwrite to Advanta Auto Finance's underwriting criteria. As a
result, the contracts purchased generally comply with established guidelines.
Any exceptions must have compensating factors and must be approved by the
appropriate level of authority at Advanta Auto Finance prior to funding. During
the underwriting process for flow/pool contracts, the underwriter assesses both
the borrower's ability and willingness to repay the obligation as well as the
underlying vehicle collateral.
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All contracts are secured by either a new or used vehicle. Vehicles
financed must have general market acceptance. Advance Auto Finance uses the
Dealer's Invoice, NADA, Kelley Blue Book and Vintek appraisals to establish
vehicles values. Valuations must be on an 'as-is' basis.
Eligible flow/pool contract collateral includes new and used cars, vans and
light trucks from automobile manufacturers actively engaged in new car sales in
the United States. Typical contract characteristics may include: vehicle age
ranging from current year to five years of age, minimum loan amount of $5,000.,
maximum loan amount of $100,000., mileage at the end of the contract term cannot
exceed 100,000 miles, maximum term of 60 months, minimum downpayment of 15% of
vehicle selling price, maximum advance rate of 105% of NADA trade, Kelley
wholesale or the Dealer's Invoice plus extras, debt to income ratio not to
exceed 45% and minimum credit bureau risk scores. A credit report is required
for all applicants. The credit report can be generated by either Equifax (BEACON
score), TransUnion (EMPIRICA score) or TRW (FICO score).
The auto finance contract flow/pool underwriting process includes the
evaluation of residence stability, employment history, credit history, ability
to pay, amount of income, debt ratio, credit bureau score and the value of the
collateral. As a result, the existing originator's applications, which are
written on the existing originator's documents, are underwritten to Advanta Auto
Finance's established underwriting guidelines which are generally consistent for
the auto finance contracts delivered on a flow/pool basis. For the flow/pool
originations, the Company generally funds the existing originator's closed
contracts within three months of origination.
Auto finance contracts which are delivered on a bulk basis may be
originated by a variety of originators under several different underwriting
guidelines. When reviewing potential bulk acquisitions, the existing
originator's underwriting guidelines are reviewed and either deemed acceptable
or unacceptable to the Company. If deemed acceptable, Advanta Auto Finance will
generally cause the contracts acquired in a bulk acquisition to be
reunderwritten on a sample basis. The sampled contracts are reunderwritten to
the existing originator's underwriting guidelines to determine conformity as
well as consistency with said guidelines. Such reunderwriting may be performed
by Advanta Auto Finance or by a third party acting at the direction of Advanta
Auto Finance. In addition to reviewing the underwriting guidelines, the Company
will generally request the following contract-specific information: the vehicle
identification number, the type of contract (i.e., Rule of 78s, pre-computed,
Simple Interest, Balloon, fixed or adjustable rate), the vehicle make, model and
year, the vehicle mileage, the debt-to-income ratio, the credit bureau risk
score, the monthly income, the time at current/prior residence, the time at
current/prior employer and the downpayment percentage. Bulk originators are
typically reviewed to verify that all applicable state laws including required
licensing are adhered to. A quality control compliance review as well as an
operational review is also generally performed.
Under the flow/pool process, each loan package must contain the original
note agreement or contract, the title application or Division of Motor Vehicles
lien receipt and proof of comprehensive/collision insurance. Contracts that are
delivered on a bulk basis must have proof of comprehensive insurance.
ORIGINATORS
Advanta Auto Finance purchases automobile finance contracts nationwide
through originators. Originators may include, but are not limited to, brokers,
small/large regional/national banks, finance companies and credit unions as well
as other sources of non-conforming auto financing.
Originators must be approved by the appropriate level of authority at
Advanta Auto Finance prior to Advanta Auto Finance originating and/or purchasing
contracts from them. Documents generally required to be submitted to Advanta
Auto Finance include: an executed standard purchase agreement, year-end audited
financials, a list of major trade and finance references and a list of owners,
partners, shareholders and officers. Moreover, the minimum net worth requirement
is approximately $250,000.
Prospective originators are subject to extensive reviews by Advanta Auto
Finance. The reviews allow Advanta Auto Finance to ascertain whether or not the
prospective originator meets Advanta Auto Finance's requirements. Specifically,
Advanta Auto Finance will analyze the potential originator's financial
statements, determine whether they possess adequate net worth and determine
whether they conduct business in accordance with Advanta Auto Finance
established standards. Before purchasing loans from a potential originator,
Advanta Auto Finance will require detailed information concerning the
originator's contracts and agreements. Generally included in this documentation
are retail sales contracts for each state the originator conducts business in,
dealer agreements and marketing materials for pertinent programs. Additionally,
the originator's outside counsel will normally assist in the process of drafting
loan purchase agreements, providing sale opinions, obtaining lien perfection and
filing UCC's. The termination of an originator relationship can occur at any
time.
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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
Except as provided in the related Prospectus Supplement, the proceeds from
the sale of the Securities of a given series will be used by the Company for the
acquisition of the related Receivables, for general corporate purposes,
including, but not limited to, the purchase of additional Receivables from
Dealers, repayment of indebtedness and general working capital purposes. The
Company expects that it will make additional transfers of Receivables to the
Trust from time to time, but the timing and amount of any such additional
transfers will be dependent upon a number of factors, including the volume of
Contracts originated or acquired by the Company, prevailing interest rates,
availability of funds and general market conditions.
THE COMPANY AND THE SERVICER
Advanta is a wholly-owned subsidiary of Advanta Mortgage Holding Company.
Advanta was incorporated in Nevada on October 20, 1995. Advanta purchases and
causes to be serviced automobile loans which are originated and assigned to
Advanta by automobile dealers. Advanta's executive offices are located at 300
Welsh Road, Building 4, Suite 400, Horsham, PA 19044; telephone (215) 283-4200.
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 Agreement.
With respect to each series of Securities, the procedures for the
resignation or removal of the Trustee and the appointment of a successor Trustee
shall be specified in the related Prospectus Supplement.
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 Agreement. The following summaries (together with additional summaries
under 'The Trust Agreement' below) describe all material terms and provisions
relating to the Securities common to each Trust Agreement. 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 Agreement 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.
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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 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 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 Agreement 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 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 will be a specified date in each month, e.g., the
fifteenth or twenty-fifth day of each month (or, in the case of quarterly-pay
Securities, a specified date in every third month; and in the case of
semi-annual pay Securities, a specified date in every sixth month) and the
Record Date will either 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, or the close of business on the business day preceding such Payment
Date.
Each Trust Agreement will describe a Remittance 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 a Trust during a Remittance Period
will be required to be remitted by the Servicer to the related 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 Agreement 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 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 Agreement 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 to Securityholders.
Such retention and temporary investment by the Trustee of such collected
payments may be required by the related Trust Agreement for the purposes of (a)
slowing the amortization rate of the related Securities relative to the
installment payment schedule of the related Receivables, or (b) attempting to
match the
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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. Such
events which may result in an early amortization event will generally consist of
(i) the Company's inability to deliver sufficient, additional Receivables to
maintain the revolving period, (ii) an event of default by the Company or the
Servicer (i.e., the Company's or the Servicer's failure to perform their
respective duties under the related Trust Agreement) and (iii) the occurrence of
a bankruptcy event with respect to the Company or the Servicer.
Neither the Securities nor the underlying Receivables will be guaranteed or
insured by any governmental agency or instrumentality or the Company, the
Servicer, any 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 Agreement will either evidence
specified beneficial ownership interests in the Trust Property or represent debt
secured by the related Trust Property.
MASTER TRUSTS
As may be described in the related Prospectus Supplement, each Trust
Agreement may provide that, pursuant to any one or more supplements thereto, the
Company may direct the related Trustee to issue from time to time new series
subject to the conditions described below (each such issuance a 'Master Trust
New Issuance'). Each Master Trust New Issuance will have the effect of
decreasing the Residual Interest in the related Master Trust. Under each such
Master Trust Agreement, the Company may designate, with respect to any newly
issued series: (i) its name or designation; (ii) its initial principal amount
(or method for calculating such amount); (iii) its Interest Rate (or formula for
the determination thereof); (iv) the Payment Dates and the date or dates from
which interest shall accrue; (v) the method for allocating collections to
Securityholders of such series; (vi) any bank accounts to be used by such series
and the terms governing the operation of any such bank accounts; (vii) the
percentage used to calculate monthly servicing fees; (viii) the provider and
terms of any form of Credit Enhancement with respect thereto; (ix) the terms on
which the Securities of such series may be repurchased or remarketed to other
investors; (x) the number of Classes of Securities of such series, and if such
series consists of more than one Class, the rights and priorities of each such
Class; (xi) the extent to which the Securities of such series will be issuable
in book-entry form; (xii) the priority of such series with respect to any other
series; and (xiii) any other relevant terms. None of the Company, the Servicer,
the related Trustee or any Master Trust is required or intends to obtain the
consent of any Securityholder of any outstanding series to issue any additional
series.
Each Master Trust Agreement provides that the Company may designate terms
such that each Master Trust New Issuance has an amortization period which may
have a different length and begin on a different date than such periods for any
series previously issued by the related Master Trust and then outstanding.
Moreover, each Master Trust New Issuance may have the benefits of Credit
Enhancements issued by enhancement providers different from the providers of the
Credit Enhancement, if any, with respect to any series previously issued by the
related Master Trust and then outstanding. Under each Master Trust Agreement,
the related Trustee shall hold any such Credit Enhancement only on behalf of the
Securityholders to which such Credit Enhancement relates. The Company will have
the option under each Master Trust Agreement to vary among series the terms upon
which a series may be repurchased by the Issuer or remarketed to other
investors. As more fully described in a related Prospectus Supplement, there is
no limit to the number of Master Trust New Issuances that the Company may cause
under a Master Trust Agreement. Each Master Trust will terminate only as
provided in the related Master Trust Agreement. There can be no assurance that
the terms of any Master Trust New Issuance might not have an impact on the
timing and amount of payments received by Securityholders of another series
issued by the same Master Trust.
Under each Master Trust Agreement and pursuant to a related supplement, a
Master Trust New Issuance may only occur upon the satisfaction of certain
conditions provided in each such Master Trust Agreement. The obligation of the
related Trustee to authenticate the Securities of any such Master Trust New
Issuance and to execute and deliver the supplement to the related Master Trust
Agreement is subject to the satisfaction of the following conditions: (a) on or
before the date upon which the Master Trust New Issuance is to occur, the
Company shall have given the related Trustee, the Servicer, the Rating Agency
and certain related providers of Credit Enhancement, if any, written notice of
such Master Trust New Issuance and the date upon which the Master Trust New
Issuance is to occur; (b) the Company shall have delivered to the related
Trustee a supplement to the related Master Trust Agreement, in form satisfactory
to such Trustee, executed by each party to the related Master Trust Agreement
other than such Trustee; (c) the Company shall have delivered to the related
Trustee any related Credit Enhancement agreement; (d) the related Trustee shall
have received confirmation from the Rating Agency that such Master Trust New
Issuance will not result in any Rating Agency reducing or withdrawing its rating
with respect to
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any other series or Class of such Trust (any such reduction or withdrawal is
referred to herein as a 'Ratings Effect'); (e) the Company shall have delivered
to the related Trustee, the Rating Agency and certain providers of Credit
Enhancement, if any, an opinion of counsel acceptable to the related Trustee
that for federal income tax purposes (i) following such Master Trust New
Issuance the related Master Trust will not be deemed to be an association (or
publicly traded partnership) taxable as a corporation, (ii) such Master Trust
New Issuance will not affect the tax characterization as debt of Securities of
any outstanding series or Class issued by such Master Trust that were
characterized as debt at the time of their issuance and (iii) such Master Trust
New Issuance will not cause or constitute an event in which gain or loss would
be recognized by any Securityholders or the related Master Trust; and (f) the
delivery of officers' certificates by the Company confirming the satisfaction of
such conditions to such Master Trust New Issuance. Upon satisfaction of the
above conditions, the related Trustee shall execute the supplement to the
related Master Trust Agreement and issue the Securities of such new series.
INDEXED SECURITIES
To the extent so specified in any Prospectus Supplement, any class of
Securities of a given series may consist of Securities ('Indexed Securities') in
which the principal amount payable at the final scheduled Payment Date (the
'Indexed Principal Amount') is determined by reference to a measure (the
'Index') which will be related to (i) the difference in the rate of exchange
between United States dollars and a currency or composite currency (the 'Indexed
Currency') specified in the applicable Prospectus Supplement (such Indexed
Securities, 'Currency Indexed Securities'); (ii) the difference in the price of
a specified commodity (the 'Indexed Commodity') on specified dates (such Indexed
Securities, 'Commodity Indexed Securities'); (iii) the difference in the level
of a specified stock index (the 'Stock Index'), which may be based on U.S. or
foreign stocks, on specified dates (such Indexed Securities, 'Stock Indexed
Securities'); or (iv) such other objective price or economic measures as are
described in the applicable Prospectus Supplement. The manner of determining the
Indexed Principal Amount of an Indexed Security and historical and other
information concerning the Indexed Currency, the Indexed Commodity, the Stock
Index (each, an 'Index') or other price or economic measures used in such
determination will be set forth in the applicable Prospectus Supplement,
together with information concerning tax consequences to the holders of such
Indexed Securities.
Depending upon the Index used, the yield to maturity of an Indexed Security
may be highly volatile. Such yield will be a function of the performance of the
Index, and no necessarily of the level of interest rates generally, as will be
the case with Securities offered hereby which are not Indexed Securities.
Indexed Securities, to the extent offered, are likely to be appropriate
investments only for sophisticated investors which would purchase such
Securities as part of an overall hedging strategy, even though such Securities
would be secured, as a credit matter, by the related pool of automobile loan
receivables.
If the determination of the Indexed Principal Amount of an Indexed Security
is based on an Index calculated or announced by a third party and such third
party either suspends the calculation or announcement of such Index or changes
the basis upon which such Index is calculated (other than changes consistent
with policies in effect at the time such Indexed Security was issued and
permitted changes described in the applicable Prospectus Supplement), then such
Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to the
original third party, then the Indexed Principal Amount of such Indexed Security
shall be calculated in the manner set forth in the applicable Prospectus
Supplement. Any determination of such independent calculation agent shall in the
absence of manifest error be binding on all parties.
Interest on an Indexed Security will be payable based on the amount
designated in the applicable Prospectus Supplement (the 'Face Amount'). The
applicable Prospectus Supplement will describe whether the principal amount of
the related Indexed Security, if any, that would be payable upon redemption or
repayment prior to the applicable final scheduled Distribution Date will be the
Face Amount of such Indexed Security, the Indexed Principal Amount of such
Indexed Security at the time of redemption or repayment or another amount
described in such Prospectus Supplement.
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
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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 its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of notes or certificates.
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.
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 its 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. Securityholders 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
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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 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 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, 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 Agreements, Securityholders representing at
least a majority of the outstanding principal amount of such Securities advise
the applicable Trustee through DTC in writing that the
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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 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 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 in accordance with the procedures
set forth in the related Indenture or Trust Agreement 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 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 may require payment of a sum sufficient
to cover any tax or other governmental charge imposed in connection therewith.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on or prior to each Payment Date
for such series, the Servicer or the related Trustee will forward or cause to be
forwarded to each holder of record of such class of Securities a statement or
statements with respect to the related Trust Property setting forth the
information specifically described in the related Trust Agreement which
generally will include the following information:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal;
(iii) the amount of such distribution allocable to interest;
(iv) the Pool Balance, if applicable, as of the close of business on
the last day of the related Remittance Period;
(v) the aggregate outstanding principal balance and the Pool Factor
for each Class of Securities after giving effect to all payments reported
under (ii) above on such Payment Date;
(vi) the amount paid to the Servicer, if any, with respect to the
related Remittance Period;
(vii) the amount of the aggregate purchase amounts for Receivables
that have been reacquired, if any, for such Remittance Period; and
(viii) the amount of coverage under any letter of credit, financial
guaranty insurance policy, reserve account or other form of credit
enhancement covering default risk as of the close of business on the
applicable Payment Date and a description of any Credit Enhancement
substituted therefor.
Each amount set forth pursuant to subclauses (i), (ii), (iii) and (v) with
respect to the Securities of any series will be expressed as a dollar amount per
$1,000 of the initial principal balance of such Securities, as applicable. The
actual information to be set forth in statements to Securityholders of a series
will be described in the related Prospectus Supplement.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year, the applicable Trustee will provide to the
Securityholders a statement containing the amounts described in (ii) and (iii)
above for that calendar year and any other information required by applicable
tax laws, for the purpose of the Securityholders' preparation of federal income
tax returns.
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FORWARD COMMITMENTS; PRE-FUNDING
An Issuer may enter into an agreement (each, a 'Forward Purchase
Agreement') with the Company whereby the Company will agree to transfer
additional Receivables to such Issuer following the date on which such Issuer is
established and the related Certificates are issued. The Issuer may enter into
Forward Purchase Agreements to permit the acquisition of additional Receivables
that could not be delivered by the Company or have not formally completed the
origination process, in each case prior to the date on which the Securities are
delivered to the Securityholders (the 'Closing Date'). Any Forward Purchase
Agreement will require that any Receivables so transferred to the Issuer conform
to the requirements specified in such Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a 'Pre-Funding Account') up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related Series; the additional
Receivables will be transferred to the related Issuer in exchange for money
released to the Company from the related Pre-Funding Account. Each Forward
Purchase Agreement will set a specified period (the 'Funding Period') during
which any such transfers must occur; a Funding Period will generally not exceed
three months, and in no event will exceed nine months. The Forward Purchase
Agreement or the related Trust Agreement will require that, if all moneys
originally deposited to such Pre-Funding Account are not so used by the end of
the related Funding Period, then any remaining moneys will be applied as a
mandatory prepayment of the related class or classes of Securities as specified
in the related Prospectus Supplement.
During the Funding Period the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in cash-equivalent
investments rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization and which will either
mature prior to the end of the Funding Period, or will be drawable on demand and
in any event, will not constitute the type of investment which would require
registration of the related Issuer as an 'investment company' under the
Investment Company Act of 1940, as amended.
The related Forward Purchase Agreement and/or Trust Agreement will set
forth the standards and required characteristics for pre-funded Receivables;
such standards and required characteristics will require that the principal
statistical measurements of the final pool do not vary materially from the final
pool as it is required to appear, as disclosed in the related Prospectus
Supplement. In most cases this will also mean that the final pool will not vary
materially, in terms of its principal statistical characteristics, from the
original pool (i.e., the pool before the addition of the pre-funded
Receivables). For purposes of the foregoing, the 'principal statistical
characteristics' will be the weighted average Coupon Rate, weighted average
remaining term to maturity and geographic distribution of Obligors.
The related Prospectus Supplement will present the disclosure concerning
the effect on the related Trust of the pre-funded Receivables on an aggregate
basis; i.e., the related Prospectus Supplement will describe the characteristics
of the entire pool of Receivables (on an aggregate basis) following the addition
of the pre-funded Receivables.
In the event that the Company is unable to deliver sufficient additional,
qualifying Receivables to utilize fully the Pre-Funding Account moneys, the
remaining moneys will be applied as a mandatory prepayment of the related class
or classes of Securities as specified in the related Prospectus Supplement. It
is expected that such moneys will be so applied at par, i.e., with the payment
of any prepayment or other 'make-whole' type premium. Depending upon the
movement of interest rates from the pricing date of the related Securities to
the date of such prepayment, holders of the prepaid class(es) may be unable to
reinvest such prepaid amounts at a yield equal to (or in excess of) the yield
that they were expecting to receive on their Securities. Furthermore, if an
investor purchased such Securities at a premium prior to such prepayment, such
investor could suffer a loss due to the prepayment being made at par, rather
than at a premium.
The Company expects to disclose, in its periodic reports to be filed with
respect to each issuance of Securities, as required by the Exchange Act, the
status of any Pre-Funding Account as of each Payment Date occurring during the
related Funding Period. Following the end of any Funding Period the Company will
file, in a Current Report on Form 8-K, statistical information regarding the
additional Receivables added to the related Trust Property during such Funding
Period. Such information will be presented in a similar fashion as the
information on the original pool in the related Prospectus Supplement, and will
be presented for the pool of additional Receivables in isolation, as well as for
the entire pool of Receivables (on an aggregate basis) following the addition of
the pre-funded Receivables.
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DESCRIPTION OF THE TRUST AGREEMENTS
The following summary describes certain terms of each Trust Agreement
pursuant to which a Trust Property will be created and the related Securities in
respect of such Trust Property will be issued. For purposes of this Prospectus,
the term 'Trust Agreement' 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 the
Indenture, (i.e. pursuant to which any Notes shall be issued). Forms of the
Trust Agreement have been filed as exhibits to the Registration Statement of
which the 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
Agreements.
ORIGINATION OF THE RECEIVABLES BY THE COMPANY AND ACQUISITION OF THE RECEIVABLES
PURSUANT TO A RECEIVABLES ACQUISITION AGREEMENT
On the closing date specified with respect to any given series of
Securities (the 'Closing Date'), the Company or a Finance Subsidiary will
transfer Receivables originated by the Company either to a Trust pursuant to a
Pooling Agreement, or will pledge the Company's or the Finance Subsidiary's
right, title and interests in and to such Receivables to a Trustee on behalf of
the Securityholders pursuant to an Indenture. The Company or a Finance
Subsidiary will either transfer the Receivables to a Trust pursuant to a Pooling
Agreement, or will pledge the Company's right, title and interests in and to
such Receivables to a Trustee on behalf of Securityholders pursuant to an
Indenture. The obligations of the Company or a Finance Subsidiary and the
Servicer under the related Trust Agreement include those specified below and in
the related Prospectus Supplement.
As more fully described in the related Prospectus Supplement, the Company
will be obligated to acquire from the related Trust Property 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
Company with respect to such Receivable, which breach has not been cured
following the discovery by or notice to the Company of the breach. In addition,
if so specified in the related Prospectus Supplement, the Company may from time
to time reacquire certain Receivables or substitute other Receivables for such
Receivable subject to specified conditions set forth in the related Trust
Agreement.
ACCOUNTS
With respect to each series of Securities issued by a Trust, 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 Agreement 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 the approval of the Rating Agencies and the related Credit Enhancer, if any,
Eligible Investments may include securities issued by the Company, the Servicer
or their respective affiliates or other trusts created by the Company or its
affiliates (any such Eligible Investments described in this sentence, 'Company
Investment Contracts'). A Company Investment Contract will be a funding
agreement designed to allow the Company or the related Servicer access to the
money held in the related Trust Account prior to the date on which such money is
required to make distributions to the Securityholders. In effect, the money in
the Trust Accounts will be invested in a note issued by the Company or the
related Servicer. Any such Company Investment Contract would be employed to
lessen the effects of 'negative carry' or 'negative arbitrage'on the structure
of the Securities, i.e., to permit the reinvestment of the Trust Account moneys
at a higher rate than would be obtainable through investment of other types of
Eligible Investments. The terms of any Company Investment Contract will be
described in the related Prospectus Supplement, and a copy thereof will be filed
with the Commission on a Current Report in connection with the issuance of the
related Securities.
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
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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, 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 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.
THE SERVICER
The Servicer under each Trust Agreement will be named in the related
Prospectus Supplement. The entity serving as Servicer may be the Company, its
designee, or an affiliate of the Company and may have other business
relationships with the Company or the Company's affiliates. The Servicer with
respect to each series will service the Receivables contained in the Trust Fund
for such series. Any Servicer may delegate its servicing responsibilities to one
or more sub-servicers, but will not be relieved of its liabilities with respect
thereto.
The Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Trust Agreement. An uncured breach of such a representation or warranty
that in any respect materially and adversely affects the interests of the
Securityholders will constitute a Servicer Default by the Servicer under the
related Trust Agreement.
SERVICING PROCEDURES
Each Trust Agreement will provide that the Servicer will make reasonable
efforts to collect all payments due with respect to the Receivables which are
part of the Trust Fund and, in a manner consistent with the related Trust
Agreement, will continue such collection procedures as the Servicer follows with
respect to the particular type of Receivable in the particular pool it services
for itself and others. Consistent with its normal procedures, the Servicer may,
in its discretion and on a case-by-case basis, arrange with the Obligor on a
Receivable to extend or modify the payment schedule. Some of such arrangements
(including, without limitation any extension of the payment schedule beyond the
final scheduled Payment Date for the related Securities) may result in the
Servicer acquiring such Receivable if such Contract becomes a Defaulted
Contract. The Servicer may sell the Vehicle securing the respective Defaulted
Contract, if any, at a public or private sale, or take any other action
permitted by applicable law. See 'Certain Legal Aspects of the Receivables'.
PAYMENTS ON RECEIVABLES
With respect to each series of Securities, unless otherwise specified in
the related Prospectus Supplement, the Servicer will deposit into the Collection
Account all payments on the related Receivables (from whatever source) and all
proceeds of such Receivables collected within three (3) business days of receipt
thereof in the related collection facility, such as a lock-box account or
collection account. Moneys deposited in such collection facility for Trust
Property may be commingled with funds from other sources.
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SERVICING COMPENSATION
As may be described in the related Prospectus Supplement with respect to
any series of securities issued by a Trust, the Servicer will be entitled to
receive a servicing fee for each Collection 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 of
the Trust Property, generally as of the first day of such Collection 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). Generally, the
Servicing Fee will be paid prior to any distribution to the related
Securityholders.
The Servicer will also collect and retain any late fees, late charges with
respect to 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 the 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 billing statements 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 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
Servicer for certain taxes, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering the
Receivables.
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 holders of Notes (the 'Noteholders') and by the applicable
Trustee to the holders of Certificates (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, 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
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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
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 Collection Period a statement setting forth substantially the
same information as is required to be provided in the periodic reports provided
to Securityholders of such series described under 'Description of the
Securities--Reports to Securityholders'.
EVIDENCE AS TO COMPLIANCE
Each Trust Agreement 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
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.
Each Trust Agreement will also provide for delivery to the related Trust
and/or the applicable Indenture Trustee of a certificate signed by an officer of
the Servicer stating that the Servicer either has fulfilled its obligations
under such Trust Agreement 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. The
Servicer also will agree to give each Indenture Trustee and each Trustee notice
of certain Servicer Defaults under the related Trust Agreement.
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 SERVICERS
Each Trust Agreement will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder, except upon determination that
the performance by the 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 Agreement.
Except as otherwise provided in the related Prospectus Supplement, each
Trust Agreement will further provide that neither the 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
Agreement, or for errors in judgment; provided, however, that neither the
Servicer nor any such person will be protected against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder. In addition, such Trust Agreement will
provide that the Servicer is under no obligation to appear in, prosecute, or
defend any legal action that is not incidental to its servicing responsibilities
under such Trust Agreement and that, in its opinion, may cause it to incur any
expense or liability.
Under the circumstances specified in any such Trust Agreement, any entity
into which the Servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the Servicer is a party, or any entity
succeeding to the business of the Servicer or, with respect to its obligations
as Servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor to the Servicer
under such Trust Agreement.
SERVICER DEFAULT
Except as otherwise provided in the related Prospectus Supplement,
'Servicer Default' under a Trust Agreement 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 to make any
required distributions therefrom, which failure continues unremedied for more
than three (3) Business Days after written notice from such Trustee is received
by the Servicer or after discovery by the Servicer; (ii) any failure by the
Servicer duly to observe or perform in any material respect any other covenant
or agreement in such Trust Agreement, which failure
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materially and adversely affects the rights of the related Securityholders and
which continues unremedied for more than thirty (30) days after the giving of
written notice of such failure (1) to the Servicer by the applicable Trustee or
(2) to the Servicer, and to the applicable Trustee by holders of the related
Securities, as applicable, evidencing not less than 50% of the voting rights of
such outstanding Securities; (iii) any Insolvency Event; and (iv) any claim
being made on a Policy issued as Credit Enhancement. 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 Agreement remains unremedied, the applicable
Trustee, Credit Enhancer or holders of Securities of the related series
evidencing not less than 50% of the voting rights of such then outstanding
Securities may terminate all the rights and obligations of the Servicer, if any,
under such Trust Agreement, whereupon a successor servicer appointed by such
Trustee or such Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Trust Agreement and will be entitled to
similar compensation arrangements. If, however, a bankruptcy trustee or similar
official has been appointed for the Servicer, and no Servicer Default other than
such appointment has occurred, such bankruptcy trustee or official may have the
power to prevent the applicable Trustee or such Securityholders from effecting a
transfer of servicing. In the event that the 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 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 Agreement.
WAIVER OF PAST DEFAULTS
With respect to each Trust, unless otherwise provided in the related
Prospectus Supplement and subject to the approval of any Credit Enhancer, the
holders of Notes 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 in the performance of its
obligations under the related Trust Agreement 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 Agreement. 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 Agreements 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
Agreements 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, materially and adversely affect the interests of any
such Securityholder and subject to the approval of any Credit Enhancer. As may
be described in the related Prospectus Supplement, the Trust Agreements may also
be amended by the Company, the Servicer, and the applicable 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 Agreements 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 or priority 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.
INSOLVENCY EVENT
As described in the related Prospectus Supplement, if an Insolvency Event
occurs with respect to a Debtor relating to the applicable Trust Property, the
related Trust will terminate, and the Receivables of the related Trust Property
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 Company) and/or Credit
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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 an Obligor, 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 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 the Reserve Account, if any, 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 Agreement will provide that the applicable Trustee does not have
the power to commence a voluntary proceeding in bankruptcy with respect to any
related Trust without the unanimous prior approval of all Certificateholders
(including the Company, if applicable) of such Trust and the delivery to such
Trustee by each such Certificateholder of a certificate certifying that such
Certificateholder reasonably believes that such Trust is insolvent.
TERMINATION
With respect to each Trust, the obligations of the Servicer, the Company
and the applicable Trustee pursuant to the related Trust Agreement 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 Agreement. As more fully described in the related
Prospectus Supplement, in order to avoid excessive administrative expense, the
Servicer will be permitted in respect of the applicable Trust Property, unless
otherwise specified in the related Prospectus Supplement, at its option to
purchase from such Trust Property, as of the end of any Collection Period
immediately preceding a Payment Date, if the Pool 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
Property, all such remaining Receivables at a price equal to the aggregate of
the loan balances thereof as of the end of such Collection Period. The related
Securities will be redeemed following such purchase.
If and to the extent provided in the related Prospectus Supplement with
respect to the Trust Property, 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. If such Trustee receives satisfactory bids as described
in such Prospectus Supplement, then the Receivables remaining in such Trust
Property will be sold to the highest bidder.
As more fully described in the related Prospectus Supplement, any
outstanding Notes of the related series will be redeemed concurrently with
either of the events specified above and the subsequent distribution to the
related Certificateholders of all amounts required to be distributed to them
pursuant to the applicable Trust Agreement may effect the prepayment of the
Certificates of such series.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
GENERAL
The transfer of Receivables by the Company or its Finance Subsidiary to the
Trust pursuant to the related Trust Agreement, the perfection of the security
interests in the Receivables and the enforcement of rights to realize on the
Vehicles as collateral for the Receivables are subject to a number of federal
and state laws, including the UCC as in effect in various states. As specified
in each Prospectus Supplement, the Servicer will take such action as is required
to perfect the rights of the Trustee in the Receivables. If, through
inadvertence or otherwise, a third party were to purchase (including the taking
of a security interest in) a Receivable for new value in the ordinary course of
its business, without actual knowledge of the Trust's interest, and take
possession of a Receivable, the purchaser would acquire an interest in such
Receivable superior to the interest of the Trust. As further specified in each
Prospectus Supplement, no action will be taken to perfect the rights of the
Trustee in proceeds of any insurance policies covering individual Vehicles or
Obligors. Therefore, the rights of a third party with an interest in such
proceeds could prevail against the rights of the Trust prior to the time such
proceeds are deposited by the Servicer into a Trust Account.
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SECURITY INTERESTS IN THE FINANCED VEHICLES
General
Retail installment sale contracts such as the Receivables evidence the
credit sale of automobiles and light duty trucks by dealers to consumers. The
contracts also constitute personal property security agreements and include
grants of security interests in the related automobiles and light duty trucks
under the UCC. Perfection of security interests in automobiles and light duty
trucks is generally governed by the vehicle registration or titling laws of the
state in which each vehicle is registered or titled. In most states a security
interest in a vehicle is perfected by notation of the secured party's lien on
the vehicle's certificate of title.
Perfection
Pursuant to the Trust Agreement, the Company will sell and assign the
Receivables it has originated or acquired and its security interests in the
Vehicles to the Trustee. Alternatively, the Company may sell and assign the
Receivables and its interest in the Vehicles to a Finance Subsidiary which will,
in turn, sell and assign such Receivables and related security interests to the
Trustee. Each of the related Prospectus Supplements will specify whether,
because of the administrative burden and expense, the Company, the Servicer or
the Trustee will amend any certificate of title to identify the Trustee as the
new secured party on the certificates of title relating to the Vehicles. Each of
the related Prospectus Supplements will specify the UCC financing statements to
be filed in order to perfect the transfer to the Finance Subsidiary of
Receivables and the transfer by the Finance Subsidiary to the Trustee of the
Receivables. Further, although the Trustee will not rely on possession of the
Receivables as the legal basis for the perfection of its interest therein or in
the security interests in the Vehicles, the Servicer, as specified in the
related Prospectus Supplement, will continue to hold the Receivables and any
certificates of title relating to the Vehicles in its possession as custodian
for the Trustee pursuant to the related Trust Agreement which, as a practical
matter, should preclude any other party from claiming a competing security
interest in the Receivables on the basis that the security interest is perfected
by possession.
A security interest in a motor vehicle registered in most states may be
perfected against creditors and subsequent purchasers without notice for
valuable consideration only by one or more of the following: depositing with the
related Department of Motor Vehicles or analogous state office a properly
endorsed certificate of title for the vehicle showing the secured party as legal
owner or lienholder thereon, or filing a sworn notice of lien with the related
Department of Motor Vehicles or analogous state office and noting such lien on
the certificate of title, or, if the vehicle has not been previously registered,
filing an application in usual form for an original registration together with
an application for registration of the secured party as legal owner or
lienholder, as the case may be. However, under the laws of most states, a
transferee of a security interest in a motor vehicle is not required to reapply
to the related Department of Motor Vehicles or analogous state office for a
transfer of registration when the security interest is sold or when the interest
of the transferee arises from the transfer of a security interest by the
lienholder to secure payment or performance of an obligation. Accordingly, under
the laws of such states, the assignment by the Company of its interest in the
Receivables to the Trustee under the related Trust Agreement is an effective
conveyance of the security interest of the Company in the Receivables, and
specifically, the Vehicles, without such re-registration and without amendment
of any lien noted on the related certificate of title, and (subject to the
immediately succeeding paragraphs) the Trustee will succeed to the Company's
rights as secured party.
Although re-registration of a Vehicle is not necessary to convey a
perfected security interest in the Vehicles to the Trustee, the Trustee's
security interest could be defeated through fraud, negligence, forgery or
administrative error since it may not be listed as legal owner or lienholder on
the certificates of title to the Vehicles. However, in the absence of fraud,
negligence, forgery or administrative error, the notation of the Company's lien
on the certificates of title will be sufficient to protect the Trust against the
rights of subsequent purchasers of a Vehicle or subsequent creditors who take a
security interest in a Vehicle. In the related Trust Agreement, the Company or
its Finance Subsidiary will represent and warrant that it has, or has taken all
action necessary to obtain, a perfected security interest in each Vehicle. If
there are any Vehicles as to which the Company failed to obtain a first priority
perfected security interest, the Company's or the unaffiliated originator's
security interest would be subordinate to, among others, subsequent purchasers
of such Vehicles and holders of first priority perfected security interests
therein. Such a failure, however, would constitute a breach of the Company's or
the Finance Subsidiary's representations and warranties under the related Trust
Agreement. Accordingly, pursuant to the related Trust Agreement, the Company or
Finance Subsidiary would be required to repurchase the related Receivables from
the Trustee unless the breach were cured.
Continuity of Perfection
Under the laws of most states, a perfected security interest in a motor
vehicle continues for four months after the vehicle is moved to a new state from
the one in which it is initially registered and thereafter until
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the owner re-registers such motor vehicle in the new state. A majority of states
generally require surrender of a certificate of title to re-register a vehicle.
In those states that require a secured party to hold possession of the
certificate of title to maintain perfection of the security interest, the
secured party would learn of the re-registration through the request from the
Obligor under the related installment sale contract to surrender possession of
the certificate of title to assist in such re-registration. In the case of
vehicles registered in states providing for the notation of a lien on the
certificate of title but not requiring possession by the secured party, the
secured party would receive notice of surrender from the state of re-
registration if the security interest is noted on the certificate of title.
Thus, the secured party would have the opportunity to reperfect its security
interest in the vehicle in the state of relocation. However, these procedural
safeguards will not protect the secured party if, through fraud, forgery or
administrative error, the debtor somehow procures a new certificate of title
that does not list the secured party's lien. Additionally, in states that do not
require surrender of a certificate of title for re-registration of a vehicle,
re-registration could defeat perfection. In each of the Trust Agreements, the
Servicer will be required to take steps to effect re-perfection upon receipt of
notice of re-registration or information from the Obligor as to relocation.
Similarly, when an Obligor sells a Vehicle, the Servicer will have an
opportunity to require satisfaction of the related Receivable before release of
the lien, either because the Servicer will be required to surrender possession
of the certificate of title in connection with the sale, or because the Servicer
will receive notice as a result of its lien noted thereon. Pursuant to the
related Trust Agreement, the related Servicer will hold the certificates
of title for the related Vehicles as custodian for the Trustee. Under the
related Trust Agreement, the Servicer will be obligated to take appropriate
steps, at its own expense, to maintain perfected security interests in the
Vehicles.
Priority of Certain Liens Arising by Operation of Law
Under the laws of most states, certain statutory liens such as mechanics',
repairmen's and garagemen's liens for repairs performed on a motor vehicle,
motor vehicle accident liens, towing and storage liens, liens arising under
various state and federal criminal statutes and liens for unpaid taxes take
priority over even a first priority perfected security interest in such vehicle
by operation of law. The UCC also grants priority to certain federal tax liens
over the lien of a secured party. The laws of most states and federal law permit
the confiscation of motor vehicles by governmental authorities under certain
circumstances if used in or acquired with the proceeds of unlawful activities,
which may result in the loss of a secured party's perfected security interest in
a confiscated vehicle. The Company will represent and warrant to the Trustee in
the related Trust Agreement that, as of the related Closing Date, each security
interest in a Vehicle shall be a valid, subsisting and enforceable first
priority security interest in such Vehicle. However, liens for repairs or taxes
superior to the security interest of the Trustee in any such Vehicle, or the
confiscation of such Vehicle, could arise at any time during the term of a
Receivable. No notice will be given to the Trustee or any Securityholder in the
event such a lien or confiscation arises and any such lien or confiscation
arising after the related Closing Date would not give rise to the Company's
repurchase obligation under the related Trust Agreement.
REPOSSESSION
In the event of default by an Obligor, the holder of the related retail
installment sale contract has all the remedies of a secured party under the UCC,
except where specifically limited by other state laws. The UCC remedies of a
secured party include the right to repossession by self-help means, unless such
means would constitute a breach of the peace. Unless a vehicle is voluntarily
surrendered, self-help repossession is accomplished simply by taking possession
of the related financed vehicle. In cases where the Obligor objects or raises a
defense to repossession, or if otherwise required by applicable state law, a
court order is obtained from the appropriate state court, and the vehicle must
then be recovered in accordance with that order. In some jurisdictions, the
secured party is required to notify the debtor of the default and the intent to
repossess the collateral and give the debtor a time period within which to cure
the default prior to repossession. Generally, this right of cure may only be
exercised on a limited number of occasions during the term of the related
contract. Other jurisdictions permit repossession without prior notice if it can
be accomplished without a breach of the peace (although in some states, a course
of conduct in which the creditor has accepted late payments has been held to
create a right by the Obligor to receive prior notice).
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and other state laws require a secured party to provide the Obligor
with reasonable notice of the date, time and place of any public sale and/or the
date after which any private sale of the collateral may be held. In addition,
some states also impose substantive timing requirements on the sale of
repossessed vehicles in certain circumstances and/or various substantive timing
and content requirements on such notices. In some states, under certain
circumstances after a financed vehicle has been repossessed, the Obligor may
redeem the collateral by paying the delinquent installments and other amounts
due. The Obligor has the right to redeem the collateral prior
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to actual sale or entry by the secured party into a contract for sale of the
collateral by paying the secured party the unpaid principal balance of the
obligation, accrued interest thereon, reasonable expenses for repossessing,
holding, and preparing the collateral for disposition and arranging for its
sale, plus, in some jurisdictions, reasonable attorneys' fees and legal expenses
or in some other states, by payment of delinquent installments on the unpaid
principal balance of the related obligation.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of the Vehicles generally will be applied first to
the expenses of resale and repossession and then to the satisfaction of the
indebtedness. In many instances, the remaining principal amount of such
indebtedness will exceed such proceeds. Under the UCC and laws applicable in
some states, a creditor is entitled to bring an action to obtain a deficiency
judgment from a debtor for any deficiency on repossession and resale of a motor
vehicle securing such debtor's loan; however, in some states, a creditor may not
seek a deficiency judgment from a debtor whose financed vehicle had an initial
cash sales price less than a specified amount, usually $3,000. Some states,
impose prohibitions or limitations or notice requirements on actions for
deficiency judgments. In addition to the notice requirement described above, the
UCC requires that every aspect of the sale or other disposition, including the
method, manner, time, place and terms, be 'commercially reasonable'. Generally,
courts have held that when a sale is not 'commercially reasonable', the secured
party loses its right to a deficiency judgment. In addition, the UCC permits the
debtor or other interested party to recover for any loss caused by noncompliance
with the provisions of the UCC. Also, prior to a sale, the UCC permits the
debtor or other interested person to obtain an order mandating that the secured
party refrain from disposing of the collateral if it is established that the
secured party is not proceeding in accordance with the 'default' provisions
under the UCC. However, the deficiency judgment would be a personal judgment
against the Obligor for the shortfall, and a defaulting Obligor can be expected
to have very little capital or sources of income available following
repossession. Therefore, in many cases, it may not be useful to seek a
deficiency judgment or, if one is obtained, it may be settled at a significant
discount or be uncollectible.
Occasionally, after resale of a vehicle and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC requires the
creditor to remit the surplus to any holder of a subordinate lien with respect
to the vehicle or if no such lienholder exists or if there are remaining funds,
the UCC requires the creditor to remit the surplus to the Obligor under the
contract.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon creditors and servicers involved in
consumer finance. These laws include the Truth-in-Lending Act, the Equal Credit
Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting
Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the
Federal Reserve Board's Regulations B and Z, state adaptations of the Uniform
Consumer Credit Code, state motor vehicle retail installment sale acts, state
'lemon' laws and other similar laws. In addition, the laws of certain states
impose finance charge ceilings and other restrictions on consumer transactions
and require contract disclosures in addition to those required under federal
law. These requirements impose specific statutory liabilities upon creditors who
fail to comply with their provisions. In some cases, this liability could affect
the ability of an assignee such as the Trustee to enforce consumer finance
contracts such as the Receivables.
The so-called 'Holder-in-Due-Course Rule' of the Federal Trade Commission
(the 'FTC Rule') has the effect of subjecting any assignee of the seller in a
consumer credit transaction (and certain related creditors and their assignees)
to all claims and defenses which the Obligor in the transaction could assert
against the seller. Liability under the FTC Rule is limited to the amounts paid
by the Obligor under the contract, and the holder of the contract may also be
unable to collect any balance remaining due thereunder from the Obligor. The FTC
Rule is generally duplicated by the Uniform Consumer Credit Code, other state
statutes or the common law in certain states. To the extent that the Receivables
will be subject to the requirements of the FTC Rule, the Trustee, as holder of
the Receivables, will be subject to any claims or defenses that the purchaser of
the related Vehicle may assert against the seller of such Vehicle. Such claims
will be limited to a maximum liability equal to the amounts paid by the Obligor
under the related Receivable.
Under most state vehicle dealer licensing laws, sellers of automobiles and
light duty trucks are required to be licensed to sell vehicles at retail sale.
In addition, with respect to used vehicles, the Federal Trade Commission's Rule
on Sale of Used Vehicles requires that all sellers of used vehicles prepare,
complete and display a 'Buyer's Guide' which explains the warranty coverage for
such vehicles. Furthermore, Federal Odometer Regulations promulgated under the
Motor Vehicle Information and Cost Savings Act and the motor vehicle title laws
of most states require that all sellers of used vehicles furnish a written
statement signed by the seller certifying
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the accuracy of the odometer reading. If a seller is not properly licensed or if
either a Buyer's Guide or Odometer Disclosure Statement was not provided to the
purchaser of a Vehicle, the Obligor may be able to assert a defense against the
seller of the Vehicle. If an Obligor on a Receivable were successful in
asserting any such claim or defense, the Servicer would pursue on behalf of the
Trust any reasonable remedies against the seller or manufacturer of the vehicle,
subject to certain limitations as to the expense of any such action to be
specified in the related Trust Agreement.
Any such loss, to the extent not covered by credit support (as specified in
the Related Prospectus Supplement), could result in losses to the
Securityholders. As specified in the related Prospectus Supplement, if an
Obligor were successful in asserting any such claim or defense as described in
this paragraph or the two immediately preceding paragraphs, such claim or
defense may constitute a breach of a representation and warranty under the
related Trust Agreement and may create an obligation of the Company to
repurchase such Receivable unless the breach were cured.
Courts have applied general equitable principles to secured parties
pursuing repossession or litigation involving deficiency balances. These
equitable principles may have the effect of relieving an Obligor from some or
all of the legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections of the 14th Amendment to the Constitution of the United States.
Courts have generally either upheld the notice provisions of the UCC and related
laws as reasonable or have found that the creditor's repossession and resale do
not involve sufficient state action to afford constitutional protection to
consumers.
As specified in the related Prospectus Supplement, the Company (or its
Finance Subsidiary, if any) will represent and warrant under the related Trust
Agreement that each Receivable complies with all requirements of law in all
material respects. Accordingly, if an Obligor has a claim against the Trustee
for violation of any law and such claim materially and adversely affects the
Trustee's interest in a Receivable, such violation would constitute a breach of
representation and warranty under the related Trust Agreement and would create
an obligation of the Company (or its Finance Subsidiary, if any) to repurchase
such Receivable unless the breach were cured.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the 'Relief Act'), an Obligor who enters military service after the
origination of such Obligor's Receivable (including an Obligor who was in
reserve status and is called to active duty after origination of the
Receivable), may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such Obligor's active duty status, unless
a court orders otherwise upon application of the lender. The Relief Act applies
to Obligors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Obligors
who enter military service (including reservists who are called to active duty)
after origination of the related Receivable, no information can be provided as
to the number of loans that may be effected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Servicer to collect full amounts of interest on certain of the
Receivables. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Receivables, would result in a reduction of
the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any form of Credit Enhancement provided in
connection with the related series of Securities. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected Receivable during the Mortgagor's period of active duty status,
and, under certain circumstances, during an additional three month period
thereafter. Thus, in the event that the Relief Act or similar legislation or
regulations applies to any Receivable which goes into default, there may be
delays in payment and losses on the related Securities in connection therewith.
Any other interest shortfalls, deferrals or forgiveness of payments on the
Receivables resulting from similar legislation or regulations may result in
delays in payments or losses to Securityholders of the related series.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a creditor to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
creditor from repossessing a motor vehicle, and, as part of the rehabilitation
plan, reduce the amount of the secured indebtedness to the market value of the
motor vehicle at the
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time of bankruptcy (as determined by the court), leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness. Any such
shortfall, to the extent not covered by credit support (as specified in each
Prospectus Supplement), could result in losses to the Securityholders.
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, special federal tax counsel for the Company ('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 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 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 may be based on 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.
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TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
Treatment of the Notes as Indebtedness. The Transferor 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 Trust that in its
opinion the Notes will be classified as debt for federal income tax purposes.
The discussion below assumes this characterization of the Notes is correct.
Treatment of Original Issue Discount ('OID'). The discussion below assumes
that all payments on the Notes are denominated in U.S. dollars, and that the
Notes are not Indexed Securities or Strip Notes. Moreover, the discussion
assumes that the interest formula for the Notes meets the requirements for
'qualified stated interest' under Treasury regulations (the 'OID regulations')
relating to original issue discount ('OID'), and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue price)
does not exceed a de minimis amount (i.e., 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 Transferor (including a holder of 10% of the
outstanding Certificates) or a 'controlled foreign corporation' with respect to
which the Trust or the Seller is a 'related person' within the meaning of the
Code and (ii) provides the 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
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or certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the Foreign 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 would likely be treated as owning an interest in a partnership and not an
interest in an association (or publicly traded partnership) taxable as a
corporation. If the Noteholders were treated as owning an equitable interest in
a partnership, the partnership itself would not be subject to federal income
tax; rather each partner would be taxed individually on their respective
distributive share of the partnership's income, gain, loss, deductions and
credits. The amount, timing and characterization of items of income and
deductions for a Noteholder would differ if the Notes were held to constitute
partnership interests, rather than indebtedness. Since the Issuer will treat the
Notes as indebtedness for federal income tax purposes, the Servicer will not
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the Notes. Investors that are foreign persons
should consult their own tax advisors in determining the federal, state, local
and other tax consequences to them of the purchase, ownership and disposition of
the Notes.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the Trust as a Partnership. The Transferor and the Company
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, the Transferor and
the Company is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
For example, because the Certificates may have certain features
characteristic of debt, the Certificates might be considered debt of the
Transferor or the Trust. Generally, provided such Certificates are issued
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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.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each 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 Pass Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Receivables that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) 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 Pass-Through Rate
plus the other items described above even though the Trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
income even if they have not received cash from the Trust to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust.
All or 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.
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
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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
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 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
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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 Transferor 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.
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
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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 Certificateholders') 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 Certificateholder 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
Certificateholder 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 Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder'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 Certificateholder 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 Certificateholders 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 Certificateholder
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 Certificateholder 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 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
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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 Certificateholder's interest in those Stripped Bonds. Generally, a Grantor
Trust Certificateholder 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
Certificateholder 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 payments.
It is unclear whether a reasonable prepayment assumption should be used in
computing amortization of premium allowable under Section 171. A Grantor Trust
Certificateholder 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 Certificateholder 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 Certificateholder 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
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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 Certificateholder 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 Certificateholder acquires during the
year of the election or thereafter. Similarly, a Grantor Trust Certificateholder
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 Certificateholder 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
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
Certificateholder 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
Certificateholder complies with certain identification requirements (including
delivery of a statement, signed by the Grantor Trust Certificateholder under
penalties of perjury, certifying that such Grantor Trust Certificateholder is
the beneficial owner, is not a U.S. Person and
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providing the name and address of such Grantor Trust Certificateholder).
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 Certificateholder at any time during such
year, such information as may be deemed necessary or desirable to assist Grantor
Trust Certificateholders 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 CERTIFICATES 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 Transferor 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 Transferor 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 Transferor 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.
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 DEBT CERTIFICATEHOLDERS
As set forth above, it is expected that Federal Tax Counsel will advise the
Transferor 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
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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.
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 Transferor and some
or all of the Noteholders resulting from the transactions is that of a
partnership, a publicly traded partnership taxable as a corporation. The
Transferor currently does not intend to comply with the federal income tax
reporting requirements that would apply if any Classes of Notes were treated as
interests in a partnership or corporation.
If a transaction were treated as creating a partnership between the
Transferor 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 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
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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 Certificateholders' 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.
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 Company from such
sale.
The Company 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 Company with institutional investors through
dealers;
3. By direct placements by the Company with institutional investors;
and
4. By competitive bid.
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 Company or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters
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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 Company 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 Company.
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 on a best efforts basis) and that, in limited
circumstances, the Company will indemnify the several underwriters and the
underwriters will indemnify the Company against certain civil liabilities,
including liabilities under the Securities Act or will contribute to payments
required to be made in respect thereof. The Commission is of the opinion that
indemnification for securities law violations is contrary to the public policy
expressed in the federal securities laws, and, consequently, that such
indemnification provisions are unenforceable.
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 Company 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, New York, New York, or other
counsel specified in the related Prospectus Supplement.
FINANCIAL INFORMATION
Certain specified Trust Property will secure each series of Securities, no
Trust 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. Accordingly, no financial statements with respect
to any Trust Property 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.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accrual Securities.................................................... 6
Additional Receivables................................................ 11
Adjustable Rate Receivables........................................... 11
Advanta............................................................... 4
APR................................................................... 9, 20
Balloon Payments...................................................... 11
caps.................................................................. 11
Cede.................................................................. 11
CEDEL Participants.................................................... 28
Certificateholders.................................................... 33
Certificates.......................................................... 1, 4
Class................................................................. 1
Closing Date.......................................................... 30, 31
Collection Account.................................................... 31
Commission............................................................ 2
Commodity Indexed Securities.......................................... 26
Company............................................................... 4
Company Investment Contracts.......................................... 31
Contracts............................................................. 1, 4
Cooperative........................................................... 28
Credit Enhancement.................................................... 18
Credit Enhancer....................................................... 18
Currency Indexed Securities........................................... 26
Dealers............................................................... 4
Debt Securities....................................................... 13
Defaulted Contracts................................................... 15
Definitive Securities................................................. 28
Depositaries.......................................................... 27
Direct Participants................................................... 17
Distribution Account.................................................. 31
DTC................................................................... 11
Eligible Deposit Account.............................................. 32
Eligible Institution.................................................. 32
Eligible Investments.................................................. 31
ERISA................................................................. 13
Euroclear Operator.................................................... 28
Euroclear Participants................................................ 28
Exchange Act.......................................................... 2, 13
Face Amount........................................................... 26
FASIT................................................................. 13
Federal Tax Counsel................................................... 41
Finance Subsidiary.................................................... 16
Fixed Income Securities............................................... 6
floors................................................................ 11
Forward Purchase Agreement............................................ 30
FTC Rule.............................................................. 39
Funding Period........................................................ 30
Grantor Trust Securities.............................................. 13
Holder-in-Due-Course Rule............................................. 39
Indenture............................................................. 5
Indenture Trustee..................................................... 5
Index................................................................. 26
Indexed Commodity..................................................... 26
Indexed Currency...................................................... 26
54
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</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Indexed Principal Amount.............................................. 26
Indexed Securities.................................................... 26
Indirect Participants................................................. 17, 27
Insolvency Event...................................................... 35
Insolvency Laws....................................................... 16
Interest Rate......................................................... 2, 6
Investment Company Act................................................ 8
Investment Earnings................................................... 32
Issuer................................................................ 4,19
market discount....................................................... 48
Master Trust.......................................................... 8
Master Trust Agreement................................................ 8
Master Trust New Issuance............................................. 25
negative arbitrage.................................................... 31
negative carry........................................................ 31
Noteholders........................................................... 33
Notes................................................................. 1, 4
Participants.......................................................... 27
Partnership Interests................................................. 13
Pass-Through Rate..................................................... 2
Pay for Performance Program........................................... 11
Payment Date.......................................................... 7, 24
Policy................................................................ 1, 5
Pool Balance.......................................................... 23
Pool Factor........................................................... 23
Pooling Agreement..................................................... 5
Pre-Funding Account................................................... 10, 30
Pre-Funding Period.................................................... 11
Prepayment............................................................ 18
principal statistical characteristics................................. 30
Prospectus Supplement................................................. 1
Rating Agencies....................................................... 13
Ratings Effect........................................................ 17, 26
Receivables........................................................... 1, 5
Record Date........................................................... 7, 24
Registration Statement................................................ 2
Relief Act............................................................ 18, 40
Remittance Period..................................................... 7
Residual Interest..................................................... 8
Rule of 78s........................................................... 9, 20
Rule of 78s Contracts................................................. 9, 20
Rules................................................................. 27
Section 1286 Treasury Regulations..................................... 47
Securities............................................................ 1
Securities Act........................................................ 2
Security Insurer...................................................... 11
Securityholders....................................................... 7
Senior Securities..................................................... 6
Servicer.............................................................. 1, 4
Servicer Default...................................................... 34
Servicing Agreement................................................... 5
Servicing Fee......................................................... 33
Servicing Fee Rate.................................................... 33
Short-Term Note....................................................... 42
Simple Interest Contracts............................................. 10, 20
Stock Index........................................................... 26
Stock Indexed Securities.............................................. 26
Strip Securities...................................................... 6
Stripped Bond......................................................... 47
Subordinate Securities................................................ 6
55
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Terms and Conditions.................................................. 28
Transferor............................................................ 4
Trust................................................................. 1, 4
Trust Accounts........................................................ 31
Trust Agreement....................................................... 5, 31
Trust Property........................................................1, 4, 9
Trustee............................................................... 5
Vehicles.............................................................. 1, 5
Vendors............................................................... 4
</TABLE>
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Securities
(the 'Global Securities') will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the
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following month. Payment will then be made by the Relevant Depository to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the CEDEL Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the CEDEL or Euroclear cash debt will be valued instead as of
the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depository, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depository, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of CEDEL Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). In the event that the CEDEL Participant or Euroclear Participant have a
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
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(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (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 Global
Securities 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.
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 Global Security
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
On April 22, 1996, the IRS 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 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.
The term 'Non-U.S. Person' means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF. 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Available Information............................................ S-2
Reports to the Noteholders....................................... S-2
Incorporation of Certain Documents by Reference.................. S-2
Summary.......................................................... S-4
Risk Factors..................................................... S-10
Formation of the Trust........................................... S-11
The Trust Property............................................... S-12
Use of Proceeds.................................................. S-12
Yield and Prepayment Considerations.............................. S-13
The Receivables Pool............................................. S-16
The Seller and Advanta Corp...................................... S-21
The Company and the Master Servicer.............................. S-21
The Insurer...................................................... S-24
Description of the Notes......................................... S-25
Description of the Trust Documents............................... S-27
Credit Enhancement............................................... S-34
The Policy....................................................... S-35
Certain Federal Income Tax Consequences.......................... S-37
State Tax Considerations......................................... S-37
ERISA Considerations............................................. S-38
Ratings.......................................................... S-38
Underwriting..................................................... S-39
Notice to Canadian Residents..................................... S-40
Experts.......................................................... S-40
Legal Opinions................................................... S-40
Index of Defined Terms........................................... S-41
PROSPECTUS
Prospectus Supplement............................................ 2
Available Information............................................ 2
Incorporation of Certain Documents by Reference.................. 2
Reports to Securityholders....................................... 2
Summary of Terms................................................. 4
Risk Factors..................................................... 14
The Trust Property............................................... 18
The Issuers...................................................... 19
The Receivables.................................................. 19
Advanta's Automobile Financing Program........................... 21
Pool Factors..................................................... 23
Use of Proceeds.................................................. 23
The Company and the Servicer..................................... 23
The Trustee...................................................... 23
Description of the Securities.................................... 23
Description of the Trust Agreements.............................. 31
Certain Legal Aspects of the Receivables......................... 36
Federal Income Tax Consequences.................................. 41
State and Local Taxation......................................... 52
ERISA Considerations............................................. 52
Methods of Distribution.......................................... 52
Legal Opinions................................................... 53
Financial Information............................................ 53
Additional Information........................................... 53
Index of Terms................................................... 54
Annex I--Global Clearance, Settlement and Tax Documentation
Procedures...................................................... A-1
</TABLE>
------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES DESCRIBED IN THIS PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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$57,602,000
ADVANTA AUTOMOBILE
RECEIVABLES TRUST 1998-1
$41,000,000
CLASS A-1 5.90% ASSET
BACKED NOTES
$16,602,000
CLASS A-2 6.09% ASSET
BACKED NOTES
ADVANTA AUTOMOBILE
RECEIVABLES CORP. I
SELLER
ADVANTA AUTO FINANCE
CORPORATION
ORIGINATOR AND MASTER SERVICER
------------------------------
PROSPECTUS SUPPLEMENT
JUNE 25, 1998
------------------------------
SALOMON SMITH BARNEY
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