<PAGE> 1
As filed pursuant to Rule 424(b)(5)
Registration No. 333-11961; 333-11961-01
$465,000,000
Mellon Bank Premium Finance Loan Master Trust
$440,000,000 Class A Floating Rate Asset Backed Certificates, Series 1996-1
$25,000,000 Class B Floating Rate Asset Backed Certificates, Series 1996-1
Mellon Bank, N.A.
Transferor
AFCO Credit Corporation
AFCO Acceptance Corporation
Originators and Servicers
------------------------
Each Class A Floating Rate Asset Backed Certificate, Series 1996-1
(collectively, the "Class A Certificates") and each Class B Floating Rate Asset
Backed Certificate, Series 1996-1 (collectively, the "Class B Certificates"
and, together with the Class A Certificates, the "Certificates") will
represent the right to receive certain payments from the Mellon Bank Premium
Finance Loan Master Trust (the "Trust"), created pursuant to a pooling and
servicing agreement (the "Pooling and Servicing Agreement") dated December
1, 1996 among Mellon Bank, N.A., as transferor (the "Transferor"), AFCO
Credit Corporation ("AFCO Credit"), as servicer, AFCO Acceptance
Corporation ("AFCO Acceptance"), as servicer (and together with AFCO
Credit in their capacity as servicers, the "Servicer"), Premium
Financing Specialists, Inc. ("PFSI") as back-up servicer, and Premium
Financing Specialists of California, Inc., as back-up servicer
(together with PFSI, the "Back-up Servicer") and The First
National Bank of Chicago, as trustee (the "Trustee"). The assets
of the Trust will include (i) premium finance agreements between
either AFCO Credit or AFCO Acceptance (each in its capacity as an
originator, an "Originator") and commercial borrowers to finance
the payment of insurance premiums on insurance and related sums
regarding insurance policies under which the borrowers are the
insureds and are governed by the law of a State in the United
States of America or the District of Columbia ("Premium
Finance Agreements"), which Premium Finance Agreements are
transferred from time to time by either of the Originators
to the Transferor and by the Transferor to the Trustee for
the benefit of Trust (the "Receivables"); (ii) all monies
due or to become due with respect to the Receivables,
including all monies received from insurance companies
and state insurance guaranty funds representing
returns of unearned portions of insurance premiums, up
to the amount of principal, interest and other charges
due on the related Receivables; (iii) such amounts as
may be from time to time held in one or more trust
accounts, which will be established and maintained
by the Trustee pursuant to the Agreement; (iv) any
Enhancement issued with respect to any Series;
(v) all of the Transferor's rights under a
receivables purchase agreement (the
"Receivables Purchase Agreement"), dated as of
December 1, 1996, among the Transferor and
each Originator and (vi) the proceeds of all
of the foregoing.
------------------------ (Continued on next page)
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE CERTIFICATES, AND THERE IS NO
ASSURANCE THAT ONE WILL DEVELOP. POTENTIAL INVESTORS SHOULD CONSIDER, AMONG
OTHER THINGS, THE INFORMATION SET FORTH IN "RISK FACTORS" COMMENCING ON PAGE 24.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF MELLON BANK, N.A., ANY OF THE ORIGINATORS OR
ANY AFFILIATE THEREOF. A CERTIFICATE IS NOT A DEPOSIT AND NEITHER
THE CERTIFICATES NOR THE UNDERLYING RECEIVABLES ARE INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public(1) Discount Transferor(1)(2)
---------------- ---------------- -----------------
<S> <C> <C> <C>
Per Class A Certificate.......... 99.953125% 0.300000% 99.653125%
Per Class B Certificate.......... 100.000000% 0.350000% 99.650000%
Total............................ $464,793,750 $1,407,500 $463,386,250
</TABLE>
- ------------
(1) Plus accrued interest, if any, at the Class A LIBOR Rate or the Class B
LIBOR Rate, as applicable, from December 19, 1996.
(2) Before deduction of expenses estimated to be $1,036,000.
------------------
The Certificates are offered by the Underwriters as specified herein,
subject to the Underwriters' right to reject orders in whole or in part. It is
expected that the Certificates will be offered globally and delivered in
book-entry form on or about December 19, 1996 through the facilities of The
Depository Trust Company, Cedel and the Euroclear System.
Underwriters of the Class A Certificates
CS First Boston Mellon Financial Markets, Inc.
Chase Securities Inc. J.P. Morgan & Co.
Underwriters of the Class B Certificates
CS First Boston Mellon Financial Markets, Inc.
The date of this Prospectus is December 12, 1996
<PAGE> 2
(Cover continued from previous page)
In addition, the Collateral Interest will be issued to the Collateral
Interest Holder in the initial amount of $35,000,000 and will be subordinated to
the Certificates as described herein. The Transferor will also own the undivided
interest in the Trust not represented by the Certificates or other interests
issued by the Trust from time to time (the "Transferor Interest"). The
Transferor may offer from time to time other Series of certificates which
evidence fractional undivided interests in certain assets of the Trust, which
may have terms significantly different from the Certificates. See "Description
of the Certificates--New Issuances."
Interest will accrue, subject to certain limitations described herein, on
the Class A Certificates from December 19, 1996 (the "Closing Date") through but
excluding March 17, 1997 and during each Interest Period (as defined herein)
thereafter, at the rate of 0.11% per annum above the London interbank offered
rate for three-month United States dollar deposits (or, in certain limited
circumstances described herein, one month United States dollar deposits)
("LIBOR"), determined as described herein, prevailing on the LIBOR Determination
Date (as defined herein) with respect to such period. Interest will accrue,
subject to certain limitations described herein, on the Class B Certificates
from the Closing Date through but excluding March 17, 1997 and during each
Interest Period thereafter, at the rate of 0.32% per annum above LIBOR
prevailing on the LIBOR Determination Date with respect to each such period. The
initial LIBOR Determination Date is December 17, 1996. Interest with respect to
the Certificates will be distributed quarterly on the 15th day of March, June,
September and December (or, if such 15th day is not a business day, the next
business day) and on the Class B Scheduled Payment Date (defined below) (each,
an "Interest Payment Date") commencing on the March, 1997 Distribution Date and
ending on the related maturity date or, under certain limited circumstances
described herein, monthly, on or about the 15th day of each calendar month.
Principal on the Class A Certificates is scheduled to be distributed on the
December 2001 Distribution Date (the "Class A Scheduled Payment Date"), but may
be paid earlier or later under the circumstances described herein. See "Summary
of Terms -- Initial Principal Payment Date; Principal Payment Period",
"Description of the Certificates -- Extension of Initial Principal Payment Date"
and "-- Pay Out Events" and "Maturity Assumptions." Principal on the Class B
Certificates is scheduled to be distributed on the January 2002 Distribution
Date (the "Class B Scheduled Payment Date"), but may be paid earlier or later
under the circumstances described herein. See "Summary of Terms -- Initial
Principal Payment Date; Principal Payment Period", "Description of the
Certificates -- Extension of Initial Principal Payment Date" and "-- Pay Out
Events" and "Maturity Assumptions."
The Class B Certificates will be subordinated to the Class A Certificates
and the Collateral Interest will be subordinated to the Class A Certificates and
the Class B Certificates, as and to the extent described herein.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
2
<PAGE> 3
AVAILABLE INFORMATION
The Transferor, as originator of the Trust, has filed a Registration
Statement on Form S-3 (together with all amendments and exhibits thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
(the "Commission") with respect to the Certificates offered pursuant to this
Prospectus. For further information, reference is made to the Registration
Statement which is available for inspection without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048; and Midwest Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates and
electronically through the Commission's Electronic Gathering and Retrieval
system at the Commission's Web site (http://www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued, monthly reports,
containing unaudited information concerning the Trust and prepared by the
Servicer, will be sent on behalf of the Trust only to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Certificates, pursuant to the Agreement. See "Description of the
Certificates--Book-Entry Registration." Such reports will not constitute
financial statements prepared in accordance with generally accepted accounting
principles. The Agreement does not require the sending of, and the Transferor
does not intend to send, any of its financial reports to Certificateholders.
Copies of the monthly reports may be obtained free of charge by calling AFCO
Credit Corporation, at (212) 612-3540. The Servicer (or Transferor, if the
Back-up Servicer is Servicer) will file with the Commission such periodic
reports with respect to the Trust as are required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of
the Commission thereunder. In furtherance of the foregoing, the Servicer will
file on behalf of the Trust a Form 8-K within 15 calendar days following the end
of each calendar month of the Trust, commencing January, 1997, containing the
information specified under the heading "Description of Certificates--Reports to
Certificateholders" and such other material changes to the characteristics of
the Receivables (including Additional Receivables) since the preceding calendar
month. The obligation to file such periodic reports may be suspended under the
Exchange Act as soon as the year after the first year of the Trust.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Servicer on behalf of the Trust referred to
herein with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act on or after the date hereof and prior to the termination of the
offering of the Certificates issued by the Trust shall be deemed to be
incorporated by reference herein 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 all purposes of this Prospectus to the extent that
a statement contained herein 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 statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of this Prospectus.
The Transferor on behalf of the Trust will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such request should be directed to: Mellon Bank
Corporation, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania
15258 (Attention: Corporate Secretarial Services Department).
3
<PAGE> 4
PROSPECTUS SUMMARY
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus. Certain capitalized terms
used in this summary are defined elsewhere in this Prospectus. A listing of the
pages on which the terms are defined is found in the "Index of Terms."
Type of Securities......... Class A Floating Rate Asset Backed Certificates,
Series 1996-1 (the "Class A Certificates") and
Class B Floating Rate Asset Backed Certificates,
Series 1996-1 (the "Class B Certificates," and
together with the Class A Certificates, the
"Certificates").
The Certificates initially will be represented by
Certificates registered in the name of Cede, as the
nominee of DTC. No Certificate Owner will be
entitled to receive a Definitive Certificate,
except under the limited circumstances described
herein. Holders may elect to hold their
Certificates through DTC (in the United States) or
Cedel Bank, Societe Anonyme ("Cedel") or the
Euroclear System (in Europe) ("Euroclear").
Transfers will be made in accordance with the rules
and operating procedures described herein. See
"Description of the Certificates--Definitive
Certificates".
Beneficial interests in the Certificates will be
offered for purchase in denominations of $1,000,
and integral multiples thereof.
Originators................ AFCO Credit Corporation, a New York corporation
("AFCO Credit") and a wholly owned subsidiary of
Mellon Bank, N.A., was formed to originate premium
finance loans throughout the United States, except
California. AFCO Acceptance Corporation, a
California corporation ("AFCO Acceptance") and a
wholly owned subsidiary of AFCO Credit, was formed
to originate premium finance loans in California.
AFCO Credit and AFCO Acceptance are collectively
sometimes referred to herein as the "Originators"
or "AFCO". See "Business of the
Originators--General."
Premium finance loans are typically installment
loans, generally made to a commercial insurance
buyer, the proceeds of which pay premiums which are
due to the insurance company. Financed commercial
insurance policies commonly (a) are for a term of
one year or less, (b) require the full premium to
be paid at or near inception of the policy period
and (c) provide for a return of the unearned
premium to the insured in the event of cancellation
of the related insurance policy.
Transferor................. Mellon Bank, N.A., a national banking association
organized under the laws of the United States of
America (the "Transferor").
Servicer................... Each of AFCO Credit and AFCO Acceptance will
service the Receivables which it originates (each
in such capacity, a "Servicer" and collectively,
the "Servicer").
Back-up Servicer........... Premium Financing Specialists, Inc., a Missouri
corporation ("PFSI") will act as back-up servicer
for all Receivables other than those originated in
California, and Premium Financing Specialists of
California, Inc., a California corporation ("PFSC")
and a subsidiary of PFSI will act as back-up
servicer for the Receivables originated in
California (together with PFSI, the "Back-up
Servicer").
Trustee.................... The First National Bank of Chicago, a national
banking association, as trustee (the "Trustee").
4
<PAGE> 5
Trust...................... The Mellon Bank Premium Finance Loan Master Trust
(the "Trust") will be created as a master trust
under which one or more series of investor
certificates (each a "Series") will be issued. The
Certificates will be the first Series issued. The
Trust will be formed pursuant to a pooling and
servicing agreement dated as of December 1, 1996
(the "Agreement"), among the Transferor, each
Servicer, each Back-up Servicer and the Trustee, as
supplemented by the supplement relating to the
Certificates (the "Series 1996-1 Supplement"). As
used in this Prospectus, the term "Holders" refers
to holders of the Certificates, the term "Class A
Holders" refers to holders of the Class A
Certificates, the term "Class B Holders" refers to
holders of the Class B Certificates and the term
"Agreement" (unless the context requires otherwise)
refers to the Agreement as supplemented by the
Series 1996-1 Supplement.
Trust Assets............... The assets of the Trust include (i) premium finance
agreements between either of the Originators and
commercial borrowers to finance the payment of
insurance premiums on insurance and related sums
regarding insurance policies under which the
borrowers are the insureds governed by the law of a
State in the United States of America or the
District of Columbia (each, a "Premium Finance
Agreement"), which Premium Finance Agreements are
transferred from time to time by either of the
Originators to the Transferor and by the Transferor
to the Trustee for the benefit of the Trust (the
"Receivables"); (ii) all monies due or to become
due with respect to the Receivables, including all
monies received from insurance companies and state
insurance guaranty funds representing returns of
unearned portions of insurance premiums, up to the
amount of principal, interest and other charges due
on the related Receivables; (iii) such amounts as
may be from time to time held in a Collection
Account, Class A Interest Funding Account, Class B
Interest Funding Account, Distribution Account,
Principal Account, Finance Charge Account,
Principal Funding Account, Excess Funding Account
and Reserve Account established and maintained by
the Trustee pursuant to the Agreement, funded by
collections on Receivables and to the extent
described herein investment earnings thereon; (iv)
any Enhancement issued with respect to any Series;
(v) all of the Transferor's rights under a
receivables purchase agreement (the "Receivables
Purchase Agreement"), dated as of December 1, 1996,
among the Transferor and each of the Originators,
including rights to require the Originators to
repurchase certain Receivables in the event of
breaches of certain representations and warranties
and covenants with respect thereto and the right to
enforce certain covenants (see "Description of the
Receivables Purchase Agreement--Representations and
Warranties," "--Certain Covenants" and
--"Repurchase Obligations") and (vi) the proceeds
of all of the foregoing. See "The Receivables."
Pursuant to the Receivables Purchase Agreement, on
the date of issuance of the Certificates (the
"Closing Date"), the Originators will transfer and
assign to the Transferor Premium Finance Agreements
from their portfolio of Premium Finance Agreements
on the day immediately preceding the Closing Date
(the "Calculation Date") to borrowers whose stated
addresses in the Premium Finance Agreements are in
one of the Permitted States (as defined under "The
Receivables") and that satisfy as of the Cut-off
Date (as defined below) the eligibility criteria
specified in the Receivables Purchase Agreement and
the Agreement.
5
<PAGE> 6
The "Cut-off Date" is (x) with respect to Premium
Finance Agreements originated prior to December 1,
1996, December 1, 1996 and (y) with respect to
Premium Financing Agreements originated on or after
December 1, 1996 but through and including the
Calculation Date, the Calculation Date. See "The
Receivables" and "Description of the
Certificates--Eligible Receivables." The selection
of the Permitted States was based on state
regulatory considerations. Each of the Originators
will represent and warrant in the Receivables
Purchase Agreement, and the Transferor will
represent and warrant in the Agreement, that the
Identified Portfolio was not selected in a manner
adverse to Certificateholders. Pursuant to the
Agreement, the Transferor will transfer and assign
such Premium Finance Agreements to the Trustee for
the benefit of the Trust. See "Description of
Certificates--Transfer and Assignment of
Receivables."
As of November 15, 1996 (the "Statistical
Calculation Date"), the Permitted States consisted
of the 36 states set forth in the table "Geographic
Concentration" under the heading "The Receivables"
herein. As of the Statistical Calculation Date,
Aggregate Receivables (as defined under
"--Receivables" below) in the Identified Portfolio
constitute approximately 59.5% of the aggregate
receivables in the Originators' entire portfolio of
Premium Finance Agreements as of the Statistical
Calculation Date. "Identified Portfolio" means, as
of any date of determination, Premium Finance
Agreements (i) with borrowers whose stated address
in the Premium Finance Agreement is in one of the
Permitted States as of such date and (ii) that
satisfy the eligibility criteria for transfer to
the Trust set forth in the Agreement as of such
date.
The statistical information relating to the
Receivables presented in this Prospectus is based
on the Receivables in the Identified Portfolio as
of the Statistical Calculation Date. Receivables
transferred to the Trust on the Closing Date will
include certain additional Premium Finance
Agreements originated by either of the Originators
after the Statistical Calculation Date and on or
prior to the Calculation Date. In addition, the
characteristics of the Receivables included as of
the Statistical Calculation Date will vary as of
the Cut-off Date as a result of payments received
by or on behalf of borrowers after the Statistical
Calculation Date and prior to the Cut-off Date.
There will be no material permissible deviations
from the eligibility criteria used for identifying
the Premium Finance Agreements in the Identified
Portfolio as of the Statistical Calculation Date
from those applied on the Closing Date. However,
certain of the Premium Finance Agreements in the
Identified Portfolio that satisfied the eligibility
criteria as of the Statistical Calculation Date may
not satisfy such criteria on the Cut-off Date
because of a change in circumstances and therefore
will not be permitted to be transferred to the
Trust. While the statistical distribution of the
characteristics of all Receivables transferred to
the Trust on the Closing Date will vary from the
statistical information presented in this
Prospectus, the Transferor does not believe that
the characteristics of the Receivables as of the
Cut-off Date will vary materially from the
information presented herein with respect to the
Receivables as of the Statistical Calculation Date.
Each Originator will be obligated pursuant to the
Receivables Purchase Agreement to transfer and
assign on each day following the Closing Date
6
<PAGE> 7
each Premium Finance Agreement with a borrower
whose stated address in such Premium Finance
Agreement is in one of the Permitted States as of
such date originated by it after the Closing Date
(or, if such Permitted State becomes a Permitted
State after the Closing Date, originated by it
after such state became a Permitted State) which
satisfies the eligibility criteria set forth under
"Description of the Certificates--Eligible
Receivables" (the "Additional Receivables") to the
Transferor. The Transferor in turn will be required
pursuant to the Agreement to transfer and assign
all such Additional Receivables to the Trustee for
the benefit of the Trust. See "Risk
Factors--Additional Receivables Considerations." In
the event that sufficient Additional Receivables
are not transferred to the Trustee for the benefit
of the Trust to maintain the Minimum Transferor
Interest as required by the Agreement and as
described herein, a Pay Out Event would occur and
the Rapid Amortization Period will occur. See
"Maturity Assumptions--Pay Out Events" and "--Pay
Out Events."
Receivables................ The Receivables are Rule of 78's Receivables (as
defined herein) and are short-term in duration,
generally with maturities under one year. Each
Receivable bears a fixed interest rate that is
established at the time of origination. Such
interest rate is generally based on a spread over
the estimated London interbank offered rate at the
date of origination of the loan for deposits with a
maturity comparable to the average life of the
loan, which currently is generally 4 1/2 months.
The principal amount of each Receivable is fully
amortized over a fixed number of scheduled
payments. The Originators assign an account number
(each, an "Account") for the borrower under a
Premium Finance Agreement for the related insurance
policy period. A Premium Finance Agreement may
finance premiums relating to more than one
insurance policy or from one or more insurance
carriers. However, there is only one monthly
payment under a Premium Finance Agreement and such
payment is not allocated to the repayment of the
financing of the premiums of any particular
insurance policy.
Each Premium Finance Agreement representing a
Receivable grants the related Originator a security
interest in the borrower's right to receive any
unearned premium from the insurance company upon
cancellation of the related insurance policy prior
to its expiration. Each Premium Finance Agreement
representing a Receivable also contains a power of
attorney granting the related Originator the right
to cancel the insurance policy, if cancelable, and
collect such unearned premium from the insurance
company following a payment default on the related
Receivable. Each Originator will assign its
security interests and related power of attorney to
the Transferor pursuant to the Receivables Purchase
Agreement, and the Transferor will assign such
security interest and such powers of attorney to
the Trustee pursuant to the Agreement. With respect
to Receivables transferred to the Trust prior to
February 1, 1997, neither the Originators nor the
Transferor will notify the related insurance
carriers of the Trustee's security interest in the
related unearned premiums and the Trustee's
security interest in the related unearned premium
of such Receivables will not be perfected. With
respect to each Receivable transferred to the Trust
on or after February 1, 1997, the Originators and
the Transferor will represent that a notice of
finance premium has been delivered to the related
insurance carrier notifying it of the Trustee's
security interest in the
7
<PAGE> 8
unearned premium and that the Trust has a first
priority perfected security interest in such
unearned premiums. See "Risk-Factors--Lack of
Perfected Security Interest in Certain Unearned
Premiums" and "Certain Legal Aspects of the
Receivables--Lack of Perfected Security Interest in
Certain Unearned Premiums."
The Aggregate Receivables as of November 30, 1996
was $614,886,198.16, consisting of $14,131,486.55
of Finance Charge Receivables and $600,754,711.61
of Principal Receivables. "Aggregate Receivables"
means, with respect to the Receivables as of any
date of determination, an amount equal to the
aggregate amount of payments owed on the
Receivables from such date (or if such date is the
Statistical Calculation Date, from November 15,
1996) through the respective scheduled final
payment dates of such Receivables (exclusive of
late fees and administrative charges) less certain
net payables as of such date of determination.
"Finance Charge Receivables" means, with respect to
the Receivables as of the first day of any Monthly
Period (as defined below), an amount equal to the
aggregate amount of unearned interest with respect
to such Receivables calculated in accordance with
the Rule of 78's method. For purposes hereof,
collections of Finance Charge Receivables with
respect to any Monthly Period generally will equal
the aggregate amount of interest accrued on such
Receivables for such Monthly Period calculated on
the basis of the Rule of 78's plus late fees and
other administrative charges collected during such
Monthly Period plus recoveries (net of the amounts
thereof applied to defaults) received during such
Monthly Period. "Monthly Period" means each
calendar month, commencing December 1996.
"Principal Receivables" means, with respect to the
Receivables as of any date of determination, an
amount equal to the product of (x) Aggregate
Receivables as of such date of determination and
(y) a fraction, the numerator of which is Beginning
of Month Principal Receivables and the denominator
of which is the Aggregate Receivables as of the
first day of the current Monthly Period. For
purposes hereof, collections of Principal
Receivables with respect to any Monthly Period will
consist of all collections on the Receivables
received during such Monthly Period that are not
treated as collections of Finance Charge
Receivables.
"Beginning of Month Principal Receivables" means,
with respect to the Receivables and any Monthly
Period, an amount equal to the Aggregate
Receivables as of the first day of such Monthly
Period minus Finance Charge Receivables as of such
date.
Under certain circumstances a borrower may have
more than one Account. It is possible that all or a
portion of the Premium Finance Agreements of any
Account will not satisfy the eligibility criteria
for transfer to the Trust resulting in the same
borrower having one or more Premium Finance
Agreements owned by the Trust and one or more
Premium Finance Agreements owned by one of the
Originators. These Premium Finance Agreements may
contain cross-default and cross-collateralization
provisions. Consequently, a default by a borrower
on a Premium Finance Agreement that is not owned by
the Trust may result in the default of the
Receivables of such borrower in the Trust and the
cancellation of the related insurance policies thus
affecting the rate and
8
<PAGE> 9
timing of payments under the Receivables. In the
event certain Premium Finance Agreements of the
same borrower are owned by the Trust and by one of
the Originators, the Originators have agreed in the
Receivables Purchase Agreement that to the extent
they receive payments (including from returns of
unearned premiums, recoveries or otherwise) that
are not clearly identified as belonging to Premium
Finance Agreements owned by one of the Originators,
such amounts will be treated first as collections
on the Receivables of such borrower until such
Receivables are paid in full. In no event will
returned unearned premiums or any other payments in
respect of the Receivables be applied to payments
in respect of Premium Finance Agreements owned by
one of the Originators until such Receivables are
paid in full.
Additional Receivables..... All Additional Receivables originated by the
Originators in the Identified Portfolio will be
transferred to the Trust from time to time
following the Closing Date. Such Additional
Receivables may be of different credit quality than
previously transferred Receivables but must be
underwritten in accordance with the Originators'
credit policies and procedures which may not be
materially different from those applied to the
Receivables transferred on the Closing Date (the
"Initial Receivables"). Except for the criteria
described under "Description of
Certificates--Eligible Receivables" and "--Transfer
and Assignment of Receivables," there are no
required characteristics of Additional Receivables.
Because the remaining term to maturity of
substantially all of the Receivables included in
the Trust as of the Statistical Calculation Date is
twelve months or less, it is expected that within
twelve months following the Closing Date
substantially all of the Receivables in the Trust
will consist of Additional Receivables. Additional
Receivables transferred to the Trust may have
characteristics materially different from the
characteristics of the previously transferred
Receivables. See "Risk Factors--Additional
Receivables Considerations."
Certificate Interest
and Principal............ Each of the Certificates represents the right to
receive certain payments from the assets of the
Trust. The Trust assets will be allocated among the
Class A Holders (the "Class A Investor Interest"),
the Class B Holders (the "Class B Investor
Interest"), the Collateral Interest Holder (the
"Collateral Interest," and together with the Class
A Investor Interest and the Class B Investor
Interest, the "Investor Interest"), the interest of
the holders of other undivided interests in the
Trust issued pursuant to the Agreement and
applicable Series Supplements and the Transferor
(the "Transferor Interest"), as described below.
The Collateral Interest in the initial amount of
$35,000,000 (which amount represents 7% of the
amount of the initial Investor Interest)
constitutes Credit Enhancement for Certificates.
The provider of such Credit Enhancement is referred
to herein as the "Collateral Interest Holder").
Allocations will be made to the Collateral Interest
and the Collateral Interest Holder will have voting
and certain other rights as if the Collateral
Interest were a subordinated class of Certificates.
The Collateral Interest is not being offered hereby
and any information contained herein relating to
the Collateral Interest is included in the
Prospectus solely for the purpose of facilitating
an understanding of the Certificates.
The term "Enhancement" means, with respect to any
Series or Class, any Credit Enhancement, guaranteed
rate agreement, maturity liquidity
9
<PAGE> 10
facility, interest rate cap agreement, interest
rate swap agreement or other similar arrangement
for the benefit of the certificateholders of that
Series or Class. The term "Credit Enhancement"
means with respect to any Series or Class, any cash
collateral guaranty or account, collateral
interest, letter of credit, surety bond, insurance
policy, spread account, reserve account or other
similar arrangement for the benefit of the
certificateholders of that Series or Class. Credit
Enhancement may also take the form of subordination
of one or more Classes of a Series to any other
Class or Classes of the same or a different Series
or a cross-support feature which requires
collections on Receivables of one Series to be paid
as principal and/or interest with respect to
another Series.
The Transferor Interest will represent the right to
the assets of the Trust not allocated to the
Investor Interest or the holders of other undivided
interests in the Trust. The principal amount of the
Transferor Interest will fluctuate as the amount of
Principal Receivables and the amount on deposit in
the Excess Funding Account change from time to
time.
The Class A Certificates will represent the right
to receive, from the assets of the Trust allocated
to the Class A Certificates, funds up to (but not
in excess of) the amounts required to make (a)
payments of interest accruing from the Closing Date
through but excluding March 17, 1997 and during
each Interest Period thereafter, at the rate of
0.11% per annum above the London interbank offered
rate for three month United States dollar deposits
(or, in certain limited circumstances described
herein, one month United States dollar deposits)
("LIBOR"), determined as described herein,
prevailing on the related LIBOR Determination Date
(such rate, the "Class A LIBOR Rate"), in each
case, subject to the Class A Available Funds Cap
for each related Monthly Period as described under
"--Interest" below, and (b) payments of principal
on the Class A Scheduled Payment Date or, under
certain limited circumstances, during the Principal
Payment Period or the Rapid Amortization Period, to
the extent of the Class A Investor Interest, which
may be less than the unpaid principal balance of
the Class A Certificates in certain circumstances
described herein. If the Class A Investor Interest
is less than the unpaid balance of the Class A
Certificates, the holders of the Class A
Certificates will incur a loss.
The Class B Certificates will represent the right
to receive, from the assets of the Trust allocated
to the Class B Certificates, funds up to (but not
in excess of) the amounts required to make (a)
payments of interest accruing from the Closing Date
through but excluding March 17, 1997 and during
each Interest Period thereafter, at the rate of
0.32% per annum above LIBOR, determined as
described herein, prevailing on the related LIBOR
Determination Date (such rate, the "Class B LIBOR
Rate"), in each case, subject to the Class B
Available Funds Cap for each related Monthly Period
as described under "--Interest" below and (b)
payments of principal on the Class B Scheduled
Payment Date or, under certain limited
circumstances, during the Principal Payment Period
or the Rapid Amortization Period, to the extent of
the Class B Investor Interest, which may be less
than the unpaid principal balance of the Class B
Certificates in certain circumstances described
herein. No principal will be paid to the Class B
Holders until the Class A Investor Interest is paid
in full. If the Class B Investor Interest is less
than the
10
<PAGE> 11
unpaid balance of the Class B Certificates, the
holders of the Class B Certificates will incur a
loss.
The aggregate principal amount of the Class A
Investor Interest and the Class B Investor Interest
will, except as otherwise provided herein, remain
fixed at $440,000,000 and $25,000,000,
respectively. The Class A Investor Interest will
decline in certain circumstances if the Default
Amounts allocated to the Class A Certificates
exceed funds allocable thereto as described herein
and the Class B Investor Interest and the
Collateral Interest are zero. The Class B Investor
Interest will decline in certain circumstances as a
result of (a) the reallocation of collections of
Principal Receivables otherwise allocable to the
Class B Investor Interest to fund certain payments
in respect of the Class A Certificates and (b) the
allocation to the Class B Investor Interest of
certain Default Amounts, including such amounts
otherwise allocable to the Class A Investor
Interest when the Collateral Interest is zero.
During the Controlled Accumulation Period, for the
sole purpose of allocating collections of Finance
Charge Receivables and Default Amounts with respect
to each Monthly Period, the Class A Investor
Interest will be further reduced by the amount on
deposit in the Principal Funding Account from time
to time (as so reduced, the "Class A Adjusted
Investor Interest" and together with the Class B
Investor Interest and the Collateral Interest, the
"Adjusted Investor Interest"). See "Description of
Certificates--Reallocation of Cash Flows,"
"--Receivables in Defaulted Accounts; Investor
Charge-offs" and "--Principal Funding Account."
The Class A Certificates, the Class B Certificates
and the Collateral Interest will each include the
right to receive (but only to the extent needed to
make required payments under the Agreement) varying
percentages of collections of Finance Charge
Receivables and Principal Receivables and will be
allocated varying percentages of the amount of
Principal Receivables which are Defaulted
Receivables net of Recoveries for such Monthly
Period (the "Default Amount") during each Monthly
Period. "Defaulted Receivables" means, with respect
to any Monthly Period, Receivables as to which
either (i) the insurance policy or policies
financed thereby has been cancelled for 270 days or
more or (ii) the Servicer has charged off in
accordance with its customary and usual practices.
"Recoveries" means, with respect to the Receivables
and any Monthly Period, all amounts received by the
Servicer in respect of Defaulted Receivables during
such Monthly Period, less related expenses of
outside collection agencies. In the event one of
the Receivables in an Account is a Defaulted
Receivable (a, "Defaulted Account") and for
administrative reasons the Servicer is unable to
identify or segregate which Receivables in such
Defaulted Account are Defaulted Receivable, all of
the Receivables in such Defaulted Account will be
treated as Defaulted Receivables.
Collections of Finance Charge Receivables and
Default Amounts at all times, and collections of
Principal Receivables during the Revolving Period,
will be allocated to the Investor Interest based on
the Floating Investor Percentage and will be
further allocated among the Class A Investor
Interest, the Class B Investor Interest and the
Collateral Interest based on the Class A Floating
Allocation, the Class B Floating Allocation and the
Collateral Floating Allocation, respectively,
applica-
11
<PAGE> 12
ble during the related Monthly Period. Collections
of Principal Receivables during the Controlled
Accumulation Period and the Rapid Amortization
Period will be allocated to the Investor Interest
based on the Fixed Investor Percentage and will be
further allocated among the Class A Investor
Interest, the Class B Investor Interest and the
Collateral Interest based on the Class A Fixed
Allocation, the Class B Fixed Allocation and the
Collateral Fixed Allocation, respectively. See
"Description of the Certificates--Allocation
Percentages" and "--Pay Out Events".
Interest................... Interest on the Class A Certificates and the Class
B Certificates will accrue from the Closing Date on
the outstanding principal balance of the Class A
Certificates and the Class B Certificates at the
Class A LIBOR Rate and Class B LIBOR Rate,
respectively, subject to the limitations described
below. Interest will be distributed quarterly on
the 15th day of March, June, September, and
December, (or if any such day is not a business
day, the next succeeding business day) and on the
Class B Scheduled Payment Date (each, an "Interest
Payment Date"), commencing on the March 1997
Distribution Date and, following the occurrence of
a Pay Out Event or Principal Payment Event, on each
Special Payment Date. Interest for any Interest
Payment Date or Special Payment Date will accrue
from and including the preceding Interest Payment
Date or Special Payment Date (or in the case of the
first Interest Payment Date, from and include the
Closing Date) to but excluding the next Interest
Payment Date or Special Payment Date and interest,
with respect to Collateral Monthly Interest, shall
accrue at One Month LIBOR during each Monthly
Interest Period (as defined below) (each, an
"Interest Period").
Interest payments or deposits with respect to the
Class A Certificates for each Distribution Date
will be calculated on the outstanding principal
balance of the Class A Certificates as of the
preceding Record Date (or in the case of the
initial Distribution Date, as of the Closing Date)
based upon, subject to certain limitations
described below, the Class A LIBOR Rate.
"Distribution Date" means the 15th day of each
calendar month (or if any such day is not a
business day, the next succeeding business day)
commencing January 15, 1997; however, the first
Interest Payment Date will not occur until March
17, 1997. Interest payments or deposits with
respect to each Distribution Date will be
calculated on the basis of the actual number of
days in the period (each, a "Monthly Interest
Period") from and including the preceding
Distribution Date (or in the case of the initial
Distribution Date, the Closing Date) to but
excluding such Distribution Date and a 360-day
year. On each Distribution Date, Class A Monthly
Interest (as defined below) and Class A Monthly
Interest previously due but not deposited in the
Class A Interest Funding Account (as defined below)
or paid to the Class A Certificateholders and any
Class A Additional Interest (as defined below) will
be (i) paid to the Class A Certificateholders, if
such Distribution Date is an Interest Payment Date
or a Special Payment Date, or (ii) deposited in the
Class A Interest Funding Account (the "Class A
Interest Funding Account"), an administrative
subaccount of an eligible trust account in the name
of Trustee and for the benefit of the
Certificateholders, if such Distribution Date is
not an Interest Payment Date or a Special Payment
12
<PAGE> 13
Date. Payments to the Class A Certificateholders or
deposits into the Class A Interest Funding Account
in respect of interest on the Class A Certificates
on any Distribution Date will be funded from Class
A Available Funds for the related Monthly Period.
See "Description of the Certificates--Application
of Collections--Allocations" and "--Commingling."
Interest payments or deposits with respect to the
Class B Certificates for each Distribution Date
will be calculated on the outstanding principal
balance of the Class B Certificates as of the
preceding Record Date (or in the case of the
initial Distribution Date, on the Closing Date)
based upon the Class B LIBOR Rate and the actual
number of days in the Monthly Interest Period and a
360-day year. On each Distribution Date, Class B
Monthly Interest and Class B Monthly Interest
previously due but not deposited in the Class B
Interest Funding Account (as defined below) or paid
to the Class B Certificateholders and any Class B
Additional Interest (as defined below) will be (i)
paid to the Class B Certificateholders, if such
Distribution Date is an Interest Payment Date or a
Special Payment Date, or (ii) deposited in the
Class B Interest Funding Account (the "Class B
Interest Funding Account"), an administrative
subaccount of an eligible trust account in the name
of the Trustee for the benefit of the
Certificateholders, if such Distribution Date is
not an Interest Payment Date or a Special Payment
Date. Payments to the Class B Certificateholders or
deposits into the Class B Interest Funding Account
in respect of interest on the Class B Certificates
on any Distribution Date will be funded from Class
B Available Funds for the related Monthly Period.
Class A Monthly Interest and Class B Monthly
Interest for any Distribution Date due but not paid
on such Distribution Date will be payable on the
next succeeding Distribution Date, together with
additional interest on such amount at the
applicable Class A LIBOR Rate or Class B LIBOR Rate
plus 2% per annum (such amount, as applicable,
"Class A Additional Interest" and "Class B
Additional Interest"). Any such amounts will not be
distributed until the related Interest Payment Date
or Special Payment Date. See "Description of the
Certificates--Application of
Collections--Allocations" and "--Commingling."
"Class A Monthly Interest" means for any
Distribution Date an amount equal to the lesser of
(x) the product of (i) the actual number of days in
the related Monthly Interest Period divided by 360,
(ii) the Class A LIBOR Rate and (iii) the
outstanding principal balance of the Class A
Certificates as of the preceding Record Date (or in
the case of the first Distribution Date, as of the
Closing Date) and (y) the Class A Available Funds
Cap for the related Monthly Period.
"Class B Monthly Interest" means for any
Distribution Date, an amount equal to the lesser of
(x) the product of (i) the actual number of days in
the related Monthly Interest Period divided by 360,
(ii) the Class B LIBOR Rate and (iii) the
outstanding principal balance of the Class B
Certificates as of the preceding Record Date (or in
the case of the first Distribution Date, as of the
Closing Date) and (y) the Class B Available Funds
Cap for the related Monthly Period.
"Class A Available Funds Cap" means, with respect
to any Monthly Period, Class A Available Funds for
such Monthly Period less, if the
13
<PAGE> 14
Originators are not the Servicer, the Class A
Servicing Fee for such Monthly Period.
"Class A Available Funds" means, with respect to
any Monthly Period, an amount equal to the sum of
(a) the Class A Floating Allocation of collections
of Finance Charge Receivables allocated to the
Investor Interest with respect to such Monthly
Period, (b) Principal Funding Investment Proceeds,
if any, with respect to the related Transfer Date
and (c) amounts, if any, to be withdrawn from the
Reserve Account which are required to be included
in Class A Available Funds pursuant to the Series
1996-1 Supplement with respect to such Transfer
Date. "Transfer Date" is the business day preceding
each Distribution Date.
"Class B Available Funds Cap" means, with respect
to any Monthly Period, Class B Available Funds for
such Monthly Period less, if the Originators are
not the Servicer, the Class B Servicing Fee for
such Monthly Period.
"Class B Available Funds" means, with respect to
any Monthly Period, an amount equal to the Class B
Floating Allocation of collections of Finance
Charge Receivables allocated to the Investor
Interest with respect to such Monthly Period.
Class A Monthly Interest and Class B Monthly
Interest will be funded from the portion of
collection of Finance Charge Receivables during the
preceding Monthly Period (or with respect to the
first Distribution Date, from and including the
Cut-off Date through December 31, 1996) and certain
other available amounts (a) with respect to the
Class A Certificates, allocated to the Class A
Investor Interest, and, if necessary, from Excess
Spread and Reallocated Principal Collections (to
the extent available), (b) with respect to the
Class B Certificates, allocated to the Class B
Investor Interest and, if necessary, from Excess
Spread and Reallocated Principal Collections (to
the extent available) and (c) with respect to the
Collateral Interest, from Excess Spread. See
"Description of the Certificates--Reallocation of
Cash Flows" and "--Application of
Collections--Payment of Interest, Fees and Other
Items" and "Risk Factors--Risk of Limitations on
Subordination."
If and to the extent on any Distribution Date, the
amount of interest payable on the Class A
Certificates based on the Class A LIBOR Rate for
the related Monthly Interest Period exceeds the
Class A Available Funds Cap for the related Monthly
Period, then such excess (the "Class A Shortfall
Amount") will be carried forward to the next
Distribution Date together with interest thereon at
the applicable Class A LIBOR Rate plus 2% per annum
(the "Class A Carry Over Amount") and will be
funded on a subordinated basis solely from Excess
Spread, if any, available therefor as described
under "Description of the Certificates--Application
of Collections--Excess Spread."
If and to the extent on any Distribution Date, the
amount of interest payable on the Class B
Certificates based on the Class B LIBOR Rate for
the related Monthly Interest Period exceeds the
Class B Available Funds Cap for the related Monthly
Period, then such excess (the "Class B Shortfall
Amount") will be carried forward to the next
Distribution Date together with interest thereon at
the applicable Class B LIBOR Rate plus 2% per annum
(the "Class B Carry Over Amount") and will be
funded on a subordinated basis solely from Excess
Spread, if
14
<PAGE> 15
any, available therefor as described under
"Description of the Certificates--Application of
Collections--Excess Spread." The Class B Carry Over
Amount is subordinated to the Class A Carry Over
Amount. The Class A Carry Over Amount and Class B
Carry Over Amount are subordinated to payments in
respect of the Collateral Interest. See "Risk
Factors--Basis Risk."
Revolving Period........... The "Revolving Period" for the Certificates means
the period from and including the Closing Date to,
but not including, the commencement of the earlier
of (a) the Controlled Accumulation Period (b) the
Principal Payment Period and (c) the Rapid
Amortization Period. During the Revolving Period,
collections on Principal Receivables otherwise
allocable to the Investor Interest will, subject to
certain limitations and unless a reduction in the
required Collateral Interest has occurred, be
treated as Shared Principal Collections and
allocated to the holders of other Series of
certificates issued and outstanding or, subject to
certain limitations, paid to the Transferor or
deposited into the Excess Funding Account. See
"Description of the Certificates--Principal
Payments." See also "Description of the
Certificates--Pay Out Events" and "Extension of
Initial Principal Payment Date" for a discussion of
the events which might lead to the termination of
the Revolving Period prior to the commencement of
the Controlled Accumulation Period.
Controlled Accumulation
Period................... Unless a Pay Out Event or Principal Payment Event
occurs, the controlled accumulation period for the
Certificates (the "Controlled Accumulation Period")
is scheduled to begin at the close of business on
February 28, 2001. Subject to the conditions set
forth under "Description of the
Certificates--Postponement of Controlled
Accumulation Period," the day on which the
Revolving Period ends and the Controlled
Accumulation Period begins may be delayed to not
later than the close of business on October 31,
2001. The Controlled Accumulation Period will end
on the earliest of (i) the commencement of the
Rapid Amortization Period or Principal Payment
Period, (ii) payment of the Investor Interest in
full and (iii) the Series 1996-1 Termination Date.
On each Transfer Date during the Controlled
Accumulation Period, prior to the payment of the
Class A Investor Interest in full, amounts equal to
the least of (a) Available Investor Principal
Collections for the related Monthly Period, (b) the
sum of the Controlled Accumulation Amount for such
Monthly Period and any portion of the Controlled
Accumulation Amount for any prior Monthly Period
that has not yet been deposited (such sum, the
"Controlled Deposit Amount" for such Monthly
Period) and (c) the Class A Investor Interest on
such Transfer Date will be deposited monthly in a
trust account established by the Servicer (the
"Principal Funding Account") on each Transfer Date
beginning with the Transfer Date in the month
following the commencement of the Controlled
Accumulation Period until the Principal Funding
Account Balance is equal to the Class A Investor
Interest. On each Transfer Date during the
Controlled Accumulation Period after the
Distribution Date on which the Class A Investor
Interest has been paid in full, an amount equal to
the lesser of (a) Available Investor Principal
Collections for the related Monthly Period and (b)
the Class B Investor Interest on such Transfer Date
will be deposited into the Distribution Account for
distribution to the Class B Holders on the Class B
Sched-
15
<PAGE> 16
uled Payment Date. If, for any Monthly Period, the
Available Investor Principal Collections for such
Monthly Period exceed the applicable Controlled
Deposit Amount, the amount of such excess will be
first paid to the Collateral Interest Holder to the
extent that the Collateral Interest exceeds the
Required Collateral Interest and then will be
treated as Shared Principal Collections and
allocated to the holders of other Series of
certificates issued and outstanding or, subject to
certain limitations, paid to the Transferor or
deposited into the Excess Funding Account. See
"Description of the Certificates--Application of
Collections."
"Available Investor Principal Collections" means,
with respect to any Monthly Period in the
Controlled Accumulation Period, Principal Payment
Period or the Rapid Amortization Period, an amount
equal to the sum of (a) (i) the Fixed Investor
Percentage of collections of Principal Receivables
received during such Monthly Period and certain
other amounts allocable to the Investor Interest,
minus (ii) the amount of Reallocated Principal
Collections with respect to such Monthly Period
used to fund interest on the Certificates or the
Servicing Fee, plus (b) any Shared Principal
Collections with respect to other Series that are
allocated to Series 1996-1. Unless a Pay Out Event
or Principal Payment Event occurs, prior to the
payment of the Class A Investor Interest in full,
all funds on deposit in the Principal Funding
Account will be invested at the direction of the
Servicer by the Trustee in certain Permitted
Investments. Investment earnings (net of investment
losses and expenses) on funds on deposit in the
Principal Funding Account (the "Principal Funding
Investment Proceeds") during the Controlled
Accumulation Period will be used to pay interest on
the Class A Certificates in an amount up to, for
each Transfer Date, the product of (a) a fraction,
the numerator of which is the actual number of days
in the related Interest Period and the denominator
of which is 360, (b) the Class A LIBOR Rate in
effect with respect to the related Interest Period
and (c) the Principal Funding Account Balance as of
the Record Date preceding such Transfer Date (the
"Class A Covered Amount"). If, for any Transfer
Date, the Principal Funding Investment Proceeds are
less than the Class A Covered Amount, the amount of
such deficiency (the "Class A Principal Funding
Investment Shortfall") shall be paid, to the extent
available, from the Reserve Account and, if
necessary, from Excess Spread and Reallocated
Principal Collections. See "Description of the
Certificates--Principal Funding Account."
Funds on deposit in the Principal Funding Account
will be available to pay the Class A Holders in
respect of the Class A Investor Interest on the
Class A Scheduled Payment Date. If the aggregate
principal amount of deposits made to the Principal
Funding Account is insufficient to pay the Class A
Investor Interest in full on the Class A Scheduled
Payment Date, the Rapid Amortization Period will
commence. Although it is anticipated that during
the Controlled Accumulation Period prior to the
payment of the Class A Investor Interest in full,
funds will be deposited in the Principal Funding
Account in an amount equal to the applicable
Controlled Deposit Amount on each Transfer Date and
that scheduled principal will be available for
distribution to the Class A Holders on the Class A
Scheduled Payment Date, no assurance can be given
in that regard. See "Maturity Assumptions."
16
<PAGE> 17
On the Class B Scheduled Payment Date, provided
that the Class A Investor Interest is paid in full
on the Class A Scheduled Payment Date and the Rapid
Amortization Period has not commenced, Available
Investor Principal Collections will be used to pay
the Class B Holders in respect of the Class B
Investor Interest as described herein. If the
Available Investor Principal Collections are
insufficient to pay the Class B Investor Interest
in full on the Class B Scheduled Payment Date, the
Rapid Amortization Period will commence. Although
it is anticipated that scheduled principal will be
available for distribution to the Class B Holders
on the Class B Scheduled Payment Date, no assurance
can be given in that regard. See "Maturity
Assumptions".
If a Pay Out Event or Principal Payment Event
occurs during the Controlled Accumulation Period,
the Principal Payment Period or the Rapid
Amortization Period may commence, and any amounts
on deposit in the Principal Funding Account will be
paid to the Class A Holders on the Distribution
Date in the month following the commencement of the
Principal Payment Period or the Rapid Amortization
Period, as the case may be.
Other Series offered by the Trust may or may not
have amortization or accumulation periods like the
Controlled Accumulation Period for the
Certificates, and such periods may have different
lengths and begin on different dates than such
Controlled Accumulation Period. Thus, certain
Series may be in their revolving periods while
others are in periods during which collections of
Principal Receivables are distributed to or held
for the benefit of certificateholders of such other
Series. In addition, other Series may allocate
Principal Receivables based upon different investor
percentages. See "Description of the
Certificates--New Issuances."
Initial Principal Payment
Date; Principal Payment
Period................... Unless a Pay Out Event has occurred, principal with
respect to the Class A Certificates is expected to
be paid on the Class A Scheduled Payment Date. If
the Transferor elects not to extend the Initial
Principal Payment Date (a "Principal Payment
Event"), the Revolving Period or the Controlled
Accumulation Period, as applicable, will end
beginning on the first day of the Monthly Period
following the Principal Payment Event and the
Principal Payment Period will commence. On each
Distribution Date with respect to the Principal
Payment Period, amounts then on deposit in the
Principal Funding Account, if any, and Available
Investor Principal Collections with respect to each
Distribution Date will be paid first to the Class A
Holders until the earlier of the date on which the
Class A Investor Interest is paid in full or the
Series 1996-1 Termination Date, and, after payment
in full of Class A Investor Interest, then to the
Class B Holders until the earlier of the date on
which the Class B Investor Interest is paid in full
or the Series 1996-1 Termination Date. "Principal
Distribution Date" means each Distribution Date
beginning with the first Distribution Date
following the Monthly Period in which the Principal
Payment Period commenced. The Class B Holders will
not begin to receive payments of principal during
the Principal Payment Period until the principal
balance of the Class A Certificates has been
reduced to zero. The "Initial Principal Payment
Date" will initially be the December 1998
Distribution Date, but will successively be
extended to the next Distribution Date after the
then-
17
<PAGE> 18
current Initial Principal Payment Date unless the
Transferor elects not to cause such extension;
provided, however, that the Initial Principal
Payment Date may not be later than the Class A
Scheduled Payment Date. The "Principal Payment
Period" means the period beginning on the Initial
Principal Payment Date following the Transferor's
election not to extend such Initial Principal
Payment Date and ending on the earliest to occur of
(i) the Rapid Amortization Period, (ii) the payment
in full of the Invested Amount and (iii) the Series
1996-1 Termination Date. See "Description of the
Certificates -- Extension of Initial Principal
Payment Date".
Rapid Amortization
Period..................... During the period from the day on which a Pay Out
Event has occurred and ending on the earlier of (a)
the payment of the Investor Interest in full and
(b) the Series 1996-1 Termination Date (the "Rapid
Amortization Period"), Available Investor Principal
Collections will be distributed monthly on each
Distribution Date to the Class A Holders and,
following payment of the Class A Investor Interest
in full, to the Class B Holders and, following
payment of the Class B Investor Interest in full,
to the Collateral Interest Holder beginning with
the Distribution Date in the month following the
commencement of the Rapid Amortization Period. See
"Description of the Certificates--Pay Out Events"
for a discussion of the events which might lead to
the commencement of the Rapid Amortization Period.
Subordination of the
Class B Certificates
and the Collateral
Interest................. The Class B Certificates and the Collateral
Interest will be subordinated, as described herein,
to the extent necessary to fund certain payments
with respect to the Class A Certificates as
described herein. In addition, the Collateral
Interest will be subordinated to the extent
necessary to fund certain payments with respect to
the Class B Certificates. If the Class B Investor
Interest and the Collateral Interest are reduced to
zero, the Class A Holders will bear directly the
credit and other risks associated with their
interest in the Trust. If the Collateral Interest
is reduced to zero, the Class B Holders will bear
directly the credit and other risks associated with
their interest in the Trust. To the extent the
Class B Investor Interest is reduced, the
percentage of collections of Finance Charge
Receivables allocable to the Class B Holders in
subsequent Monthly Periods will be reduced. Such
reductions of the Class B Investor Interest will
thereafter be reimbursed and the Class B Investor
Interest increased on each Transfer Date by the
amount, if any, of Excess Spread for such Transfer
Date available for that purpose. To the extent the
amount of such reduction in the Class B Investor
Interest is not reimbursed, the amount of principal
and interest distributable to the Class B Holders
will be reduced. See "Risk Factors--Risk of
Limitations on Subordination" and "Description of
the Certificates-- Subordination."
Additional Amounts
Available
to Holders............... With respect to any Transfer Date, Excess Spread
will be applied to fund the Class A Required Amount
and the Class B Required Amount, if any. The "Class
A Required Amount" means the amount, if any, by
which the sum of (a) the Class A Monthly Interest
due on the related Distribution Date and any
overdue Class A Monthly Interest and Class A
Additional Interest thereon, (b) the Class A
Servicing Fee for the
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<PAGE> 19
related Monthly Period and any overdue Class A
Servicing Fee and (c) the Class A Investor Default
Amount, if any, for the related Monthly Period
exceeds the Class A Available Funds for the related
Monthly Period. The Class A Required Amount does
not include any Class A Shortfall Amount or Class A
Carry Over Amount. The "Class B Required Amount"
means an amount, if any, equal to the sum of (a)
the amount, if any, by which the sum of (i) Class B
Monthly Interest due on the related Distribution
Date and any overdue Class B Monthly Interest and
Class B Additional Interest thereon, and (ii) the
Class B Servicing Fee for the related Monthly
Period and any overdue Class B Servicing Fee
exceeds the Class B Available Funds for the related
Monthly Period and (b) the Class B Investor Default
Amount, if any, for the related Monthly Period. The
Class B Required Amount does not include any Class
B Shortfall Amount or Class B Carry Over Amount.
"Excess Spread" for any Transfer Date will equal
the sum of (1) the excess of (A) Class A Available
Funds for the related Monthly Period over (B) the
sum of the amounts referred to in clauses (a), (b),
and (c) in the definition of "Class A Required
Amount" above, (2) the excess of (A) Class B
Available Funds for the related Monthly Period over
(B) the sum of the amounts referred to in clauses
(a)(i) and (a)(ii) in the definition of "Class B
Required Amount" above and (3) Collateral Available
Funds for the related Monthly Period not used under
certain circumstances to pay the Collateral
Interest Servicing Fee, as described herein.
If, on any Transfer Date, Excess Spread is less
than the Class A Required Amount, Reallocated
Principal Collections allocable first to the
Collateral Interest and then to the Class B
Investor Interest with respect to the related
Monthly Period will be used to fund the remaining
Class A Required Amount. If Reallocated Principal
Collections with respect to such Monthly Period are
insufficient to fund the remaining Class A Required
Amount for the related Transfer Date, then the
Collateral Interest (after giving effect to
reductions for any Collateral Charge-Offs and any
Reallocated Principal Collections allocable to the
Collateral Interest on such Transfer Date) will be
reduced by the amount of such deficiency (but not
by more than the Class A Investor Default Amount
for such Monthly Period). In the event that such
reduction would cause the Collateral Interest to be
a negative number, the Collateral Interest will be
reduced to zero and the Class B Investor Interest
(after giving effect to reductions for any Class B
Investor Charge-Offs and Reallocated Principal
Collections allocable to the Class B Investor
Interest) will be reduced by the amount by which
the Collateral Interest would have been reduced
below zero (but not by more than the excess of the
Class A Investor Default Amount, if any, for such
Monthly Period over the amount, if any, of the
Collateral Interest with respect to such Monthly
Period). In the event that such reduction would
cause the Class B Investor Interest to be a
negative number, the Class B Investor Interest will
be reduced to zero and the Class A Investor
Interest will be reduced by the amount by which the
Class B Investor Interest would have been reduced
below zero (but not by more than the excess, if
any, of the Class A Investor Default Amount for
such Monthly Period over such reductions in the
Collateral Interest and the Class B Investor
Interest with respect to such Monthly Period) (such
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<PAGE> 20
reduction, a "Class A Investor Charge-Off"). If the
Collateral Interest and the Class B Investor
Interest are reduced to zero, the Class A Holders
will bear directly the credit and other risks
associated with their undivided interest in the
Trust. See "Description of the Certificates--
Reallocation of Cash Flows" and "--Receivables in
Defaulted Accounts; Investor Charge-Offs."
If, on any Transfer Date, Excess Spread not
required to pay the Class A Required Amount and to
reimburse Class A Investor Charge-Offs is less than
the Class B Required Amount, Reallocated Principal
Collections allocable to the Collateral Interest
for the related Monthly Period not required to pay
the Class A Required Amount will be allocated to
fund the remaining Class B Required Amount. If such
remaining Reallocated Principal Collections
allocable to the Collateral Interest with respect
to such Monthly Period are insufficient to fund the
remaining Class B Required Amount for the related
Transfer Date, then the Collateral Interest (after
giving effect to reductions for any Collateral
Charge-Offs, Reallocated Principal Collections
allocable to the Collateral Interest and any
adjustments made thereto for the benefit of the
Class A Holders) will be reduced by the amount of
such deficiency (but not by more than the Class B
Investor Default Amount for such Monthly Period).
If such reduction would cause the Collateral
Interest to be a negative number, the Collateral
Interest will be reduced to zero, and the Class B
Investor Interest will be reduced by the amount by
which the Collateral Interest would have been
reduced below zero (but not by more than the
excess, if any, of the Class B Investor Default
Amount for such Monthly Period over such reduction
in the Collateral Interest with respect to such
Monthly Period) (such reduction, a "Class B
Investor Charge-Off"). In the event of a reduction
of the Class A Investor Interest, the Class B
Investor Interest or the Collateral Interest, the
amount of principal and interest available to fund
payments with respect to the Class A Certificates
and the Class B Certificates will be decreased. See
"Description of the Certificates--Reallocation of
Cash Flows" and "-- Receivables in Defaulted
Accounts; Investor Charge-Offs."
Required Collateral
Interest................... The "Required Collateral Interest" with respect to
any Transfer Date means (a) initially, $35,000,000
(the "Initial Collateral Interest") and (b) on any
Transfer Date thereafter, an amount equal to 7% of
the Adjusted Investor Interest on such Transfer
Date, after taking into account deposits into the
Principal Funding Account on such Transfer Date and
payments to be made on the related Distribution
Date, and the Collateral Interest on the prior
Transfer Date after any adjustments made on such
Transfer Date, but not less than $15,000,000;
provided however, (i) that if certain reductions in
the Collateral Interest occur or if a Pay Out Event
occurs, the Required Collateral Interest for such
Transfer Date shall equal the Required Collateral
Interest for the Transfer Date immediately
preceding the occurrence of such reduction or Pay
Out Event; (ii) in no event shall the Required
Collateral Interest exceed the unpaid principal
amount of the Certificates as of the last day of
the Monthly Period preceding such Transfer Date
after taking into account payments to be made on
the related Distribution Date; and (iii) the
Required Collateral Interest may be reduced at any
time to a lesser amount if the Rating Agency
Condition is satisfied. See "Description of the
Certificates--Required Collateral Interest."
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If on any Transfer Date, the Collateral Interest is
less than the Required Collateral Interest, certain
Excess Spread amounts, if available, will be used
to increase the Collateral Interest to the extent
of such shortfall. If on any Transfer Date the
Collateral Interest equals or exceeds the Required
Collateral Interest, any such Excess Spread amounts
will first be deposited into the Reserve Account as
described herein and second, to the extent
available, be applied in accordance with the Loan
Agreement among the Trustee, the Transferor, each
Servicer and the Collateral Interest Holder (the
"Loan Agreement") and will not be available to the
Holders.
Shared Excess Finance
Charge Collections......... To the extent that collections of Finance Charge
Receivables allocated to the Investor Interest (and
certain other amounts that are to be treated as
collections of Finance Charge Receivables allocated
to the Investor Interest) are not needed to make
payments in respect of the Investor Interest as
described herein under "Description of the
Certificates-- Application of Collections," such
Excess Finance Charge Collections will be applied
to make payments with respect to other Series
entitled to share therein in accordance with the
Agreement. In addition, Excess Finance Charge
Collections otherwise allocable to certain other
Series, to the extent not required to make payments
in respect of such Series, may be applied to cover
shortfalls in amounts payable from Excess Spread as
described herein under "Description of the
Certificates-- Application of Collections."
Shared Principal
Collections................ To the extent that collections of Principal
Receivables allocated to the Investor Interest are
not needed to make payments on the Investor
Interest or to be deposited in the Principal
Funding Account, such collections ("Shared
Principal Collections") will be allocated to cover
certain principal payments due to or for the
benefit of certificateholders of other Series or,
under certain circumstances, deposited into the
Excess Funding Account or paid to the Transferor.
Any such reallocation or deposit will not result in
a reduction in the Investor Interest with respect
to Series 1996-1. In addition, collections of
Principal Receivables and certain other amounts
otherwise allocable to other Series, to the extent
such collections are not needed to make payments to
or deposits for the benefit of the
certificateholders of such other Series, may be
applied to cover principal payments due to or for
the benefit of the holders of the Certificates or
the holder of the Collateral Interest. See
"Description of the Certificates--Shared Principal
Collections."
Servicing Fee.............. The Servicers will receive a monthly fee as
servicing compensation from the Trust on each
Transfer Date. On each Transfer Date, the Class A
Servicing Fee, the Class B Servicing Fee and the
Collateral Interest Servicing Fee will be paid as
described under "Description of the
Certificates--Servicing Compensation, Back-up
Servicing Compensation and Payment of Expenses."
Optional Repurchase........ The Investor Interest will be subject to optional
repurchase by the Transferor on any Distribution
Date on or after the Distribution Date on which the
Investor Interest is reduced to an amount less than
or equal to $25,000,000 (5% of the initial Investor
Interest), if certain conditions set forth in the
Agreement are met. The repurchase price will be
equal to the sum of the Investor Interest and all
accrued and unpaid interest on the Certificates and
the Collateral Interest through the day preceding
the
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<PAGE> 22
Distribution Date on which the repurchase occurs.
See "Description of the Certificates--Final Payment
of Principal; Termination."
New Issuances.............. Pursuant to any one or more supplements to the
Agreement (each, a "Series Supplement"), the
Transferor may require the Trustee to issue one or
more new Series in exchange for a reduction in the
Transferor Interest. In addition, if provided in
the relevant Series Supplement (and subject to any
applicable requirements under the Exchange Act and
the rules and regulations thereunder, including
Rule 13E-4), Certificates representing any Series
issued by that trust may be tendered to the trustee
in exchange for one or more new Series. Any
issuance or tender and issuance pursuant to either
of the above procedures is referred to as a "New
Issuance."
A New Issuance may occur only upon delivery to the
trustee of the following: (i) a Series Supplement
specifying the principal terms (the "Principal
Terms") of the new Series, (ii) (a) an opinion of
counsel to the effect that, unless otherwise stated
in the related Series Supplement, the certificates
of that Series will be characterized as
indebtedness for Federal income tax purposes and
(b) an opinion of counsel to the effect that, for
Federal income tax purposes, (1) such issuance will
not adversely affect the tax characterization as
debt of Certificates of any outstanding Series or
Class that were characterized as debt at the time
of their issuance, (2) such issuance will not cause
the Trust to be classified as an association (or
publicly traded partnership) taxable as a
corporation and (3) such issuance will not cause or
constitute an event in which gain or loss would be
recognized by any Certificateholder, other than the
Transferor (an opinion of counsel to this effect
with respect to any action being a "Tax Opinion"),
(iii) if Credit Enhancement is required by the
Series Supplement, an appropriate Credit
Enhancement agreement with respect thereto, (iv)
written confirmation from each Rating Agency that
the New Issuance will not result in that Rating
Agency reducing or withdrawing its rating on any
then outstanding Series rated by it, (v) an
officer's certificate of the Transferor to the
effect that after giving effect to the New Issuance
the Transferor Interest would be at least equal to
the Minimum Transferor Interest and (vi) the
Certificates representing the Series to be
exchanged, if applicable. See "Description of the
Certificates--New Issuances."
The Transferor also may from time to time cause the
Trustee to sell purchased interests in the
Receivables and other assets of the Trust to one or
more purchasers. Any purchased interest will
represent an interest in the Trust's assets similar
to the interest of a Series of Certificates, and
will represent a reduction in the Transferor
Interest, and will not reduce the Investor
Interest. No Series will be subordinated to any
purchased interest, and no purchased interest will
have any interest in the Enhancement or series
accounts specified for any Series, except as
specified in the prospectus relating to that
Series. Any such sale will take place pursuant to
one or more agreements which will specify terms
similar to Principal Terms for the applicable
purchased interests and may grant the purchasers of
such interests notice and consultation rights with
respect to rights or actions of the Trustee. Any
sale of purchased interests in the assets of a
Trust will be subject to the satisfaction of the
same conditions (including Rating Agency
confirmations) as for a New Issuance, as
appropriately modified to refer to a purchased
interest rather than a New
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<PAGE> 23
Issuance. The modification of conditions would not
result in any substantive change in such
conditions, but would simply change the conditions
to refer to the contemplated sale of a purchased
interest rather than a New Issuance. See "Risk
Factors--Master Trust Considerations."
Tax Status................. Special Tax Counsel to the Transferor will opine on
the Closing Date that under existing law the
Certificates will be characterized as debt for
Federal income tax purposes and the Trust will not
be an association or publicly traded partnership
taxable as a corporation. Under the Agreement, the
Transferor, the Servicer, the Holders and the
Certificate Owners will agree to treat the
Certificates as debt for Federal, state, local and
foreign income and franchise tax purposes. See
"U.S. Federal Income Tax Consequences" for
additional information concerning the application
of Federal income tax laws.
ERISA Considerations....... Under a regulation issued by the Department of
Labor, the Trust's assets would not be deemed "plan
assets" of an employee benefit plan or other
retirement arrangement holding such Certificates if
certain conditions are met, including that the
Class of such Certificates must be held, upon
completion of the public offering made hereby, by
at least 100 investors who are independent of the
Transferor and of one another. The Underwriters do
not expect that the Class A or Class B Certificates
will be held by at least 100 such persons and,
therefore, do not expect that such Certificates
will qualify as publicly-offered securities under
the regulation. If the Trust's assets were deemed
to be "plan assets" of an employee benefit plan
investor (e.g., if the 100 independent investor
critera are not satisfied with respect to the Class
of Certificates held by the plan investor),
violations of the "prohibited transaction" rules of
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), could result and
generate excise tax and other liabilities under
ERISA and section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"), unless a
statutory, regulatory or administrative exemption
is available. It is uncertain whether existing
exemptions from the "prohibited transaction" rules
of ERISA would apply to all transactions involving
the Trust's assets.
Accordingly, no investor which is (a) an employee
benefit plan that is subject to ERISA, (b) a plan
or other arrangement (including an individual
retirement account or Keogh plan) that is subject
to section 4975 of the Code or (c) an entity whose
underlying assets include "plan assets" under the
regulation by reason of any such plan's investment
in the entity may acquire either a Class A
Certificate or a Class B Certificate. See "ERISA
Considerations."
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<PAGE> 24
RISK FACTORS
Limited Liquidity. There is currently no market for the Certificates. The
Underwriters intend to make a market in the Certificates but are not obligated
to do so. There is no assurance that a secondary market will develop or, if it
does develop, that it will provide Certificateholders with liquidity of
investment or that it will continue until the Certificates are paid in full.
Nonrecourse Obligations. No Certificateholder will have recourse for
payment of its Certificates to any assets of the Originators, the Transferor,
the Back-up Servicer, the Trustee or any of their affiliates. Consequently,
Certificateholders must rely solely upon payments on or in respect of the
Receivables for the payment of principal of and interest on the Certificates and
the Collateral Interest. Furthermore, under the Agreement, the
Certificateholders will have an interest in the Receivables and collections with
respect thereto only to the extent of the Invested Amount. Should the
Certificates not be paid in full on a timely basis, Certificateholders may not
look to any assets of the Originators, the Transferor, the Back-up Servicer, the
Trustee or any of their affiliates to satisfy their claims.
Lack Of Perfected Security Interests in Certain Unearned Premiums. Each
Receivable includes a grant by the borrower to the applicable Originator of a
security interest in the unearned portion of the premium of the financed
commercial insurance policy (the "Unearned Premium"). The perfection of a
security interest in an unearned premium is not governed by the Uniform
Commercial Code. In many states, state statutes and common law govern the
perfection of a security interest in the unearned premiums and generally require
for the perfection of such security interest, a notice informing the applicable
insurance company of the identity of the person entitled to the payment of such
unearned premium. In other states and in foreign jurisdictions, there is no case
law or statute that governs the perfection of security interests in unearned
premiums and in those states the method of perfecting such a security interest
is not free from doubt; however, it is industry practice to follow the same
procedures for perfection in those jurisdictions by notifying the applicable
insurance carrier of the person entitled to receive payment of such unearned
premiums. It is standard practice for the Originators to send such a notice to
the applicable insurance company or its agent at or about the time the insurance
policy premium is financed. Each Originator will represent and warrant in the
Receivables Purchase Agreement to the Transferor and the Transferor will
represent and warrant to the Trust, in each case, as of the date of transfer,
that the applicable Originator has a first priority perfected security interest
in the Unearned Premiums relating to the Receivables so transferred.
Each Originator will assign its security interest in the Unearned Premiums
to the Transferor, who will in turn assign its security interest in the Unearned
Premiums to the Trust. Due to the administrative burden and expense of mailing a
notice for each Receivable to the applicable insurance company and the
administrative burden and expense of the related insurance companies, which
would have to process such notices, neither the Transferor nor the Trustee will
send notices to the related insurance companies, with respect to the Trust's
security interests in the Unearned Premiums relating to the Receivables
transferred to the Trust on or prior to February 1, 1997. In the absence of such
procedures neither the Transferor nor the Trust will have a perfected security
interest in the Unearned Premiums relating to such Receivables.
With respect to the Receivables transferred to the Trust on or after
February 1, 1997, the applicable Originator will represent and warrant in the
Receivables Purchase Agreement to the Transferor, and the Transferor will
represent and warrant in the Agreement, that a notice of finance premium has
been delivered to the related insurance carrier notifying it of the Trustee's
security interest in the related Unearned Premiums and that the Trust has a
perfected security interest in such Unearned Premiums.
In the event the representations and warranties relating to the perfection
of security interests in Unearned Premiums are breached and as a result of such
breach the related Account becomes a Defaulted Account or the Trust's rights in,
to or under the Receivables or its proceeds are impaired or the proceeds of such
Receivable are not free and clear of any lien, then upon the expiration of the
applicable cure period specified in the Agreement such Receivable (and, in
certain circumstances, all of the Receivables in such Defaulted Account) shall
be removed from the Trust as described under "Description of the
Certificates--Representations and Warranties."
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<PAGE> 25
If an Originator becomes the subject of a bankruptcy or insolvency
proceeding and the Trust does not have a perfected security interest in the
Unearned Premiums, the Trust's interest in such Unearned Premiums would be
subordinate to the interest of a bankruptcy trustee of such Originator. As a
result, Certificateholders might not be able to obtain the proceeds of any
returned Unearned Premiums.
Transferor Bankruptcy Risk. While the Transferor will transfer Receivables
to the Trust, a court could treat such transfers as an assignment of collateral
as security for the benefit of holders of certificates issued by the Trust. The
Transferor represents and warrants in the Agreement that the transfer of the
Receivables to the Trust is either a valid transfer and assignment of the
Receivables to the Trust or the grant to the Trust of a security interest in the
Receivables. The Transferor has taken and will take certain actions as are
required to perfect the Trust's security interest in the Receivables and
warrants that if the transfer to the Trust is deemed to be a grant to the Trust
of a security interest in the Receivables, the Trustee will have a first
priority perfected security interest therein. Nevertheless, if the transfer of
the Receivables to the Trust is deemed to create a security interest therein, a
tax or government lien on property of the Transferor arising before Receivables
come into existence may have priority over the Trust's interest in such
Receivables, and, if the FDIC were appointed receiver of the Transferor, the
receiver's administrative expenses may also have priority over the Trust's
interest in such Receivables. See "Certain Legal Aspects of the
Receivables--Transfer of Receivables."
To the extent that the Transferor has granted a security interest in the
Receivables to the Trust and that security interest was validly perfected before
any insolvency of the Transferor and was not granted or taken in contemplation
of insolvency or with the intent to hinder, delay or defraud the Transferor or
its creditors, that security interest should not be subject to avoidance in the
event of insolvency and receivership, and payments to the Trust with respect to
the Receivables should not be subject to recovery by a conservator or receiver
for the Transferor. If, however, the conservator or receiver were to assert a
contrary position, or were to require the Trustee to establish its right to
those payments by submitting to and completing the administrative claims
procedure established under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), or the conservator or receiver were to
request a stay of proceedings with respect to the Transferor as provided under
FIRREA, delays in payments on the Certificates and possible reductions in the
amount of those payments could occur. If a conservator or receiver were
appointed for the Transferor pursuant to the Agreement, new Receivables would
not be transferred to the Trust and the Trustee would sell the portion of the
Receivables allocable in accordance with the Agreement to each Series (unless
holders of more than 50% of the principal amount of each class of such Series
instruct otherwise), thereby causing early termination of the Trust and a loss
to the Certificateholders if the net proceeds allocable to the
Certificateholders from such sale, if any, were insufficient to pay the
Certificateholders in full. Upon the occurrence of a Pay Out Event, if a
conservator or receiver is appointed for the Transferor and no Pay Out Event
other than such conservatorship, receivership or insolvency of the Transferor
exists, the conservator or receiver may have the power to prevent the early
sale, liquidation or disposition of the Receivables and the commencement of the
Rapid Amortization Period. In addition, a conservator or receiver for the
Transferor may have the power to cause early payment of the Certificates. See
"Certain Legal Aspects of the Receivables--Certain Matters Relating to
Receivership."
Originators' Bankruptcy Risk. Each of the Originators intends that each
transfer of Receivables to the Transferor pursuant to the Receivables Purchase
Agreement will constitute a sale, rather than a pledge of such Receivables to
secure indebtedness of such Originator. However, if such Originator were to
become a debtor under the federal bankruptcy code or similar applicable state
laws (collectively, "Insolvency Laws"), a creditor or trustee in bankruptcy of
such Originator or such Originator as debtor-in-possession might argue that such
sale of Receivables by such Originator was a pledge of such Receivables rather
than a sale. This position, if presented to, or accepted by a court, could cause
among other things, the Trust to experience a delay in or reduction of
collections on the Receivables. In addition, upon the occurrence of certain
insolvency events relating to either Originator, Additional Receivables will not
be conveyed to the Trust and a Pay Out Event will occur which may cause early
payment of the Certificates.
Premium Finance Loan Credit and Related Risks. Commercial premium finance
loans entail several different risks, including (a) the creditworthiness of the
borrower, (b) the creditworthiness of the insurance
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<PAGE> 26
company, and (c) the capabilities and operating procedures of the insurance
agent or broker that (i) places the insurance policy, (ii) serves as a source of
significant information concerning the loan transaction and (iii) may pay the
loan proceeds to insurance companies or their agents or collect unearned premium
funds. Application of federal and state bankruptcy, debtor relief or insolvency
laws to an insolvency of a borrower, insurance company or insurance agent or
broker involved with a loan would affect the interests of the Certificateholders
in the Receivables if such laws result in any Receivables being written off as
uncollectible or prevent the cancellation of such borrower's insurance policy or
the collection of related Unearned Premium, if any, which may serve as
collateral for such borrower's loan. Moreover, the amount of the unearned
premium required to be returned to the insured is dependent on state law and
varies depending on when the notice of cancellation becomes effective.
Additionally, at the time of the origination of a Receivable, the Unearned
Premium will not fully collateralize the borrower's obligations. Generally,
depending on the amount of the borrower's downpayment, the payment terms of the
Receivable and applicable state law, the Unearned Premium will fully
collateralize the Receivable after four or five scheduled payments have been
made; although in some circumstances the Unearned Premium may never fully
collateralize the Receivable. The Receivables Purchase Agreement and the
Agreement do not require (i) the Unearned Premium of any Receivable to represent
a minimum percentage of such Receivable or (ii) the Unearned Premium of any
Receivable at any time to fully collateralize such Receivable. Consequently, in
certain circumstances, the Trust will have to rely on payments and recoveries
from borrowers as its sole source of payment on the Receivables. See "Business
of the Originators--General" and "Description of the Certificates--Receivables
in Defaulted Accounts; Investor Charge-Offs."
Dependence on Business of Originators. The premium finance loan industry
is competitive and includes banks as well as other premium finance lending
companies that offer financing to companies that purchase commercial insurance.
Insurance premium lenders may compete on the basis of loan pricing and terms,
underwriting criteria and servicing quality. If commercial insurance consumers
choose to utilize competing sources of credit, the amount of available
Additional Receivables generated may be reduced. The size of the Trust will be
dependent upon the Originators' continued ability to generate and transfer
Additional Receivables to the Transferor, who in turn will transfer such
Receivables to the Trustee for the benefit of the Trust. While the Receivables
only represent a portion of the Originators' total portfolio and the Originators
have generated a relatively stable dollar volume of premium finance loans on a
year-to-year basis over the past five fiscal years, due to state regulatory
considerations, the Additional Receivables eligible to be transferred to the
Trustee for the benefit of the Trust must be originated with borrowers located
in Permitted States. In addition, certain eligibility criteria relating to
concentration limits on insurance carriers or obligors will further limit that
portion of the Originators' portfolio that is eligible for transfer to the
Trust. Moreover, because a Premium Finance Agreement may finance premiums of
more than one insurance carrier and the obligations of a borrower under a
Premium Finance Agreement relate to the financing of all premiums financed
thereunder, if a concentration limit would be breached as a result of the
addition of such Premium Finance Agreement, the aggregate receivables under such
Premium Finance Agreement (including those relating to the financing of premiums
of other insurance carriers unless the Transferor can segregate such premiums)
will not be eligible for transfer to the Trust. See "The Receivables." As of the
Statistical Calculation Date Aggregate Receivables in the Identified Portfolio
constitute approximately 59.5% of the aggregate receivables in the Originators'
entire portfolio of Premium Finance Agreements as of the Statistical Calculation
Date. If the amount of Additional Receivables originated with borrowers located
in Permitted States declines significantly or the amount of Additional
Receivables that satisfy the eligibility criteria for transfer to the Trust
materially declines (including as a result of material changes in the
concentration of certain insurance carriers or obligors in the Originators'
portfolio), Additional Receivables available to be transferred to the Trustee
for the benefit of the Trust will decline. If the amount of Additional
Receivables originated and eligible for transfer to the Trust declines to such
an extent that the Transferor is unable to maintain the Minimum Transferor
Interest as required by the Agreement and described herein, a Pay Out Event
would occur, in which event the Rapid Amortization Period would commence. If the
Rapid Amortization Period commences, Certificateholders are likely to be repaid
principal on the Certificates earlier than anticipated which would affect the
anticipated average life of the Certificates and could result in reinvestment
risk with respect to such earlier repayments. See "Description of the
Certificates--Pay Out Events."
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Risk of Limitations on Subordination. Although the probability of payment
of amounts due with respect to the Certificates is intended to be enhanced by
the subordination described herein of payments on the Collateral Interest as
described herein and, in the case of the Class A Certificates, also by the
subordination of payments on the Class B Certificates to the Class A
Certificates as described herein, the amount of such enhancement is limited and
may decline during any Rapid Amortization Period or as a result of Receivables
in Defaulted Accounts. If the subordination of payments on the Collateral
Interest are insufficient to protect the Class B Certificates from shortfalls or
delays in collections on the Receivables, then the Class B Certificateholders
will bear directly the credit risk associated with their undivided interests in
the Trust. If the subordination of payments on the Collateral Interest and the
Class B Certificates are insufficient to protect the Class A Certificates from
shortfalls or delays in collections on the Receivables, then the Class A
Certificateholders will bear directly the credit risk associated with their
undivided interests in the Trust. The credit risk associated with the
Certificateholders' undivided interests in the Trust is the risk that the Trust
will not receive full and timely payment of the Receivables. Series of
certificates issued in the future may share with the Class A Certificates and
the Class B Certificates in the benefits of the subordination of the Collateral
Interest, and any amounts deposited into the Excess Funding Account. See
"--Basis Risk", "Description of the Certificates--Excess Funding Account."
Geographic Concentration and Adverse Economic Factors. As of the
Statistical Calculation Date, 23.12% of the Aggregate Receivables were related
to Premium Finance Agreements with borrowers whose stated address in the related
Premium Finance Agreement are in California. After giving effect to the transfer
of Additional Receivables this percentage may increase or decrease. Economic
factors, including the occurrence of a recession, the rate of inflation, and
relative interest rates, may have an adverse impact upon the performance of the
Receivables and on the Originators' ability to generate Additional Receivables.
In particular, negative economic developments in California could have an
adverse impact on the timing and amounts of payments made by borrowers in
respect of Receivables and could cause such borrowers to become bankrupt or
insolvent. See "--Premium Finance Loan Credit and Related Risks" and "Maturity
Assumptions."
Additional Receivables Considerations. Each Originator will be obligated
pursuant to the Receivables Purchase Agreement to transfer all Additional
Receivables originated by it in the Identified Portfolio to the Transferor, who
in turn will be obligated pursuant to the Agreement to transfer such Additional
Receivables to the Trustee for the benefit of the Trust. Such Additional
Receivables may include Receivables originated using criteria different from
those which were applied to the Receivables assigned to the Trustee for the
benefit of the Trust on the Closing Date or to previously transferred Additional
Receivables, because such Receivables were originated at a different date.
Consequently there can be no assurance that Additional Receivables transferred
to the Trust in the future will be of the same credit quality as previously
transferred Receivables. The transfer of Additional Receivables will be subject
to the satisfaction of certain criteria described herein under "Description of
Certificates--Eligible Receivables" and "--Transfer and Assignment of
Receivables." Except for the criteria described thereunder, there are no
required characteristics of Additional Receivables. Additionally, because the
remaining term to maturity of substantially all of the Receivables included in
the Trust as of the Statistical Calculation Date is twelve months or less, it is
expected that within twelve months following the Closing Date substantially all
of the Receivables in the Trust will consist of Additional Receivables.
Following the transfer of Additional Receivables to the Trust, the aggregate
characteristics of the entire pool of Receivables included in the Trust may vary
from those of the Receivables included in the Trust on the Closing Date. See
"The Receivables."
Risk of Pay Out Event Upon Sale of Back-up Servicer. In the event that no
earlier than six months following the Closing Date a Sale Notice has been
delivered to the Transferor, the Servicer and the Trustee, and if after ninety
days following receipt of such Sale Notice, the Transferor is unable to find a
replacement Back-up Servicer to assume the obligations of the Back-up Servicer
under the Agreement which satisfies the Rating Agency Condition, a Pay Out Event
will occur and the Rapid Amortization Period will commence. In addition, in the
event that no earlier than six months following the Closing Date, a third party
acquires the Back-up Servicer and assumes the obligations of Back-up Servicer in
accordance with the Agreement and, within 10 days of the assumption of such
obligations the successor Back-up Servicer delivers a Successor Back-up Servicer
Termination Notice to the Transferor, the Servicer and the Trustee, if after
ninety days
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following receipt of such Back-up Servicer Termination Notice, the Transferor is
unable to find a replacement Back-up Servicer to assume the obligations of such
successor Back-up Servicer under the Agreement which satisfies the Rating Agency
Condition, a Pay Out Event will occur and the Rapid Amortization Period will
commence. The Back-up Servicer has advised the Transferor that it is not
currently in negotiations with any third party in connection with any
transaction that may result in the delivery of a Sale Notice or Successor
Back-up Servicer Termination Notice. However, there can be no assurance that
either a Sale Notice or Successor Back-up Servicer Termination Notice will not
be delivered in the future, or that if any such notice is delivered, that the
Transferor will be able to find a successor Back-up Servicer to assume the
obligations of Back-up Servicer which satisfies the Rating Agency Condition. Any
reinvestment risk resulting from the commencement of the Rapid Amortization
Period will be borne by Certificateholders.
"Sale Notice" means an officer's certificate signed by the President or
chief executive officer of the Back-up Servicer certifying (i) the Back-up
Servicer has agreed to consolidate with or merge with a third party or a third
party has agreed to acquire the Back-up Servicer's properties and assets
substantially as an entirety (other than assets conveyed or transferred through
a financing or securitization program) or purchase all or substantially all of
the capital stock of the Back-up Servicer and (ii) such agreement is conditioned
on the Back-up Servicer being released from its obligations under this Agreement
or the purchase price included in such agreement is subject to downward
adjustment unless the Back-up Servicer is released from its obligations under
this Agreement. "Successor Back-up Servicer Termination Notice" means a written
notice signed by the President or chief executive officer of a successor Back-up
Servicer that became Back-up Servicer as a result of acquiring the prior Back-up
Servicer in accordance with the Agreement in a transaction as to which no Sale
Notice was given stating that it is terminating its obligations and duties under
the Agreement. If a Sale Notice has been given with respect to a transaction it
will not be necessary for a Successor Back-up Servicer Termination Notice to be
given with respect to such transaction.
Basis Risk. Each Receivable bears a fixed rate of interest that is
established at the time of origination. Such interest rate is based on a spread
over the estimated London interbank offered rate at the date of origination of
the loan for deposits with a maturity comparable to the average life of the
loan, which currently is generally 4 1/2 months. The Class A LIBOR Rate and
Class B LIBOR Rate are established for each quarterly Interest Period once on
the related LIBOR Determination Date. As a result, there may be a mismatch
between collections of Finance Charge Receivables and interest accruing at the
Class A LIBOR Rate or Class B LIBOR Rate, as applicable, on the Certificates.
The amount of interest required to be paid or deposited in respect of the Class
A Certificates or Class B Certificates on any Distribution Date is subject to
the Class A Available Funds Cap and Class B Available Funds Cap, respectively.
If as a result there exists a Class A Shortfall Amount, Class A Carry Over
Amount, Class B Shortfall Amount or Class B Carry Over Amount, such amounts will
be funded on a subordinated basis from Excess Spread, if any, available therefor
as described under "Description of the Certificates--Application of
Collections--Excess Spread." The Class B Shortfall Amount and Class B Carry Over
Amount are subordinated to the Class A Shortfall Amount and Class A Carry Over
Amount. Interest on the Collateral Interest is not subject to any similar
available funds cap. Payments of the Class A Shortfall Amount, Class A Carry
Over Amount, Class B Shortfall Amount and Class B Carry Over Amount are
subordinated to payments in respect of the Collateral Interest. Each Originator
will covenant in the Receivables Purchase Agreement not to decrease the interest
rates payable under its Premium Finance Agreements (other than as a result of a
decrease in LIBOR) so as to materially increase the likelihood that the Class A
Available Funds Cap or Class B Available Funds Cap will be met but there can be
no assurance that such Class A or Class B Available Funds Cap will not be met on
any Distribution Date.
Risk of State Regulation of Premium Finance Lending. On occasion, Congress
has introduced bills that would limit the fees and finance charges that
financial institutions may impose on the purchase of insurance policies, or
which would require additional disclosure to borrowers. In some cases, the rates
proposed have been substantially below the rate at which the Originators assess
fees and finance charges on most of the Receivables. In addition, the
Originators are subject to state laws and regulations which impose requirements
on the making, enforcement and collection of insurance premium loans. The states
may enact additional laws and regulations and amendments to existing laws and
regulations to regulate further the premium loan industry or to reduce finance
charges or other fees or charges applicable to insurance premium loans.
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Currently the Originators do not expect the enactment of any such legislation.
However, if any such laws were adopted, the Servicer's ability to collect on the
Receivables or maintain the required level of finance charges and other fees and
charges would be impaired. In addition, the Servicer (so long as the Originator
is a Servicer) will covenant in the Agreement to comply with applicable
licensing and regulatory laws of any Receivable State and to cause the
Transferor, the Trustee and the Trust to at all times be in compliance with such
licensing and regulatory laws. Under certain circumstances, a breach of such
covenant will result in an obligation of the Servicer to cure such breach by
either removing Receivables from the affected Receivable State or indemnifying
the Trust, Trustee and Transferor for any losses arising from such Receivables
as described under "Description of the Certificates -- Certain Covenants." A
failure of the Servicer to either remove such Receivables in a timely manner or
indemnify such parties in a timely manner will cause a Pay Out Event to occur
and the Rapid Amortization Period to commence.
Limitations on State Insurance Guaranty Funds. All states have state
insurance guaranty funds that support the obligations of insurance companies
regulated by that state, including the obligation of such insurance companies to
return unearned premiums to their insureds upon cancellation of the related
insurance policies. Some state insurance guaranty funds impose dollar limits,
exclude certain types of coverage and do not operate with reference to surplus
and excess lines insurance companies, including in most states, foreign
insurance companies (the "State Fund Refund"). Additionally, state legislation
may be enacted imposing additional limitations or restrictions on State Fund
Refunds. There is also a possibility that a state insurance guaranty fund will
become underfunded which could cause an additional delay in the Trust receiving
a State Fund Refund, or could ultimately result in a failure by the state
insurance guaranty fund to pay to the Trust any State Fund Refund. In addition,
certain of the Premium Finance Agreements finance premiums of foreign insurance
carriers that do not have the benefit of any state insurance guaranty funds.
Commingling Risk. For as long as an Originator remains a Servicer under
the Agreement, no Pay Out Event has occurred and (a)(i) such Servicer provides
to the Trustee a letter of credit or other credit enhancement covering the risk
of collection of such Servicer acceptable to the Rating Agencies and (ii) the
Transferor shall not have received a notice from the Rating Agency that reliance
on such letter of credit or other credit enhancement would result in the
lowering of such Rating Agency's then-existing rating of any Series then
outstanding or (b) the certificates of deposit or unsecured short-term debt
obligations of such Servicer (or, if neither such certificates of deposit nor
obligations of such Servicer are rated by Moody's or Standard & Poor's, then the
certificates of deposit or unsecured short-term debt obligations of Mellon Bank,
N.A.) are rated P-1 by Moody's and at least A-1 by Standard & Poor's and insured
by either BIF or SAIF or such Servicer makes other arrangements satisfactory to
each Rating Agency rating any Series then outstanding, then such Servicer may
make deposits and payments described in "Description of the
Certificates--Application of Collections" on the business day immediately prior
to the Distribution Date in an amount equal to the net amount of such deposits
and payments which would have been required to be made on each day during the
related Monthly Period had the conditions set forth above not applied. In the
event that a Servicer commingles collections, the Certificateholders will be
subject to the risk of loss of such collections, including as a result of the
bankruptcy or insolvency of such Servicer. Because Mellon Bank, N.A.'s unsecured
short-term debt obligations are currently rated P-1 by Moody's and A-1 by
Standard & Poor's, the Servicer will initially make such deposits and payments
monthly on a net basis and expects to continue to do so (subject to the
requirements described above) for as long as the Certificates are outstanding.
See "Description of the Certificates--Application of Collections."
Master Trust Considerations. The Trust, as a master trust, will issue the
Certificates and may issue additional Series of certificates. While the
principal terms of any Series will be specified in a series supplement, the
provisions of a Supplement and, therefore, the terms of any additional Series,
will not be subject to the prior review or consent of holders of the
certificates of any previously issued Series, including Series 1996-1. Such
principal terms may include methods for determining applicable investor
percentages and allocating collections, provisions creating different or
additional security or other Enhancement, provisions subordinating such Series
to another Series (if the Series Supplement relating to such Series so permits;
the Series 1996-1 Supplement will not permit the subordination of the
Certificates to any other Series). It is a condition precedent to the issuance
of any additional Series that either (a) each Rating Agency deliver written
confirmation to the Trustee that such New Issuance will not result in such
Rating Agency reducing or
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withdrawing its then-existing rating on any outstanding Series or (b) if at the
time of the New Issuance there is no outstanding Series which is currently rated
by a Rating Agency, a nationally recognized investment banking firm or
commercial bank delivers a certificate to the trustee to the effect that the New
Issuance will not have an adverse effect on the timing or distribution of
payments to such other Series. There can be no assurance, however, that the
principal terms of any Series issued from time to time hereafter might not have
an impact on the timing and amount of payments received by a Certificateholder,
including as a result of the refixing of the percentage utilized with respect to
the allocation of the Principal Receivables. See "Description of the
Certificates--New Issuances" and "--Allocation Percentages."
If the Trust issues any additional Series in a future public offering, the
Trust will do so pursuant to a registration statement (and prospectus) under the
Securities Act that is separate from this Prospectus and its related
registration statement.
Certificateholder Control Limitations. Subject to certain exceptions, the
certificateholders of each Series may take certain actions, or direct certain
actions to be taken, under the Agreement or the related Series Supplement.
However, under certain circumstances, the consent or approval of a specified
percentage of the aggregate certificateholders ownership interest of all Series
or of the certificateholders ownership interest of each Series or of Classes
within a Series will be required to take or direct certain actions, including
requiring the appointment of a successor Servicer following a Servicer Default,
amending the Agreement in certain circumstances and directing a repurchase by
the Transferor of all outstanding Receivables upon the breach of certain
representations and warranties by the Transferor. In such instances, the
interests of the holders of the Certificates may not be aligned with the
interests of the holders of certificates of such other Series. Thus, even if the
requisite majority of Certificateholders votes to take or direct such action,
the certificateholders of such other Series may control whether or not such
action occurs.
Limitations on Certificate Rating; Risk of Downgrade. Any rating assigned
to the Certificates by a Rating Agency will reflect such Rating Agency's
assessment of the likelihood that Certificateholders will receive the payments
of interest, subject to the Class A Available Funds Cap in the case of the Class
A Certificates and the Class B Available Funds Cap in the case of the Class B
Certificates, and principal required to be made under the Agreement and will be
based primarily on the value of the Receivables in the Trust and the Collateral
Interest. However, any such rating will not, unless otherwise specified herein
with respect to any Class offered hereby, address the likelihood that the
principal of, or interest on, any Certificates will be paid on a scheduled date.
In addition, any such rating will not address the likelihood of payment of any
Class A Shortfall Amount, Class A Carry Over Amount, Class B Shortfall Amount or
Class B Carry Over Amount, the possibility of the occurrence of a Pay Out Event
with respect to such Class or the possibility of the imposition of the United
States withholding tax with respect to non-U.S. Certificateholders. The rating
will not be a recommendation to purchase, hold or sell Certificates, and such
rating will not comment as to the marketability of such Certificates, any market
price or suitability for a particular investor. There is no assurance that any
rating will remain for any given period of time or that any rating will not be
lowered or withdrawn entirely by a Rating Agency if in such Rating Agency's
judgment circumstances so warrant.
The Transferor will request a rating of the Certificates offered hereby by
each of Moody's Investor Services, Inc. ("Moody's") and Standard & Poor's
Ratings Services, a Division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's and together with, the "Rating Agencies"). There can be no assurance as
to whether any rating agency not requested to rate the Certificates will
nonetheless issue a rating with respect to any Certificates, and, if so, what
such rating would be. A rating assigned to any of the Certificates by a rating
agency that has not been requested by the Transferor to do so may be lower than
the rating assigned by the Rating Agencies pursuant to the Transferor's request.
Book-Entry Registration. The Certificates initially will be represented by
one or more certificates registered in the name of Cede, the nominee for DTC,
and will not be registered in the names of the Certificate Owners or their
nominees. Unless and until Definitive Certificates are issued for a Series, the
owners of the beneficial interests of the Certificates ("Certificate Owners")
will not be recognized by the Trustee as Certificateholders. Hence, until such
time, Certificate Owners will only be able to exercise the rights of
Certificateholders indirectly through DTC, Cedel or Euroclear and their
participating organizations. See "Description of the Certificates--Book-Entry
Registration" and "--Definitive Certificates."
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BUSINESS OF THE ORIGINATORS
GENERAL
AFCO Credit Corporation, a New York corporation ("AFCO Credit"), was formed
in 1954 as a wholly owned subsidiary of Continental Insurance Company and was
subsequently purchased by Mellon Bank, N.A. in 1993. The principal business of
AFCO Credit consists of making loans to commercial borrowers to finance property
and casualty insurance premiums throughout the United States, other than in
California. AFCO Acceptance Corporation ("AFCO Acceptance") was formed in
California in 1968 for the purpose of making loans to commercial borrowers to
finance property and casualty insurance premiums in California. For the purpose
of this "Business of the Originators" section, AFCO Credit and AFCO Acceptance
will be referred to collectively as "AFCO". AFCO finances premiums for most
lines of property and casualty insurance and is the largest insurance premium
finance company in the United States. AFCO financed insurance premiums during
1995 in excess of $3.3 billion, and during the first nine months of 1996, in
excess of $2.4 billion. The principal executive offices of AFCO Credit are
located at 10 Hanover Street, New York, New York 10004, telephone number (212)
612-3500 and of AFCO Acceptance Corporation are located at 21800 Oxnard Street,
P.O. Box 1260, Woodland Hills, California 91365-1260, telephone number (818)
227-2900.
A Premium Finance Agreement typically is an installment loan made to a
commercial insurance buyer, the proceeds of which pay premiums which are due to
the insurance company. Financed commercial insurance policies commonly (a) are
for a term of one year or less, (b) require the full premium to be paid at or
near inception of the policy period and (c) provide for a return of the unearned
premium to the insured in the event of cancellation of the related insurance
policy. Borrowers generally make fixed scheduled payments which include a
finance charge that is established at the time of origination of the loan. Such
finance charge is based on a spread over the estimated London interbank offered
rate at the date of origination of the loan for deposits with a maturity
comparable to the average life of the loan, which currently is generally 4 1/2
months.
The finance charges on Premium Finance Agreements made by AFCO may vary
considerably, depending on the term and amount of the loan, the insured's credit
payment history, the size of the premium down payment and other considerations.
AFCO utilizes standardized Premium Finance Agreements that give AFCO a
limited power of attorney allowing it to cancel the insurance coverage upon
non-payment of a loan installment by the borrower, to collect from the insurance
company any unearned premium that may secure the loan and to take certain
limited actions in furtherance of the Premium Finance Agreement. Depending on
the terms of the loan and of the related insurance policy, the unearned premium
may or may not be sufficient to pay off the outstanding balance of the loan.
AFCO also has a right to recover any unpaid loan balance directly from the
borrower if any returned premium is insufficient.
A common premium finance loan structure may include a 20% down payment on
the premium paid by the borrower with the remaining 80% funded by a loan from
the insurance premium finance company to be repaid by the borrower in nine equal
monthly installments. AFCO's premium finance loans generally have terms that
range from 6 to 12 months with higher or lower down payment percentages
depending upon insured's needs and AFCO's applicable credit and underwriting
policies. Certain loans do not have level repayment requirements, usually to
accommodate a borrower's cash flow; however, all of the Receivables have monthly
repayment requirements. Given the relatively short duration of most premium
finance loans, such loans are generally not prepaid prior to the scheduled
payment dates although the loan terms and controlling regulations do not
prohibit prepayments or provide for penalties in the event of prepayment.
Financed commercial insurance policies usually require that the full
insurance premium be paid at or near the commencement of the policy period. The
insurance company customarily earns the full premium over the course of the
policy period. If the insured cancels the policy prior to the end of the policy
period, the insured is commonly entitled to a repayment of the portion of
premium payment that is unearned by the insurance company at the time of
cancellation. Depending on the type of insurance coverage and the terms of the
particular insurance policy, the amount of unearned premium available upon
cancellation will vary in light of relevant factors such as (a) the applicable
method for measuring unearned premium which may be by proration over the policy
term or, as required by some states, by an accelerated method under which more
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premium is earned in the earlier portion of the policy period, (b) the extent of
the policy period that has expired at the time of cancellation, (c) the loss
experience under the policy prior to cancellation and (d) variations after the
commencement of the policy period in the scope of the risks covered. The
insurance company may, depending on the terms of the policy, be entitled to
retroactively review and evaluate factors (c) and (d) above after cancellation
which may result in a reduction of the amount, and affect the timing, of
repayment of any unearned premiums. Also, in certain cases the insurance company
may earn the entire premium or a portion thereof at inception of the policy or
upon the occurrence of an insured loss under the policy, in either of which case
there would be either less or no unearned premium to be returned.
Premium finance lending activities are regulated by most states. Among
other matters, many states regulate various terms of the premium finance loans
such as refund policies and rates of interest and late charges that may be
charged an insured. Premium finance loans are made by AFCO on standardized loan
forms, the provisions and format of which are also usually subject to state
regulation. AFCO regards its relations with state regulatory agencies as good.
See "--Risk of State Regulation of Premium Finance Lending Activities."
PREMIUM FINANCE LOAN ORIGINATION; COLLECTION POLICY
AFCO generally locates premium finance borrowers through independent
insurance agents and brokers that are licensed under state laws, who offer
premium loan programs to enable their commercial customers to purchase the full
amount of insurance coverage needed and spread out the premium payments over
time. Thus, origination is usually dependent on relationships with insurance
brokers and agents and knowledge of the insurance marketplace. The origination
by AFCO of insurance premium finance loans is commonly commenced by an agent or
broker contacting AFCO to initiate the premium loan process and outlining to
AFCO the proposed loan transaction, including borrower and insurance company
information and coverage types and amounts. AFCO then reviews the information
submitted by such agent or broker in light of its underwriting procedures. See
"--Premium Finance Loan Underwriting Procedures" below. After AFCO approval, the
borrower executes a standard Premium Finance Agreement which contains a limited
power of attorney giving AFCO the authority in the event of default on the loan
to contact the insurance company directly and cancel coverage, and a collateral
assignment to AFCO of the unearned insurance premium, if any, returnable
following such cancellation or for any other reason.
Following receipt and acceptance of the signed Premium Finance Agreement,
AFCO either sends the loan proceeds to the insurance company to pay the premium
balance due or releases funds to the insurance agent or broker who then pays the
insurance company. AFCO bills the borrower directly. Each borrower is directed
to remit payments to the appropriate regional lockbox account maintained by AFCO
or in some cases to one of AFCO's processing centers. While most premium finance
loans are repaid in equal monthly installments, AFCO may enter into transactions
in which payments are to be made quarterly or in some other fashion; however all
of the Receivables are required to be repaid in equal monthly installments.
Finance charges on AFCO's premium finance loans are generally calculated based
on the Rule of 78's and finance charges on all of the Receivables will be
calculated in accordance with the Rule of 78's. See "The Receivables".
Since the insurance company generally earns a portion of the premium each
day, thereby reducing unearned premium amounts for loans secured by such
collateral, prompt action on loan defaults is critical. On defaulted loans, most
states require premium finance companies such as AFCO to issue to the borrower a
"Notice of Intent to Cancel" the related insurance policy after the premium loan
installment due date on which the borrower defaulted. A "Notice of Cancellation"
can then be issued to the applicable insurance company generally ten days after
a Notice of Intent to Cancel has been mailed. AFCO's policy for defaulted loans
is to mail a Notice of Intent to Cancel 10 days after the loan installment due
date and to mail a notice of cancellation 28 days after the loan installment due
date. Once a Notice of Cancellation has been issued, AFCO will customarily
proceed to collect any unearned premium available from the insurance company and
apply it to the loan balance and to seek direct collection from the borrower.
The Originators continue to earn interest on a cancelled loan, which has
unearned interest, until the maturity date of such loan.
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Generally, the policy cancellation date occurs within one month of the
related loan installment default. The current policy of AFCO is to generally
charge off as a loss the unpaid defaulted loan balance 270 days after the
effective date of the cancellation. Following cancellation, AFCO will process
the collection of any unearned premium with the appropriate insurance company
and may pursue collection against the borrower. Under the terms of the
Agreement, any recoveries with respect to Receivables that have been written off
will be included in the assets of the Trust and considered Finance Charge
Receivables to the extent not applied against Default Amounts. See "The
Receivables."
PREMIUM FINANCE LOAN UNDERWRITING PROCEDURES
AFCO considers and evaluates a variety of risks in evaluating each
insurance premium finance loan transaction. These include (a) the loan structure
(the loan term, the amount of down payment and the availability of unearned
premium as collateral), (b) the creditworthiness of the borrower, (c) the
creditworthiness of the insurance company, and (d) the capabilities and
operating procedures of the insurance agent or broker that (i) places the
insurance policy, (ii) serves as a source of significant information regarding
the loan transaction, and (iii) may pay the loan proceeds or collect unearned
premium funds for AFCO. These factors may be given different weight in the case
of any particular loans. See "Risk Factors--Premium Finance Loan Credit and
Related Risks."
If a prospective loan is less than $150,000, the amount of down payment
made by the prospective borrower is at least 10% of the financed premium,
unearned premium under the insurance policy is available as collateral, and the
insurance carrier is acceptable, AFCO sales representatives can approve the loan
without additional action. If the loan fails to meet one or more of these
criteria, analysis of the transaction is conducted by AFCO's home or regional
office depending on the amount of the unsecured exposure. If the loan amount is
$150,000 or more, an AFCO regional manager will conduct a detailed credit review
of the borrower before approval of the loan. If the loan amount is more than
$500,000, credit review of the borrower is conducted by AFCO's New York office,
including obtaining a Dun & Bradstreet report on the borrower and financial
statements, as needed and under certain circumstances the creditworthiness of
the borrower is reviewed by representatives of Mellon Bank, N.A.
In addition to AFCO's internal review of the credit of an insurance
carrier, AFCO's general guideline for approval of an insurance carrier is a
rating of at least B+ by A.M. Best Company. No insurance carrier group accounted
for more than 15% of the Aggregate Receivables in the Identified Portfolio as of
the Statistical Calculation Date. Based upon AFCO's own credit determination, it
may finance insurance policies issued by insurance carriers that have a lower
rating or, in the case of foreign insurers and certain domestic insurers that
meet AFCO credit requirements, that are unrated. On an annual basis AFCO sets an
exposure limit with respect to each insurance carrier and in cases where AFCO's
approved exposure with respect to a particular insurance carrier exceeds $25
million, a credit committee conducts a special review of the insurance carrier.
The Rating Agencies and the provider of Enhancement have imposed certain
concentration limits on insurance carriers relating to the Receivables, some of
which are based on the Standard & Poor's and Moody's credit ratings of such
insurance carriers. See "Description of the Certificates--Pay Out Events."
STATE REGULATION OF PREMIUM FINANCE LENDING ACTIVITIES
The making, enforcement and collection of insurance premium loans is
subject to extensive regulation by many states' laws. Such laws vary widely by
state, but often (i) require that premium finance lenders be licensed by the
state, (ii) restrict the content of premium finance loan agreements, and impose
certain disclosure requirements on such agreements, (iii) limit the amount of
finance charges that may be lawfully imposed, (iv) regulate the amount of
refunds due an obligor who prepays the premium finance loan prior to maturity,
(v) regulate the amount of late fees, if any, and finance charges that may be
charged upon a premium finance loan becoming overdue, (vi) regulate the manner
and method of canceling an insurance policy upon non-payment of the premium
finance loan, including a requirement that the premium finance lender provide
the obligor with appropriate notice prior to such cancellation, and (vii) allow
imposition of penalties, which may be significant, upon premium finance lenders
for violations of the state's premium finance laws. See "Risk Factors--Risk of
State Regulation of Premium Finance Lending."
33
<PAGE> 34
In order to increase the likelihood of the payment of claims and unearned
premiums in the event that an insurance carrier becomes insolvent, the insurance
industry created self-funded state guaranty associations. All States have state
insurance guaranty funds that cover the return of some or all unearned insurance
premiums in the event an insurance carrier becomes insolvent or is placed in
receivership. However, there is no guaranty of payment in the event the state
insurance guaranty fund is underfunded or legislation changes the terms and
conditions of its refund program. In addition, certain of the Premium Finance
Agreements finance premiums of foreign insurance carriers that do not have the
benefit of any state insurance guaranty fund. See "Risk Factors--Limitations on
State Insurance Guaranty Funds."
State insurance guaranty funds differ by the types of insurance policies
covered and by deductible amounts required or maximum refunds allowed.
Generally, state insurance guaranty funds have successfully responded to claims
for refunds in a timely manner if access to the liquidation estate is readily
accessible and their premium assessments on fund members are accurate.
Generally, the timing of payment of a State Fund Refund by a state insurance
guaranty fund ranges from a few months to one year.
AS SERVICER
Each Originator will act as a Servicer for the Receivables it transferred
to the Transferor in accordance with the Agreement. In certain limited
circumstances, a Servicer may resign or be removed as Servicer, in which case a
Pay Out Event will occur and the Back-up Servicer will automatically be
appointed as the successor Servicer. See "Risk Factors--Risk of State Regulation
of Premium Finance Lending" and "Description of the Certificates--Servicer
Default."
THE RECEIVABLES
The assets of the Trust will include (i) Premium Finance Agreements between
either of the Originators and commercial borrowers to finance the payment of
insurance premiums on insurance and related sums regarding insurance policies
under which the borrowers are the insureds governed by the law of a State in the
United States of America or the District of Columbia, which Premium Finance
Agreements are transferred from time to time by either of the Originators to the
Transferor and by the Transferor to the Trustee for the benefit of the Trust
(the "Receivables"); (ii) all monies due or to become due with respect to the
Receivables, including all monies received from insurance companies and state
insurance guaranty funds representing returns of unearned portions of insurance
premiums, the proceeds of any guarantees issued by insurance agents with respect
to the Receivables and other charges due on the related Receivables; (iii) such
amounts as may be from time to time held in one or more trust accounts, which
will be established and maintained by the Trustee pursuant to the Agreement;
(iv) any Enhancement issued with respect to any Series; (v) all of the
Transferor's rights under a receivables purchase agreement (the "Receivables
Purchase Agreement"), dated as of December 1, 1996, among the Transferor and the
Originators and (vi) the proceeds of all of the foregoing.
Each Receivable will have been originated by the Originators to finance
commercial insurance premiums. The Receivables are not guaranteed by AFCO
Credit, AFCO Acceptance, the Transferor, PFSI, the Trustee or any affiliate
thereof, and the Trust, as holder of the Receivables, has no recourse against
AFCO Credit, AFCO Acceptance, the Transferor, PFSI, the Trustee or any affiliate
thereof for the non-collectibility of the Receivables, except that, under
certain limited circumstances, AFCO Credit or AFCO Acceptance, as the case may
be, and the Transferor will be required to repurchase certain Receivables from
the Trust and to provide indemnification to the Trust in certain events. AFCO
Credit and AFCO Acceptance will each act as Servicer with respect to the
Receivables it originated and transferred to the Transferor, who in turn will
transfer such Receivables to the Trust. PFSI and PFSC will initially act as
Back-up Servicer.
Receivables provide for allocation of payments according to the "sum of
periodic balances" or "sum of monthly payments" method, similar to the "Rule of
78's" ("Rule of 78's Receivables"). A Rule of 78's Receivable provides for the
payment by the obligor of a specified total amount of payments, payable in equal
monthly installments on each due date, which total represents the principal
amount financed and add-on interest in an amount calculated on the basis of the
stated annual percentage rate for the term of the
34
<PAGE> 35
Receivable. The fraction used in the calculation of add-on interest earned each
month has as its denominator a number equal to the sum of the series of numbers
(the sum of the numbers of payments) and the numerator of the fraction for a
given month is the number of payments before giving effect to the payment to be
made in that month. For example, in the case of a Rule 78's Receivable providing
for twelve payments, the denominator of each month's fraction will be 78, the
sum of the series of numbers from one to twelve. The fraction for the first
payment would be 12/78, the fraction for the second payment would be 11/78 and
the faction for the last payment would be 1/78. The applicable fraction is then
multiplied by the total add-on interest payable over the entire term of the
Receivable, and the resulting amount is the amount of add-on interest "earned"
that month. The difference between the amount of the monthly payment and the
amount of add-on interest earned for the month is applied to reduce the
outstanding principal balance of the Receivable. Interest accrues more rapidly
and principal is amortized more slowly on Rule of 78's Receivables than if
interest on the Receivables were calculated using the actuarial method. The rate
at which such amount of add-on interest is earned and, correspondingly, the
amount of each fixed monthly payment allocated to reduction of the outstanding
principal are calculated in accordance with the "Rule of 78's".
Generally, in the event of the prepayment in full (voluntarily or by
acceleration) of a Rule of 78's Receivable, under the terms of the contract, a
"refund" or "rebate" will be made to the obligor of the portion of the total
amount of payments under the contract allocable to "unearned" add-on interest,
calculated in accordance with a method equivalent to the Rule of 78's.
Each Receivable bears a fixed interest rate that is established at the time
of origination. Such interest rate is generally based on a spread over the
estimated London interbank offered rate at the date of origination of the loan
for deposits with a maturity comparable to the average life of the loan, which
currently is generally 4 1/2 months. The principal amount of each Receivable is
fully amortized over a fixed number of scheduled payments. The Originators
assign an account number (each, an "Account") for the borrower under a Premium
Finance Agreement for the related insurance policy period. A Premium Finance
Agreement may finance premiums relating to more than one insurance policy or
from one or more insurance carriers. However, there is only one monthly payment
under a Premium Finance Agreement and such payment is not allocated to the
repayment of the financing of the premiums of any particular insurance policy.
Each Premium Finance Agreement representing a Receivable grants the related
Originator a security interest in the borrower's right to receive any unearned
premium from the insurance company upon cancellation of the related insurance
policy prior to its expiration. Each Premium Finance Agreement representing a
Receivable also contains a power of attorney granting the related Originator the
right to cancel the insurance policy, if cancelable, and collect such unearned
premium from the insurance company following a payment default on the related
Receivable. Each Originator will assign its security interests and related power
of attorney to the Transferor pursuant to the Receivables Purchase Agreement,
and the Transferor will assign such security interest and such powers of
attorney to the Trustee pursuant to the Agreement. With respect to Receivables
transferred to the Trust prior to February 1, 1997, neither the Originators nor
the Transferor will notify the related insurance carriers of the Trustee's
security interest in the related unearned premiums and the Trustee's security
interest in the related unearned premium of such Receivables will not be
perfected. With respect to each Receivable transferred to the Trust on or after
February 1, 1997, the Originators and the Transferor will represent that a
notice of finance premium has been delivered to the related insurance carrier
notifying it of the Trustee's security interest in the unearned premium and that
the Trust has a first priority perfected security interest in such unearned
premiums. See "Risk Factors--Lack of Perfected Security Interests in Certain
Unearned Premiums" and "Certain Legal Aspects of the Receivables--Lack of
Perfected Security Interests in Certain Unearned Premiums."
Pursuant to the Receivables Purchase Agreement, on the date of issuance of
the Certificates (the "Closing Date"), the Originators will transfer and assign
to the Transferor Premium Finance Agreements from their portfolio of Premium
Finance Agreements on the day immediately preceding the Closing Date (the
"Calculation Date") with borrowers whose stated addresses in the Premium Finance
Agreements are in one of the Permitted States (as defined below) and that
satisfy as of the Cut-off Date (as defined below) the eligibility criteria
specified in the Receivables Purchase Agreement and the Agreement. The "Cut-off
Date" is (x) with respect to Premium Finance Agreements originated prior to
December 1, 1996, December 1, 1996
35
<PAGE> 36
and (y) with respect to Premium Finance Agreements originated after December 1,
1996 but through and including the Calculation Date, the Calculation Date. See
"Description of the Certificates--Eligible Receivables." The selection of the
Permitted States was based on state regulatory considerations. Each of the
Originators will represent and warrant in the Receivables Purchase Agreement,
and the Transferor will represent and warrant in the Agreement, that the
Identified Portfolio was not selected in a manner adverse to Certificateholders.
Pursuant to the Agreement, the Transferor will transfer and assign such Premium
Finance Agreements to the Trustee for the benefit of the Trust. See "Description
of Certificates--Transfer and Assignment of Receivables."
As of November 15, 1996 (the "Statistical Calculation Date"), the Permitted
States consisted of the 36 states set forth in the table "Geographic
Concentration" under the heading "The Receivables" herein. As of the Statistical
Calculation Date, Aggregate Receivables in the Identified Portfolio constitute
approximately 59.5% of the aggregate receivables in the Originators' entire
portfolio of Premium Finance Agreements as of the Statistical Calculation Date.
"Permitted State" means (i) any state listed in the chart entitled
"Geographic Concentration" appearing below or (ii) any other state with respect
to which each of the Originators, the Transferor and the Trust has either
complied with such state's applicable licensing laws or is not required to be
licensed under such state's applicable licensing laws, in each case, as
evidenced by (x) an opinion of counsel or (y) written correspondence from the
applicable state regulatory authority. Any such written correspondence shall be
attached to an officer's certificate certifying that such written correspondence
evidences compliance with clause (ii) of the definition of Permitted States.
Following the Closing Date, a state that is not a Permitted State as of the
Closing Date will not become a Permitted State unless and until such opinion or
officer's certificate is delivered to the Trustee. Thereafter, the Originators
will be obligated to transfer to the Transferor, and the Transferor will be
obligated to transfer to the Trust, all Premium Finance Agreements originated in
such state after such state becomes a Permitted State that otherwise satisfy the
eligibility criteria as of the date of origination.
Each Originator will be required pursuant to the Receivables Purchase
Agreement to transfer and assign all Additional Receivables from the Identified
Portfolio to the Transferor, who in turn will be required pursuant to the
Agreement to transfer and assign all such Additional Receivables to the Trustee
for the benefit of the Trust. Such Additional Receivables may include
Receivables originated using criteria different from those which were applied to
the Receivables assigned to the Trustee for the benefit of the Trust on the
Closing Date or to previously Additional Receivables, because such Receivables
were originated at a different date. Consequently there can be no assurance that
Additional Receivables transferred to the Trust in the future will be of the
same credit quality as previously transferred Receivables. Additionally, because
the remaining term to maturity of substantially all of the Receivables included
in the Trust as of the Statistical Calculation Date is twelve months or less, it
is expected that within twelve months following the Closing Date substantially
all of the Receivables in the Trust will consist of Additional Receivables. See
"Risk Factors--Additional Receivables Considerations". In addition, there are
many legal, economic and competitive factors that could adversely affect the
amount and collectibility of the Receivables, including insureds' decisions to
use new sources of credit, which would affect the Originators' ability to
generate Additional Receivables, and changes in usage of credit, payment
patterns and general economic conditions. Because the impact of these and other
factors (including the composition of the Receivables and the interest rates,
fees and charges assessed thereon) may change in the future, the text and tables
set forth below are not necessarily indicative of the future performance of the
Receivables that are transferred to the Trust. In the event that sufficient
Additional Receivables are not transferred to the Trustee for the benefit of the
Trust to maintain the Minimum Transferor Interest as required by the Agreement
and as described herein, a Pay Out Event would occur and the Rapid Amortization
Period will commence. See "Description of the Certificates--Pay Out Events."
The statistical information relating to the Receivables presented in this
Prospectus is based on the Receivables in the Identified Portfolio as of the
Statistical Calculation Date. Receivables transferred to the Trust on the
Closing Date will include certain other Premium Finance Agreements originated by
either of the Originators after the Statistical Calculation Date and on or prior
to the Calculation Date. In addition, the characteristics of the Receivables
included as of the Statistical Calculation Date will vary as of the Cut-off
36
<PAGE> 37
Date as a result of payments received by or on behalf of borrowers after the
Statistical Calculation Date and prior to the Cut-off Date. There will be no
material permissible deviations from the eligibility criteria used for
identifying the Premium Finance Agreements in the Identified Portfolio as of the
Statistical Calculation Date from those applied on the Closing Date. However,
certain of the Premium Finance Agreements in the Identified Portfolio that
satisfied the eligibility criteria as of the Statistical Calculation Date may
not satisfy such criteria on the Closing Date because of a change in
circumstances and therefore will not be permitted to be transferred to the
Trust. While the statistical distribution of the characteristics of all
Receivables transferred to the Trust on the Closing Date will vary from the
statistical information presented in this Prospectus, the Transferor does not
believe that the characteristics of the Receivables as of the Cut-off Date will
vary materially from the information presented herein with respect to the
Receivables as of the Statistical Calculation Date.
The Aggregate Receivables as of November 30, 1996 was $614,886,198.16,
consisting of $14,131,486.55 of Finance Charge Receivables and $600,754,711.61
of Principal Receivables. "Aggregate Receivables" means, with respect to the
Receivables as of any date of determination, an amount equal to the aggregate
amount of payments owed on the Receivables from such date (or, if such date is
the Statistical Calculation Date, from November 15, 1996) through the respective
scheduled final payment dates of such Receivables (exclusive of late fees and
administrative charges) less certain net payables as of such date of
determination.
AGGREGATE RECEIVABLES BALANCE BY AMOUNT
IDENTIFIED PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE AGGREGATE
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
AGGREGATE RECEIVABLES BALANCE(1) ACCOUNTS ACCOUNTS BALANCE BALANCE
- -------------------------------- -------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
$5,000 or less.................. 43,865 71.07% $ 72,347,473.30 11.70%
$5,001 to $10,000............... 7,586 12.29 53,601,224.21 8.67
$10,001 to $25,000.............. 6,102 9.89 94,450,056.92 15.28
$25,001 to $50,000.............. 2,216 3.59 76,547,667.53 12.38
$50,001 to $75,000.............. 764 1.24 46,456,649.27 7.51
$75,001 to $100,000............. 341 0.55 29,307,237.64 4.74
$100,001 to $250,000............ 605 0.98 91,211,347.78 14.75
$250,001 to $500,000............ 159 0.26 54,519,494.55 8.82
$500,001 to $1,000,000.......... 53 0.09 35,436,226.75 5.73
$1,000,001 to $5,000,000........ 28 0.05 58,186,198.68 9.41
Over $5,000,000................. 1 0.00 6,127,376.50 0.99
------ ------ ------------ ------
Total........................... 61,720 100.00% $ 618,190,953.13 100.00%
====== ====== ============ ======
</TABLE>
- ---------
(1) Includes the aggregate amount owed (including unearned finance charges
calculated based on the Rule of 78's) from the Statistical Calculation Date
through the scheduled final payment date of the premium finance loan
(exclusive of the late fees, administrative charges and net payables).
37
<PAGE> 38
COMPOSITION OF RECEIVABLES BY REMAINING INSTALLMENT TERM
IDENTIFIED PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE AGGREGATE
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
REMAINING INSTALLMENT TERM ACCOUNTS ACCOUNTS BALANCE(1) BALANCE
- -------------------------------- -------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
3 months or less................ 22,574 36.57% $ 95,807,270.68 15.50%
4 to 6 months................... 22,371 36.25 224,664,602.22 36.34
7 to 9 months................... 16,382 26.54 246,606,890.66 39.89
10 to 12 months................. 273 0.44 32,710,771.85 5.29
13 to 18 months................. 49 0.08 5,093,387.00 0.82
More than 18 months............. 71 0.12 13,308,030.72 2.15
------ ------ ------------ ------
Total 61,720 100.00% $ 618,190,953.13 100.00%
====== ====== ============ ======
</TABLE>
- ---------
(1) Includes the aggregate amount owed (including unearned finance charges
calculated based on the Rule of 78's) from the Statistical Calculation Date
through the scheduled final payment date of the premium finance loan
(exclusive of the late fees, administrative charges and net payables).
GEOGRAPHIC CONCENTRATION
The Identified Portfolio as of the Statistical Calculation Date includes
Premium Finance Agreements with borrowers whose stated address in the related
Premium Finance Agreement is in one of the 36 states listed below.
GEOGRAPHIC CONCENTRATION
IDENTIFIED PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
RECEIVABLES RECEIVABLES
STATES(1) BALANCE(2) BALANCE
- ------------------------------------------------------------- --------------- -------------
<S> <C> <C>
California................................................... $142,939,062.92 23.12%
Texas........................................................ 78,954,323.48 12.77
New York..................................................... 77,084,390.67 12.47
Florida...................................................... 62,317,119.78 10.08
New Jersey................................................... 40,266,729.97 6.51
Pennsylvania................................................. 22,553,696.01 3.65
Massachusetts................................................ 20,096,040.78 3.25
Ohio......................................................... 16,205,043.28 2.62
Michigan..................................................... 15,342,506.64 2.48
Utah......................................................... 13,886,039.87 2.25
Louisiana.................................................... 12,437,516.00 2.01
Colorado..................................................... 11,350,277.71 1.84
Maryland..................................................... 10,058,567.51 1.63
Connecticut.................................................. 9,956,253.97 1.61
Arkansas..................................................... 9,450,332.39 1.53
Alabama...................................................... 8,750,046.53 1.42
South Carolina............................................... 6,934,386.80 1.12
Arizona...................................................... 6,523,501.92 1.06
Hawaii....................................................... 6,180,970.39 1.00
Oklahoma..................................................... 5,687,370.46 0.92
North Carolina............................................... 5,453,566.25 0.88
Indiana...................................................... 5,275,869.16 0.85
Nevada....................................................... 4,511,265.17 0.73
West Virginia................................................ 4,385,827.93 0.71
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
RECEIVABLES RECEIVABLES
STATES(1) BALANCE(2) BALANCE
- ------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Wisconsin.................................................... 4,230,364.89 0.68
Minnesota.................................................... 3,795,514.03 0.61
Kentucky..................................................... 3,295,101.46 0.53
Idaho........................................................ 2,167,552.77 0.35
New Hampshire................................................ 1,761,494.59 0.28
Rhode Island................................................. 1,702,746.77 0.28
Maine........................................................ 1,431,707.34 0.23
Montana...................................................... 947,145.28 0.15
Iowa......................................................... 864,239.39 0.14
Nebraska..................................................... 623,064.87 0.10
Wyoming...................................................... 414,677.75 0.07
South Dakota................................................. 356,638.40 0.06
--------------- -------------
Total........................................................ $618,190,953.13 100.00%
============== ==========
</TABLE>
- ---------
(1) Indicates the states where the insured's stated address in the related
Premium Finance Agreement is located.
(2) Includes the aggregate amount owed (including unearned finance charges
calculated based on the Rule of 78's) from the Statistical Calculation Date
through the scheduled final payment date of the premium finance loan
(exclusive of the late fees, administrative charges and net payables).
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth the historical loss and delinquency
experience with respect to Premium Finance Agreements in the Originators' entire
portfolio of Premium Finance Agreements for each of the periods or at each of
the dates shown, as applicable. As a result, the historical loss and delinquency
experience set forth in the tables below includes Premium Finance Agreements
with borrowers whose stated addresses therein are in all 50 states (including
states that are one of the Permitted States as of the Statistical Calculation
Date) or which otherwise would not satisfy the eligibility criteria for transfer
to the Trust pursuant to the Agreement. As of the Statistical Calculation Date,
Aggregate Receivables in the Identified Portfolio constituted approximately
59.5% of the aggregate receivables in the Originators' entire portfolio of
Premium Finance Agreements. It is likely that Premium Finance Agreements in the
Identified Portfolio at any time will represent only a portion of the
Originators' entire portfolio of Premium Finance Agreements. The Originators do
not believe that the historical performance of Premium Finance Agreements in the
Identified Portfolio differs materially from the historical performance of their
entire portfolio of Premium Finance Agreements. There can be no assurance that
the loss or delinquency experience for the Trust with respect to the Receivables
will be similar to the historical experience set forth below.
39
<PAGE> 40
LOAN LOSS EXPERIENCE
The following table sets forth loss experience with respect to payments by
borrowers on commercial premium finance loans in the Originator's entire
portfolio of Premium Finance Agreements for each of the periods shown. Neither
the Originators nor the Transferor believe that changes of amounts from period
to period reflect any material trends.
LOAN LOSS EXPERIENCE
ENTIRE PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
OCTOBER YEAR ENDED DECEMBER 31,
31, --------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Outstanding Principal
Balance(1).............................. $1,016,716 $1,036,464 $1,105,789 $1,067,703
Gross Charge-Offs(2)...................... 3,435 3,230 2,836 3,614
Recoveries(3)............................. 1,804 1,153 966 0
Net Charge-Offs........................... 1,631 2,077 1,870 3,614
Net Charge-Offs as Percentage of Average
Aggregate Outstanding Principal
Balance................................. 0.19 %(4) 0.20% 0.17% 0.34%
</TABLE>
- ---------
(1) Calculated as the average of the Principal Balance (aggregate receivables
less unearned interest) at the beginning of each month in the period
indicated.
(2) Since December 1993, loans have been generally charged off if uncollected
270 days after cancellation of the related insurance policy. Prior to
December 1993, loans were charged off when deemed to be uncollectible.
Charge-offs in 1993 exclude a one-time cumulative charge-off to reflect the
change in charge-off procedures in December.
(3) A recovery occurs if, after a loan is written off, AFCO receives additional
funds to pay in whole or in part the outstanding balance due.
(4) Calculated on an annualized basis.
LOAN DELINQUENCY EXPERIENCE FOLLOWING CANCELLATION
The following table sets forth the delinquency experience with respect to
payments on Premium Finance Agreements in the Originators' entire portfolio of
Premium Finance Agreements at each of the dates shown. In conformity with state
requirements regarding cancellation notification, insurance policies are
generally cancelled within one month following a borrower's failure to make a
related scheduled loan installment payment. The loan delinquency data presented
in the following table are measured from the date of issuance of a Notice of
Cancellation. The percentages presented for each aging category reflect the sum
of the balance of principal and unearned finance charges (including the overdue
installment(s) as well as all of the remaining installment payments not yet due)
on all cancelled accounts within each category divided by the aggregate
principal loan balance (excluding unearned finance charges). Since the table
reflects percentages calculated by including unearned finance charges in the
cancelled accounts, but not including such amounts in the aggregate loan
balances, the resulting percentages may reflect higher percentages of
delinquencies than actually experienced. Variations from one measurement date to
another measurement date within aging categories are primarily a reflection of
the variability of time required to collect the unearned insurance premium from
the insurance carrier or, alternatively, the remaining loan balance from the
borrower, on a revolving pool of loans. Neither the Originators nor the
Transferor believe the changes in amounts from period to period in the
categories in the table reflect any material trend. There can be no assurance
that the delinquency experience with respect to the Receivables will be similar
to the historical experience set forth below. The Originators and Transferor
have no knowledge of any trends which are expected to materially change future
delinquency experience.
40
<PAGE> 41
LOAN DELINQUENCY EXPERIENCE FOLLOWING CANCELLATION
ENTIRE PORTFOLIO
<TABLE>
<CAPTION>
AT DECEMBER
31,
AT OCTOBER 31, --------------
1996 1995 1994
--------------- ----- -----
<S> <C> <C> <C>
Number of days a loan remains overdue after
cancellation of the related insurance policy:
31-89 days........................................ 0.80% 0.80 % 1.07 %
90-270 days....................................... 0.82% 0.69 % 0.63 %
Over 270 days(1).................................. 0.00% 0.00 % 0.01 %
----- ----- -----
Total........................................... 1.62% 1.49 % 1.71 %
============== ====== ======
</TABLE>
- ---------
(1) A loan is generally written off to the extent it is uncollected 270 days
after the effective date of cancellation of the related insurance policy.
See "Business of the Originators--Premium Finance Loan Origination;
Collection Policy."
ORIGINATORS' PORTFOLIO YIELD
ENTIRE PORTFOLIO
(DOLLARS IN THOUSANDS)
The following table sets forth the total revenues from finance charges
accrued and fees collected with respect to the Originators' entire portfolio of
Premium Finance Agreements for each of the periods shown. The figures in the
table do not include deductions for charge-offs or other expenses.
<TABLE>
<CAPTION>
FOR THE TEN
MONTHS FOR THE FISCAL YEAR ENDED DECEMBER 31,
ENDED
OCTOBER 31, --------------------------------------
1996 1995 1994 1993
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Outstanding Principal Balance
Receivables(1)........................ $1,016,716 $1,036,464 $1,105,789 $1,067,703
Interest and Fee Income(2).............. 86,959 108,551 100,010 93,982
Average Revenue Yield................... 10.26 %(3) 10.47% 9.04% 8.80%
</TABLE>
- ---------
(1) Calculated as the average of the Principal Balance (aggregate receivables
less unearned interest) at the beginning of each month in the period
indicated.
(2) Includes interest income, late fees, cancellation fees, returned check
charges, and other fees.
(3) Calculated on an annualized basis.
41
<PAGE> 42
USE OF PROCEEDS
The net proceeds from the sale of the Certificates, approximately
$463,386,250 before deduction of expenses, will be applied to the purchase of
the Receivables from the Originators.
MATURITY ASSUMPTIONS
The Agreement provides that Class A Holders will not receive payments of
principal until the Class A Scheduled Payment Date, or earlier in the event of a
Principal Payment Event which results in the commencement of the Principal
Payment Period or a Pay Out Event which results in the commencement of the Rapid
Amortization Period. Class A Holders will receive payments of principal (i) on
each Distribution Date following the Monthly Period in which a Pay Out Event
occurs and (ii) on each Principal Distribution Date during the Principal Payment
Period (each such Distribution Date, a "Special Payment Date") until the Class A
Investor Interest has been paid in full or the Series 1996-1 Termination Date.
The Class B Holders will not begin to receive payments of principal until the
final principal payment on the Class A Certificates has been made.
CONTROLLED ACCUMULATION PERIOD. On each Transfer Date during the
Controlled Accumulation Period prior to the payment of the Class A Investor
Interest in full, an amount equal to, for each Monthly Period, the least of (a)
the Available Investor Principal Collections, (b) the "Controlled Deposit
Amount" for such Monthly Period (which equals the sum of the Controlled
Accumulation Amount for such Monthly Period and any portion of the Controlled
Accumulation Amount for any prior Monthly Period that was not deposited in the
Principal Funding Account) and (c) the Class A Adjusted Investor Interest prior
to any deposits on such day, will be deposited in the Principal Funding Account
(as defined herein) established by the Trustee until the principal amount on
deposit in the Principal Funding Account (the "Principal Funding Account
Balance") equals the Class A Investor Interest. After the Class A Investor
Interest has been paid in full, Available Investor Principal Collections, to the
extent required, will be distributed to the Class B Holders on each Distribution
Date until the earlier of the date the Class B Investor Interest has been paid
in full and the Series 1996-1 Termination Date. After the Class A Investor
Interest and the Class B Investor Interest have each been paid in full,
Available Investor Principal Collections, to the extent required, will be
distributed to the Collateral Interest Holder on each Transfer Date until the
earlier of the date the Collateral Interest has been paid in full and the Series
1996-1 Termination Date. Amounts in the Principal Funding Account are expected
to be available to pay the Class A Investor Interest on the Class A Scheduled
Payment Date. After the payment of the Class A Investor Interest in full,
Available Investor Principal Collections are expected to be available to pay the
Class B Investor Interest on the Class B Scheduled Payment Date. Although it is
anticipated that collections of Principal Receivables will be available on each
Transfer Date during the Controlled Accumulation Period to make a deposit of the
applicable Controlled Deposit Amount and that the Class A Investor Interest will
be paid to the Class A Holders on the Class A Scheduled Payment Date and the
Class B Investor Interest will be paid to the Class B Holders on the Class B
Scheduled Payment Date, respectively, no assurance can be given in this regard.
If the amount required to pay the Class A Investor Interest or the Class B
Investor Interest in full is not available on the Class A Scheduled Payment Date
or the Class B Scheduled Payment Date, respectively, a Pay Out Event will occur
and the Rapid Amortization Period will commence. The ability of
Certificateholders to receive payments of principal on the Class A Scheduled
Payment Date or the Class B Scheduled Payment Date, as applicable, depends on
the amount and schedule of installments of outstanding Receivables,
delinquencies, charge-offs and the timing of the origination and transfer of
Additional Receivables, which may vary from month to month due to seasonal
variations, regulatory factors, general economic conditions and conditions in
the insurance premium finance market.
PRINCIPAL PAYMENT PERIOD. If a Principal Payment Event occurs, the
Principal Payment Period will commence and the amount on deposit in the
Principal Funding Account, if any, will be paid to the Class A Holders on the
Distribution Date in the month following the commencement of the Principal
Payment Period. In addition, to the extent that the Class A Investor Interest
has not been paid in full, the Class A Holders will be entitled to monthly
payments of principal on each Principal Distribution Date equal to the Available
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Investor Principal Collections until the earlier of the date on which the Class
A Certificates have been paid in full and the Series 1996-1 Termination Date.
After the Class A Certificates have been paid in full and if the Series 1996-1
Termination Date has not occurred, Available Investor Principal Collections will
be paid to the Class B Certificates on each Distribution Date until the earlier
of the date on which the Class B Certificates have been paid in full and the
Series 1996-1 Termination Date. If a Principal Payment Event occurs, the average
life and maturity of the Certificates could be significantly reduced. No
prepayment premium will be payable on account of any prepayment of the
Certificates as a result of the occurrence of the Principal Payment Event and
any reinvestment risk will be borne by the Certificateholders.
RAPID AMORTIZATION PERIOD. If a Pay Out Event occurs, the Rapid Amortization
Period may commence and, if commenced, any amount on deposit in the Principal
Funding Account will be paid to the Class A Holders on the Distribution Date in
the month following the commencement of the Rapid Amortization Period. In
addition, to the extent that the Class A Investor Interest has not been paid in
full, the Class A Holders will be entitled to monthly payments of principal on
each Special Payment Date equal to the Available Investor Principal Collections
until the earlier of the date on which the Class A Certificates have been paid
in full and the Series 1996-1 Termination Date. After the Class A Certificates
have been paid in full and if the Series 1996-1 Termination Date has not
occurred, Available Investor Principal Collections will be paid to the Class B
Certificates on each Distribution Date until the earlier of the date on which
the Class B Certificates have been paid in full and the Series 1996-1
Termination Date.
PAY OUT EVENTS. A Pay Out Event occurs, either automatically or after
specified notice, upon (a) certain insolvency events involving the Transferor or
either Originator; (b) the Trust becoming an "investment company" within the
meaning of the Investment Company Act of 1940, as amended; (c) the Back-up
Servicer becomes legally unable to act as successor Servicer or has been
terminated as Back-up Servicer and, within 90 days of such event, a successor
Back-up Servicer has not assumed the obligations of Back-up Servicer and the
Rating Agency Condition has not been satisfied with respect to the appointment
of such Back-up Servicer; (d) the failure of the Transferor to make certain
payments or transfers of funds for the benefit of the Holders within the time
periods stated in the Agreement; (e) material breaches of certain
representations, warranties or covenants of the Transferor; (f) a reduction in
the average of the Portfolio Yields for any three consecutive Monthly Periods to
a rate that is less than the average of the Base Rates for such period; (g) (i)
the average Transferor Interest during any 10 consecutive days being below the
Minimum Transferor Interest for the same period and (ii) during any 10
consecutive days the sum of (x) the Principal Receivables and (y) the principal
amount on deposit in the Excess Funding Account being less than the Minimum
Aggregate Principal Receivables for the same period; (h) the failure of either
Originator to transfer Additional Receivables to the Transferor when required by
the Receivables Purchase Agreement or the failure of the Transferor to convey
Additional Receivables when required by the Agreement; (i) the occurrence of a
Servicer Default which would have a material adverse effect on the Holders; (j)
the Class A Investor Interest or the Class B Investor Interest not being paid in
full on the Class A Scheduled Payment Date or the Class B Scheduled Payment
Date, respectively; (k) the Monthly Payment Rate averaged for three consecutive
Monthly Periods is less than 12%; (l) the third consecutive Determination Date
on which (i) there exists an Excess Obligor Concentration Amount, (ii) there
exists an Excess Insurer Concentration, (iii) the Investment Grade Insurer
Percentage is less than the Required Investment Grade Insurer Percentage, (iv)
the Investment Grade Insurer Percentage to be decreased, if on such day the
Investment Grade Insurer Percentage is equal to or less than the Required
Investment Grade Insurer Percentage, (v) there are less than 300 insurance
carriers whose insurance premiums have been financed by the Receivables in the
Identified Portfolio, or (vi) the Top 10 Insurer Percentage is greater than the
Maximum Top 10 Insurer Percentage; (m) the Originators cease to be the Servicer
under the Agreement; (n) the failure to appoint a successor Back-up Servicer by
a date which is ninety days after the receipt by the Servicer, the Trustee and
the Transferor of either a Sale Notice or Successor Back-up Servicer Termination
Notice in accordance with the Agreement; or (o) the failure of the Servicer (so
long as the Originator is a Servicer) to remove Receivables from the Trust or
indemnify for certain losses resulting from the breach of the Servicer's
covenant to maintain certain licenses and regulatory approvals as described
under "Description of the Certificates -- Certain Covenants." See "Description
of the Certificates--Pay Out Events." If a Pay Out Event occurs, the average
life and maturity of the Certificates could be significantly reduced. No
prepayment premium will be payable
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on account of any prepayment of the Certificates as the result of the occurrence
of the Rapid Amortization Period and any reinvestment risk will be borne by the
Certificateholders.
The Pay Out Event described in clause (l) may be amended at any time by the
Transferor, the Trustee and the Servicer, with the consent of each provider of
Enhancement, but without the consent of any certificateholder, if the Rating
Agency Condition is satisfied.
As of the Statistical Calculation Date (i) the amount of the Aggregate
Receivables related to any single borrower was not greater than 2.1% of the
amount of Aggregate Receivables in the Identified Portfolio as of the
Statistical Calculation Date; (ii) the amount of the portion of the Aggregate
Receivables relating to the financing of insurance premiums of any Tier 1
Insurer was not greater than 5.2% of the amount of Aggregate Receivables as of
the Statistical Calculation Date; (iii) the amount of the portion of the
Aggregate Receivables relating to the financing of insurance premiums of any
Tier 2 Insurer was not greater than 6.7% of the amount of Aggregate Receivables
as of the Statistical Calculation Date; (iv) the amount of the portion of the
Aggregate Receivables relating to the financing of insurance premiums of any
Tier 3 Insurer was not greater than 2.9% of the amount of Aggregate Receivables
as of the Statistical Calculation Date; (v) the Investment Grade Insurer
Percentage equaled 94.2%; (vi) the Top 10 Insurer Percentage equaled 49.3%; and
(vii) there were at least 486 insurance carriers whose insurance premiums have
been financed by the 61,720 Premium Finance Agreements in the Identified
Portfolio as of the Statistical Calculation Date.
Because there may be a slowdown in the payment rate below the payment rates
used to determine the Controlled Accumulation Amounts, a Principal Payment Event
may occur which would initiate the Principal Payment Period or a Pay Out Event
may occur which would initiate the Rapid Amortization Period, there can be no
assurance that the actual number of months elapsed from the date of issuance of
the Class A Certificates and the Class B Certificates to their respective final
Distribution Dates will equal the expected number of months. In addition, as
described under "Description of the Certificates--Postponement of Controlled
Accumulation Period," the Servicer may shorten the Controlled Accumulation
Period and, in such event, there can be no assurance that there will be
sufficient time to accumulate all amounts necessary to pay the Class A Investor
Interest and the Class B Investor Interest on the Class A Scheduled Payment Date
and the Class B Scheduled Payment Date, respectively.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. Pursuant to the
Agreement, the Transferor and the Trustee may execute further series supplements
in order to issue additional Series. The following summary of the Certificates
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the Agreement.
GENERAL
The Certificates will represent the right to receive certain payments from
the assets of the Trust, including the right to the applicable allocation
percentage of all borrower payments on the Receivables in the Trust. Each Class
A Certificate represents the right to receive payments of interest at the
applicable Class A LIBOR Rate for the related Interest Period, subject to the
Class A Available Funds Cap for each related Monthly Period, and payments of
principal on the Class A Scheduled Payment Date or, to the extent of the Class A
Investor Interest, on each Special Payment Date during the Principal Payment
Period or Rapid Amortization Period, funded from collections of Finance Charge
Receivables and Principal Receivables, respectively, allocated to the Class A
Investor Interest and certain other available amounts. Each Class B Certificate
represents the right to receive payments of interest at the applicable Class B
LIBOR Rate for the related Interest Period, subject to the Class B Available
Funds Cap for each related Monthly Period, and payments of principal on the
Class B Scheduled Payment Date or, to the extent of the Class B Investor
Interest, on each Special Payment Date during the Principal Payment Period or
the Rapid Amortization Period after the Class A Certificates have been paid in
full, funded from collections of Finance Charge Receivables and Principal
Receivables, respectively, allocated to the Class B Investor Interest and
certain other available amounts. In addition to representing the right to
payment from collections of Finance Charge
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Receivables and Principal Receivables, each Class A Certificate also represents
the right to receive payments from Excess Spread, funds on deposit in the
Principal Funding Account and the Reserve Account and certain investment
earnings thereon, Reallocated Principal Collections and Shared Principal
Collections and certain other available amounts (including, under certain
circumstances, amounts on deposit in the Excess Funding Account). In addition to
representing the right to payment from collections of Finance Charge Receivables
and Principal Receivables, each Class B Certificate also represents the right to
receive payments from Excess Spread, Reallocated Collateral Principal
Collections and Shared Principal Collections and certain other available amounts
(including, under certain circumstances, amounts on deposit in the Excess
Funding Account). Payments of interest and principal will be made, to the extent
of funds available therefor, on each Distribution Date on which such amounts are
due to Holders in whose names the Certificates were registered on the last
business day of the calendar month preceding such Distribution Date (each, a
"Record Date").
The Transferor initially will own the Transferor Interest. The Transferor
Interest will represent the right to receive certain payments from the assets of
the Trust, including the right to a percentage (the "Transferor Percentage") of
all payments on the Receivables in the Trust equal to 100% minus the sum of the
applicable Investor Percentages for all Series of certificates then outstanding.
The Transferor Interest may be transferred in whole or in part subject to
certain limitations and conditions set forth in the Agreement. See "--Certain
Matters Regarding the Transferor and the Servicer."
The Class A Certificates and the Class B Certificates initially will be
represented by certificates registered in the name of Cede, as nominee of DTC.
Unless and until Definitive Certificates are issued, all references herein to
actions by Class A Holders and/or Class B Holders shall refer to actions taken
by DTC upon instructions from DTC Participants and all references herein to
distributions, notices, reports and statements to Class A Holders and/or Class B
Holders shall refer to distributions, notices, reports and statements to DTC or
Cede, as the registered holder of the Class A Certificates and the Class B
Certificates, as the case may be, for distribution to Certificate Owners in
accordance with DTC procedures. Holders may hold their Certificates 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
Certificates. Cede and Euroclear will hold omnibus positions on behalf of the
Cedel Participants and the Euroclear Participants, respectively, through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective Depositaries which in turn will hold such positions in
customers' securities accounts in the Depositaries' names on the books of DTC.
See "--Book-Entry Registration."
BOOK-ENTRY REGISTRATION
Certificateholders may hold their certificates 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 Certificates. Cedel and
Euroclear will hold omnibus positions on behalf of the Cedel Participants and
the Euroclear Participants, respectively, through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositories
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities for its Participants ("DTC Participants") and facilitates the
clearance and settlement among DTC Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic book-entry
changes in DTC Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to the DTC system is also available to others
such
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as securities brokers and dealers, banks, and trust companies that clear through
or maintain a custodial relationship with a DTC Participant, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its DTC
Participants are on file with the Securities and Exchange Commission.
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.
Purchases of Certificates under the DTC system must be made by or through
DTC Participants, which will receive a credit for the Certificates on DTC's
records. The ownership interest of each actual Certificate Owner is in turn to
be recorded on the DTC Participants' and Indirect Participants' records.
Certificate Owners will not receive written confirmation from DTC of their
purchase, but Certificate Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the DTC Participant or Indirect Participant through which the
Certificate Owner entered into the transaction. Transfers of ownership interests
in the Certificates are to be accomplished by entries made on the books of DTC
Participants acting on behalf of Certificate Owners. Certificate Owners will not
receive certificates representing their ownership interest in Certificates,
except in the event that use of the book-entry system for the Certificates is
discontinued.
To facilitate subsequent transfers, all Certificates deposited by DTC
Participants with DTC are registered in the name of DTC's nominee, Cede & Co.
The deposit of Certificates with DTC and their registration in the name of Cede
& Co. effects no change in beneficial ownership. DTC has no knowledge of the
actual Certificate Owners of the Certificates; DTC's records reflect only the
identity of the DTC Participants to whose accounts such Certificates are
credited, which may or may not be the Certificate Owners. The DTC Participants
will remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect Participants, and by DTC Participants and
Indirect Participants to Certificate Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to
Certificates. Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date, which assigns Cede & Co.'s
consenting or voting rights to those DTC Participants to whose accounts the
Certificates are credited on the record date (identified in a listing attached
thereto).
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Principal and interest payments on the Certificates will be made to DTC.
DTC's practice is to credit DTC Participants' accounts on the applicable
Distribution Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such Distribution Date. Payments by DTC Participants to Certificate Owners will
be governed by standing instructions and customary practices, as is the case
with securities held for the accounts of customers in bearer form or registered
in "street name" and will be the responsibility of such DTC Participant and not
of DTC, the Trustee or the Transferor, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal and
interest to DTC is the responsibility of the Trustee, disbursement of such
payments to DTC Participants shall be the responsibility of DTC, and
disbursement of such payments to Certificate Owners shall be the responsibility
of DTC Participants and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Certificates at any time by giving reasonable notice to the
Transferor or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Certificates are
required to be printed and delivered. The Transferor may decide to discontinue
use of the system of book-entry transfers through DTC (or a successor securities
depository). In that event, Definitive Certificates will be delivered to
Certificateholders. See "--Definitive Certificates."
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Transferor believes to be reliable, but
the Transferor takes no responsibility for the accuracy thereof.
Cedel Bank, Societe Anonyme ("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 32 currencies, including United States dollars. Cedel
provides to its Cedel Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel interfaces with domestic
markets in several countries. As a professional depository, Cedel is subject to
regulation by the Luxembourg Monetary Institute. Cedel Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the underwriters of any Series
of Certificates. 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.
The Euroclear System 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 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in 25 countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, Societe Cooperative, a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative Board establishes policy for the Euroclear System. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any Series of Certificates. Indirect access to the Euroclear
System is also available to other firms that maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
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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 (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 or relationship
with persons holding through Euroclear Participants.
Distributions with respect to Certificates held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "U.S. Federal Income Tax Consequences." Cedel or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Certificateholder under the Agreement on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
Certificates will be issued as Definitive Certificates in fully registered,
certificated form to Certificate Owners or their nominees rather than to DTC or
its nominee, only if (i) the Transferor advises the Trustee for such Series in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as Depositary with respect to such Series of Certificates, and
the Trustee or the Transferor is unable to locate a qualified successor, (ii)
the Transferor, at its option, advises the Trustee in writing that it elects to
terminate the book-entry system through DTC or (iii) after the occurrence of a
Servicer Default, Certificate Owners representing not less than 50% of the
Investor Interest advise the Trustee and DTC through DTC Participants in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interest of the Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all DTC Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive certificate representing the Certificates and instructions for
registration, the Trustee will issue the Certificates as Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as holders under the Agreement ("Holders").
Distribution of principal and interest on the Certificates will be made by
the Trustee directly to Holders of Definitive Certificates in accordance with
the procedures set forth herein and in the Agreement. Interest payments and any
principal payments on each Distribution Date will be made to Holders in whose
names the Definitive Certificates were registered at the close of business on
the related Record Date. The final payment on any Certificate (whether
Definitive Certificates or the Certificates registered in the name of Cede
representing the Certificates), will be made only upon presentation and
surrender of such Certificate at the office or agency specified in the notice of
final distribution to Certificateholders. The Trustee will provide such notice
to registered Certificateholders not later than the fifth day of the month of
such final distributions.
Definitive Certificates will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar, which shall initially be the
Trustee. No service charges will be imposed for any registration of
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transfer or exchange, but the Transfer Agent and Registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith. The Transfer Agent and Registrar shall not be required to
register the transfer or exchange of Definitive Certificates for a period of
fifteen days preceding the due date for any payment with respect to such
Definitive Certificates.
INTEREST PAYMENTS
Interest on the Class A Certificates and the Class B Certificates will
accrue from the Closing Date on the outstanding principal balance of the Class A
Certificates and the Class B Certificates at the Class A LIBOR Rate and Class B
LIBOR Rate, respectively, subject to the limitations described below. Interest
will be distributed quarterly on the 15th day of March, June, September, and
December (or if any such day is not a business day, the next succeeding business
day) and on the Class B Scheduled Payment Date (each, an "Interest Payment
Date"), commencing on the March 17, 1997 Distribution Date and, following the
occurrence of a Principal Payment Event or a Pay Out Event, on each Special
Payment Date to the Certificateholders in whose names the Certificates were
registered at the close of business on the last day of the calendar month
preceding such Interest Payment Date or Special Payment Date. Interest for any
Interest Payment Date or Special Payment Date will accrue from and including the
preceding Interest Payment Date or Special Payment Date (or in the case of the
first Interest Payment Date, from and include the Closing Date) to but excluding
the next Interest Payment Date or Special Payment Date and interest, with
respect to Collateral Monthly Interest, shall accrue at One Month LIBOR during
such Monthly Interest Period (each, an "Interest Period").
Interest payments or deposits with respect to the Class A Certificates for
each Distribution Date will be calculated on the outstanding principal balance
of the Class A Certificates as of the preceding Record Date (or in the case of
the initial Distribution Date, as of the Closing Date) based upon, subject to
certain limitations described below, the Class A LIBOR Rate. "Distribution Date"
means the 15th day of each calendar month (or if any such day is not a business
day, the next succeeding business day) commencing January 15, 1997; however, the
first Interest Payment Date will not occur until March 17, 1997. Interest
payments or deposits with respect to each Distribution Date will be calculated
on the basis of the actual number of days in the period (each, a "Monthly
Interest Period") from and including the preceding Distribution Date (or in the
case of the initial Distribution Date, the Closing Date) to but excluding such
Distribution Date and a 360-day year. On each Distribution Date, Class A Monthly
Interest (as defined below) and Class A Monthly Interest previously due but not
deposited in the Class A Interest Funding Account (as defined below) or paid to
the Class A Certificateholders and any Class A Additional Interest will be (i)
paid to the Class A Certificateholders, if such Distribution Date is an Interest
Payment Date or a Special Payment Date, or (ii) deposited in the Class A
Interest Funding Account (the "Class A Interest Funding Account"), an
administrative subaccount of an eligible trust account in the name of Trustee
and for the benefit of the Certificateholders, if such Distribution Date is not
an Interest Payment Date or a Special Payment Date. Payments to the Class A
Certificateholders or deposits into the Class A Interest Funding Account in
respect of interest on the Class A Certificates on any Distribution Date will be
funded from Class A Available Funds for the related Monthly Period. See
"Description of the Certificates--Application of Collections--Allocations."
Interest payments or deposits with respect to the Class B Certificates for
each Distribution Date will be calculated on the outstanding principal balance
of the Class B Certificates as of the preceding Record Date (or in the case of
the initial Distribution Date, on the Closing Date) based upon the Class B LIBOR
Rate and the actual number of days in the Monthly Interest Period and a 360-day
year. On each Distribution Date, Class B Monthly Interest and Class B Monthly
Interest previously due but not deposited in the Class B Interest Funding
Account (as defined below) or paid to the Class B Certificateholders and any
Class B Additional Interest will be (i) paid to the Class B Certificateholders,
if such Distribution Date is an Interest Payment Date or a Special Payment Date,
or (ii) deposited in the Class B Interest Funding Account (the "Class B Interest
Funding Account"), an administrative subaccount of an eligible trust account in
the name of the Trustee for the benefit of Certificateholders, if such
Distribution Date is not an Interest Payment Date or a Special Payment Date.
Payments to the Class B Certificateholders or deposits into the Interest Funding
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Account in respect of interest on the Class B Certificates on any Distribution
Date will be funded from Class B Available Funds for the related Monthly Period.
Class A Monthly Interest and Class B Monthly Interest for any Distribution Date
due but not paid on such Distribution Date will be payable on the next
succeeding Distribution Date, together with additional interest on such amount
at the applicable Class A LIBOR Rate or Class B LIBOR Rate plus 2% per annum
(such amount, as applicable, "Class A Additional Interest" and "Class B
Additional Interest"). Any such amounts will not be distributed until the
related Interest Payment Date. See "Description of the Certificates--Application
of Collections--Allocations."
"Class A Monthly Interest" means for any Distribution Dates an amount equal
to the lesser of (x) the product of (i) the actual number of days in the related
Monthly Interest Period divided by 360, (ii) the Class A LIBOR Rate and (iii)
the outstanding principal balance of the Class A Certificates as of the
preceding Record Date (or in the case of the first Distribution Date, as of the
Closing Date) and (y) the Class A Available Funds Cap for the related Monthly
Period.
"Class B Monthly Interest" means for any Distribution Date, an amount equal
to the lesser of (x) the product of (i) the actual number of days in the related
Monthly Interest Period divided by 360, (ii) the Class B LIBOR Rate and (iii)
the outstanding principal balance of the Class B Certificates as of the
preceding Record Date (or in the case of the first Distribution Date, as of the
Closing Date) and (y) the Class B Available Funds Cap for the related Monthly
Period.
"Class A Available Funds Cap" means, with respect to any Monthly Period,
Class A Available Funds for such Monthly Period less, if the Originators are not
the Servicer, the Class A Servicing Fee for such Monthly Period.
"Class A Available Funds" means, with respect to any Monthly Period, an
amount equal to the sum of (a) the Class A Floating Allocation of collections of
Finance Charge Receivables allocated to the Investor Interest with respect to
such Monthly Period, (b) Principal Funding Investment Proceeds, if any, with
respect to the related Transfer Date and (c) amounts, if any, to be withdrawn
from the Reserve Account which are required to be included in Class A Available
Funds pursuant to the Series 1996-1 Supplement with respect to such Transfer
Date.
"Class B Available Funds Cap" means, with respect to any Monthly Period,
Class B Available Funds for such Monthly Period less, if the Originators are not
the Servicer, the Class B Servicing Fee for such Monthly Period.
"Class B Available Funds" means, with respect to any Monthly Period, an
amount equal to the Class B Floating Allocation of collections of Finance Charge
Receivables allocated to the Investor Interest with respect to such Monthly
Period.
Interest payments or deposits on each Distribution Date (other than any
payments or deposits relating to any Class A or Class B Shortfall Amounts or
Class A or Class B Carry Over Amounts) will be funded from the portion of
Finance Charge Receivables collected during the preceding Monthly Period (or
with respect to the first Distribution Date, from and including the Cut-off Date
through December 31, 1996) and certain other available amounts (a) with respect
to the Class A Certificates, allocated to the Class A Investor Interest, and, if
necessary, from Excess Spread and Reallocated Principal Collections (to the
extent available), (b) with respect to the Class B Certificates, allocated to
the Class B Investor Interest and, if necessary, from Excess Spread and
Reallocated Principal Collections (to the extent available) and (c) with respect
to the Collateral Interest, from Excess Spread. See "Description of the
Certificates--Reallocation of Cash Flows" and "--Application of
Collections--Payment of Interest, Fees and Other Items" and "Risk Factors--Risk
of Limitations on Subordination."
If and to the extent on any Distribution Date, the amount of interest
payable on the Class A Certificates based on the Class A LIBOR Rate for the
related Monthly Interest Period exceeds the Class A Available Funds Cap for the
related Monthly Period, then such excess (the "Class A Shortfall Amount") will
be carried forward to the next Distribution Date together with interest thereon
at the applicable Class A LIBOR Rate plus 2% per annum (the "Class A Carry Over
Amount") and will be funded on a subordinated basis solely
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from Excess Spread, if any, available therefor as described under "Description
of the Certificates-- Application of Collections--Excess Spread."
If and to the extent on any Distribution Date, the amount of interest
payable on the Class B Certificates based on the Class B LIBOR Rate for the
related Monthly Interest Period exceeds the Class B Available Funds Cap for the
related Monthly Interest Period, then such excess (the "Class B Shortfall
Amount") will be carried forward to the next Distribution Date together with
interest thereon at the applicable Class B LIBOR Rate plus 2% per annum (the
"Class B Carry Over Amount") and will be funded on a subordinated basis solely
from Excess Spread, if any, available therefor as described under "Description
of the Certificates--Application of Collections--Excess Spread." The Class B
Carry Over Amount is subordinated to the Class A Carry Over Amount. The Class A
Carry Over Amount and Class B Carry Over Amount are subordinated to payments in
respect of the Collateral Interest. See "Risk Factors--Basis Risk."
The Trustee will determine LIBOR and One Month LIBOR on December 12, 1996
for the period from the Closing Date (x) through March 17, 1997 in the case of
the Certificates and (y) January 15, 1997, for the Collateral Interest, and for
each applicable Interest Period thereafter, on the second business day prior to
the Distribution Date on which such Interest Period commences (each, a "LIBOR
Determination Date"). For purposes of calculating LIBOR, a business day is any
business day on which dealings in deposits in United States dollars are
transacted in the London interbank market.
"Class A LIBOR Rate" means, with respect to each Interest Period, a per
annum rate equal to .11% per annum in excess of LIBOR, as determined on the
related LIBOR Determination Date.
"Class B LIBOR Rate" means, with respect to each Interest Period, a per
annum rate equal to .32% per annum in excess of LIBOR, as determined on the
related LIBOR Determination Date.
"LIBOR" means, as of any LIBOR Determination Date, the rate for deposits in
United States dollars for a period equal to the related Interest Period which
appears on Telerate Page 3750 as of 11:00 a.m., London time, on such date. If
such rate does not appear on Telerate Page 3750, the rate for that LIBOR
Determination Date will be determined on the basis of the rates at which
deposits in United States dollars are offered by the Reference Banks at
approximately 11:00 a.m., London time, on that day to prime banks in the London
interbank market for a period equal to the relevant Interest Period. The Trustee
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that LIBOR Determination Date will be the arithmetic mean of the
quotations. If fewer than two quotations are provided as requested, the rate for
that LIBOR Determination Date will be the arithmetic mean of the rates quoted by
major banks in New York City, selected by the Servicer, at approximately 11:00
a.m., New York City time, on that day for loans in United States dollars to
leading European banks for a period equal to the relevant Interest Period.
"One Month LIBOR" is calculated in the same manner as LIBOR with the
related Interest Period being one month.
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the Servicer.
The Class A LIBOR Rate and the Class B LIBOR Rate applicable to the current
and immediately preceding Interest Period may be obtained by telephoning the
Trustee at its Corporate Trust Office at One First National Plaza, Suite 0126,
Chicago, Illinois 60670-0126 Attention: Corporate Trust Servicer Division.
Interest on the Certificates will be calculated on the basis of the actual
number of days in the Interest Period and a 360-day year.
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PRINCIPAL PAYMENTS
On each Transfer Date relating to the Revolving Period (which begins on the
Closing Date and ends at the commencement of the Controlled Accumulation Period
or, if earlier, the Principal Payment Period or the Rapid Amortization Period),
unless a reduction in the Required Collateral Interest has occurred, collections
of Principal Receivables allocable to the Investor Interest will, subject to
certain limitations, including the allocation of any Reallocated Principal
Collections with respect to the related Monthly Period to pay the Class A
Required Amount and the Class B Required Amount, be treated as Shared Principal
Collections or, under certain circumstances, deposited into the Excess Funding
Account.
On each Transfer Date relating to the Controlled Accumulation Period, the
Trustee will deposit in the Principal Funding Account an amount equal to the
least of (a) Available Investor Principal Collections with respect to such
Transfer Date, (b) the applicable Controlled Deposit Amount and (c) the Class A
Adjusted Investor Interest prior to any deposits on such date. Amounts in the
Principal Funding Account will be paid to the Class A Holders on the Class A
Scheduled Payment Date. After the Class A Investor Interest has been paid in
full, on each Transfer Date during the Controlled Accumulation Period, amounts
equal to the lesser of (a) Available Investor Principal Collections with respect
to such Transfer Date and (b) the Class B Investor Interest will be deposited in
the Distribution Account for distribution to the Class B Holders until the Class
B Investor Interest has been paid in full. Such amounts in the Distribution
Account will be paid to the Class B Holders on the Class B Scheduled Payment
Date. During the Controlled Accumulation Period until the final principal
payment to the Class B Holders, the portion of Available Investor Principal
Collections not applied to Class A Monthly Principal, Class B Monthly Principal
or Collateral Monthly Principal on a Transfer Date will generally be treated as
Shared Principal Collections or, under certain circumstances, deposited into the
Excess Funding Account.
"Available Investor Principal Collections" means, with respect to any
Monthly Period in the Controlled Accumulation Period or the Rapid Amortization
Period, an amount equal to the sum of (a) (i) the Fixed Investor Percentage of
collections of Principal Receivables received during such Monthly Period and
certain other amounts allocable to the Investor Interest, minus (ii) the amount
of Reallocated Principal Collections with respect to such Monthly Period used to
fund interest on the Certificates or Servicing Fee, plus (b) any Shared
Principal Collections with respect to other Series that are allocated to Series
1996-1.
On each Distribution Date during the Principal Payment Period or the Rapid
Amortization Period, the Class A Holders will be entitled to receive Available
Investor Principal Collections for the related Monthly Period in an amount up to
the Class A Investor Interest until the earlier of the date the Class A
Certificates are paid in full and the Series 1996-1 Termination Date. After
payment in full of the Class A Investor Interest, the Class B Holders will be
entitled to receive on each Distribution Date during the Principal Payment
Period or the Rapid Amortization Period Available Investor Principal Collections
until the earlier of the date the Class B Certificates are paid in full and the
Series 1996-1 Termination Date. After payment in full of the Class B Investor
Interest, the Collateral Interest Holder will be entitled to receive on each
Transfer Date (other than the Transfer Date prior to the Series 1996-1
Termination Date) and on the Series 1996-1 Termination Date, Available Investor
Principal Collections until the earlier of the date the Collateral Interest is
paid in full and the Series 1996-1 Termination Date. See "--Pay Out Events"
below for a discussion of events which might lead to the commencement of the
Rapid Amortization Period.
EXTENSION OF INITIAL PRINCIPAL PAYMENT DATE
Unless a Pay Out Event has occurred, principal with respect to the Class A
Certificates is expected to be paid on the Class A Scheduled Payment Date and
principal with respect to the Class B Certificates is expected to be paid on the
Class B Scheduled Payment Date, provided, that the Investor Certificateholders
will receive payments of principal earlier than such dates if the Transferor
elects not to extend the Initial Principal Payment Date. The Initial Principal
Payment Date for the Series 1996-1 Certificates will initially be the December
1998 Distribution Date, but will successively be extended to the next
Distribution Date after the then-current Initial Principal Payment Date unless
the Transferor, as of the first day of the Monthly Period preceding the Monthly
Period in which the then-current Initial Principal Payment Date occurs, elects
not to cause such extension. Such election may be made by the Transferor by
giving written notice thereof to the Trustee no earlier than the Distribution
Date second preceding the then-current Initial Principal Payment
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Date and no later than the first day of the Monthly Period preceding the Monthly
Period in which the then-current Initial Principal Payment Date occurs. In the
event that the Transferor elects not to extend the Initial Principal Payment
Date, the Revolving Period or the Controlled Accumulation Period, as applicable,
will end beginning on the first day of the Monthly Period following the
Principal Payment Event, and the Principal Payment Period will commence. During
the Principal Payment Period, interest will be paid monthly on each Distribution
Date, and amounts then on deposit in the Principal Funding Account, if any, and
Available Investor Principal Collections with respect to each Distribution Date
will be paid first to the Class A Certificateholders until the earlier of the
date on which the Class A Invested Amount is paid in full or the Series
Termination Date, and, after payment in full of the Class A Invested Amount,
then to the Class B Certificateholders until the earlier of the date on which
the Class B Invested Amount is paid in full or the Series Termination Date.
The payment in full of the Invested Amount on the first Principal
Distribution Date is dependent on Available Investor Principal Collections with
respect to such date and, if applicable, any amounts then on deposit in the
Principal Funding Account. With respect to certain principal payments to be made
prior to the Class A Scheduled Payment Date, other Series will have priority
over the Investor Certificates in the allocation of Shared Principal
Collections, as described under "-- Shared Principal Collections".
The Transferor will cause the Trustee to provide written notice to each
Certificateholder, the Servicer, each Rating Agency and the Collateral Interest
Holder of any election by the Transferor not to extend the Initial Principal
Payment Date. The Transferor will cause the Trustee to provide such notice not
more than 60 nor less than 30 days prior to the then-current Initial Principal
Payment Date.
POSTPONEMENT OF CONTROLLED ACCUMULATION PERIOD
Upon written notice to the Trustee, the Servicer may elect to postpone the
commencement of the Controlled Accumulation Period, and extend the length of the
Revolving Period, subject to certain conditions including those set forth below.
The Servicer may make such election only if the Accumulation Period Length
(determined as described below) is less than nine months. On each Determination
Date on and after the Determination Date preceding the March 2001 Monthly
Period, until the Controlled Accumulation Period begins, the Servicer will
determine the "Accumulation Period Length," which is a number of months such
that the amount available for distribution of principal on the Class A
Certificates on the Class A Scheduled Payment Date is expected to equal or
exceed the Class A Investor Interest, assuming (a) the expected monthly
collections of Principal Receivables expected to be distributable to the Holders
of all Series have a principal payment rate no greater than the lowest monthly
principal payment rate on the Receivables for the preceding nine months, (b) the
amount of principal expected to be distributable to Holders of all Series
remains constant at the level on such date of determination, (c) no Pay Out
Event with respect to any Series will subsequently occur and (d) no additional
Series will be subsequently issued. If the Accumulation Period Length is less
than nine months, the Servicer may, at its option, postpone the commencement of
the Controlled Accumulation Period such that the number of months included in
the Controlled Accumulation Period will be equal to or exceed the Accumulation
Period Length. The effect of the foregoing calculation is to permit the
reduction of the length of the Controlled Accumulation Period based on the
investor interest of certain other Series which are scheduled to be in their
revolving periods during the Controlled Accumulation Period and on increases in
the principal payment rate occurring after the Closing Date. The length of the
Controlled Accumulation Period will not be determined to be less than one month.
SUBORDINATION
The Class B Certificates and the Collateral Interest will be subordinated
to the extent necessary to fund certain payments with respect to the Class A
Certificates. In addition, the Collateral Interest will be subordinated to the
extent necessary to fund certain payments with respect to the Class B
Certificates. Certain principal payments otherwise allocable to the Class B
Holders may be reallocated to cover amounts in respect of the Class A
Certificates and the Class B Investor Interest may be reduced if the Collateral
Interest is equal to zero. Similarly, certain principal payments allocable to
the Collateral Interest may be reallocated to cover amounts in respect of the
Class A Certificates and the Class B Certificates and the Collateral Interest
may be reduced. To the extent the Class B Investor Interest is reduced, the
percentage of collections of Finance
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Charge Receivables allocated to the Class B Certificates in subsequent Monthly
Periods will be reduced. Moreover, to the extent the amount of such reduction in
the Class B Investor Interest is not reimbursed, the amount of principal and
interest distributable to the Class B Holders will be reduced. See "--Allocation
Percentages," "--Reallocation of Cash Flows" and "--Application of
Collections--Excess Spread."
TRANSFER AND ASSIGNMENT OF RECEIVABLES
Pursuant to the Receivables Purchase Agreement, on the Closing Date, the
Originators will transfer and assign to the Transferor Premium Finance
Agreements from their portfolio of Premium Finance Agreements on the Calculation
Date to borrowers whose stated addresses in the Premium Finance Agreements are
in one of the Permitted States (as defined under "The Receivables") and that
satisfy as of the Cut-off Date (as defined below) the eligibility criteria
specified in the Receivables Purchase Agreement and the Agreement. The selection
of the Permitted States was based on state regulatory considerations. Each of
the Originators will represent and warrant in the Receivables Purchase
Agreement, and the Transferor will represent and warrant in the Agreement, that
the Identified Portfolio was not selected in a manner adverse to
Certificateholders. Pursuant to the Agreement, the Transferor will transfer and
assign such Premium Finance Agreements to the Trustee for the benefit of the
Trust.
Each Originator will be obligated pursuant to the Receivables Purchase
Agreement to transfer and assign on each day following the Closing Date each
Premium Finance Agreement with a borrower whose stated address in such Premium
Finance Agreement is in one of the Permitted States originated by it after the
Closing Date (or, if such Permitted State becomes a Permitted State after the
Closing Date, originated by it after such state became a Permitted State) which
satisfies the eligibility criteria set forth under "--Eligible Receivables"
below (the "Additional Receivables") to the Transferor. The Transferor in turn
will be required pursuant to the Agreement to transfer and assign all such
Additional Receivables to the Trustee for the benefit of the Trust. See "Risk
Factors--Additional Receivables Considerations." In the event that sufficient
Additional Receivables are not transferred to the Trustee for the benefit of the
Trust to maintain the Minimum Transferor Interest as required by the Agreement
and as described herein, a Pay Out Event would occur and the Rapid Amortization
Period will occur. See "Maturity Assumptions--Pay Out Events" and "--Pay Out
Events."
In connection with the transfer of the Receivables to the Trust, the
Originators will indicate in their respective computer files that the
Receivables have been conveyed to the Transferor who will in turn convey such
Receivables to the Trust. In addition, the Transferor has provided to the
Trustee or its bailee computer files or microfiche lists containing a true and
complete list showing each Receivable, identified by account number and by
aggregate receivable balance on the Closing Date. On each Addition Date, the
Transferor will provide the Trustee with an updated list of each Receivable
transferred to the Trust on such Addition Date, identified by account number and
indicating the aggregate receivable balance as of the Addition Date. Neither the
Originators nor the Transferor will deliver to the Trustee any other records or
agreements relating to the Receivables and documents and agreements maintained
by an Originator will not be segregated by such Originator from other documents
and agreements relating to other Premium Finance Agreements and will not be
stamped or marked to reflect the transfer and assignment of the related
Receivables to the Trustee on behalf of the Trust, but the Originators are
required to indicate on their computer records that the Receivables have been
transferred and assigned to the Transferor, who in turn will transfer and assign
such Receivables to the Trustee on behalf of the Trust. The Originators have not
taken and will not be obligated to take any actions in order to perfect for the
benefit of the Transferor a security interest in the Receivables, other than
filing in the appropriate filing offices in the states of New York and
California a financing statement on Form UCC-1. The Transferor has not taken and
will not be obligated to take any actions in order to perfect for the benefit of
the Trust a security interest in the Receivables, other than filing in the
appropriate filing offices in the Commonwealth of Pennsylvania a financing
statement on Form UCC-1. See "Risk Factors--Transferor Bankruptcy Risk."
The Transferor shall covenant in the Agreement that it shall not transfer
on any day any Premium Finance Agreement to the Trust which would cause as of
such day after giving effect to such transfer (i) an Excess Obligor
Concentration Amount to exist or be increased; (ii) an Excess Insurer
Concentration Amount to exist or be increased; (iii) the Investment Grade
Insurer Percentage to be less than the Required
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Investment Grade Insurer Percentage; (iv) the Investment Grade Insurer
Percentage to be decreased, if on such day the Investment Grade Insurer
Percentage is equal to or less than the Required Investment Grade Insurer
Percentage; (v) the Top 10 Insurer Percentage to exceed the Maximum Top Insurer
Percentage and (vi) the Top 10 Insurer Percentage to be increased, if on such
day the Top 10 Insurer Percentage is equal to or greater than the Maximum Top 10
Insurer Percentage.
The covenants described above may be amended at any time by the Transferor,
the Trustee and the Servicer, with the consent of each provider of Enhancement
but without the consent of any certificateholder, if the Rating Agency Condition
is satisfied.
In the event any transfer of a Receivable results in a breach of any of the
covenants described in clauses (i) through (vi) above and such breach continues
for a period of 15 days after discovery of such breach by the Transferor or by
the Servicer or receipt by the Transferor of written notice by the Trustee of
such event, then such Receivable shall be an "Ineligible Receivable" and shall
be removed from the Trust on the same terms and conditions as Ineligible
Receivables are removed from the Trust as described under "--Representations and
Warranties." In the event for administrative reasons the Transferor is unable to
segregate or identify the Ineligible Receivable from other Receivables in the
related Account (an, "Ineligible Account"), then the Transferor shall be
obligated to accept reassignment of all of the Receivables in such Ineligible
Account and such other Receivables as may be necessary so as to cure the breach
of any of the foregoing covenants. Currently, the Transferor is unable to
segregate Receivables in an Account.
NEW ISSUANCES
The Agreement will authorize the Trustee to issue one or more Series of
Certificates which are transferable and have the characteristics described
below. The Transferor Interest will initially be held by the Transferor and will
be transferable only as provided in the Agreement. The Transferor may require
the Trustee to issue one or more new Series in exchange for a reduction in the
Transferor Interest. Pursuant to the Agreement, the Transferor may define, with
respect to any newly issued Series, all Principal Terms of such new Series. Upon
the issuance of an additional Series of Certificates, none of the Transferor,
the Servicer, the Trustee or the related Trust will be required or will intend
to obtain the consent of any Certificateholder of any other Series previously
issued by such Trust. However, as a condition of a New Issuance, the Transferor
will deliver to the Trustee written confirmation that the New Issuance will not
result in the reduction or withdrawal by any Rating Agency of its rating of any
outstanding Series, including Series 1996-1. The Transferor may offer any Series
to the public or other investors in transactions either registered or under the
Securities Act or exempt from registration thereunder, directly, through the
Underwriters or one or more other underwriters or placement agents, in
fixed-price offerings, in negotiated transactions, or otherwise. Any such Series
may be issued in fully registered or book-entry form in minimum denominations
determined by the Transferor.
The Transferor may require New Issuances and define Principal Terms such
that a Series issued under the Trust has a period during which amortization or
accumulation of the principal amount thereof is intended to occur which may have
a different length and begin on a different date than such period for the
Certificates. Further, one or more Series may be in their amortization or
accumulation periods while the Certificates are not. Moreover, each Series may
have the benefit of a Credit Enhancement which is available only to such Series.
Under the Agreement, the Trustee shall hold any such form of Credit Enhancement
only on behalf of the Series to which it relates. The Transferor may deliver a
different form of Credit Enhancement agreement with respect to any Series. The
Transferor may specify different certificate rates and monthly servicing fees
with respect to each Series (or a particular Class within such Series). The
Transferor will also have the option under the Agreement to vary between Series
the terms upon which a Series (or a particular Class within such Series) may be
repurchased by the Transferor or remarketed to other investors. There will be no
limit to the number of New Issuances that may be performed under the Agreement.
Under the Agreement, the Transferor may commence a New Issuance by
notifying the Trustee at least five days in advance of the date upon which the
New Issuance is to occur stating the Series to be issued on the date of the New
Issuance and, with respect to each such Series (and, if applicable, each Class
thereof): (1) its
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initial principal amount (or method for calculating such amount), (2) its
certificate rate (or method of calculating such rate) and (3) the provider of
Credit Enhancement, if any, which is expected to provide support with respect to
it. The Agreement will provide that on the date of the New Issuance the Trustee
will authenticate any such Series only upon delivery to it of at least the
following: (i) a Series Supplement specifying the Principal Terms of such
Series; (ii)(a) an opinion of counsel to the effect that, unless otherwise
stated in the related Series Supplement, the certificates of such Series will be
characterized as indebtedness for Federal income tax purposes and (b) a Tax
Opinion; (iii) if Credit Enhancement is required by the Series Supplement, an
appropriate Credit Enhancement agreement executed by the Transferor and the
Credit Enhancement Provider; (iv) written confirmation from each Rating Agency
that the New Issuance will not result in such Rating Agency's reducing or
withdrawing its rating on any then outstanding Series rated by it; (v) an
officer's certificate of the Transferor to the effect that after giving effect
to the New Issuance the Transferor would not be required to add Additional
Receivables pursuant to the Agreement and the Transferor Interest would be at
least equal to the Minimum Transferor Interest; and (vi) the certificates
representing the Series to be exchanged, if applicable. Upon satisfaction of
such conditions, the Trustee will reduce the Transferor Interest and/or cancel
the certificates of the exchanged Series, as applicable, and authenticate the
new Series.
The Transferor also may from time to time cause the Trustee to sell
purchased interests in the Receivables and other assets of a Trust to one or
more purchasers. Any purchased interest will represent an interest in the
applicable Trust's assets similar to the interest of a Series of Certificates.
No Series will be subordinated to any purchased interest, and no purchased
interest will have any interest in the Enhancement or series accounts specified
for any Series, except as specified in the prospectus relating to that Series.
Any such sale will take place pursuant to one or more agreements which will
specify terms similar to Principal Terms for the applicable purchased interests
and may grant the purchasers of such interests notice and consultation rights
with respect to rights or actions of the Trustee. Any sale of purchased
interests in the assets of a Trust will be subject to the satisfaction of the
same conditions (including Rating Agency confirmations) as for a New Issuance,
as appropriately modified to refer to a purchased interest rather than a New
Issuance. The modifications of conditions would not result in any substantive
change in such conditions, but would simply change the conditions to refer to
the contemplated sale of a purchased interest rather than a New Issuance.
REPRESENTATIONS AND WARRANTIES
The Transferor will represent and warrant in the Agreement on the Closing
Date that as of the Cut-off Date, with respect to Initial Receivables conveyed
to the Trust on the Closing Date and on each date Additional Receivables are
transferred to the Trust (each, an "Addition Date") with respect to Additional
Receivables that (a) the Agreement and the Receivables Purchase Agreement will
constitute a legal, valid and binding obligation of the Transferor, (b) the
transfer of Receivables by it to the Trust under the Agreement will constitute
either a valid transfer and assignment to the Trust of all right, title and
interest of the Transferor in and to the Receivables, whether then existing or
thereafter created and the proceeds thereof (including amounts in any of the
accounts established for the benefit of Certificateholders) or the grant of a
first priority perfected security interest in such Receivables (except for
certain tax and other governmental liens) and the proceeds thereof (including
amounts in any of the accounts established for the benefit of
Certificateholders), which is effective as to each such Receivable upon the
creation thereof, (c) the Agreement and the Receivables Purchase Agreement
constitute legal, valid and binding obligations of Transferor, enforceable
against Transferor in accordance with their terms, except (A) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
affecting the enforcement of creditors' rights in general and the rights of
creditors of national banking associations, and (B) as such enforceability may
be limited by general principles of equity (whether considered in a suit at law
or in equity), (d) the execution and delivery of the Agreement, the Certificates
and the Receivables Purchase Agreement, the performance of the transactions
contemplated by the Agreement, the Certificates and the Receivables Purchase
Agreement and the fulfillment of the terms hereof and thereof will not conflict
with or result in any breach of any of the material terms and provisions of any
material agreement to which Transferor is a party or by which it or any of its
properties are bound, (e) the
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execution and delivery of the Agreement, the Certificates and the Receivables
Purchase Agreement, the performance of the transactions contemplated by the
Agreement and the fulfillment of the terms thereof will not conflict with or
violate any requirements of law applicable to Transferor, (f) each Receivable
then existing has been conveyed to the Trust free and clear of any Lien (as
defined in the Agreement) of any Person claiming through or under Transferor or
any of its Affiliates (other than any Liens for municipal and other local taxes
if such taxes shall not at the time be due and payable or if Transferor shall
currently be contesting the validity thereof in good faith by appropriate
proceedings and shall have set aside on its books adequate reserves with respect
thereto) and in compliance, in all material respects, with all Requirements of
Law (as defined in the Agreement) applicable to Transferor, and (g) each such
Receivable transferred on such date is an Eligible Receivable (as defined under
"--Eligible Receivables" below) as of the related Cut-off Date or Addition Date.
In the event of a material breach of the representation and warranty
described in clause (f) above, and if any of the following two conditions is
met: (A) as a result of such breach such Receivable is charged off as
uncollectible or the Trust's rights in, to or under such Receivable or its
proceeds are impaired or the proceeds of such Receivable are not available for
any reason to the Trust free and clear of any Lien or (B) the Lien upon the
subject Receivable (1) arises in favor of the United States of America or any
State or any agency or instrumentality thereof and involves taxes or liens
arising under Title IV of ERISA or (2) has been consented to by Transferor;
then, upon the earlier to occur of the discovery of such breach or event by
Transferor or Servicer or receipt by Transferor of written notice of such breach
given by Trustee, each such Receivable shall be an Ineligible Receivable and
shall be automatically removed from the Trust on the terms are conditions set
forth below. In the event of a material breach of the representation and
warranty described in clause (g) above, as a result of such breach, the related
Receivable becomes a Defaulted Receivable or the Trust's rights in, to or under
the Receivable or its proceeds are impaired or the proceeds of such Receivable
are not available for any reason to the Trust free and clear of any Lien, then,
upon the expiration of 60 days (or such longer period as may be agreed to by
Trustee in its sole discretion, but in no event later than 120 days) from the
earlier to occur of the discovery of any such event by either Transferor or
Servicer, or receipt by Transferor of written notice of any such event given by
Trustee, then each such Receivable shall be removed from the Trust on the terms
and conditions set forth below; provided that no such removal shall be required
to be made if, on any day within such applicable period, such representations
and warranties with respect to such Receivable shall then be true and correct in
all material respects as if such Receivable had been created on such day. In the
event that for administrative reasons the Transferor is unable to segregate or
identify the Ineligible Receivables from other Receivables in the related
Ineligible Account, then the Transferor shall be obligated to accept
reassignment of all of the Receivables in such Ineligible Account. Currently,
the Transferor is unable to segregate Receivables within an Account.
The Transferor will accept reassignment of each Receivable conveyed to the
Trust in breach of clauses (f) and (g) above (a "Transferor Ineligible
Receivable") on the terms and conditions set forth below. The Transferor will
accept reassignment of Transferor Ineligible Receivables by directing the
Servicers to deduct the amount of the principal amount of each Transferor
Ineligible Receivable from the aggregate amount of Principal Receivables used to
calculate the Transferor Interest. If the exclusion of an Ineligible Receivable
from the calculation of the Transferor Interest would cause the Transferor
Interest to be less than zero, on the date of reassignment of such Ineligible
Receivable, the Transferor will make a deposit in the Excess Funding Account in
immediately available funds in an amount equal to the amount by which the
Transferor Interest would be reduced below zero. Any such deduction or deposit
shall be considered a repayment in full of the Transferor Ineligible Receivable.
The obligation of the Transferor to accept reassignment of any Transferor
Ineligible Receivable is the sole remedy respecting any breach of the
representations and warranties or covenants set forth in this paragraph with
respect to such Receivable available to the Certificateholders or the Trustee on
behalf of Certificateholders. In the event of a material breach of any of the
representations and warranties described in clauses (a) through (e) above,
either the Trustee or the Holders of Certificates evidencing undivided interests
in the Trust aggregating more than 50% of the aggregate Investor Interest of all
Series outstanding under such Trust may direct the Transferor to accept
reassignment of the entire Identified Portfolio within 60 days of such notice,
or within such longer period specified in such notice. The Transferor will be
obligated to accept reassignment of such Receivables on a Distribution Date
occurring within such
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applicable period. Such reassignment will not be required to be made, however,
if at any time during such applicable period, or such longer period, the
representations and warranties are true and correct in all material respects.
The deposit amount for such reassignment will equal the Investor Interest and
the Invested Amount of any Enhancement, if any, plus accrued and unpaid interest
for each Series outstanding under the Trust on the last day of the Monthly
Period preceding the Distribution Date on which the reassignment is scheduled to
be made less the amount, if any, previously allocated for payment of principal
and interest to such Certificateholders or such holders of the Invested Amount
of any Enhancement or the Collateral Interest, if any, on such Distribution
Date. The payment of the reassignment deposit amount and the transfer of all
other amounts deposited for the preceding month in the Distribution Account will
be considered a payment in full of the Investor Interest and the Invested Amount
of any Enhancement, if any, for each such Series required to be repurchased and
will be distributed upon presentation and surrender of the Certificates for each
such Series. The obligation of the Transferor to make any such deposit will
constitute the sole remedy respecting a breach of the representations and
warranties available to the Trustee or Certificateholders.
CERTAIN COVENANTS
Pursuant to the Agreement, the Transferor covenants that, among other
things, subject to specified exceptions and limitations, (i) it will take no
action to cause any Receivable to be evidenced by any "instruments" or to be
anything other than a "general intangible", in each case, as defined in the
Uniform Commercial Code as in effect in the State of New York and the
Commonwealth of Pennsylvania (the "UCC"), (ii) except for the conveyances under
the Agreement, it will not sell any Receivable or grant a lien on any
Receivable, (iii) it will comply with and perform its obligations under, and
will cause each Originator to comply with and perform its obligations under, any
Receivable to which it is a party and its credit and collection policies and it
will not change the terms of such agreements or policies except as provided in
the Agreement, (iv) in the event it is unable for any reason to transfer
Receivable to the Trust, it will nevertheless continue to allocate and pay all
collections from all Receivables to the Trust, (v) it will notify the Trust
promptly after becoming aware of any Lien on any Receivable and (vi) it will
take all actions necessary to enforce its rights and claims under the Receivable
Purchase Agreement.
Pursuant to the Agreement, the Servicer covenants (a) that it shall not
take any action which would impair, with respect to each Receivable originated
on or before February 1, 1997, each Originator's first priority perfected
security interest in the Unearned Premiums securing such Receivables and with
respect to each Receivable originated after February 1, 1997, the Trust's first
priority perfected security interest in the Unearned Premiums securing such
Receivables, (b) not to impair the rights of the Certificateholders in any
Receivable, (c) so long as the Originators are the Servicer, to make reasonable
efforts to collect all payments called for under the terms and provisions of the
Receivables as and when the same shall become due and Servicer (including
Back-up Servicer, if Servicer) shall follow such collection procedures as it
follows with respect to all comparable insurance premium finance loans that it
services and (d) not to voluntarily increase or decrease the number or amount of
any scheduled payment, or the principal balance of a Receivable or the annual
percentage rate of a Receivable, or extend, rewrite or otherwise modify the
payment terms; provided, however, Servicer may (i) extend the term of any
Receivable, but not past the maturity date of the related insurance policies and
(ii) change the installment due date in the related Premium Finance Agreement
one time during the term of a Receivable, provided that such a change does not
result in extending the maturity of such Receivable for more than 30 days or
past the maturity date of the related insurance policies.
In the event of a breach of any of the covenants set forth in (i) clauses
(b), (c) and (d) above and as a result of such breach the related Receivable
becomes a Defaulted Receivable or the Trust's rights in, to or under such
Receivable or its proceeds are impaired or the proceeds of such Receivable are
not available for any reason to the Trust free and clear of any Lien, then, upon
the expiration of 60 days (or such longer period as may be agreed to by the
Trustee in its sole discretion, but in no event later than 120 days) from the
earlier to occur of the discovery of any such event by either Transferor or
Servicer, or receipt by Servicer of written notice of any such event given by
Trustee or (ii) clause (a) above then, upon the expiration of 15 days from the
earlier to occur of the discovery of any such event by either Transferor or
Servicer, or receipt by Servicer of written notice of any such event given by
Trustee, then each such Receivable (each, a "Servicer Ineligible
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Receivable") shall be removed from the Trust on the terms and conditions set
forth below. When the above provisions require removal of a Receivable, Servicer
shall accept assignment of such Servicer Ineligible Receivable by depositing
into the Collection Account on the applicable Determination Date an amount equal
to the principal portion of each Servicer Ineligible Receivable and deducting
such amount from the Principal Receivables in the Trust (to the extent
previously included therein). Deposits of any amounts into the Collection
Account shall be treated for all purposes of the Agreement as collections of
Principal Receivables. Upon the removal of Servicer Ineligible Receivables (and
the mailing of any deposit required above), the Trust shall automatically and
without further action be deemed to transfer, assign, and otherwise convey to
Servicer, without recourse, representation or warranty, all the right, title and
interest of the Trust in and to each Servicer Ineligible Receivable, all monies
due or to become due with respect to each such Servicer Ineligible Receivable
and all proceeds of such Servicer Ineligible Receivable and Recoveries relating
to such Servicer Ineligible Receivable. Such assigned Receivables shall be
treated by the Trust as collected in full as of the date on which it was
transferred. Trustee shall execute such documents and instruments of transfer or
assignment and take other actions as shall reasonably be requested by Servicer
to evidence the conveyance of each such Servicer Ineligible Receivable. The
obligation of Servicer set forth above shall constitute the sole remedy
respecting any breach set forth above with respect to such Receivable available
to the Holders or Trustee on behalf of the Holders.
In addition, the Servicer (so long as the Originator is a Servicer) will
covenant in the Agreement to comply with applicable licensing and regulatory
laws of any Receivable State and to cause the Transferor, the Trustee and the
Trust to at all times be in compliance with such licensing and regulatory laws.
In the event of a breach of such covenant that (x) results in Receivables in
such state being unenforceable, (y) results in the Transferor, Trustee or the
Trust being subjected to any civil or criminal penalties, sanctions or taxes or
(z) materially and adversely affects the ability of the Servicer, the
Transferor, the Trustee or the Trust to perform their respective obligations
under the Agreement, then either the Servicer shall remove such Receivables as
if they were Servicer Ineligible Receivables so as to cure such breach within 15
days from the earlier to occur of the discovery of any such breach by the
Servicer or receipt by the Servicer of written notice of such breach or
indemnify the Transferor, the Trustee and the Trust for any losses suffered by
any of them as a result of such noncompliance within 15 days of receipt of
notice of any such loss. Any removal of Receivables shall be accomplished in the
manner specified in the preceding paragraph.
In the event for administrative reasons the Servicer is unable to segregate
or identify Servicer Ineligible Receivables from other Receivables in the
related Account (a "Servicer Ineligible Account"), then the Servicer will be
obligated to remove all of the Receivables in the Servicer Ineligible Account to
cure the foregoing covenants and each such Receivable shall be treated as a
Servicer Ineligible Receivable. Currently, the Servicer is unable to segregate
Receivables in an Account.
If the Back-up Servicer is Servicer in lieu of accepting such assignment of
Receivable, it may indemnify the Trust for its losses in connection with the
related breach and deposit the amount of such losses into the Collection Account
on the applicable date. The related Receivables shall not be removed from the
Trust if such option is exercised by the Servicer.
The Back-up Servicer will covenant in the Pooling and Servicing Agreement
that it will use its best efforts to be licensed or exempt from licensing with
respect to its ability to service the Receivables in the Permitted States in
which it is presently licensed. Upon the discovery by the Back-up Servicer that
it is not so licensed or exempt in any Permitted State for a period of 30 days,
the Back-up Servicer shall deliver written notice of such fact to the
Transferor, the Servicer and the Trustee. The Transferor shall terminate the
Back-up Servicer 15 days after receipt of such notice, unless prior to such time
the Transferor is furnished with an opinion of counsel which states that the
absence of such license or exemption would not, if the Back-up Servicer were the
Servicer on such date, (x) cause any of the Receivables in such state to be
unenforceable, (y) subject the Trust or the Trustee to any civil or criminal
penalties, sanctions or taxes or (z) materially and adversely affects the
ability of the Transferor, the Trustee or the Back-up Servicer to perform their
obligations under the Agreement. If the Back-up Servicer is terminated, the
Trust would have 90 days to find a successor Back-up Servicer or a Pay Out Event
will occur. Back-up Servicer is not obligated, but has the option, to deliver
such opinion.
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ELIGIBLE RECEIVABLES
"Eligible Receivable" means, with respect to each Receivable conveyed to
the Trust on the Closing Date (the "Initial Receivables") each Receivable, as of
the Cut-Off Date and with respect to each Additional Receivable each Additional
Receivable, as of the date of origination of such Receivable: (a) which is
payable in United States dollars; (b) which has been funded by the related
Originator in whole or in part or which relates to an Account that has been
funded in whole or in part; (c) which does not finance premiums of any insurance
policy (i) of Lloyds of London, subject to the limitations described below, or
any other foreign insurance carrier (except up to 3% of the Aggregate
Receivables, after giving effect to such transfer, may finance premiums of other
foreign insurance carriers) or (ii) of any insurance carrier known to any of the
Originators or the Transferor to be the subject of any insolvency, receivership
or other similar proceedings; (d) which does not relate to a Premium Finance
Agreement under which the Obligor is a Governmental Authority (as defined in the
Agreement); (e) which (i) in the case of the Initial Receivables, is
underwritten in accordance with the Originators' policies and procedures
relating to the creditworthiness of borrowers and insurance carriers and the
extension of credit to borrowers ("Guidelines") in effect at the time of
origination of such Receivables and (ii) in the case of Additional Receivables,
is underwritten in accordance with Guidelines that are not materially different
from the Guidelines that were used by the Originators with respect to the
Initial Receivables; (f) which the related Obligor used all the proceeds of such
Receivable to pay premiums and related items with respect to commercial property
or casualty insurance policies, governed by the law of any state or territory of
the United States or the District of Columbia, under which such Obligor is the
insured; (g) with respect to which all materials consents, licenses, approvals
or authorizations of, or registrations or declarations with, any Governmental
Authority required to be obtained, effected or given in connection with the
creation of such Receivable or the execution, delivery and performance by the
related Originator of the related Premium Finance Agreement, have been duly
obtained, effected or given and are in full force and effect as of the date of
transfer of such Receivable to the Trust; (h) which, at the time of transfer of
such Receivables to the Trust, the terms of the related Premium Finance
Agreement have not been waived or modified except for waivers or modifications
that were made by the Originators in accordance with the Guidelines; (i) with
respect to which the related Premium Finance Agreement is not subject to any
right of rescission, setoff, counterclaim, defense arising out of the violations
of usury laws or any other defenses of any Obligor at the time of the transfer
of such Receivable to the Trust, other than defenses that may arise after the
time of transfer out of applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights in
general and general equity principles; (j) with respect to which, at the time of
transfer of such Receivable to the Trust, the related Originator has not taken
any action which would impair, or failed to take any action necessary to avoid
impairing, the rights of the Trust or the Certificateholders therein; (k) which
is not delinquent for more than 30 days; (l) which if an Initial Receivable,
provides the related Originator with a limited power of attorney allowing it to
cancel the related insurance policy, if cancelable, in accordance with state law
upon non-payment of a loan installment by the related Obligor; (m) which if an
Additional Receivable, provides the related Originator with a limited power of
attorney allowing it to cancel the related insurance policy, in accordance with
state law upon non-payment of a loan installment by the related Obligor; (n)
which (i) with respect to the Initial Receivables and Additional Receivables
conveyed to the Trust prior to February 1, 1997, grants the related Originator a
first priority perfected security interest in the related Unearned Premium and
allows such Originator to direct the related insurance company to pay such
Originator any such Unearned Premium calculated as of the time of cancellation
of the related insurance policy, if cancelable and (ii) with respect to
Additional Receivables conveyed to the Trust on or after February 1, 1997 only,
the Trust has a first priority perfected security interest in the Unearned
Premiums relating to such Additional Receivable and a notice of financed premium
has been delivered to the applicable insurance company or companies; (o) with
respect to which any related insurance policy has not been canceled; (p) with
respect to which the stated address of the Obligor in the related Premium
Finance Agreement is in a Permitted State; (q) which was originated in
compliance, in all material respects, with all Requirements of Law (as defined
in the Agreement) applicable to the applicable Originator and pursuant to loan
documents which comply, in all material respects, with all Requirements of Law
applicable to the applicable Originator; (r) which is the legal, valid and
binding payment obligation of the related Obligor, legally enforceable against
such Obligor in accordance with its terms; (s) with respect to
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which the related Obligor is not the subject of a bankruptcy or insolvency
proceeding; (t) with respect to which the related Premium Finance Agreement
provides for monthly payments by the related Obligor; (u) which is a "general
intangible" under the UCC; and (w) which after giving effect to the transfer of
such Receivable would not cause any Excess Insurer Concentration Amount to exist
assuming that immediately prior to such transfer each insurance carrier which
has premiums financed by such Receivable was downgraded by any Rating Agency by
one rating category (giving effect to pluses or minuses). Under certain
circumstances, Additional Receivables relating to an Account under which an
Initial Receivable or another Additional Receivable was previously transferred
to the Trust may finance premiums of an insurance policy issued by Lloyds of
London; however all such Additional Receivables will be subject to the insurance
carrier concentration limits and will not be an Eligible Receivable if the
transfer of such Additional Receivable would result in more than 3% of the
Aggregate Receivables, after giving effect to such transfer, financing premiums
of foreign insurance carriers.
REMOVAL OF ACCOUNTS
The Transferor may, but shall not be obligated to, designate from time to
time certain Accounts for deletion and removal ("Removed Accounts") from the
Trust. The Transferor will, however, be permitted to designate and require
reassignment to it of the Receivables in Removed Accounts only if: (i) the
removal of any Receivables will not, in the reasonable belief of the Transferor,
cause a Pay Out Event to occur; (ii) the Transferor shall have delivered to the
Trustee for execution a written assignment and a computer file or microfiche
list containing a true and complete list of all Receivables in Removed Accounts;
(iii) the Transferor represents and warrants that no selection procedures
believed by the Transferor to be materially adverse to the interests of the
holders of any Series of Certificates outstanding under such Trust were used in
selecting the Removed Accounts to be removed from such Trust; (iv) the
Transferor shall have notified each such Rating Agency of such proposed removal
and shall have received notice from each such Rating Agency that such proposed
removal will not result in a downgrade of its then-current rating for any such
Series; (v) the principal balance of the Receivables in Removed Accounts to be
reassigned to the Transferor shall not equal or exceed 5% of the amount of
Principal Receivables in the Trust at such time; and (vi) the Transferor shall
have delivered to the Trustee an officers certificate confirming the items set
forth in clauses (i) through (v) above. Notwithstanding the above, the
Transferor will be permitted to designate as a Receivable in a Removed Account
without the consent of the Trustee, Certificateholders or Rating Agencies any
Receivable that has a zero balance and which the Transferor will remove from its
computer file.
COLLECTION AND OTHER SERVICING PROCEDURES
For each Series of Certificates, the Servicer will be responsible for
servicing and administering the Receivables in accordance with the Servicer's
policies and procedures for servicing insurance premium finance loans comparable
to the Receivables. The Servicer will be required to maintain fidelity bond
coverage insuring against losses through wrongdoing of its officers and
employees who are involved in the servicing of insurance premium Finance loans
covering such actions and in such amounts as the Servicer believes to be
reasonable from time to time.
TRUST ACCOUNTS
The Servicer will establish and maintain in the name of the Trust a
"Finance Charge Account," an "Excess Funding Account" and a "Principal Funding
Account" as segregated trust accounts or with a Qualified Institution, for the
benefit of the Certificateholders of all related Series, including any Series
offered pursuant to this Prospectus. The Trustee will also establish a
non-interest bearing segregated demand deposit account to serve as the
"Distribution Account" for the Trust. The Servicer will establish and maintain,
in the name of the Trust, for the benefit of Certificateholders of all Series
issued thereby, a non-interest bearing segregated account to serve as the
Collection Account for the Trust. The Distribution Account and Collection
Account will each be established as a segregate trust account or with a
"Qualified Institution," defined as a depository institution or trust company,
which may include the Trustee, organized under the laws of the United States or
any one of the states thereof, which at all times has a certificate of deposit,
short-term deposit
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or commercial paper rating of P-1 by Moody's Investors Service, Inc. ("Moody's")
and of at least A-1 by Standard & Poor's Ratings Services, a division of The
McGraw Hill Companies, Inc. ("Standard & Poor's") or long-term unsecured debt
obligation (other than such obligation the rating of which is based on
collateral or on the credit of a person other than such institution (or trust
company) rating of at least Aa3 by Moody's and AA-- by Standard & Poor's and
deposit insurance provided by either the Bank Insurance Fund ("BIF") or the
Savings Association Insurance Fund ("SAIF"), each administered by the FDIC, or a
depository institution, which may include the Trustee, which is acceptable to
each Rating Agency. Funds in the Excess Funding Account and the Finance Charge
Account for each Trust will be invested, at the direction of the Servicer, in
(i) obligations fully guaranteed by the United States of America, (ii) demand
deposits, time deposits or certificates of deposit of depository institutions or
trust companies, the certificates of deposit of which have the highest rating
from Moody's and Standard & Poor's, (iii) commercial paper having, at the time
of the Trust's investment, a rating in the highest rating category from Moody's
and Standard & Poor's, (iv) bankers' acceptances issued by any depository
institution or trust company described in clause (ii) above, (v) money market
funds which have the highest rating from, or have otherwise been approved in
writing by, Moody's and Standard & Poor's (so long as such investment will not
require the Trust to register as an "investment company" under the Investment
Company Act of 1940, as amended), (vi) repurchase obligations with respect to
any security described in clause (i) above or with respect to any other security
issued or guaranteed by an agency or instrumentality of the United States of
America, in either case entered into with a depository institution or trust
company described in clause (ii) above and (vii) any other investment if (a)
Standard & Poor's confirms in writing that such investment will not adversely
affect its then current rating or ratings of the Certificates (b) after 10
business days prior written notice to Moody's of the proposed Investment.
Moody's has not informed the Transferor that such investment will cause the then
current rating of the Certificates to be downgraded or withdrawn and (c) making
such investment will not require the related Trust to register as an investment
company under the Investment Company Act of 1940, as amended (such investments,
"Permitted Investments"). Any earnings (net of losses and investment expenses)
on funds in the Finance Charge Account or the Excess Funding Account will be
paid to the Transferor. The Servicer will have the revocable power to withdraw
funds from the Collection Account and to instruct the Trustee to make
withdrawals and payments from the Finance Charge Account and the Excess Funding
Account for the purpose of carrying out the Servicer's duties under the
Agreement. The Trustee will be the paying agent and will have the revocable
power to withdraw funds from the Distribution Account for the purpose of making
distributions to the Certificateholders.
EXCESS FUNDING ACCOUNT
If on any date the Transferor Interest is less than zero (after giving
effect to any addition of Principal Receivables to the applicable Trust), the
Servicer will not distribute to the holder of the Transferor Interest any
collections of Principal Receivables that otherwise would be distributed to the
holder of the Transferor Interest, but shall instead deposit such funds in a
segregated account established and maintained by the Servicer, in the name of
the Trust, for the benefit of Certificateholders of all Series issued by such
Trust, as a trust account or with the Servicer or with a Qualified Institution
(the "Excess Funding Account") until the Transferor Interest equals zero. Funds
on deposit in the Excess Funding Account will be withdrawn and paid to the
Transferor on any date to the extent that the Transferor Interest is greater
than zero on such date.
Funds on deposit in the Excess Funding Account will be invested by the
Trustee, at the direction of the Servicer, in Permitted Investments. Any
earnings (net of losses and investment expenses) earned on amounts on deposit in
the Excess funding Account during any Monthly Period will be withdrawn from the
Excess Funding Account and turned over to or at the direction of the Servicer.
ALLOCATION OF COLLECTIONS
The Aggregate Receivables as of November 30, 1996 was $614,886,198.16,
consisting of $14,131,486.55 of Finance Charge Receivables and $600,754,711.61
of Principal Receivables. "Aggregate Receivables" means, with respect to the
Receivables as of any date of determination, an amount equal to the aggregate
amount of payments owed on the Receivables from such date (or, if such date is
the Statistical Calculation
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Date, from November 15, 1996) through the respective scheduled final payment
dates of such Receivables (exclusive of late fees and administrative charges)
less certain net payables as of such date of determination.
"Finance Charge Receivables" means, with respect to the Receivables as of
the first day of any Monthly Period (as defined below), an amount equal to the
aggregate amount of unearned interest with respect to such Receivables
calculated in accordance with the Rule of 78's method. For purposes hereof,
collections of Finance Charge Receivables with respect to any Monthly Period
generally will equal the aggregate amount of interest accrued on such
Receivables for such Monthly Period calculated on the basis of the Rule of 78's
plus late fees and other administrative charges collected during such Monthly
Period plus Recoveries (net of the amounts thereof applied to defaults) received
during such Monthly Period. "Monthly Period" means each calendar month,
commencing December 1996.
"Principal Receivables" means as of any date of determination, an amount
equal to the product of (x) Aggregate Receivables as of such date of
determination and (y) a fraction, the number of which is Beginning of Month
Principal Receivables and the denominator of which is the Aggregate Receivables
as of the first day of the current Monthly Period. For purposes hereof,
collections of Principal Receivables with respect to any Monthly Period will
consist of all collections on the Receivables received during such Monthly
Period that are not treated as collections of Finance Charge Receivables.
"Beginning of Month Principal Receivables" means, with respect to the
Receivables and any Monthly Period, an amount equal to the Aggregate Receivables
as of the first day of such Monthly Period (or, in the case of the Monthly
Period commencing December 1996, as of December 1, 1996) minus Finance Charge
Receivables as of such date.
Under certain circumstances a borrower may have more than one Account. It
is possible that all or a portion of the Premium Finance Agreements of any
Account will not satisfy the eligibility criteria for transfer to the Trust
resulting in the same borrower having one or more Premium Finance Agreements
owned by the Trust and one or more Premium Finance Agreements owned by one of
the Originators. These Premium Finance Agreements may contain cross-default and
cross-collateralization provisions. Consequently, a default by a borrower on a
Premium Finance Agreement that is not owned by the Trust may result in the
default of the Receivables of such borrower in the Trust and the cancellation of
the related insurance policies thus affecting the rate and timing of payments
under the Receivables. In the event certain Premium Finance Agreements of the
same borrower are owned by the Trust and by one of the Originators, the
Originators have agreed in the Receivables Purchase Agreement that to the extent
they receive payments (including from returns of unearned premiums, recoveries
or otherwise) that are not clearly identified as belonging to Premium Finance
Agreements owned by one of the Originators, such amounts will be treated first
as collections on the Receivables of such borrower until such Receivables are
paid in full. In no event will returned unearned premiums or any other payments
in respect of the Receivables be applied to payments in respect of Premium
Finance Agreements owned by one of the Originators until such Receivables are
paid in full.
ALLOCATION PERCENTAGES
Pursuant to the Agreement, with respect to each Monthly Period the Servicer
will allocate among the Investor Interest, the investor interest for all other
Series issued and outstanding and the Transferor Interest, all amounts collected
and allocated to Finance Charge Receivables, all amounts collected and allocated
to Principal Receivables and all Default Amounts with respect to such Monthly
Period.
Default Amounts and collections of Finance Charge Receivables at any time
and collections of Principal Receivables during the Revolving Period will be
allocated to the Investor Interest based on the Floating Investor Percentage.
The "Floating Investor Percentage" means, with respect to any Monthly Period,
the percentage equivalent of a fraction, the numerator of which is the Adjusted
Investor Interest as of the close of business on the last day of the preceding
Monthly Period (or with respect to the first Monthly Period, the initial
Investor Interest) and the denominator of which is the greater of (a) the
aggregate amount of Beginning of Month Principal Receivables for the related
Monthly Period and (b) the sum of the numerators used to calculate the Investor
Percentages for allocations with respect to Finance Charge Receivables, Default
Amounts or Principal Receivables, as applicable, for all outstanding Series on
such date of determination;
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provided, however, that with respect to any Monthly Period in which a Reset Date
occurs, the amount in clause (a) above shall be (i) the aggregate amount of
Principal Receivables in the Trust as of the close of business on the last day
of the prior Monthly Period for the period from and including the first day of
such Monthly Period to but excluding the Reset Date and (ii) the aggregate
amount of Principal Receivables in the Trust as of the beginning of the day on
the Reset Date after adjusting for the aggregate amount of Principal Receivables
added to or, in certain circumstances, removed from the Trust on the Reset Date,
if any, for the period from and including the Reset Date to and including the
last day of such Monthly Period. The amounts so allocated will be further
allocated between the Class A Holders, Class B Holders and the Collateral
Interest Holder based on the Class A Floating Allocation, the Class B Floating
Allocation and the Collateral Floating Allocation, respectively. The "Class A
Floating Allocation" means, with respect to any Monthly Period, the percentage
equivalent (which percentage shall never exceed 100%) of a fraction, the
numerator of which is equal to the Class A Adjusted Investor Interest as of the
close of business on the last day of the preceding Monthly Period and the
denominator of which is equal to the Adjusted Investor Interest as of the close
of business on such day. The "Class B Floating Allocation" means, with respect
to any Monthly Period, the percentage equivalent (which percentage shall never
exceed 100%) of a fraction, the numerator of which is equal to the Class B
Investor Interest as of the close of business on the last day of the preceding
Monthly Period (or with respect to the first Monthly Period, as of the Closing
Date) and the denominator of which is equal to the Adjusted Investor Interest as
of the close of business on such day. The "Collateral Floating Allocation"
means, with respect to any Monthly Period, the percentage equivalent (which
percentage shall never exceed 100%) of a fraction, the numerator of which is
equal to the Collateral Interest as of the close of business on the last day of
the preceding Monthly Period (or with respect to the first Monthly Period, as of
the Closing Date) and the denominator of which is equal to the Adjusted Investor
Interest as of the close of business on such day.
Collections of Principal Receivables during the Controlled Accumulation
Period, Principal Payment Period and Rapid Amortization Period will be allocated
to the Investor Interest based on the Fixed Investor Percentage. The "Fixed
Investor Percentage" means, with respect to any Monthly Period, the percentage
equivalent of a fraction, the numerator of which is the Investor Interest as of
the close of business on the last day of the Revolving Period and the
denominator of which is the greater of (a) the aggregate amount of Beginning of
Month Principal Receivables for such Monthly Period and (b) the sum of the
numerators used to calculate the Investor Percentages for allocations with
respect to Principal Receivables for all outstanding Series for such Monthly
Period; provided, however, that with respect to any Monthly Period in which a
Reset Date occurs, the amount in clause (a) above shall be (i) the aggregate
amount of Beginning of Month Principal Receivables for such Monthly Period for
the period from and including the first day of such Monthly Period to but
excluding the Reset Date and (ii) the aggregate amount of Principal Receivables
in the Trust at the beginning of the day on the Reset Date after adjusting for
the aggregate amount of Principal Receivables added to or, in certain
circumstances, removed from the Trust on the Reset Date, if any, for the period
from and including the Reset Date to and including the last day of such Monthly
Period. The amounts so allocated will be further allocated between the Class A
Holders, the Class B Holders and the Collateral Interest Holder based on the
Class A Fixed Allocation, the Class B Fixed Allocation and the Collateral Fixed
Allocation, respectively. The "Class A Fixed Allocation" means, with respect to
any Monthly Period, the percentage equivalent (which percentage shall never
exceed 100%) of a fraction, the numerator of which is equal to the Class A
Investor Interest as of the close of business on the last day of the Revolving
Period, and the denominator of which is equal to the Investor Interest as of the
close of business on the last day of the Revolving Period. The "Class B Fixed
Allocation" means, with respect to any Monthly Period, the percentage equivalent
(which percentage shall never exceed 100%) of a fraction, the numerator of which
is equal to the Class B Investor Interest as of the close of business on the
last day of the Revolving Period, and the denominator of which is equal to the
Investor Interest as of the close of business on the last day of the Revolving
Period. The "Collateral Fixed Allocation" means, with respect to any Monthly
Period, the percentage equivalent (which percentage shall never exceed 100%) of
a fraction, the numerator of which is equal to the Collateral Interest as of the
close of business on the last day of the Revolving Period, and the denominator
of which is equal to the Investor Interest as of the close of business on the
last day of the Revolving Period.
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"Class A Adjusted Investor Interest," for any date of determination, means
an amount equal to the then current Class A Investor Interest, minus the
Principal Funding Account Balance on such date.
"Class A Investor Interest" for any date means an amount equal to (a) the
aggregate initial principal amount of the Class A Certificates, minus (b) the
aggregate amount of principal payments made to Class A Holders prior to such
date, minus (c) the excess, if any, of the aggregate amount of Class A Investor
Charge-Offs for all Transfer Dates preceding such date over the aggregate amount
of any reimbursements of Class A Investor Charge-Offs for all Transfer Dates
preceding such date; provided, however, that the Class A Investor Interest may
not be reduced below zero.
"Class B Investor Interest" for any date means an amount equal to (a) the
aggregate initial principal amount of the Class B Certificates, minus (b) the
aggregate amount of principal payments made to Class B Holders prior to such
date, minus (c) the aggregate amount of Class B Investor Charge-Offs for all
prior Transfer Dates, minus (d) the aggregate amount of Reallocated Class B
Principal Collections for all prior Transfer Dates for which the Collateral
Interest has not been reduced, minus (e) an amount equal to the aggregate amount
by which the Class B Investor Interest has been reduced to fund the Class A
Investor Default Amount on all prior Transfer Dates as described under
"--Receivables in Defaulted Accounts; Investor Charge Offs," and plus (f) the
aggregate amount of Excess Spread allocated and available on all prior Transfer
Dates for the purpose of reimbursing amounts deducted pursuant to the foregoing
clauses (c), (d) and (e); provided, however, that the Class B Investor Interest
may not be reduced below zero.
"Collateral Interest" for any date means an amount equal to (a) the Initial
Collateral Interest, minus (b) the aggregate amount of principal payments made
to the Collateral Interest Holder prior to such date, minus (c) the aggregate
amount of Collateral Charge-Offs for all prior Transfer Dates, minus (d) the
aggregate amount of Reallocated Principal Collections for all prior Transfer
Dates, minus (e) an amount equal to the aggregate amount by which the Collateral
Interest has been reduced to fund the Class A Investor Default Amount and the
Class B Investor Default Amount on all prior Transfer Dates as described under
"--Receivables in Defaulted Accounts; Investor Charge-Offs," plus (f) the
aggregate amount of Excess Spread allocated and available on all prior Transfer
Dates for the purpose of reimbursing amounts deducted pursuant to the foregoing
clauses (c), (d) and (e); provided, however, that the Collateral Interest may
not be reduced below zero.
"Reset Date" means each of (a) any date on which Receivables are removed
from the Trust and on which, if any Series has been paid in full, Principal
Receivables in an aggregate amount approximately equal to the initial investor
interest of such Series are removed from the Trust and (b) a date on which there
is an increase in the Investor Interest under any Variable Interest issued by
the Trust.
"Variable Interest" means either of (a) any certificate that is designated
as a variable funding certificate in the related Series Supplement and (b) any
purchased interest sold as permitted by an Agreement.
REALLOCATION OF CASH FLOWS
With respect to each Transfer Date, the Servicer will determine the amount
(the "Class A Required Amount"), if any, by which the sum of (a) Class A Monthly
Interest due on the related Distribution Date and overdue Class A Monthly
Interest and Class A Additional Interest thereon, if any, (b) the Class A
Servicing Fee for the related Monthly Period and overdue Class A Servicing Fee,
if any, and (c) the Class A Investor Default Amount, if any, for the related
Monthly Period exceeds the Class A Available Funds for the related Monthly
Period. If the Class A Required Amount is greater than zero, Excess Spread
allocated to Series 1996-1 and available for such purpose will be used to fund
the Class A Required Amount with respect to such Transfer Date. If such Excess
Spread is insufficient to fund the Class A Required Amount, first, Reallocated
Collateral Principal Collections and, then, Reallocated Class B Principal
Collections will be used to fund the remaining Class A Required Amount. If
Reallocated Principal Collections with respect to the related Monthly Period,
together with Excess Spread, are insufficient to fund the remaining Class A
Required Amount for such related Monthly Period, then the Collateral Interest
(after giving effect to reductions for any Collateral Charge-Offs and
Reallocated Principal Collections on such Transfer Date) will be reduced by the
amount of such excess (but not by more than the Class A Investor Default Amount
for such Monthly Period).
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In the event that such reduction would cause the Collateral Interest to be a
negative number, the Collateral Interest will be reduced to zero, and the Class
B Investor Interest (after giving effect to reductions for any Class B Investor
Charge-Offs and any Reallocated Class B Principal Collections for which the
Collateral Interest was not reduced on such Transfer Date) will be reduced by
the amount by which the Collateral Interest would have been reduced below zero
(but not by more than the excess of the Class A Investor Default Amount, if any,
for such Monthly Period over the amount of such reduction, if any, of the
Collateral Interest with respect to such Monthly Period). In the event that such
reduction would cause the Class B Investor Interest to be a negative number, the
Class B Investor Interest will be reduced to zero and the Class A Investor
Interest will be reduced by the amount by which the Class B Investor Interest
would have been reduced below zero (but not by more than the excess, if any, of
the Class A Investor Default Amount for such Monthly Period over the amount of
the reductions, if any, of the Collateral Interest and the Class B Investor
Interest with respect to such Monthly Period). Any such reduction in the Class A
Investor Interest will have the effect of slowing or reducing the return of
principal and interest to the Class A Holders. In such case, the Class A Holders
will bear directly the credit and other risks associated with their interests in
the Trust. See "--Receivables in Defaulted Accounts; Investor Charge-Offs."
With respect to each Transfer Date, the Servicer will determine the amount
(the "Class B Required Amount"), which will be equal to the sum of (a) the
amount, if any, by which the sum of (i) Class B Monthly Interest due on the
related Distribution Date and overdue Class B Monthly Interest and Class B
Additional Interest thereon, if any, and (ii) the Class B Servicing Fee for the
related Monthly Period and overdue Class B Servicing Fee, if any, exceeds the
Class B Available Funds for the related Monthly Period and (b) the Class B
Investor Default Amount, if any, for the related Monthly Period. If the Class B
Required Amount is greater than zero, Excess Spread allocated to Series 1996-1
not required to pay the Class A Required Amount or reimburse Class A Investor
Charge-Offs will be used to fund the Class B Required Amount with respect to
such Transfer Date. If such Excess Spread is insufficient to fund the Class B
Required Amount, Reallocated Collateral Principal Collections not required to
fund the Class A Required Amount for the related Monthly Period will be used to
fund the remaining Class B Required Amount. If such Reallocated Collateral
Principal Collections with respect to the related Monthly Period are
insufficient to fund the remaining Class B Required Amount, then the Collateral
Interest (after giving effect to reductions for any Collateral Charge-Offs and
Reallocated Principal Collections on such Transfer Date and after any
adjustments made thereto for the benefit of the Class A Holders) will be reduced
by the amount of such deficiency (but not by more than the Class B Investor
Default Amount for such Monthly Period). In the event that such a reduction
would cause the Collateral Interest to be a negative number, the Collateral
Interest will be reduced to zero, and the Class B Investor Interest will be
reduced by the amount by which the Collateral Interest would have been reduced
below zero (but not by more than the excess of the Class B Investor Default
Amount for such Monthly Period over the amount of such reduction of the
Collateral Interest), and the Class B Holders will bear directly the credit and
other risks associated with their interests in the Trust. See "--Receivables in
Defaulted Accounts; Investor Charge-Offs."
Reductions of the Class A Investor Interest or Class B Investor Interest
described above will be reimbursed by, and the Class A Investor Interest or
Class B Investor Interest increased to the extent of, Excess Spread available
for such purposes on each Transfer Date. See "--Application of
Collections--Excess Spread." When such reductions of the Class A Investor
Interest and Class B Investor Interest have been fully reimbursed, reductions of
the Collateral Interest shall be reimbursed until reimbursed in full in a
similar manner.
"Reallocated Class B Principal Collections" for any Monthly Period means
collections of Principal Receivables allocable to the Class B Investor Interest
for the related Monthly Period in an amount not to exceed the amount applied to
fund the Class A Required Amount, if any; provided, however, that such amount
will not exceed the Class B Investor Interest after giving effect to any Class B
Investor Charge-Offs for the related Transfer Date.
"Reallocated Collateral Principal Collections" for any Monthly Period means
collections of Principal Receivables allocable to the Collateral Interest for
the related Monthly Period in an amount not to exceed the amount applied to fund
the Class A Required Amount and the Class B Required Amount, if any; provided,
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however, that such amount will not exceed the Collateral Interest after giving
effect to any Collateral Charge-Offs for the related Transfer Date.
"Reallocated Principal Collections" for any Monthly Period means the sum of
(a) the Reallocated Class B Principal Collections for such Monthly Period, if
any, and (b) the Reallocated Collateral Principal Collections such Monthly
Period, if any.
APPLICATION OF COLLECTIONS
ALLOCATIONS. Except as otherwise provided below, the Servicer will deposit
into the Collection Account, no later than the second business day following the
date of processing, any payment collected by the Servicer on the Receivables. On
the same day as any such deposit is made, the Servicers will make the deposits
and payments to the accounts and parties as indicated below; provided, however,
that for as long as an Originator remains the Servicer under the Agreement, no
Pay Out Event has occurred and (a) (i) such Servicer provides to the Trustee a
letter of credit or other credit enhancement covering the risk of collection of
such Servicer acceptable to the Rating Agency and (ii) the Transferor shall not
have received a notice from the Rating Agency that reliance on such letter of
credit or other credit enhancement would result in the lowering of such Rating
Agency's then-existing rating of any Series then outstanding, or (b) the
certificate of deposit or unsecured short-term debt obligations of the
Transferor (or, if neither such certificates of deposit nor obligations of the
Transferor are rated by Moody's or Standard & Poor's, then the certificate of
deposit or unsecured short-term debt obligations of Mellon Bank, N.A.) are rated
P-1 by Moody's and at least A-1 by Standard & Poor's and insured by either BIF
or SAIF or such Servicer makes other arrangements satisfactory to each Rating
Agency rating any Series then outstanding, then such Servicer may make such
deposits and payments on the Transfer Date in an amount equal to the net amount
of such deposits and payments which would have been made during the related
Monthly Periods had the conditions of this proviso not applied. Because Mellon
Bank, N.A.'s unsecured short-term debt obligations are currently rated P-1 by
Moody's and A-1 by Standard & Poor's, the Servicer will initially make such
deposits and payments monthly on a net basis and expects to continue to do so
(subject to the requirements described above) for as long as the Certificates
are outstanding.
With respect to the Certificates and any Monthly Period, and
notwithstanding anything in the Agreement to the contrary, whether the Servicer
is required to make monthly or daily deposits from the Collection Account into
the Finance Charge Account or the "Principal Account", (i) the Servicer will
only be required to deposit Collections from the Collection Account into the
Finance Charge Account or the Principal Account up to the required amount to be
deposited into any such deposit account or, without duplication, distributed on
or prior to the related Distribution Date to Holders or to the Collateral
Interest Holder and (ii) if at any time prior to such Distribution Date the
amount of Collections deposited in the Collection Account exceeds the amount
required to be deposited pursuant to clause (i) above, the Servicer will be
permitted to withdraw the excess from the Collection Account.
PAYMENT OF INTEREST, FEES AND OTHER ITEMS. On each Transfer Date, the
Trustee, acting pursuant to the Servicer's instructions, will apply the Class A
Available Funds, Class B Available Funds and Collateral Available Funds in the
Finance Charge Account in the following manner:
(a) On each Transfer Date, an amount equal to the Class A Available
Funds will be distributed or deposited in the following priority:
(i) an amount equal to Class A Monthly Interest for the related
Distribution Date, plus the amount of any overdue Class A Monthly
Interest and Class A Additional Interest thereon, if any, will be (x)
deposited into the Distribution Account for distribution to Class A
Holders on such Distribution Date if such Distribution Date is an
Interest Payment Date or a Special Payment Date or (y) deposited into
the Class A Interest Funding Account, if such Distribution Date is not
an Interest Payment Date or a Special Payment Date, for distribution to
the Class A Holders on the next Interest Payment Date or Special Payment
Date;
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(ii) an amount equal to the Class A Servicing Fee for the related
Monthly Period, plus the amount of any overdue Class A Servicing Fee,
will be paid to the Servicer;
(iii) an amount equal to the Class A Investor Default Amount, if
any, for the related Monthly Period will be treated as a portion of
Available Investor Principal Collections and deposited into the
Principal Account for such Transfer Date; and
(iv) the balance, if any, will constitute a portion of Excess
Spread and will be allocated and distributed as described under
"--Excess Spread."
If the Back-up Servicer is the Servicer, the amounts described in clause
(ii) above shall be paid prior to the amounts described in clause (i) above.
(b) On each Transfer Date, an amount equal to the Class B Available
Funds will be distributed or deposited in the following priority:
(i) an amount equal to Class B Monthly Interest for the related
Distribution Date, plus the amount of any overdue Class B Monthly
Interest and Class B Additional Interest thereon, if any, will be (x)
deposited into the Distribution Account for distribution to Class B
Holders on such Distribution Date if such Distribution Date is an
Interest Payment Date or a Special Payment Date or (y) deposited into
the Class B Interest Funding Account, if such Distribution Date is not
an Interest Payment Date, or a Special Payment Date, for distribution to
the Class B Holders on the next Interest Payment Date or Special Payment
Date therefor;
(ii) an amount equal to the Class B Servicing Fee for the related
Monthly Period, plus the amount of any overdue Class B Servicing Fee,
will be paid to the Servicer; and
(iii) the balance, if any, will constitute a portion of Excess
Spread and will be allocated and distributed as described under
"--Excess Spread."
If the Back-up Servicer is the Servicer, the amounts described in clause
(ii) above shall be paid prior to the amounts described in clause (i) above.
(c) On each Transfer Date, an amount equal to the Collateral Available
Funds will be distributed or deposited in the following priority:
(i) if AFCO Credit and AFCO Acceptance are no longer the Servicers,
an amount equal to the Collateral Interest Servicing Fee for the related
Monthly Period, plus the amount of any overdue Collateral Interest
Servicing Fee, will be paid to the Servicer; and
(ii) the balance, if any, will constitute a portion of Excess
Spread and will be allocated and distributed or deposited as described
under "--Excess Spread."
"Collateral Available Funds" means, with respect to any Monthly Period, an
amount equal to the Collateral Floating Allocation of collections of Finance
Charge Receivables allocated to the Investor Interest with respect to such
Monthly Period.
"Excess Spread" means, with respect to any Transfer Date, an amount equal
to the sum of the amounts described in clause (a)(iv), clause (b)(iii) and
clause (c)(ii) above. To the extent such amounts are insufficient to make the
distributions required by subparagraphs (a) through (l) below under "--Excess
Spread," Excess Spread shall also be deemed to include any Excess Finance Charge
Collections allocable to other Series available to Series 1996-1 in accordance
with the Agreement.
EXCESS SPREAD. On each Transfer Date, the Trustee, acting pursuant to the
Servicer's instructions, will apply Excess Spread with respect to the related
Monthly Period, to make the following distributions or deposits in the following
priority:
(a) an amount equal to the Class A Required Amount, if any, with
respect to such Transfer Date will be used to fund the Class A Required
Amount; provided, that in the event the Class A Required Amount for such
Transfer Date exceeds the amount of Excess Spread, such Excess Spread shall
be
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applied first to pay amounts due with respect to such Transfer Date
pursuant to clause (a)(i) above under "--Payment of Interest, Fees and
Other Items", second to pay amounts due with respect to such Transfer Date
pursuant to clause (a)(ii) above under "--Payment of Interest, Fees and
Other Items," and third to pay amounts due with respect to such Transfer
Date pursuant to clause (a)(iii) above under "--Payment of Interest, Fees
and Other Items";
(b) an amount equal to the aggregate amount of Class A Investor
Charge-Offs which have not been previously reimbursed (after giving effect
to the allocation on such Transfer Date of certain other amounts applied
for that purpose) will be deposited into the Principal Account and treated
as a portion of Available Investor Principal Collections for such Transfer
Date as described under "--Payments of Principal" below;
(c) an amount equal to the Class B Required Amount, if any, with
respect to such Transfer Date will be used to fund the Class B Required
Amount and will be applied first to pay amounts due with respect to such
Transfer Date pursuant to clause (b) (i) above under "--Payment of
Interest, Fees and Other Items," second to pay amounts due with respect to
such Transfer Date pursuant to clause (b) (ii) above under "--Payment of
Interest, Fees and Other Items," and third, the amount remaining, up to the
Class B Investor Default Amount, will be deposited into the Principal
Account and treated as a portion of Available Investor Principal
Collections for such Transfer Date as described under "--Payments of
Principal" below;
(d) an amount equal to the aggregate amount by which the Class B
Investor Interest has been reduced below the initial Class B Investor
Interest for reasons other than the payment of principal to the Class B
Holders (but not in excess of the aggregate amount of such reductions which
have not been previously reimbursed) will be deposited into the Principal
Account and treated as a portion of Available Investor Principal
Collections for such Transfer Date as described under "--Payments of
Principal" below;
(e) an amount equal to the Collateral Monthly Interest for such
Transfer Date, plus the amount of any Collateral Monthly Interest
previously due but not distributed to the Collateral Interest Holder on a
prior Transfer Date, will be distributed to the Collateral Interest Holder
for distribution in accordance with the Loan Agreement;
(f) if AFCO Credit and AFCO Acceptance are the Servicers, an amount
equal to the Collateral Interest Servicing Fee for the related Monthly
Period, plus the amount of any overdue Collateral Interest Servicing Fee,
will be paid to the Servicer;
(g) an amount equal to the aggregate Collateral Default Amount, if
any, for such Transfer Date will be deposited into the Principal Account
and treated as a portion of Available Investor Principal Collections for
such Transfer Date as described under "--Payments of Principal" below;
(h) an amount equal to the aggregate amount by which the Collateral
Interest has been reduced below the Required Collateral Interest for
reasons other than the payment of principal to the Collateral Interest
Holder (but not in excess of the aggregate amount of such reductions which
have not been previously reimbursed) will be deposited into the Principal
Account and treated as a portion of Available Investor Principal
Collections for such Transfer Date as described under "--Payments of
Principal" below;
(i) on each Transfer Date from and after the Reserve Account Funding
Date, but prior to the date on which the Reserve Account terminates as
described under "--Reserve Account," an amount up to the excess, if any, of
the Required Reserve Account Amount over the Available Reserve Account
Amount will be deposited into the Reserve Account;
(j) an amount equal to all other amounts due under the Loan Agreement
(to the extent payable out of Excess Spread or Excess Finance Charge
Collections) shall be distributed in accordance with the Loan Agreement;
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(k) an amount equal to the sum of (x) any Class A Shortfall Amount for
the current Distribution Date and (y) any accrued and unpaid Class A
Carry-Over Amount from a prior Distribution Date shall be deposited by
Servicer or Trustee in the Class A Interest Funding Account for payment to
the Class A Holders on the applicable Interest Payment Date;
(l) an amount equal to the sum of (x) any Class B Shortfall Amount for
the current Distribution Date and (y) any accrued and unpaid Class B
Carry-Over Amount from a prior Distribution Date shall be deposited by
Servicer or Trustee into the Class B Interest Funding Account for payment
to the Class B Holders on the applicable Interest Payment Date; and
(m) the balance, if any, after giving effect to the payments made
pursuant to subparagraphs (a) through (m) above, will constitute "Excess
Finance Charge Collections" to be applied with respect to other Series in
accordance with the Agreement.
"Collateral Monthly Interest" with respect to any Transfer Date will equal
the product of (a) an amount equal to One Month LIBOR plus 1.00% per annum, or
such lesser amount as may be designated in the Loan Agreement (the "Collateral
Rate"), (b) the actual number of days in the related Interest Period divided by
360 and (c) the Collateral Interest as of the related Record Date, or with
respect to the first Transfer Date, the Initial Collateral Interest.
PAYMENTS OF PRINCIPAL. On each Transfer Date, the Trustee, acting pursuant
to the Servicer's instructions, will distribute Available Investor Principal
Collections (see "--Principal Payments" above) on deposit in the Principal
Account in the following manner:
(a) on each Transfer Date with respect to the Revolving Period, all
such Available Investor Principal Collections will be distributed or
deposited in the following priority:
(i) an amount equal to the Collateral Monthly Principal will be
paid to the Collateral Interest Holder in accordance with the Loan
Agreement; and
(ii) the balance will be treated as Shared Principal Collections
and applied as described under "--Shared Principal Collections";
(b) on each Transfer Date with respect to the Controlled Accumulation
Period, Principal Payment Period or the Rapid Amortization Period, all such
Available Investor Principal Collections will be distributed or deposited
in the following priority:
(i) an amount equal to Class A Monthly Principal will be deposited
in the Principal Funding Account (during the Controlled Accumulation
Period) or distributed to the Class A Holders (during the Principal
Payment Period or the Rapid Amortization Period); and
(ii) for each Transfer Date after the Class A Investor Interest has
been paid in full (after taking into account payments to be made on the
related Distribution Date), an amount equal to the Class B Monthly
Principal for such Transfer Date will be distributed to the Class B
Holders;
(c) on each Transfer Date with respect to the Controlled Accumulation
Period, Principal Payment Period and the Rapid Amortization Period in which
a reduction in the Required Collateral Interest has occurred, Available
Investor Principal Collections not applied to Class A Monthly Principal or
Class B Monthly Principal will be applied to reduce the Collateral Interest
to the Required Collateral Interest; and
(d) on each Transfer Date with respect to the Controlled Accumulation
Period, Principal Payment Period and Rapid Amortization Period, the balance
of Available Investor Principal Collections not applied pursuant to (b) and
(c) above, if any, will be treated as Shared Principal Collections and
applied as described under "--Shared Principal Collections".
"Class A Monthly Principal" with respect to any Transfer Date relating to
the Controlled Accumulation Period, Principal Payment Period or the Rapid
Amortization Period, prior to the payment in full of the Class A Investor
Interest, will equal the least of (i) the Available Investor Principal
Collections on deposit in
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the Principal Account with respect to such Transfer Date, (ii) for each Transfer
Date with respect to the Controlled Accumulation Period, prior to the payment in
full of the Class A Investor Interest, and on or prior to the Class A Scheduled
Payment Date, the applicable Controlled Deposit Amount for such Transfer Date
and (iii) the Class A Adjusted Investor Interest prior to any deposits on such
Transfer Date.
"Class B Monthly Principal" with respect to any Transfer Date relating to
the Controlled Accumulation Period, Principal Payment Period or the Rapid
Amortization Period, after the Class A Certificates have been paid in full
(after taking into account payments to be made on the related Distribution
Date), will equal the lesser of (i) the Available Investor Principal Collections
on deposit in the Principal Account with respect to such Transfer Date (minus
the portion of such Available Investor Principal Collections applied to Class A
Monthly Principal on such Transfer Date) and (ii) the Class B Investor Interest
for such Transfer Date.
"Collateral Monthly Principal" means (a) with respect to any Transfer Date
relating to the Revolving Period following any reduction of the Required
Collateral Interest pursuant to clause (3) of the proviso in the definition
thereof an amount equal to the lesser of (i) the excess, if any, of the
Collateral Interest (after giving effect to reductions for any Collateral
Charge-Offs and Reallocated Principal Collections on such Transfer Date and
after giving effect to any adjustments thereto for the benefit of the Class A
Holders and the Class B Holders on such Transfer Date) over the Required
Collateral Interest on such Transfer Date, and (ii) the Available Investor
Principal Collections on such Transfer Date or (b) with respect to any Transfer
Date relating to the Controlled Accumulation Period, Principal Payment Period or
Rapid Amortization Period an amount equal to the lesser of (i) the excess, if
any, of the Collateral Interest (after giving effect to reductions for any
Collateral Charge-Offs and Reallocated Principal Collections on such Transfer
Date and after giving effect to any adjustments thereto for the benefit of the
Class A Holders and the Class B Holders on such Transfer Date) over the Required
Collateral Interest on such Transfer Date, and (ii) the excess, if any, of (A)
the Available Investor Principal Collections on such Transfer Date over (B) the
sum of the Class A Monthly Principal and the Class B Monthly Principal for such
Transfer Date.
"Controlled Accumulation Amount" means (a) for any Transfer Date with
respect to the Controlled Accumulation Period, prior to the payment in full of
the Class A Investor Interest, $48,888,888.89; provided, however, that if the
commencement of the Controlled Accumulation Period is modified as described
above under "--Postponement of Controlled Accumulation Period," (i) the
Controlled Accumulation Amount for each Transfer Date with respect to the
Controlled Accumulation Period shall mean the amount determined in accordance
with the Agreement on the date on which the Controlled Accumulation Period has
most recently been modified and (ii) the sum of the Controlled Accumulation
Amounts for all Transfer Dates with respect to the modified Controlled
Accumulation Period shall not be less than the Class A Investor Interest.
SHARED EXCESS FINANCE CHARGE COLLECTIONS
To the extent that collections of Finance Charge Receivables allocated to
the Investor Interest (and any other amounts that are to be treated as
collections of Finance Charge Receivables allocated to the Investor Interest)
are not needed to make payment in respect of the Investor Interest as described
above under "--Application of Collections--Payment of Interest, Fees and Other
Items" and "--Excess Spread," such Excess Finance Charge Collections will be
applied to make payments in respect of other Series entitled to share therein in
accordance with the Agreement. In addition, Excess Finance Charge Collections
with respect to certain other Series, to the extent not required to make
payments in respect of such Series, may be applied to cover shortfalls in
amounts payable from Excess Spread as described above under "--Application of
Collections--Excess Spread" (as well as shortfalls experienced by other Series).
SHARED PRINCIPAL COLLECTIONS
Collections of Principal Receivables for any Monthly Period allocated to
the Investor Interest will first be used to cover, with respect to any Monthly
Period during the Controlled Accumulation Period, deposits of the applicable
Controlled Deposit Amount to the Principal Funding Account or the Distribution
Account, and during the Rapid Amortization Period, payments to the Holders and
then under certain circumstances payments to the Collateral Interest Holder. The
Servicer will determine the amount of collections of Principal
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Receivables for any Monthly Period allocated to the Investor Interest remaining
after covering required payments to the Holders and any similar amount remaining
for any other Series ("Shared Principal Collections"); provided that in such
allocation, all other Series will have priority over any Series whose terms
permit the Servicer to extend the Initial Principal Payment Date, and then only
to the extent that the Principal Shortfall for such Series is greater than such
Principal Shortfall would otherwise have been due to the election by the
Transferor not to extend the Initial Principal Payment Date. The Servicer will
allocate the Shared Principal Collections to cover any scheduled or permitted
principal distributions to certificateholders and deposits to principal funding
accounts, if any, for any Series entitled thereto which have not been covered
out of the Collections of Principal Receivables allocable to such Series and
certain other amounts for such Series ("Principal Shortfalls"). Shared Principal
Collections will not be used to cover investor charge-offs for any Series. If
Principal Shortfalls exceed Shared Principal Collections for any Monthly Period,
Shared Principal Collections will be allocated pro rata among the applicable
Series based on the relative amounts of Principal Shortfalls. To the extent that
Shared Principal Collections exceed Principal Shortfalls, the balance will be
paid to the Transferor or, under certain circumstances, deposited into the
Excess Funding Account.
REQUIRED COLLATERAL INTEREST
The "Required Collateral Interest" with respect to any Transfer Date means
(i) initially $35,000,000 and (ii) thereafter on each Transfer Date an amount
equal to 7% of the sum of (x) the Class A Adjusted Investor Interest and the
Class B Investor Interest on such Transfer Date, after taking into account
deposits into the Principal Funding Account on such Transfer Date and payments
to be made on the related Distribution Date, and (y) the Collateral Interest on
the prior Transfer Date after any adjustments made on such Transfer Date, but
not less than $15,000,000; provided, however, (1) that if certain reductions in
the Collateral Interest are made or if a Pay Out Event occurs, the Required
Collateral Interest for such Transfer Date shall equal the Required Collateral
Interest for the Transfer Date immediately preceding the occurrence of such
reduction or Pay Out Event, (2) in no event shall the Required Collateral
Interest exceed the unpaid principal amount of the Certificates as of the last
day of the Monthly Period preceding such Transfer Date after taking into account
payments to be made on the related Distribution Date and (3) the Required
Collateral Interest may be reduced to a lesser amount at any time if the Rating
Agency Condition is satisfied.
"Rating Agency Condition" means the notification in writing by each Rating
Agency that a proposed action will not result in such Rating Agency reducing or
withdrawing its then existing rating of the investor certificates of any
outstanding Series or class with respect to which it is a Rating Agency.
With respect to any Transfer Date, if the Collateral Interest is less than
the Required Collateral Interest, certain Excess Spread, if available, will be
allocated to increase the Collateral Interest to the extent of such shortfall.
Any of such Excess Spread not required to be so allocated or deposited into the
Reserve Account with respect to any Transfer Date will be applied in accordance
with the Loan Agreement. See "--Application of Collections--Excess Spread."
RECEIVABLES IN DEFAULTED ACCOUNTS; INVESTOR CHARGE-OFFS
On or before each Transfer Date, the Servicer will calculate the Investor
Default Amount for the preceding Monthly Period. The term "Investor Default
Amount" means, for any Monthly Period, the product of (a) the Floating Investor
Percentage with respect to such Monthly Period and (b) the aggregate Default
Amount for such Monthly Period. The "Default Amount" for any Monthly Period will
equal the amount of Principal Receivables which are Defaulted Receivables net of
Recoveries for such Monthly Period. "Defaulted Receivables" means, with respect
to any Monthly Period, Receivables as to which either (i) the insurance policy
or policies financed thereby has been cancelled for 270 days or more or (ii) the
Servicer has charged off in accordance with its customary and usual practices.
"Recoveries" means, with respect to the Receivables and any Monthly Period, all
amounts received by the Servicer in respect of Defaulted Receivables during such
Monthly Period, less related expenses of outside collection agencies. In the
event one of the Receivables in an Account is a Defaulted Receivable (a,
"Defaulted Account") and for administrative reasons the Servicer is unable to
identify or segregate which Receivables in a Defaulted Account are Defaulted
Receivables, all of the Receivables in such Defaulted Account will be treated as
Defaulted Receivables. A
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portion of the Investor Default Amount will be allocated to the Class A Holders
(the "Class A Investor Default Amount") on each Transfer Date in an amount equal
to the product of the Class A Floating Allocation applicable during the related
Monthly Period and the Investor Default Amount for such Monthly Period. A
portion of the Investor Default Amount will be allocated to the Class B Holders
(the "Class B Investor Default Amount") on each Transfer Date in an amount equal
to the product of the Class B Floating Allocation applicable during the related
Monthly Period and the Investor Default Amount for such Monthly Period. A
portion of the Investor Default Amount will be allocated to the Collateral
Interest Holder (the "Collateral Default Amount") on each Transfer Date in an
amount equal to the product of the Collateral Floating Allocation applicable
during the related Monthly Period and the Investor Default Amount for such
Monthly Period.
On each Transfer Date, if the Class A Investor Default Amount for such
Transfer Date exceeds the amount of Excess Spread and Reallocated Principal
Collections available to fund such amount with respect to the Monthly Period
immediately preceding such Transfer Date, the Collateral Interest (after giving
effect to reductions for any Collateral Charge-Offs and any Reallocated
Principal Collections on such Transfer Date) will be reduced by the amount of
such excess, but not more than the lesser of the Class A Investor Default Amount
and the Collateral Interest (after giving effect to reductions for any
Collateral Charge-Offs and any Reallocated Principal Collections on such
Transfer Date) for such Transfer Date. In the event that such reduction would
cause the Collateral Interest to be a negative number, the Collateral Interest
will be reduced to zero, and the Class B Investor Interest (after giving effect
to reductions for any Class B Investor Charge-Offs and any Reallocated Class B
Principal Collections on such Transfer Date) will be reduced by the amount by
which the Collateral Interest would have been reduced below zero. In the event
that such reduction would cause the Class B Investor Interest to be a negative
number, the Class B Investor Interest will be reduced to zero, and the Class A
Investor Interest will be reduced by the amount by which the Class B Investor
Interest would have been reduced below zero, but not more than the Class A
Investor Default Amount for such Transfer Date (a "Class A Investor
Charge-Off"), which will have the effect of slowing or reducing the return of
principal and interest to the Class A Holders. If the Class A Investor Interest
has been reduced by the amount of any Class A Investor Charge-Offs, it will be
reimbursed on any Transfer Date (but not by an amount in excess of the aggregate
Class A Investor Charge-Offs) by the amount of Excess Spread allocated and
available for such purpose as described under "--Application of
Collections--Excess Spread."
On each Transfer Date, if the Class B Investor Default Amount for such
Transfer Date exceeds the amount of Excess Spread and Reallocated Collateral
Principal Collections which are allocated and available to fund such amount with
respect to the Monthly Period preceding such Transfer Date, the Collateral
Interest (after giving effect to reductions for any Collateral Charge-Offs and
any Reallocated Principal Collections on such Transfer Date and after giving
effect to any adjustments with respect thereto as described in the preceding
paragraph) will be reduced by the amount of such excess but not more than the
lesser of the Class B Investor Default Amount and the Collateral Interest (after
giving effect to reductions for any Collateral Charge-Offs and any Reallocated
Principal Collections on such Transfer Date and after giving effect to any
adjustments with respect thereto as described in the preceding paragraph) for
such Transfer Date. In the event that such reduction would cause the Collateral
Interest to be a negative number, the Collateral Interest will be reduced to
zero and the Class B Investor Interest will be reduced by the amount by which
the Collateral Interest would have been reduced below zero, but not more than
the Class B Investor Default Amount for such Transfer Date (a "Class B Investor
Charge-Off"). The Class B Investor Interest will also be reduced by the amount
of Reallocated Class B Principal Collections in excess of the Collateral
Interest (after giving effect to reductions for any Collateral Charge-Offs and
any Reallocated Collateral Principal Collections on such Transfer Date) and the
amount of any portion of the Class B Investor Interest allocated to the Class A
Certificates to avoid a reduction in the Class A Investor Interest. The Class B
Investor Interest will thereafter be reimbursed (but not in excess of the unpaid
principal balance of the Class B Certificates) on any Transfer Date by the
amount of Excess Spread allocated and available for that purpose as described
under "--Application of Collections--Excess Spread."
On each Transfer Date, if the Collateral Default Amount for such Transfer
Date exceeds the amount of Excess Spread which is allocated and available to
fund such amount as described under "--Application of
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Collections--Excess Spread," the Collateral Interest will be reduced by the
amount of such excess but not more than the lesser of the Collateral Default
Amount and the Collateral Interest for such Transfer Date (a "Collateral
Charge-Off"). The Collateral Interest will also be reduced by the amount of
Reallocated Principal Collections and the amount of any portion of the
Collateral Interest allocated to the Class A Certificates to avoid a reduction
in the Class A Investor Interest or to the Class B Certificates to avoid a
reduction in the Class B Investor Interest. The Collateral Interest will
thereafter be reimbursed on any Transfer Date by the amount of Excess Spread
allocated and available for that purpose as described under "--Application of
Collections--Excess Spread."
PRINCIPAL FUNDING ACCOUNT
Pursuant to the Series 1996-1 Supplement, the Trustee will establish and
maintain a segregated account held for the benefit of the Holders (the
"Principal Funding Account"). The Principal Funding Account will be established
as a segregated trust account or with a Qualified Institution. During the
Controlled Accumulation Period, the Trustee at the direction of the Servicer
will transfer collections in respect of Principal Receivables (other than
Reallocated Principal Collections) and Shared Principal Collections from other
Series, if any, allocated to Series 1996-1 from the Principal Account to the
Principal Funding Account as described under "--Application of Collections."
Funds on deposit in the Principal Funding Account will be invested to the
following Transfer Date by the Trustee at the direction of the Servicer in
Permitted Investments. Investment earnings (net of investment losses and
expenses) on funds on deposit in the Principal Funding Account (the "Principal
Funding Investment Proceeds") will be used to pay interest on the Class A
Certificates in an amount up to, for each Transfer Date, the product of (a) a
fraction, the numerator of which is the actual number of days in the related
Interest Period and the denominator of which is 360, (b) the Class A LIBOR Rate
in effect with respect to the related Interest Period and (c) the Principal
Funding Account Balance as of the Record Date preceding such Transfer Date (the
"Class A Covered Amount"). If, for any Transfer Date, the Principal Funding
Investment Proceeds are less than the Class A Covered Amount, the amount of such
deficiency (the "Class A Principal Funding Investment Shortfall") shall be
withdrawn, to the extent available, from the Reserve Account and deposited in
the Finance Charge Account and included in collections of Finance Charge
Receivables to be applied to the payment of Class A Monthly Interest.
RESERVE ACCOUNT
Pursuant to the Series 1996-1 Supplement, the Trustee will establish and
maintain a segregated account held for the benefit of the Holders (the "Reserve
Account") in order to assist with the subsequent distribution of interest on the
Certificates during the Controlled Accumulation Period. The Reserve Account will
be established as a segregated trust account or with a Qualified Institution. On
each Transfer Date from and after the Reserve Account Funding Date, but prior to
the termination of the Reserve Account, the Trustee, acting pursuant to the
Servicer's instructions, will apply Excess Spread allocated to the Certificates
(to the extent described above under "--Application of Collections--Excess
Spread") to increase the amount on deposit in the Reserve Account (to the extent
such amount is less than the Required Reserve Account Amount). The "Reserve
Account Funding Date" will be the Transfer Date with respect to the Monthly
Period which commences no later than three months prior to the commencement of
the Controlled Accumulation Period, or such earlier date as the Servicer may
determine. The "Required Reserve Account Amount" for any Transfer Date on or
after the Reserve Account Funding Date will be equal to (a) 0.50% of the
outstanding principal balance of the Class A Certificates or (b) any other
amount designated by the Transferor; provided, that if such designation is of a
lesser amount, the Transferor shall have provided the Servicer, the Collateral
Interest Holder and the Trustee with evidence that the Rating Agency Condition
has been satisfied and the Transferor shall have delivered to the Trustee a
certificate of an authorized officer to the effect that, based on the facts
known to such officer at such time, in the reasonable belief of the Transferor,
such designation will not cause a Pay Out Event or an event that, after the
giving of notice or the lapse of time, would cause a Pay Out Event to occur with
respect to Series 1996-1. On each Transfer Date, after giving effect to any
deposit to be made to, and any withdrawal to be made from, the Reserve Account
on such Transfer Date, the Trustee will withdraw
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from the Reserve Account an amount equal to the excess, if any, of the amount on
deposit in the Reserve Account over the Required Reserve Account Amount and
distribute such excess to the Collateral Interest Holder for application in
accordance with the terms of the Loan Agreement.
Provided that the Reserve Account has not terminated as described below,
all amounts on deposit in the Reserve Account on any Transfer Date (after giving
effect to any deposits to, or withdrawals from, the Reserve Account to be made
on such Transfer Date) will be invested to the following Transfer Date by the
Trustee at the direction of the Servicer in Permitted Investments. The interest
and other investment income (net of investment expenses and losses) earned on
such investments will be retained in the Reserve Account (to the extent the
amount on deposit is less than the Required Reserve Account Amount) or deposited
in the Finance Charge Account and treated as Class A Available Funds.
On or before each Transfer Date with respect to the Controlled Accumulation
Period and on the first Transfer Date with respect to the earlier of the
Principal Payment Period or the Rapid Amortization Period, a withdrawal will be
made from the Reserve Account, and the amount of such withdrawal will be
deposited in the Finance Charge Account and included in collections of Finance
Charge Receivables to be applied to the payment of the Class A Monthly Interest
for such Transfer Date in an amount equal to the lesser of (a) the Available
Reserve Account Amount with respect to such Transfer Date and (b) the Class A
Principal Funding Investment Shortfall with respect to such Transfer Date;
provided, that the amount of such withdrawal shall be reduced to the extent that
funds otherwise would be available to be deposited in the Reserve Account on
such Transfer Date. On each Transfer Date, the amount available to be withdrawn
from the Reserve Account (the "Available Reserve Account Amount") will be equal
to the lesser of the amount on deposit in the Reserve Account (before giving
effect to any deposit to be made to the Reserve Account on such Transfer Date)
and the Required Reserve Account Amount for such Transfer Date.
The Reserve Account will be terminated upon the earlier to occur of (a) the
termination of the Trust pursuant to the Agreement and (b) if the Controlled
Accumulation Period has not commenced, the first Transfer Date with respect to
the Principal Payment Period or Rapid Amortization Period or, if the Controlled
Accumulation Period has commenced, the earlier to occur of (a) the first
Transfer Date with respect to the Principal Payment Period or Rapid Amortization
Period and (ii) the Transfer Date immediately preceding the Class A Scheduled
Payment Date. Upon the termination of the Reserve Account, all amounts on
deposit therein (after giving effect to any withdrawal from the Reserve Account
on such date as described above) will be distributed to the Collateral Interest
Holder for application in accordance with the terms of the Loan Agreement. Any
amounts withdrawn from the Reserve Account and distributed to the Collateral
Interest Holder as described above will not be available for distribution to the
Holders.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Certificates will be subject to optional repurchase by the Transferor
on any Distribution Date after the Investor Interest is reduced to an amount
less than or equal to 5% of the initial Investor Interest, if certain conditions
set forth in the Agreement are met. The repurchase price will be equal to the
Investor Interest (less the amount, if any, on deposit in any Principal Funding
Account), plus accrued and unpaid interest on the Certificates and interest or
other amounts payable on the Collateral Interest, through the day preceding the
Distribution Date on which the repurchase occurs.
The Certificates will be retired on the day following the Distribution Date
on which the final payment of principal is scheduled to be made to the
Certificateholders, whether as a result of optional reassignment to the
Transferor or otherwise. Subject to prior termination as provided above, the
Agreement provides that the final distribution of principal and interest on the
Certificates will be made on the January 2003 Distribution Date (the "Series
1996-1 Termination Date"). In the event that the Invested Amount is greater than
zero on the Series 1996-1 Termination Date, the Trustee will sell or cause to be
sold (and apply the proceeds first to the Class A Certificates until paid in
full, then to the Class B Certificates and finally to the Collateral Interest to
the extent necessary to pay such remaining amounts to all Certificateholders pro
rata within each class as final payment of the Certificates) interests in the
Receivables or certain Receivables, as specified in the Agreement in an amount
equal to up to 110% of the Investor Interest at the close of business on such
date (but not more
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than the total amount of Receivables allocable to the Certificates). The net
proceeds of such sale and any collections on the Receivables allocable to the
Certificates). The net proceeds of such sale and any collections on the
Receivables, up to an amount equal to the Investor Interest plus accrued
interest due on the Certificates, will be paid on the Series 1996-1 Termination
Date, first to the Class A Certificateholders until the Class A Invested Amount
is paid in full, then to the Class B Certificateholders until the Class B
Invested Amount is paid in full.
Unless the Servicer and the Transferor instruct the Trustee otherwise, the
Trust will terminate on the earlier of (a) the day after the Distribution Date
on which the aggregate Investor Interest and, Collateral Interest, with respect
to each Series issued by such Trust is zero, (b) April 7, 2020 or (c) if the
Receivables are sold, disposed of or liquidated following the occurrence of an
Insolvency Event, immediately following such sale, disposition or liquidation
(such date, the "Trust Termination Date"). Upon the termination of each Trust
and the surrender of the Transferor Interest, the Trustee shall convey to the
holder of the Transferor Interest all right, title and interest of the Trust in
and to the Receivables and other funds of the Trust.
PAY OUT EVENTS
As described above, the Revolving Period will continue through February 28,
2001 (unless such date is postponed as described under "--Postponement of
Controlled Accumulation Period"), unless a Principal Payment Event or a Pay Out
Event occurs prior to such date. A "Pay Out Event" refers to any of the
following events:
(a) certain insolvency events involving the Transferor or either
Originator;
(b) the Trust becoming an "investment company" within the meaning of
the Investment Company Act of 1940, as amended;
(c) the Back-up Servicer becomes legally unable to act as Successor
Servicer or has been terminated as Back-up Servicer and, within 90 days of
such event, a successor Back-up Servicer has not assumed the obligations of
Back-up Servicer and the Rating Agency Condition has not been satisfied
with respect to the appointment of such Back-up Servicer;
(d) the failure of the Transferor to make certain payments or
transfers of funds for the benefit of the Holders within the time periods
stated in the Agreement;
(e) material breaches of certain representations, warranties or
covenants of the Transferor;
(f) a reduction in the average of the Portfolio Yields for any three
consecutive Monthly Periods to a rate that is less than the average of the
Base Rates for such period;
(g) (i) the average Transferor Interest during any 10 consecutive days
being below the Minimum Transferor Interest for the same period and (ii)
during any 10 consecutive days the sum of (x) the Principal Receivables and
(y) the principal amount on deposit in the Excess Funding Account being
less than the Minimum Aggregate Principal Receivables for the same period;
(h) the failure of either Originator to transfer Additional
Receivables to the Transferor when required by the Receivables Purchase
Agreement or the failure of the Transferor to convey Additional Receivables
when required by the Agreement;
(i) the occurrence of a Servicer Default which would have a material
adverse effect on the Holders;
(j) the Class A Investor Interest or the Class B Investor Interest not
being paid in full on the Class A Scheduled Payment Date or the Class B
Scheduled Payment Date, respectively;
(k) the Monthly Payment Rate averaged for three consecutive Monthly
Periods is less than 12%;
(l) the third consecutive Determination Date on which (i) there exists
an Excess Obligor Concentration Amount, (ii) there exists an Excess Insurer
Concentration Amount, (iii)the Investment Grade Insurer Percentage is less
than the Required Investment Grade Insurer Percentage, (iv) the Investment
Grade Insurer Percentage to be decreased, if on such day the Investment
Grade Insurer
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Percentage is equal to or less than the Required Investment Grade Insurer
Percentage, (v) there are less than 300 insurance carriers whose insurance
premiums have been financed by the Receivables in the Identified Portfolio,
or (vi) the Top 10 Insurer Percentage is greater than the Maximum Top 10
Insurer Percentage;
(m) the Originators cease to be the Servicer under the Agreement;
(n) the failure to appoint a successor Back-up Servicer by a date
which is ninety days after the receipt by the Servicer, Trustee and
Transferor of either a Sale Notice or Successor Back-up Servicer
Termination Notice in accordance with the Agreement; or
(o) the failure of the Servicer (so long as the Originator is a
Servicer) to remove Receivables from the Trust or indemnify for certain
losses resulting from the breach of the Servicer's covenant to maintain
certain licenses and regulatory approvals as described under "-- Certain
Covenants."
In the case of any event described in clause (d), (e), or (i) above, a Pay
Out Event will be deemed to have occurred with respect to the Certificates only
if, after any applicable grace period, either the Trustee or Holders and the
Collateral Interest Holder evidencing undivided interests aggregating more than
50% of the Investor Interest, by written notice to the Transferor and the
Servicer (and to the Trustee if given by the Holders) declare that a Pay Out
Event has occurred with respect to the Certificates as of the date of such
notice. In the case of any event described in clause (a), (b), (c), (h), (m),
(n) or (o), a Pay Out Event with respect to all Series then outstanding, and in
the case of any event described in clause (f), (g), (j), (k) or (l), a Pay Out
Event with respect to only the Certificates, will be deemed to have occurred
without any notice or other action on the part of the Trustee or the Holders,
the Collateral Interest Holder or all certificateholders, as appropriate,
immediately upon the occurrence of such event. On the date on which a Pay Out
Event is deemed to have occurred, the Rapid Amortization Period will commence.
In such event, distributions of principal to the Holders will begin on the first
Distribution Date following the month in which such Pay Out Event occurred.
The Pay Out Event described in clause (l) may be amended at any time by the
Transferor, the Trustee and the Servicer, with the consent of each provider of
Enhancement, but without the consent of any certificateholder, if the Rating
Agency Condition is satisfied.
In addition to the consequences of a Pay Out Event discussed above, if
pursuant to certain provisions of Federal law, the Transferor voluntarily enters
liquidation or a receiver is appointed for the Transferor, on the day of such
event the Transferor will immediately cease to transfer Receivables to the Trust
and promptly give notice to the Trustee of such event. Within 15 days, the
Trustee will publish a notice of the liquidation or the appointment stating that
the Trustee intends to sell, dispose of, or otherwise liquidate the Receivables
in a commercially reasonable manner. Unless otherwise instructed within a
specified period by Certificateholders representing undivided interests
aggregating more than 50% of the Investor Interest of each Series (or if any
Series has more than one Class, of each Class, and any other Person specified in
the Agreement or a Series Supplement) issued and outstanding, the Trustee will
sell, dispose of, or otherwise liquidate the Receivables in a commercially
reasonable manner and on commercially reasonable terms. The Proceeds from the
sale, disposition or liquidation of the Receivables will be treated as
collections of the Receivables and applied as specified above in "--Application
of Collections".
If the only Pay Out Event to occur is either the insolvency of the
Transferor or the appointment of a conservator or receiver for the Transferor,
the conservator or receiver may have the power to prevent the early sale,
liquidation or disposition of the Receivables and the commencement of a Rapid
Amortization Period. In addition, a conservator or receiver may have the power
to cause the early sale of the Receivables and the early retirement of the
Certificates. See "Risk Factors--Transferor Bankruptcy Risk" and "Certain Legal
Aspects of the Receivables--Certain Matters Relating to Receivership."
As of the Statistical Calculation Date (i) the amount of the Aggregate
Receivables related to any single borrower was not greater than 2.1% of the
amount of Aggregate Receivables in the Identified Portfolio as of the
Statistical Calculation Date; (ii) the amount of the portion of the Aggregate
Receivables relating to the financing of insurance premiums of any Tier 1
Insurer was not greater than 5.2% of the amount of Aggregate
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Receivables as of the Statistical Calculation Date; (iii) the amount of the
portion of the Aggregate Receivables relating to the financing of insurance
premiums of any Tier 2 Insurer was not greater than 6.7% of the amount of
Aggregate Receivables as of the Statistical Calculation Date; (iv) the amount of
the portion of the Aggregate Receivables relating to the financing of insurance
premiums of any Tier 3 Insurer was not greater than 2.9% of the amount of
Aggregate Receivables as of the Statistical Calculation Date; (v) the Investment
Grade Insurer Percentage equaled 94.2%; (vi) the Top 10 Insurer Percentage
equaled 49.3%; and (vii) there were at least 486 insurance carriers whose
insurance premiums have been financed by the 61,720 Premium Finance Agreements
in the Identified Portfolio as of the Statistical Calculation Date.
"Base Rate" means, with respect to any Monthly Period, the annualized
percentage equivalent of a fraction, the numerator of which is the sum of the
Class A Monthly Interest, the Class B Monthly Interest and the Collateral
Monthly Interest, each for the related Distribution Date, and the Investor
Servicing Fee for such Monthly Period, and the denominator of which is the
Investor Interest as of the close of business on the last day of such Monthly
Period.
"Portfolio Yield" means, with respect to any Monthly Period, the annualized
percentage equivalent of a fraction, the numerator of which is the sum of
collections of Finance Charge Receivables, Principal Funding Investment Proceeds
and amounts withdrawn from the Reserve Account deposited into the Finance Charge
Account and, in each case, allocable to the Certificates and the Collateral
Interest for such Monthly Period, after subtracting the Investor Default Amount
for such Monthly Period, and the denominator of which is the Investor Interest
as of the close of business on the last day of such Monthly Period.
"Excess Obligor Concentration Amount" means, as of any date of
determination, the Aggregate Receivables related to a single borrower (or an
affiliated group of borrowers), but only to the extent such amount is in excess
of 3% of the amount of the Aggregate Receivables as of such date of
determination.
"Excess Insurer Concentration Amount" means as of any date of determination
an amount equal to the sum of (i) with respect to each Tier 1 Insurer, the
amount by which the portion of the Aggregate Receivables relating to the
financing of insurance premiums of such Tier 1 Insurer exceeds 25% of the amount
of the Aggregate Receivables as of such date of determination (ii) with respect
to each Tier 2 Insurer, the amount by which the portion of the Aggregate
Receivables relating to the financing of insurance premiums of such Tier 2
Insurer exceeds 10% of the Aggregate Receivables as of such date of
determination and (iii) with respect to each Tier 3 Insurer, the amount by which
the portion of the Aggregate Receivables relating to the financing of insurance
premiums of any single Tier 3 Insurer exceeds 5% of the Aggregate Receivables as
of such date of determination.
"Investment Grade Insurer Percentage" means as of any date of determination
a fraction (expressed as a percentage) the numerator of which is the portion of
the Aggregate Receivables relating to the financing of insurance premiums of the
Top Ten Investment Grade Insurers as of such date of determination and the
denominator of which is the portion of the Aggregate Receivables relating to the
financing of insurance premiums of the Top Ten Insurers as of such date of
determination.
"Maximum Top 10 Insurer Percentage" means 60%.
"Minimum Aggregate Principal Receivables" means, as of any date of
determination, an amount equal to the sum of the numerators used to calculate
the Investor Percentage with respect to the allocation of collections of
Principal Receivables for each Series outstanding on such date. "Minimum
Transferor Interest" means 5% of the sum of the aggregate amount of Principal
Receivables and the principal amount on deposit in the Excess Funding Account at
the end of the day immediately prior to the date of determination; provided that
Transferor may increase or reduce the percentage used to determine the Minimum
Transferor Interest (but not below 2%) upon (a) 30 day's prior notice to
Trustee, each Rating Agency and Credit Enhancement Provider, (b) satisfaction of
the Rating Agency Condition, and (c) delivery to Trustee and each such Credit
Enhancement Provider of an Officer's Certificate stating that Transferor
reasonably believes that such reduction will not, based on the facts known to
such officer at the time of such certification, then or thereafter cause a Pay
Out Event to occur with respect to any Series.
Required Investment Grade Percentage means 90%.
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"Monthly Payment Rate" means, in respect of any Monthly Period, a fraction
(expressed as a percentage), the numerator of which shall equal the aggregate
collections received by the Servicer during such Monthly Period and the
denominator of which shall equal the aggregate amount of Principal Receivables
in the Trust at the beginning of such Monthly Period.
"Receivable State" means any State where the stated address of a borrower
under any Receivable conveyed to the Trust is located (excluding Receivables
with zero balances, Receivables in Defaulted Accounts or Receivables that have
been removed from the Trust).
"Tier 1 Insurer" means as of any date of determination, an insurance
carrier which has a then current (i) claims-paying ability rating from Standard
& Poor's of at least A-, but below AAA and (ii) insurance financial strength
rating from Moody's of at least A3, but below Aaa.
"Tier 2 Insurer" means as of any date of determination, an insurance
carrier which has a then current (i) claims-paying ability rating from Standard
& Poor's of at least BBB-, but below A- and (ii) insurance financial strength
rating from Moody's of at least Baa3, but below A3.
"Tier 3 Insurer" means as of any date of determination, an insurance
carrier that did not have (i) a claims-paying ability rating of at least
investment grade (i.e., in one of the top four generic rating categories,
irrespective of any plus or minus) from Standard & Poor's and (ii) an insurance
financial strength rating of at least investment grade (i.e., in one of the top
four generic rating categories, irrespective of any plus or minus) by Moody's.
Notwithstanding the definitions of Tier 1 Insurer, Tier 2 Insurer and Tier
3 Insurer, in the event an insurance carrier has a split rating from Standard &
Poor's and Moody's, the lower of the two ratings will govern for purposes of
determining whether such insurance carrier is a Tier 1 Insurer, Tier 2 Insurer
or Tier 3 Insurer.
"Top 10 Insurer" means as of any date of determination any insurance
carrier with insurance premiums financed by the Receivables and the aggregate
amount of all such premiums are at least the 10th largest relative to any other
insurance carrier's aggregate amount of insurance premiums financed by the
Receivables.
"Top 10 Investment Grade Insurer" means as of any date of determination any
Top 10 Insurer which is an Investment Grade Insurer.
"Top 10 Insurer Percentage" means with respect to any Top 10 Insurer and as
of any date of determination a fraction (expressed as a percentage), the
numerator of which is the portion of the aggregate amount of Receivables
relating to the financing of insurance premiums of such Top Ten Insurer and the
denominator of which is the aggregate amount of Receivables.
SERVICING COMPENSATION, BACK-UP SERVICING COMPENSATION AND PAYMENT OF EXPENSES.
The share of the Servicing Fee allocable to the Investor Interest with
respect to any Transfer Date (the "Investor Servicing Fee") shall be equal to
one-twelfth of the product of (a) .50% and (b) the Adjusted Investor Interest as
of the last day of the Monthly Period preceding such Transfer Date.
The share of the Investor Servicing Fee allocable to the Class A Holders
with respect to any Transfer Date (the "Class A Servicing Fee") shall be equal
to one-twelfth of the product of (a) the Class A Floating Allocation, (b) 0.50%
(the "Servicing Fee Rate") and (c) the Adjusted Investor Interest as of the last
day of the Monthly Period preceding such Transfer Date. The share of the
Investor Servicing Fee allocable to the Class B Holders with respect to any
Transfer Date (the "Class B Servicing Fee") shall be equal to one-twelfth of the
product of (a) the Class B Floating Allocation, (b) the Servicing Fee Rate and
(c) the Adjusted Investor Interest as of the last day of the Monthly Period
preceding such Transfer Date. The share of the Investor Servicing Fee allocable
to the Collateral Interest Holder with respect to any Transfer Date (the
"Collateral Interest Servicing Fee") shall be equal to one-twelfth of the
product of (a) the Collateral Floating Allocation, (b) the Servicing Fee Rate
and (c) the Adjusted Investor Interest as of the last day of the Monthly Period
preceding such Transfer Date. The remainder of the Servicing Fee shall be paid
by the Transferor or other Series (as provided in the related Series
Supplements). The Class A Servicing Fee and the
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Class B Servicing Fee shall be payable to the Servicer solely to the extent
amounts are available for distribution in respect thereof as described under
"--Application of Collections."
The Servicer (or the Transferor, if the Back-up Servicer is Servicer) will
pay from its servicing compensation certain expenses incurred in connection with
servicing the Receivables including, without limitation, payment of the fees and
disbursements of the Trustee and independent certified public accountants and
other fees which are not expressly stated in the Agreement to be payable by the
Trust or the Holders other than federal, state and local income and franchise
taxes, if any, of the Trust.
The Back-up Servicer will receive a fee from the Transferor for agreeing to
act as successor Servicer hereunder.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The Servicer may not resign from their obligations and duties under the
Agreement, except upon determination that performance of their duties are no
longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor or successors to the Servicer has
assumed the Servicer's responsibilities and obligations under the Agreement.
The Agreement provides that, subject to the limitations on the Servicer's
liability described below, the Servicer will indemnify the Trust from and
against any loss, liability, reasonable expense, damage, or injury suffered or
sustained by reason of any acts or omissions or alleged acts or omissions which
(i) constitute gross negligence on the part of the Servicer with respect to the
activities of the Trust or the Trustee for which the Servicer is responsible
pursuant to the Agreement or (ii) the Servicer's (if the Servicer is not a
Back-up Servicer) wrongful cancellation of an insurance policy financed by a
Receivable under which an insured subsequently makes a claim; provided, however,
that the Servicer will not indemnify (a) the Trust if such acts, omissions, or
alleged acts or omissions constitute or are caused by fraud, negligence, or
willful misconduct by, the Trustee (or any of its officers, directors,
employees, or agents), or the Certificateholders, (b) the Trust, the
Certificateholders, or the Certificate Owners for losses, liabilities, expenses,
damages, or injuries arising from actions taken by the Trustee at the request of
Certificateholders, (c) except as required by the Agreement as described under
"-- Certain Covenants," the Trust, the Certificateholders, or the Certificate
Owners for any losses, liabilities, expenses, damages, or injuries incurred by
any of them in their capacities as investors, including without limitation
losses incurred as a result of Receivables in Defaulted Accounts or Defaulted
Receivables which are written off as uncollectible, or (d) the Trust, the
Certificateholders, or the Certificate Owners for any losses, liabilities,
expenses, damages, or injuries suffered or sustained by the Trust, the
Certificateholders, or the Certificate Owners arising under any tax law,
including without limitation any federal, state, local, or foreign income or
franchise tax or any other tax imposed on or measured by income (or any interest
or penalties with respect thereto or arising from a failure to comply therewith)
required to be paid by the Trust, the Certificateholders, or the Certificate
Owners in connection with the Agreement to any taxing authority. The Agreement
also provides that the Servicer (or, if the Servicer is the Back-up Servicer,
the Transferor) will indemnify the Trustee and its officers, directors,
employees, or agents from and against any loss, liability, reasonable expense,
damage, or injury suffered or sustained by reason of the acceptance of the Trust
by the Trustee, the issuance by the Trust of certificates , or any of the other
matters contemplated in the Agreement; provided, however, that the Servicer will
not indemnify the Trustee or its officers, directors, employees, or agents for
any loss, liability, expense, damage, or injury caused by the fraud, negligence,
or willful misconduct of any of them.
In addition, the Agreement provides that, subject to certain exceptions,
the Transferor will indemnify and the Trust and the Trustee from and against any
reasonable loss, liability, expense, damage, or injury (other than to the extent
that any of the foregoing relate to any tax law or any failure to comply
therewith) suffered or sustained by reason of any acts or omissions or alleged
acts or omissions arising out of or based upon the arrangement created by the
Agreement as though the Agreement created a partnership under the Delaware
Uniform Partnership Law in which the Transferor is a general partner.
The Agreement provides that, except for obligations specifically undertaken
by the Transferor and the Servicer pursuant to the Agreement, neither the
Transferor nor the Servicer nor any of their respective
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directors, officers, employees, or agents will be under any liability to the
Trust, the Trustee, its officers, directors, employees, or agents, the
Certificateholders, or any other person for any action taken, or for refraining
from taking any action pursuant to the Agreement provided that neither the
Transferor nor the Servicer will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith, or gross
negligence of the Transferor or the Servicer in the performance of its duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the Agreement provides that the Servicer is not under
any obligation to appear in, prosecute, or defend any legal action which is not
incidental to its servicing responsibilities under the Agreement and which in
its opinion may expose it to any expense or liability.
Any person into which, in accordance with the Agreement, the Transferor or
any of the Servicers may be merged or consolidated or any person resulting from
any merger or consolidation to which the Transferor or the Servicer is a party,
or any person succeeding to the business of the Transferor or any of the
Servicers, upon execution of a Series Supplement and delivery of an opinion of
counsel with respect to the compliance of the transaction with the applicable
provisions of the Agreement, will be the successor to the Transferor or the
applicable Servicer, as the case may be, under the Agreement.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the Trustee
or Certificateholders representing undivided interests aggregating more than 50%
of the Investor Interests for all Series of certificates of the Trust, by
written notice to the applicable Servicer (and to the Trustee if given by the
certificateholders), may terminate all of the rights and obligations of the
applicable Servicer as servicer under the Agreement and in and to the
Receivables and the proceeds thereof and the Trustee may appoint a new Servicer
(a "Service Transfer"). The rights and interest of the Transferor under the
Agreement and in the Transferor Interest will not be affected by such
termination. The Trustee will as promptly as possible appoint a successor
Servicer. If no such Servicer has been appointed and has accepted such
appointment by the time a Servicer ceases to act as Servicer, all authority,
power and obligations of such Servicer under the Agreement will pass to and be
vested in the Trustee. If the Trustee is unable to obtain any bids from eligible
servicers and the Servicer delivers an officer's certificate to the effect that
it cannot in good faith cure the Servicer Default which gave rise to a transfer
of servicing, and if the Trustee is legally unable to act as successor Servicer,
then the Trustee will give the Transferor the right of first refusal to purchase
the Receivables on terms equivalent to the best purchase offer as determined by
the Trustee.
"Servicer Default" under the Agreement refers to any of the following
events:
(a) failure by the Servicer to make any payment, transfer or deposit,
or to give instructions to the Trustee to make certain payments, transfers
or deposits, on the date such Servicer is required to do so under the
Agreement (or within the applicable grace period, which shall not exceed 10
business days);
(b) failure on the part of the Servicer to duly observe or perform in
any respect any other covenants or agreements of the Servicer which has a
material adverse effect on the certificateholders of any Series issued and
outstanding under the Trust and which continues unremedied for a period of
60 days after written notice and continues to have a material adverse
effect on such certificateholders; or the delegation by a Servicer of its
duties under the Agreement, except as specifically permitted thereunder;
(c) any representation, warranty or certification made by the Servicer
in the Agreement, or in any certificate delivered pursuant to the
Agreement, proves to have been incorrect when made which has a material
adverse effect on the certificateholders of any Series issued and
outstanding under the Trust, and which continues to be incorrect in any
material respect for a period of 60 days after written notice and continues
to have a material adverse effect on such certificateholders; or
(d) the occurrence of certain insolvency events with respect to the
Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to in clause (a) above for a period of 10 business days, or referred to
under clause (b) or (c) for a period of 60 business days, will not constitute a
Servicer Default if such delay or failure could not be prevented by the exercise
of reasonable
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diligence by the Servicer or if such delay or failure caused by an act of God or
other similar occurrence. Upon the occurrence of any such event, the Servicer
will not be relieved from using their best efforts to perform their obligations
in a timely manner in accordance with the terms of Agreement, and the Servicer
will provide the Trustee, any provider of Enhancement, the Transferor and the
holders of certificates of each Series issued and outstanding under the Trust
prompt notice of such failure or delay by it, together with a description of the
cause of such failure or delay and its efforts to perform its obligations.
If a conservator or receiver is appointed for the Servicer, and no Servicer
Default other than such conservatorship or receivership or the insolvency of
such Servicer exists, the conservator or receiver may have the power to prevent
either the Trustee or the majority of the certificateholders from effecting a
Service Transfer.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each
Certificateholder of record a statement prepared by the Servicers setting forth,
among other things: (a) the total amount distributed or deposited, (b) the
amount of the distribution or deposit on such Distribution Date allocable to
principal on the Class A Certificates, the Class B Certificates and the
Collateral Interest, (c) the amount of such distribution or deposit allocable to
interest on the Class A Certificates, the Class B Certificates and the
Collateral Interest, (d) the amount of collections of Principal Receivables
processed during the preceding Monthly Period and allocated in respect of the
Class A Certificates, the Class B Certificates, the Collateral Interest and the
Transferor's Interest, (e) the aggregate amount of Principal Receivables, as of
the end of the first day of the current Monthly Period, (f) the amount of
Aggregate Receivables which are 30-59, 60-89 and 90 or more days delinquent (or
a similar classification of delinquency) as of the first day of the current
Monthly Period, (g) the Class A Investor Default Amount, Class B Investor
Default Amount and the Collateral Default Amount for the preceding Monthly
Period, (h) the amount of Class A Investor Charge-Offs, Class B Investor Charge-
Offs and Collateral Charge-Offs for the preceding Monthly Period and the amount
of reimbursements of previous Investor Charge-Offs for the preceding Monthly
Period, (i) the amount of the Class A Servicing Fee, the Class B Servicing Fee
and the Collateral Interest Servicing Fee for the preceding Monthly Period, (j)
the Class A Adjusted Investor's Interest, the Class B Investor's Interest, the
Collateral Interest and the Transferor's Interest, as of the close of business
on such Distribution Date, (k) the aggregate amount of collections of Finance
Charge Receivables processed during the preceding Monthly Period and the amount
of such collections allocated in respect of the Class A Certificates, the Class
B Certificates, the Collateral Interest and the Transferor's Interest,
respectively, (l) the Portfolio Yield for the preceding Monthly Period, (m) the
amount deposited in the Principal Funding Account and the balance in such
Account, (n) the amount deposited in the Reserve Account and the balance in such
account, (o) the amount of investment income since the previous report, (p) any
Class A Shortfall Amount, any Class B Shortfall Amount, any Class A Carry Over
Amount and any Class B Carry Over Amount, and (q) any Accumulation Shortfall.
On or before January 31 of each calendar year the Trustee will furnish to
each person who at any time during the preceding calendar year was a
Certificateholder of record, a statement prepared by the Servicer containing the
information required to be contained in the regular monthly report to
Certificateholders, as set forth in clauses (a), (b) and (c) above aggregated
for such calendar year or the applicable portion thereof during which such
person was a Certificateholder, together with such other customary information
(consistent with the treatment of the Certificates as debt) as the Trustee or
the Servicer deems necessary or desirable to enable the Certificateholders to
prepare their United States tax returns.
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that on or before March 31 of each calendar
year, commencing March 31, 1998, will cause a firm of independent certified
public accountants (who may also render other services to the Servicer or the
Bank) to furnish a report to the effect that such accounting firm has examined
certain documents and records relating to the servicing of the Receivables,
compared the information contained in the Servicer's certificates delivered
during the period covered by the report with such documents and records and
that, on the basis of such examination, such firm is of the opinion that such
servicing was conducted in
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compliance with the Agreement except for such exceptions or errors as such firm
shall believe to be immaterial and such other exceptions as shall be set forth
in such statement.
The Agreement will provide for delivery to the Trustee on or before March
31 of each calendar year commencing in 1998, of an annual statement signed by an
officer of each Servicer to the effect that each Servicer has fully performed
its obligations under the Agreement throughout the preceding year, or, if there
has been a default in the performance of any such obligation, specifying the
nature and status of the default.
AMENDMENTS
The Agreement may be amended by the Transferor, the Servicer and the
Trustee, without the consent of Certificateholders of any Series then
outstanding, for any purpose, so long as (i) the Transferor delivers to the
Trustee an opinion of counsel to the effect that such amendment will not
adversely affect in any material respect the interest of such Certificateholders
and (ii) such amendment will not result in a withdrawal or reduction of the
rating of any outstanding Series under the Trust by any Rating Agency; provided
that if such amendment provides for additional or substitute Credit Enhancement
for a Series, changes the definition of Eligible Receivable or provides for the
addition of a Participation to the Trust, the matters to be covered by the
opinion of counsel described in clause (i) may instead be covered by a
certificate of an authorized officer of the Transferor. Such an amendment may be
entered into in order to comply with or obtain the benefits of certain future
tax legislation (such as legislation creating FASIT, as described below under
"U.S. Federal Income Tax Consequences--FASIT Legislation").
The Agreement may also be amended by the Transferor, the Servicer and the
Trustee with the consent of the holders of certificates evidencing undivided
interests aggregating not less than 66 2/3% of the Investor Interests for all
Series of the Trust, for the purpose of adding any provisions to, changing in
any manner or eliminating any of the provisions of, the Agreement or the related
Series Supplement or of modifying in any manner the rights of Certificateholders
of any outstanding Series of the Trust. No such amendment, however, may (a)
reduce in any manner the amount of, or delay the timing of, distributions
required to be made on any Series, (b) change the definition of or the manner of
calculating the interest of any certificateholder of any Series issued by the
Trust or (c) reduce the aforesaid percentage of undivided interests the holders
of which are required to consent to any such amendment, in each case without the
consent of all certificateholders of the related Series and of all Series
adversely affected. Promptly following the execution of any amendment to the
Agreement, the Trustee will furnish written notice of the substance of such
amendment to each certificateholder. Any Series Supplement and any amendments
regarding the addition or removal of Receivables or Participations from the
Trust will not be considered an amendment requiring Certificateholders consent
under the provisions of the Agreement. Notwithstanding anything to the contrary
contained in the prior two paragraphs, the Agreement may not be amended without
the written consent of the Back-up Servicer, if such amendment would adversely
affect the Back-up Servicer, including without limitation any amendment to
clause (m) described under " -- Pay Out Events" above.
LIST OF CERTIFICATEHOLDERS
Upon written request of Certificateholders of record representing undivided
interests in the Trust aggregating not less than 10% of the Investor Interest,
the Trustee will afford such Certificateholders access during business hours to
the current list of Certificateholders of the Trust for purposes of
communicating with other Certificateholders with respect to their rights under
the Agreement. The Trustee may, however, refuse to supply such list until it has
been adequately indemnified by such Certificateholders for its costs and
expenses, and will give the Servicers notice that such request has been made.
See "--Book-Entry Registration" and "--Definitive Certificates" above.
THE TRUSTEE
The First National Bank of Chicago is the Trustee under the Agreement. The
Transferor, the Servicer and their respective affiliates may from time to time
enter into normal banking and trustee relationships with the Trustee and its
affiliates. The Trustee, the Transferor, the Servicer and any of their
respective affiliates
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may hold Certificates in their own names (except that the Trustee may not hold a
Certificate issued by the related Trust for its own account). In addition, for
purposes of meeting the legal requirements of certain local jurisdictions, the
Trustee shall have the power to appoint a co-trustee or separate trustees of all
or part of the Trust. In the event of such appointment, all rights, powers,
duties and obligations conferred or imposed upon the Trustee by the Agreement
shall be conferred or imposed upon the Trustee and such separate trustee or co-
trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee.
The Trustee may resign at any time, in which event the Transferor will be
obligated to appoint a successor Trustee. The Transferor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. In such circumstances, the
Transferor will be obligated to appoint a successor Trustee. Any resignation or
removal of the Trustee and appointment of a successor Trustee does not become
effective until acceptance of the appointment by the successor Trustee.
BACK-UP SERVICER
Premium Financing Specialists, Inc., a Missouri corporation, will act as
back-up servicer for all Receivables other than those originated in California
and Premium Financing Specialists of California, Inc., a California corporation,
will act as back-up servicer for the Receivables originated in California
(together, the "Back-up Servicer"). The Back-up Servicer will act as such until
the earlier to occur of (a) the appointment of a successor Back-up Servicer that
assumes the obligations of the Back-up Servicer under the Agreement, including
the circumstances described under "Risk Factors--Risk of Pay Out Event Upon Sale
of Back-up Servicer", (b) the removal of the Back-up Servicer by the Transferor
pursuant to the Agreement, and (c) the Series 1996-1 Termination Date.
DESCRIPTION OF THE RECEIVABLES PURCHASE AGREEMENT
PURCHASES OF RECEIVABLES
The Receivables transferred to the Trust pursuant to the Agreement are
purchased by the Transferor pursuant to a Receivables Purchase Agreement.
Pursuant to the Receivables Purchase Agreement, the Transferor purchases
Receivables from the Originators from time to time. The purchase price of such
Receivables is equal to the outstanding principal balance of such Receivables,
and is payable by the Transferor in cash or by a note. See "Description of the
Certificates." Pursuant to the Agreement, such Receivables are thereafter
transferred immediately by the Transferor to the Trust. Pursuant to the
Agreement, the Transferor assigned its rights in, to, and under the Receivables
Purchase Agreement with respect to such Receivables to the Trust.
REPRESENTATIONS AND WARRANTIES
Pursuant to the Receivables Purchase Agreement, each of the Originators
jointly and severally represent and warrant that as of the Closing Date, with
respect to Receivables conveyed to the Transferor on such date, and the related
Addition Date with respect to Additional Receivables that (a) each Receivable
then existing has been conveyed to the Transferor free and clear of any Lien of
any Person claiming through or under Originator or any of its Affiliates (other
than any Liens for municipal and other local taxes if such taxes shall not at
the time be due and payable or if Originator shall currently be contesting the
validity thereof in good faith by appropriate proceedings and shall have set
aside on its books adequate reserves with respect thereto) and in compliance, in
all material respects, with all Requirements of Law applicable to Originator,
and (b) each such Receivable is an Eligible Receivable. In the event of a
material breach of the representation and warranty described in clause (a)
above, and if any of the following two conditions is met: (A) as a result of
such breach such Receivable is charged off as uncollectible or the Transferor's
rights in, to or under such Receivable or its proceeds are impaired or the
proceeds of such Receivable are not available for any reason to the Transferor
free and clear of any Lien or (B) the Lien upon the subject Receivable (1)
arises in favor of the United States of America or any State or any agency or
instrumentality thereof and involves taxes or liens
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arising under Title IV of ERISA or (2) has been consented to by Originator; and
as a result thereof, the Transferor is required to repurchase any Receivable
from the Trust pursuant to the Pooling and Servicing Agreement, then the
Originator of the repurchased Receivable shall be obligated to pay to the
Transferor immediately upon the Transferor's demand therefor an amount equal to
the amount of all losses, damages and liabilities of the Transferor that result
from such breach, including but not limited to the cost of the Transferor's
repurchase obligations pursuant to the Pooling and Servicing Agreement. In the
event of a material breach of the representation and warranty described in
clause (b) above, and as a result of such breach, the related Account becomes a
Defaulted Account or the Transferor's rights in, to or under the Receivable or
its proceeds are impaired or the proceeds of such Receivable are not available
for any reason to the Transferor free and clear of any Lien, then, upon the
expiration of 60 days (or such longer period as may be agreed to by Transferor
in its sole discretion, but in no event later than 120 days) from the earlier to
occur of the discovery of any such event by either Originator or Servicer, or
receipt by Originator of written notice of any such event given by Transferor,
and as a further result thereof, if the Transferor is required to repurchase any
Receivable from the Trust pursuant to the Pooling and Servicing Agreement, then
the Originator of the repurchased Receivable shall be obligated to pay to the
Transferor immediately upon the Transferor's demand therefor an amount equal to
the amount of all losses, damages and liabilities of the Transferor that result
from such breach, including but not limited to the cost of the Transferor's
repurchase obligations pursuant to the Pooling and Servicing Agreement; provided
that no such removal shall be required to be made if, on any day within such
applicable period, such representations and warranties with respect to such
Receivable shall then be true and correct in all material respects as if such
Receivable had been created on such day.
CERTAIN COVENANTS
Pursuant to the Receivables Purchase Agreement, each Originator jointly and
severally covenants that, among other things, subject to specified exceptions
and limitations, it will take no action to cause (i) any Receivable to be
evidenced by any instruments or to be anything other than a "general intangible"
as defined in the UCC, (ii) in the event any Originator is unable for any reason
to transfer Receivables to the Transferor, it will nevertheless continue to
allocate and pay all collections from all Receivables to the Transferor, (ii)
any Excess Obligor Concentration Amount to exist or be increased; (iii) any
Excess Insurer Concentration Amount to exist or be increased; (iv) the
Investment Grade Insurer Percentage to be less than the Required Investment
Grade Insurer Percentage; (v) the Investment Grade Insurer Percentage to be
decreased, if on such day the Investment Grade Insurer Percentage is equal to or
less than the Required Investment Grade Insurer Percentage; (vi) the Top 10
Insurer Percentage to exceed the Maximum Top Insurer Percentage and (vii) the
Top 10 Insurer Percentage to be increased, if on such day the Top 10 Insurer
Percentage is equal to or greater than the Maximum Top 10 Insurer Percentage.
REPURCHASE OBLIGATIONS
If (i) any of the representations and warranties contained in clauses (v)
and (vi) in "--Representations and Warranties" was not true with respect to such
Originator or any Receivable, as applicable, at the time such representation or
warranty was made or (ii) if the Originators breach any of the covenants
contained in clauses (iii) through (vii) in "--Certain Covenants", and as a
result thereof, the Transferor is required to repurchase any Receivable from the
Trust pursuant to the Agreement, then the Originator of the repurchased
Receivable shall be obligated to pay to the Transferor immediately upon the
Transferor's demand therefor an amount equal to the amount of all losses,
damages and liabilities of the Transferor that result from such breach,
including but not limited to the cost of the Transferor's repurchase obligations
pursuant to the Agreement.
PURCHASE TERMINATION
If any of the Originators becomes insolvent, the Transferor's obligations
under the Receivables Purchase Agreement to purchase Receivables from such
Originator will automatically be terminated. In addition, if the Transferor
becomes insolvent, the Originator's obligations to transfer Receivables to the
Transferor will automatically be terminated.
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The Transferor will represent and warrant in the Agreement that the
transfer of Receivables by it to the related Trust is either a valid transfer
and assignment to such Trust of all right, title and interest of the Transferor
in and to the related Receivables, except for the Transferor Interest, or the
grant to the Trust of a security interest in such Receivables. The Transferor
also will represent and warrant in the Agreement that, if the transfer of
Receivables by the Transferor or the related Trust is deemed to create a
security interest under the UCC, there will exist a valid, subsisting and
enforceable first priority perfected security interest in such Receivables
created thereafter in favor of such Trust on and after their creation and
transfer to the Trust, except for certain tax and other governmental liens. For
a discussion of the Trust's rights arising from a breach of these warranties,
see "Description of the Certificates--Representations and Warranties."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The Transferor is chartered as a national banking association and is
subject to regulation and supervision by the Office of the Comptroller of the
Currency, which is authorized to appoint the FDIC as conservator or receiver of
the Transferor upon the occurrence of certain events relating to the
Transferor's financial condition.
The FDIA, as amended by FIRREA, sets forth certain powers that the FDIC in
its capacity as conservator or receiver for the Transferor could exercise.
Positions taken by the FDIC prior to the passage of FIRREA suggest that the
FDIC, if appointed as conservator or receiver of the Transferor, would not
interfere with the timely transfer to a Trust of payments collected on the
Receivables or interfere with the timely liquidation of related Receivables, as
described below. To the extent that the Transferor has granted a security
interest in related Receivables to a Trust, and that interest was validly
perfected before the Transferor's insolvency and was not taken in contemplation
of the insolvency of the Transferor, or with the intent to hinder, delay or
defraud the Transferor or the creditors of the Transferor, the FDIA provides
that such security interest should not be subject to avoidance. As a result,
payments to such Trust with respect to the Receivables should not be subject to
recovery by the FDIC as conservator or receiver of the Transferor. If, however,
the FDIC, as conservator or receiver for the Transferor, were to assert a
contrary position, or were to require the Trustee to establish its right to
those payments by submitting to and completing the administrative claims
procedure established under the FDIA, or the conservator or receiver were to
request a stay of proceedings with respect to the Transferor as provided under
the FDIA, delays in payments on the related Series of Certificates and possible
reductions in the amount of those payments could occur.
Upon the appointment of a conservator or receiver or upon a voluntary
liquidation with respect to the Transferor, the Transferor will promptly give
notice thereof to each Trustee and a Pay Out Event will occur with respect to
all Series then outstanding under the related Trust. Pursuant to the Agreement,
newly created Principal Receivables will not be transferred to the Trust on and
after any such appointment or voluntary liquidation, and the Trustee will
proceed to sell, dispose of or otherwise liquidate the Receivables in a
commercially reasonable manner and on commercially reasonable terms, unless
otherwise instructed within a specified period by holders of Certificates
representing undivided interests aggregating more than 50% of the Investor
Interest of each Series (or if any Series has more than one Class, of each
Class, and any other Person specified in the related Agreement of a Series
Supplement), or unless otherwise required by the FDIC as receiver or conservator
of the Transferor. Under the Agreement, the proceeds from the sale of the
Receivables would be treated as collections of the Receivables and the Investor
Percentage of such proceeds would be distributed to the Certificateholders. This
procedure could be delayed, as described above. If the only Pay Out Event to
occur is either the insolvency of the Transferor or the appointment of a
conservator or receiver for the Transferor, the conservator or receiver may have
the power to prevent the early sale, liquidation or disposition of the
Receivables and the commencement of a Rapid Amortization Period. In addition, a
conservator or receiver may have the power to cause the early sale of the
Receivables and the early retirement of the Certificates or to prohibit the
continued transfer of Principal Receivables to the Trust. See "Description of
the Certificates--Pay Out Events."
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LACK OF PERFECTED SECURITY INTERESTS IN CERTAIN UNEARNED PREMIUMS
Each Receivable includes a grant by the borrower to the applicable
Originator of a security interest in the related Unearned Premium. The
perfection of a security interest in an unearned premium is not governed by the
UCC. State statutes, common law and industry practice govern the perfection of a
security interest in the unearned premiums and generally require for the
perfection of such security interest, a notice informing the applicable
insurance company of the identity of the person entitled to the payment of such
unearned premium. It is standard practice for the Originators to send such a
notice to the applicable insurance company at or about the time the insurance
policy premium is financed. Each Originator will represent and warrant in the
Receivables Purchase Agreement to the Transferor and the Transferor will
represent and warrant to the Trust, in each case, as of the date of transfers,
that the applicable Originator has a first priority perfected security interest
in the Unearned Premiums relating to the Receivables so transferred.
Each Originator will assign its security interest in the Unearned Premiums
to the Transferor, who will in turn assign its security interest in the Unearned
Premiums to the Trust. Due to the administrative burden and expense of mailing a
notice for each Receivable to the applicable insurance company and the
administrative burden and expense of the related insurance companies, which
would have to process such notices, neither the Transferor nor the Trustee will
send notices to the related insurance companies, with respect to the Trust's
security interests in the Unearned Premiums relating to the Receivables
transferred to the Trust on or prior to February 1, 1997. In the absence of such
procedures neither the Transferor nor the Trust will have a perfected security
interest in the Unearned Premiums relating to such Receivables.
With respect to the Receivables transferred to the Trust on or after
February 1, 1997, the applicable Originator will represent and warrant in the
Receivables Purchase Agreement to the Transferor and the Transferor will
represent and warrant in the Agreement that a notice of finance premium has been
delivered to the related insurance carrier notifying it of the Trustee's
security interest in the Unearned Premium and that the Trust has a perfected
security interest in such Unearned Premiums.
In the event the representations and warranties relating to the perfection
of security interests in Unearned Premiums are breached and as a result of such
breach the related Account becomes a Defaulted Account or the Trust's rights in,
to or under the Receivables or its proceeds are impaired or the proceeds of such
Receivable are not free and clear of any lien, then upon the expiration of the
applicable grace period such Receivable shall be removed from the Trust as
described under "Description of the Certificates--Representations and
Warranties."
If an Originator becomes the subject of a bankruptcy or insolvency
proceeding and the Trust does not have a perfected security interest in the
Unearned Premium, the Trust's interest in such Unearned Premium would be
subordinate to the interest of a bankruptcy trustee of such Originator. As a
result, Certificateholders might not be able to obtain the proceeds of any
returned Unearned Premiums.
U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, summarizing the anticipated material generally
applicable Federal income tax consequences of the purchase, ownership and
disposition of the Certificates of a Series, is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), proposed, temporary and
final Treasury regulations thereunder, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change, possibly
retroactive. This discussion does not address every aspect of the Federal income
tax laws that may be relevant to Certificate Owners in light of their personal
investment circumstances or to certain types of Certificate Owners subject to
special treatment under the Federal income tax laws (for example, banks and life
insurance companies). Accordingly, investors should consult their own tax
advisors regarding Federal, state, local, foreign and any other tax consequences
to them of any investment in the Certificates. PROSPECTIVE INVESTORS ARE ADVISED
TO CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE FEDERAL TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP, OR DISPOSITION OF INTERESTS IN CERTIFICATES, AS WELL AS
THE TAX
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CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, FOREIGN COUNTRY, OR OTHER
TAXING JURISDICTION. For purposes of this section "U.S. Federal Income Tax
Consequences" the term "Certificate Owner" refers to a holder of a beneficial
interest in a Certificate.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Stroock & Stroock & Lavan will act as special tax counsel to the Transferor
("Special Tax Counsel") and will advise the Transferor based on the assumptions
and qualifications set forth in the opinion that the Certificates will be
treated as indebtedness for Federal income tax purposes. However, opinions of
counsel are not binding on the Internal Revenue Service (the "IRS"), and there
can be no assurance that the IRS could not successfully challenge this
conclusion.
The Transferor will express in the Agreement its intent that for Federal,
state and local income and franchise tax purposes, Certificates will be
indebtedness secured by the Receivables. The Transferor agrees and each
Certificateholder and Certificate Owner, by acquiring an interest in a
Certificate, agrees or will be deemed to agree to treat the Certificates 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 Agreement, the
Transferor expects to treat such transaction, for regulatory and financial
accounting purposes, as a sale of an ownership interest in the Receivables and
not as a debt obligation.
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 rather than its form or the manner in
which it is labeled. 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 benefits of ownership thereof. Special 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 Certificate Owners.
In some instances, 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 Special Tax
Counsel will advise that the rationale of those cases will not apply to the
transaction evidenced by a Series of Certificates, because the form of the
transaction, as reflected in the operative provisions of the documents, either
is not inconsistent with the characterization of the Certificates as debt for
Federal income tax purposes or otherwise makes the rationale of those cases
inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATEHOLDERS
As set forth above, it is expected that Special Tax Counsel will advise the
Transferor that the Certificates will constitute indebtedness for Federal income
tax purposes, and accordingly, interest thereon will be includible in income by
Certificate Owners as ordinary income when received (in the case of a cash basis
taxpayer) or accrued (in the case of an accrual basis taxpayer) in accordance
with their respective methods of tax accounting. Interest received on the
Certificates may also constitute "investment income" for purposes of certain
limitations of the Code concerning the deductibility of investment interest
expense.
If the Certificates are issued with original issue discount ("OID"), the
provisions of sections 1271 through 1273 and 1275 of the Code will apply to the
Certificates. Under those provisions, a U.S. Certificate Owner (including a cash
basis holder) generally would be required to accrue the OID on its interest in a
Certificate 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. In general, a Certificate will be treated as having
OID to the extent that its "stated redemption price" exceeds its "issue price,"
if such excess is more than 0.25 percent multiplied by the weighted average life
of the Certificate (determined by taking into account only the number of
complete years following issuance until payment is made for any partial
principal payments). Under section 1272(a)(6) of the Code, special provisions
apply to debt instruments on which
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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
Certificates is unclear. Additionally, the IRS could take the position based on
Treasury Regulations that none of the interest payable on a Certificate is
"unconditionally payable" and hence that all of such interest should be included
in the Certificate's stated redemption price at maturity. Accordingly, Special
Tax Counsel is unable to opine as to whether interest payable on a Certificate
constitutes "qualified stated interest" that is not included in a Certificate's
stated redemption price at maturity. The Transferor intends to take the position
that interest on the Certificates constitutes "qualified stated interest".
A holder who purchases a Certificate at a discount from its adjusted issue
price may be subject to the "market discount" rules of the Code. These rules
provide, in part, for the treatment of gain attributable to accrued market
discount as ordinary income upon the receipt of partial principal payments or on
the sale or other disposition of the Certificate, and for the deferral of
interest deductions with respect to debt incurred to acquire or carry the market
discount Certificate.
A holder who purchases a Certificate at a premium may elect to amortize and
deduct this premium over the remaining term of the Certificate in accordance
with rules set forth in Section 171 of the Code.
SALE OF A CERTIFICATE
In general, a Certificate Owner will recognize gain or loss upon the sale,
exchange, redemption, or other taxable disposition of a Certificate measured by
the difference between (i) the amount of cash and the fair market value of any
property received (other than amounts attributable to, and taxable as, accrued
interest) and (ii) the Certificate Owner's tax basis in the Certificate (as
increased by any OID or market discount previously included in income by the
holder and decreased by any deductions previously allowed for amortizable bond
premium and by any payments reflecting principal or OID received with respect to
such Certificate). Subject to the market discount rules discussed above and to
the more than one-year holding period requirement for long-term capital gain
treatment, any such gain or loss generally will be long-term capital gain,
provided that the Certificate was held as a capital asset. The maximum ordinary
income rate for individuals, estates, and trusts exceeds the maximum long-term
capital gains rate for such taxpayers. In addition, capital losses generally may
be used only to offset capital gains.
TAX CHARACTERIZATION OF TRUST
The Agreement permits the issuance of Classes of Certificates that are
treated for Federal income tax purposes either as indebtedness or as an interest
in a partnership. The Trust could be characterized either as (i) a security
device to hold Receivables securing the repayment of the Certificates or (ii) a
partnership in which the Transferor and certain classes of Certificateholders
are partners, and which has issued debt represented by other classes of
Certificates of such Trust (including the Certificates). In connection with the
issuance of Certificates of any Series, Special Tax Counsel will render an
opinion to the Transferor, based on the assumptions and qualifications set forth
therein, that under then current law, the issuance of the Certificates 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.
FASIT LEGISLATION
Legislation enacted on August 20, 1996 provides for a new entity for
Federal income tax purposes, the "financial asset securitization investment
trust" (or "FASIT"), beginning on September 1, 1997. The Agreement provides that
the Transferor may cause a FASIT election to be made for all or a portion of the
Trust if the Transferor delivers to the Trustee a Tax Opinion.
POSSIBLE CLASSIFICATION OF THE TRANSACTION AS A PARTNERSHIP OR AS AN ASSOCIATION
TAXABLE AS A CORPORATION
The opinion of Special Tax Counsel with respect to Certificates will not be
binding on the courts or the IRS. It is possible that the IRS could assert that,
for purposes of the Code, the transaction contemplated by this Prospectus
constitutes a sale of the Receivables (or an interest therein) to the
Certificate Owners and that the proper classification of the legal relationship
between the Transferor and some or all of the Certificate Owners or
Certificateholders resulting from the transaction is that of a partnership, a
publicly traded
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partnership taxable as a corporation, or an association 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
Certificates were treated as interests in a partnership or corporation (unless,
as is permitted by the Agreement, an interest in the Trust is issued or sold
that is intended to be classified as an interest in a partnership).
If the Trust were treated in whole or in part as a partnership in which
some or all of the holders of interests in the publicly offered Certificates
were partners, that partnership would be classified as a publicly traded
partnership, and so could be taxable as a corporation. Further, if interests in
the Trust other than the publicly offered Certificates are considered to be
equity and are considered to be publicly traded, regulations published by the
Treasury Department on December 4, 1995 could cause the Trust to constitute a
publicly traded partnership even if all holders of interests in the publicly
offered Certificates were treated as debt for tax purposes. The regulations
generally apply to taxable years beginning after December 31, 1995. If the Trust
were classified as a publicly traded partnership, whether by reason of the
treatment of publicly offered Certificates as equity or by reason of the
regulations, it would avoid taxation as a corporation if its income was not
derived in the conduct of a "financial business"; however, whether the income of
the Trust would be so classified is unclear and Special Tax Counsel is unable to
opine as to whether the Trust would be so classified.
Under the Code and the regulations, a partnership will be classified as a
publicly traded partnership if equity interests are traded on an "established
securities market," or are "readily tradeable" on a "secondary market" or its
"substantial equivalent." The Transferor intends to take measures designed to
reduce the risk that the Trust could be classified as a publicly traded
partnership by reason of interests in the Trust other than the publicly offered
Certificates. Although the Transferor expects such measures will ultimately be
successful, certain of the actions that may be necessary for avoiding the
treatment of such interests as "readily tradeable" on a "secondary market" or
its "substantial equivalent" are not fully within the control of the Transferor.
As a result, there can be no assurance that the measures the Transferor intends
to take will in all circumstances be sufficient to prevent the Trust from being
classified as a publicly traded partnership under the regulations.
If a transaction were treated as creating a partnership between the
Transferor and the Certificate Owners or Certificateholders that is not
characterized as a publicly traded partnership taxable as a corporation, the
partnership itself would not be subject to Federal income tax; rather, the
partners of such partnership, including the Certificate Owners or
Certificateholders, 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 Certificate Owner could
differ if the Certificates 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 Certificates. Finally, even assuming a partnership qualifies
for exemption from taxation as a corporation, all or a portion of any taxable
income allocated to a Certificate Owner that is a pension, profit-sharing or
employee benefit plan or other tax-exempt entity (including an individual
retirement account) may, under certain circumstances, constitute "unrelated
business taxable income" which generally would be taxable to the holder under
the Code.
If it were determined that a transaction created an entity classified as an
association or as a publicly traded partnership taxable as a corporation, the
Trust would be subject to Federal income tax at corporate income tax rates on
the income it derives from the Receivables, which would reduce the amounts
available for distribution to the Certificate Owners, possibly including
Certificate Owners of a Class that is treated as indebtedness. Such
classification may also have adverse state and local tax consequences that would
reduce amounts available for distribution to Certificate Owners. Cash
distributions to the Certificate Owners (except any Class not recharacterized as
an equity interest in an association) generally would be treated as dividends
for tax purposes to the extent of such deemed corporation's earnings and
profits.
FOREIGN INVESTORS
As set forth above, it is expected that Special Tax Counsel will render an
opinion, upon issuance, that the Certificates will be treated as debt for U.S.
Federal income tax purposes. The following information describes
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the U.S. Federal income tax treatment of investors that are not U.S. persons
("Foreign Investors") if the Certificates are treated as debt. The term "Foreign
Investor" means any person other than (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 whose income is includable in gross income for United States federal
income taxation regardless of its source, or (iv) a trust for which one or more
United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. For years beginning before January
1, 1997, the term "Foreign Investor" shall include any trust (except a trust
whose income is includable in gross income for United States Federal income
taxation regardless of source), in lieu of trusts described in (iv) above,
unless the trust elects to have its Foreign Investor status determined under the
criteria set forth in (iv) above for tax years ending after August 20, 1996.
Interest, including principal to the extent of accrued OID, paid to a
Foreign Investor will be subject to U.S. withholding taxes at a rate of 30%
unless (i) the income is "effectively connected" with the conduct by such
Foreign Investor of a trade or business in the United States and the investor
provides on a timely basis Form 4224 in which case, the Foreign Investor will
generally be subject to tax at the same rates as a U.S. person or (ii) the
Foreign Investor and each securities clearing organization, bank, or other
financial institution that holds the Certificates on behalf of the customer in
the ordinary course of its trade or business, in the chain between the
Certificate Owner and the U.S. person otherwise required to withhold the U.S.
tax, complies with applicable identification requirements and the Certificate
Owner does not actually or constructively own 10% or more of the voting stock of
the Transferor, or the Collateral Interest (or, upon the issuance of an interest
in the Trust that is treated as a partnership interest, any holder of such
interest) and is not a controlled foreign corporation with respect to the
Transferor. Applicable identification requirements generally will be satisfied
if there is delivered to the securities clearing organization (i) IRS Form W-8
signed under penalties of perjury by the Certificate Owner, stating that the
Certificate Owner is not a U.S person and providing such Certificate Owner's
name and address, or (ii) IRS Form 1001, signed by the Certificate Owner or such
Certificate Owner's agent, claiming exemption from withholding under an
applicable tax treaty that provides for exemption; provided that in any such
case (x) the applicable form is delivered pursuant to applicable procedures and
is properly transmitted to the United States entity otherwise required to
withhold tax and (y) none of the entities receiving the form has actual
knowledge that the Certificate Owner is a U.S. person or that the form is
otherwise inaccurate.
A Certificate Owner that is a nonresident alien or foreign corporation will
not be subject to U.S. Federal income tax on gain realized upon the sale,
exchange, or redemption of a Certificate, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States, (ii) in the case of a Certificate Owner that is an individual, such
Certificate Owner is not present in the United States for 183 days or more
during the taxable year in which such sale, exchange, or redemption occurs, and
(iii) in the case of gain representing accrued interest or OID the conditions
described in the immediately preceding paragraph are satisfied.
If the interests of the Certificate Owners were reclassified as interests
in a partnership (not taxable as a corporation), such recharacterization could
cause a Foreign Investor to be treated as engaged in a trade or business in the
United States. In such event the Certificate Owner would be required to file a
Federal income tax return and, in general, would be subject to Federal income
tax, including branch profits tax in the case of a Certificateholder that is a
corporation, on its net income from the partnership. Further, the partnership
would be required, on a quarterly basis, to pay withholding tax equal to the
sum, for each foreign partner, of such foreign partner's distributive share of
"effectively connected" income of the partnership multiplied by the highest rate
of tax applicable to that foreign partner. The tax withheld from each foreign
partner would be credited against such foreign partner's U.S. income tax
liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
The Trust or a holder holding on behalf of a Certificateholder generally
will be required to report annually to the IRS, the amount of interest paid on a
Certificate (and the amount of accrued OID, if any, and interest
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withheld for Federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, or individual
retirement accounts). Each holder (other than exempt holders who are not subject
to the reporting requirements) will be required to provide, under penalties of
perjury, a certificate containing the holder's name, address, correct Federal
taxpayer identification number and a statement that the holder is not subject to
backup withholding. Should a nonexempt Certificateholder fail to provide the
required certification, the Trust or other intermediary will be required to
withhold 31% 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.
STATE AND LOCAL TAXATION
The discussion above does not address the tax treatment of a Trust, the
Certificates, or the Certificate Owners 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 and the Certificates, and
the consequences of purchase, ownership or disposition of the Certificates under
any state or local tax law.
ERISA CONSIDERATIONS
Section 406 of ERISA and/or Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan or retirement arrangement from
engaging in certain transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to the plan. ERISA also imposes certain duties on persons who are
fiduciaries of plans subject to ERISA and prohibits certain transactions between
such plans and parties in interest with respect to such plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a plan is considered to be a fiduciary of such plan
(subject to certain exceptions not here relevant). A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons.
Plan fiduciaries must determine whether the acquisition and holding of the
Certificates and the operations of the Trust would result in direct or indirect
prohibited transactions under ERISA and the Code. The operations of the Trust
could result in prohibited transactions if Benefit Plans (as defined below) that
purchase the Certificates are deemed to own an interest in the underlying assets
of the Trust. There may also be an improper delegation of the responsibility to
manage Benefit Plan assets if Benefit Plans that purchase the Certificates are
deemed to own an interest in the underlying assets of the Trust.
Pursuant to a final regulation (the "Final Regulation") issued by the
Department of Labor ("DOL") concerning the definition of what constitutes the
"plan assets" of (a) any employee benefit plan that is subject to ERISA, (b) any
plan or other arrangement (including an individual retirement account or Keogh
plan) that is subject to section 4975 of the Code or (c) any entity whose
underlying assets include "plan assets" under the regulation by reason of any
such plan's investment in the entity (collectively referred to as "Benefit
Plans"), the assets and properties of certain entities in which a Benefit Plan
makes an equity investment could be deemed to be assets of the Benefit Plan in
certain circumstances. Accordingly, if Benefit Plans purchase Certificates, the
Trust could be deemed to hold plan assets unless one of the exceptions under the
Final Regulation is applicable to the Trust.
The Final Regulation only applies to the purchase by a Benefit Plan of an
"equity interest" in an entity. Assuming that interests in Certificates are
equity interests, the Final Regulation contains an exception that provides that
if a Benefit Plan acquires a "publicly-offered security," the issuer of the
security is not deemed to hold plan assets. A publicly-offered security is a
security that is (i) freely transferable, (ii) part of a class of securities
that is owned by 100 or more investors independent of the issuer and of one
another (the "100 Investor Requirement") and (iii) either is (A) part of a class
of securities registered under Section 12(b) or 12(g) of the Exchange Act or (B)
sold to the plan as part of an offering of securities to the public pursuant to
an effective registration statement under the Act and the class of securities of
which such security is a part is registered under the Exchange Act within 120
days (or such later time as may be allowed by the Commission) after the end of
the fiscal year of the issuer during which the offering of such securities to
the public occurred. In addition, the Final Regulation provides that if at all
times more than 75% of the value of all classes of equity
92
<PAGE> 93
interests in Certificates are held by investors other than benefit plan
investors (which is defined as including plans subject to ERISA, government
plans and IRAs), the investing plan's assets will not include any of the
underlying assets of the applicable Trust.
The Certificates offered hereby will be sold as part of an offering
pursuant to an effective registration statement under the Securities Act and
each Class of Certificates will be timely registered under the Securities
Exchange Act of 1934. The Underwriters do not expect that the Class A or Class B
Certificates will satisfy the 100 Investor Requirement, and, therefore, do not
expect that such Certificates will qualify as publicly-offered securities under
the Final Regulation.
If interests in a Class of Certificates fail to meet the criteria of
publicly-offered securities and the applicable Trust's assets are deemed to
include assets of Benefit Plans acquiring such Class of Certificates
transactions involving the Trust and "parties in interest" or "disqualified
persons" with respect to such Benefit Plans might be prohibited under Section
406 of ERISA and Section 4975 of the Code unless an exemption is applicable. The
Transferor, Servicer, Trustee or any Underwriter of such Certificates may be
considered to be a party in interest, disqualified person or fiduciary with
respect to an investing Benefit Plan. Accordingly, an investment by a Benefit
Plan in such Certificates may be a prohibited transaction under ERISA and the
Code unless such investment is subject to a statutory or administrative
exemption. There is no assurance that any exemption, even if all of the
conditions specified therein are satisfied, will apply to all transactions
involving the Trust's assets.
NO INVESTOR WHICH IS ACQUIRING A CERTIFICATE FOR OR ON BEHALF OF, A BENEFIT
PLAN MAY ACQUIRE EITHER: A CLASS A CERTIFICATE OR A CLASS B CERTIFICATE, AND BY
THE ACQUISITION OF SUCH CERTIFICATE THE INVESTOR WILL BE DEEMED TO HAVE
REPRESENTED AND WARRANTED THAT SUCH INVESTOR IS NOT A BENEFIT PLAN. FIDUCIARIES
OF A BENEFIT PLAN CONSIDERING THE PURCHASE OF INTERESTS IN CERTIFICATES OF ANY
SERIES SHOULD CONSULT THEIR OWN COUNSEL AS TO WHETHER THE ASSETS OF THE TRUST
WHICH ARE REPRESENTED BY SUCH INTERESTS WOULD BE CONSIDERED PLAN ASSETS, AND
WHETHER, UNDER THE GENERAL FIDUCIARY STANDARDS OF INVESTMENT PRUDENCE AND
DIVERSIFICATION, AN INVESTMENT IN CERTIFICATES OF ANY SERIES IS APPROPRIATE FOR
THE BENEFIT PLAN TAKING INTO ACCOUNT THE OVERALL INVESTMENT POLICY OF THE
BENEFIT PLAN AND THE COMPOSITION OF THE BENEFIT PLAN'S INVESTMENT PORTFOLIO. IN
ADDITION, FIDUCIARIES SHOULD CONSIDER THE CONSEQUENCES THAT WOULD APPLY IF THE
TRUST'S ASSETS WERE CONSIDERED PLAN ASSETS, THE APPLICABILITY OF EXEMPTIVE
RELIEF FROM THE PROHIBITED TRANSACTION RULES AND WHETHER ALL CONDITIONS FOR SUCH
EXEMPTIVE RELIEF WOULD BE SATISFIED.
In particular, insurance companies considering the purchase of Certificates
should consult their own benefits or other appropriate counsel with respect to
the United States Supreme Court's decision in John Hancock Mutual Life Insurance
Co. v. Harris Trust & Savings Bank, 114 S. Ct. 517 (1993) ("John Hancock") and
the applicability of PTE 95-60. In John Hancock, the Supreme Court held that
assets held in an insurance company's general account may be deemed to be "plan
assets" under certain circumstances, however, PTE 95-60 may exempt some or all
of the transactions that could occur as the result of the acquisition and
holding of the Certificates by an insurance company general account from the
penalties normally associated with prohibited transactions. In addition, recent
amendments to Section 401 of ERISA enacted under the Small Business Job
Protection Act of 1996 (the "1996 Act") may affect the acquisition of
Certificates by insurance company general accounts. Accordingly, investors
should analyze whether John Hancock and PTE 95-60 or any other exemption may
have an impact with respect to their purchase of the Certificates.
93
<PAGE> 94
UNDERWRITING
Subject to the terms and conditions set forth in the Class A Underwriting
Agreement (the "Class A Underwriting Agreement") between the Transferor and the
Class A Underwriters named below (the "Class A Underwriters"), and the terms and
conditions set forth in the Class B Underwriting Agreement (the "Class B
Underwriting Agreement," and together with the Class A Underwriting Agreement,
the "Underwriting Agreement") between the Transferor and the Class B
Underwriters named below (the "Class B Underwriters," and together with the
Class A Underwriters, the "Underwriters"), the Transferor has agreed to sell to
the Underwriters, and each of the Underwriters has severally agreed to purchase,
the principal amount of the Certificates set forth opposite its name:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
CLASS A UNDERWRITERS CLASS A CERTIFICATES
- ------------------------------------------------------------------------- --------------------
<S> <C>
CS First Boston.......................................................... $110,000,000
Mellon Financial Markets, Inc............................................ $110,000,000
Chase Securities Inc..................................................... $110,000,000
J.P. Morgan Securities Inc............................................... $110,000,000
--------------------
Total............................................................... $440,000,000
=================
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
CLASS B UNDERWRITERS CLASS B CERTIFICATES
- ------------------------------------------------------------------------- --------------------
<S> <C>
CS First Boston.......................................................... $ 12,500,000
Mellon Financial Markets, Inc............................................ $ 12,500,000
--------------------
Total............................................................... $ 25,000,000
=================
</TABLE>
In the Class A Underwriting Agreement, the Class A Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
of the Class A Certificates offered hereby if any of the Class A Certificates
are purchased. In the Class B Underwriting Agreement, the Class B Underwriters
have agreed, subject to the terms and conditions set forth therein, to purchase
all of the Class B Certificates offered hereby if any of the Class B
Certificates are purchased. The Underwriters have agreed to reimburse the
Transferor for certain expenses of the issuance and distribution of the
Certificates.
The Class A Underwriters propose initially to offer the Class A
Certificates to the public at the price set forth on the cover page hereof and
to certain dealers at such price less concessions not in excess of 0.30% of the
principal amount of the Class A Certificates. The Class A Underwriters may
allow, and such dealers may reallow, concessions not in excess of 0.0018% of the
principal amount of the Class A Certificates to certain brokers and dealers.
After the initial public offering, the public offering price and other selling
terms may be changed by the Class A Underwriters.
The Class B Underwriters propose initially to offer the Class B
Certificates to the public at the price set forth on the cover page hereof and
to certain dealers at such price less concessions not in excess of 0.35% of the
principal amount of the Class B Certificates. The Class B Underwriters may
allow, and such dealers may reallow, concessions not in excess of 0.0020% of the
principal amount of the Class B Certificates to certain brokers and dealers.
After the initial public offering, the public offering price and other selling
terms may be changed by the Class B Underwriters.
Each Underwriter has represented and agreed that (a) it has not offered or
sold and, prior to the expiry of the period of six months from the Closing Date,
will not offer or sell any Certificates 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 do not constitute an offer
to the public in the United Kingdom for the purposes of the Public Offers of
Securities Regulations 1995, (b) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 of the United Kingdom
with respect to anything done by it in relation to the Certificates in, from or
otherwise involving the United Kingdom and (c) it has only issued or
94
<PAGE> 95
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 Certificates to a person who
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 of the United Kingdom or is
a person to whom the document may otherwise lawfully be issued or passed on.
Mellon Financial Markets, Inc. is an affiliate of Mellon Bank, N.A. CS
First Boston has performed certain investment banking services for the
Transferor for which it receives compensation.
The Transferor will indemnify the Underwriters against liabilities relating
to the adequacy of disclosure to investors, including under the Securities Act,
or contribute to payments the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Transferor and the Trust by Carl Krasik, Esq., Associate
General Counsel to Mellon Bank Corporation, Reed Smith Shaw & McClay,
Pittsburgh, Pennsylvania and Stroock & Stroock & Lavan, New York, New York. The
federal income tax matters described under "U.S. Federal Income Tax
Consequences" will be passed upon for the Transferor and the Trust by Stroock &
Stroock & Lavan, New York, New York. Stroock & Stroock & Lavan, New York, New
York will act as counsel for the Underwriters. Certain ERISA matters will be
passed upon for the Transferor and the Trust by Stroock & Stroock & Lavan, New
York, New York. At October 31, 1996, Mr. Krasik held options to purchase 5,950
shares of Mellon Bank Corporation common stock.
95
<PAGE> 96
INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
100 Investor Requirement........................................................ 92
1996 Act........................................................................ 93
Account......................................................................... 7, 35
Accumulation Period Length...................................................... 53
Additional Receivables.......................................................... 7
Adjusted Investor Interest...................................................... 11
AFCO............................................................................ 4, 31
AFCO Acceptance................................................................. cover, 4, 31
AFCO Credit..................................................................... cover, 4, 31
Aggregate Receivables........................................................... 8, 37
Agreement....................................................................... 5
Available Investor Principal Collections........................................ 16, 52
Available Reserve Account Amount................................................ 75
Back-up Servicer................................................................ cover, 4
banking organization............................................................ 45
Base Rate....................................................................... 78
Beginning of Month Principal Receivables........................................ 8, 63
Benefit Plans................................................................... 92
BIF............................................................................. 62
Calculation Date................................................................ 5, 35
Cede............................................................................ 3
Cedel........................................................................... 4, 46
</TABLE>
<TABLE>
<S> <C>
Cedel Participants.............................................................. 47
Certificate Owners.............................................................. 30
Certificates.................................................................... cover, 4
Class A Additional Interest..................................................... 13, 50
Class A Adjusted Investor Interest.............................................. 11, 65
Class A Available Funds......................................................... 14, 50
Class A Available Funds Cap..................................................... 13, 50
Class A Carry-Over Amount....................................................... 14, 50
Class A Certificates............................................................ cover, 4
Class A Covered Amount.......................................................... 16, 74
Class A Fixed Allocation........................................................ 64
Class A Floating Allocation..................................................... 64
Class A Holders................................................................. 5
Class A Interest Funding Account................................................ 12, 49
Class A Investor Charge-Off..................................................... 20, 73
Class A Investor Default Amount................................................. 73
Class A Investor Interest....................................................... 9, 65
Class A LIBOR Rate.............................................................. 10, 51
Class A Monthly Interest........................................................ 13, 50
Class A Monthly Principal....................................................... 70
Class A Principal Funding Investment Shortfall.................................. 16, 74
Class A Required Amount......................................................... 19, 65
Class A Scheduled Payment Date.................................................. 2
Class A Servicing Fee........................................................... 79
Class A Shortfall Amount........................................................ 14, 50
Class A Underwriters............................................................ 94
Class A Underwriting Agreement.................................................. 94
Class B Additional Interest..................................................... 13, 50
</TABLE>
96
<PAGE> 97
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Class B Available Funds......................................................... 14, 50
Class B Available Funds Cap..................................................... 14, 50
Class B Carry-Over Amount....................................................... 14, 51
Class B Certificates............................................................ cover, 4
Class B Fixed Allocation........................................................ 64
Class B Floating Allocation..................................................... 64
Class B Holders................................................................. 5
Class B Interest Funding Account................................................ 13, 49
Class B Investor Charge-Off..................................................... 20, 73
Class B Investor Default Amount................................................. 73
Class B Investor Interest....................................................... 10, 65
Class B LIBOR Rate.............................................................. 9, 51
Class B Monthly Interest........................................................ 13, 50
Class B Monthly Principal....................................................... 71
Class B Required Amount......................................................... 19, 65
Class B Scheduled Payment Date.................................................. 2
Class B Servicing Fee........................................................... 79
Class B Shortfall Amount........................................................ 14, 51
Class B Underwriters............................................................ 94
Class B Underwriting Agreement.................................................. 94
clearing agency................................................................. 45
clearing corporation............................................................ 45
Closing Date.................................................................... 2, 5, 35
Code............................................................................ 23, 87
Collateral Available Funds...................................................... 68
Collateral Charge-Off........................................................... 74
Collateral Default Amount....................................................... 73
Collateral Fixed Allocation..................................................... 64
Collateral Floating Allocation.................................................. 64
Collateral Interest............................................................. 9, 65
Collateral Interest Holder...................................................... 9
Collateral Interest Servicing Fee............................................... 79
Collateral Monthly Interest..................................................... 70
Collateral Monthly Principal.................................................... 71
Collateral Rate................................................................. 70
Commission...................................................................... cover, 3
Controlled Accumulation Amount.................................................. 71
Controlled Accumulation Period.................................................. 15
Controlled Deposit Amount....................................................... 15, 42
Cooperative..................................................................... 47
Credit Enhancement.............................................................. 10
Cut-off Date.................................................................... 5, 35
Default Amount.................................................................. 11, 72
Defaulted Account............................................................... 11, 72
Depositories.................................................................... 45
Distribution Account............................................................ 61
Distribution Date............................................................... 12, 49
DOL............................................................................. 92
DTC............................................................................. 3
DTC Participants................................................................ 45
Eligible Receivable............................................................. 60
</TABLE>
97
<PAGE> 98
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Enhancement..................................................................... 10
ERISA........................................................................... 23
Euroclear....................................................................... 4, 47
Euroclear Operator.............................................................. 47
Euroclear Participants.......................................................... 47
Excess Finance Charge Collections............................................... 70
Excess Funding Account.......................................................... 61
Excess Insurer Concentration Amount............................................. 78
Excess Obligor Concentration Amount............................................. 78
Excess Spread................................................................... 68
Exchange Act.................................................................... 3
FASIT........................................................................... 89
Final Regulation................................................................ 92
Finance Charge Account.......................................................... 61
Financed Charge Receivables..................................................... 8, 63
FIRREA.......................................................................... 25
Fixed Investor Percentage....................................................... 64
Floating Investor Percentage.................................................... 63
Foreign Investors............................................................... 91
Governmental Authority.......................................................... 60
Guidelines...................................................................... 60
Holders......................................................................... 5, 48
Identified Portfolio............................................................ 6
Indirect Participants........................................................... 46
Ineligible Account.............................................................. 55
Ineligible Receivable........................................................... 55
Initial Collateral Interest..................................................... 20
Initial Principal Payment Date.................................................. 18
Initial Receivables............................................................. 60
Insolvency Event................................................................ 76
Insolvency Laws................................................................. 25
Interest Payment Date........................................................... 2
Interest Period................................................................. 12, 49
Investment Grade Insurer Percentage............................................. 78
Investor Interest............................................................... 9
Investor Servicing Fee.......................................................... 79
IRA............................................................................. 93
IRS............................................................................. 88
John Hancock.................................................................... 93
LIBOR........................................................................... 2, 10, 51
LIBOR Determination Date........................................................ 51
Loan Agreement.................................................................. 21
Maximum Top 10 Insurer Percentage............................................... 78
Minimum Aggregate Principal Receivables......................................... 78
Minimum Transferor Interest..................................................... 78
Monthly Interest Period......................................................... 12, 49
Monthly Payment Rate............................................................ 79
Monthly Period.................................................................. 8, 63
Moody's......................................................................... 62
New Issuance.................................................................... 22
Notice of Cancellation.......................................................... 32
</TABLE>
98
<PAGE> 99
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Notice of Intent to Cancel...................................................... 32
OID............................................................................. 88
One Month LIBOR................................................................. 51
Originator...................................................................... cover
Originators..................................................................... 4
Pay Out Event................................................................... 43, 76
Permitted Investments........................................................... 62
Permitted State................................................................. 36
PFSI............................................................................ 4
plan assets..................................................................... 23
Pooling and Servicing Agreement................................................. cover
Portfolio Yield................................................................. 78
Premium Finance Agreement....................................................... cover, 5
Principal Account............................................................... 67
Principal Distribution Date..................................................... 17
Principal Funding Account....................................................... 15, 74
Principal Funding Account Balance............................................... 42
Principal Funding Investment Proceeds........................................... 16, 74
Principal Payment Event......................................................... 18
Principal Payment Period........................................................ 18
Principal Receivables........................................................... 8, 63
Principal Shortfalls............................................................ 72
Principal Terms................................................................. 27
PTE............................................................................. 93
Qualified Institution........................................................... 61
Rapid Amortization Period....................................................... 18
Rating Agency Condition......................................................... 72
Reallocated Class B Principal Collections....................................... 66
Reallocated Collateral Principal Collections.................................... 66
Reallocated Principal Collections............................................... 67
Receivables..................................................................... cover, 5, 34
Receivables Purchase Agreement.................................................. cover, 5, 34
Receivable State................................................................ 79
Record Date..................................................................... 45
Reference Banks................................................................. 51
Registration Statement.......................................................... 3
Removed Accounts................................................................ 61
Required Collateral Interest.................................................... 20, 72
Required Reserve Account Amount................................................. 74
Requirements of Law............................................................. 60
Reserve Account................................................................. 74
Reserve Account Funding Date.................................................... 74
Reset Date...................................................................... 65
Revolving Period................................................................ 15
Rule of 78's.................................................................... 34
Rule of 78's Receivables........................................................ 34
SAIF............................................................................ 62
Sale Notice..................................................................... 28
</TABLE>
99
<PAGE> 100
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Series.......................................................................... 5
Series 1996-1 Supplement........................................................ 5
Series 1996-1 Termination Date.................................................. 75
Series Supplement............................................................... 22
Servicer Ineligible Account..................................................... 59
Servicer Ineligible Receivable.................................................. 58
Service Transfer................................................................ 81
Servicer........................................................................ cover, 4
Servicer Default................................................................ 81
Servicing Fee Rate.............................................................. 79
Shared Principal Collections.................................................... 21, 72
Special Payment Date............................................................ 42
Special Tax Counsel............................................................. 88
Standard & Poor's............................................................... 62
State Fund Refund............................................................... 29
Statistical Calculation Date.................................................... 6, 36
Successor Back-up Servicer Termination Notice................................... 28
Telerate Page 3750.............................................................. 51
Terms and Conditions............................................................ 48
Tier 1 Insurer.................................................................. 79
Tier 2 Insurer.................................................................. 79
Tier 3 Insurer.................................................................. 79
Top 10 Insurer.................................................................. 79
Top 10 Investment Grade Insurer................................................. 79
Top 10 Insurer Percentage....................................................... 79
Transfer Date................................................................... 14
Transferor...................................................................... cover, 4
Transferor Ineligible Receivable................................................ 57
Transferor Interest............................................................. 2, 9
Transferor Percentage........................................................... 45
Trust........................................................................... cover, 4
Trust Termination Date.......................................................... 76
Trustee......................................................................... cover, 4
Underwriters.................................................................... 94
Underwriting Agreement.......................................................... 94
Unearned Premium................................................................ 24
Variable Interest............................................................... 65
</TABLE>
100
<PAGE> 101
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Mellon Bank
Premium Finance Loan Master Trust Asset Backed Certificates (the "Global
Securities") to be issued in Series from time to time (each, a "Series") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ("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 holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to U.S. corporate debt obligations. 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 U.S. corporate
debt obligations 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 purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or
I-1
<PAGE> 102
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. Payment will then be made by the
respective Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The Global Securities credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Cedel or
Euroclear cash debit will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to pre-position
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the bonds to
the DTC Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. The payment will then be reflected in the
account of the Cedel Participant or Euroclear Participant the following day, and
receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the Cedel
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date. Finally, day traders that use Cedel or
Euroclear and that purchase Global Securities from DTC Participants for delivery
to Cedel Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At lease three techniques should be readily available to eliminate this
potential problem:
I-2
<PAGE> 103
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner or
his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisers for specific tax advice concerning their holding and disposing of the
Global Securities.
I-3
<PAGE> 104
- ---------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRANSFEROR OR ANY AGENT OR UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE TRANSFEROR OR THE RECEIVABLES SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<S> <C>
Available Information................... 3
Reports to Certificateholders........... 3
Incorporation of Certain Documents by
Reference............................. 3
Prospectus Summary...................... 4
Risk Factors............................ 24
Business of the Originators............. 31
The Receivables......................... 34
Use of Proceeds......................... 42
Maturity Assumptions.................... 42
Description of the Certificates......... 44
Description of the Receivables Purchase
Agreement............................. 84
Certain Legal Aspects of the
Receivables........................... 86
U.S. Federal Income Tax Consequences.... 87
State and Local Taxation................ 92
ERISA Considerations.................... 92
Underwriting............................ 94
Legal Matters........................... 95
Index of Terms.......................... 96
Annex I: Global Clearance, Settlement
and Tax Documentation Procedures...... I-1
</TABLE>
UNTIL MARCH 12, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CERTIFICATES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
- ---------------------------------------------------------
Mellon Bank
Premium Finance Loan
Master Trust
$440,000,000 Class A
Floating Rate Asset Backed Certificates, Series 1996-1
$25,000,000 Class B
Floating Rate Asset Backed Certificates, Series 1996-1
Mellon Bank, N.A.
Transferor
AFCO Credit Corporation
AFCO Acceptance Corporation
Originators and Servicers
PROSPECTUS
Underwriters of the Class A Certificates
CS First Boston
Mellon Financial Markets, Inc.
Chase Securities Inc.
J.P. Morgan & Co.
Underwriters of the Class B Certificates
CS First Boston
Mellon Financial Markets, Inc.
- ---------------------------------------------------------
<PAGE> 105
As filed pursuant to Rule 424(b)(5)
Registration No. 333-11961; 333-11961-01
[ALTERNATE PAGE]
$465,000,000
Mellon Bank Premium Finance Loan Master Trust
$440,000,000 Class A Floating Rate Asset
Backed Certificates, Series 1996-1
$25,000,000 Class B Floating Rate Asset
Backed Certificates, Series 1996-1
Mellon Bank, N.A.
Transferor
AFCO Credit Corporation
AFCO Acceptance Corporation
Originators and Servicers
------------------------
Each Class A Floating Rate Asset Backed Certificate, Series 1996-1
(collectively, the "Class A Certificates") and each Class B Floating Rate Asset
Backed Certificate, Series 1996-1 (collectively, the "Class B Certificates"
and, together with the Class A Certificates, the "Certificates") will
represent the right to receive certain payments from the Mellon Bank Premium
Finance Loan Master Trust (the "Trust"), created pursuant to a pooling and
servicing agreement (the "Pooling and Servicing Agreement") dated December
1, 1996 among Mellon Bank, N.A., as transferor (the "Transferor"), AFCO
Credit Corporation ("AFCO Credit"), as servicer, AFCO Acceptance
Corporation ("AFCO Acceptance"), as servicer (and together with AFCO
Credit in their capacity as servicers, the "Servicer"), Premium
Financing Specialists, Inc., "PFSI" as back-up servicer, and Premium
Financing Specialists of California, Inc., as back-up Servicer
(together with PFSI, the "Back-up Servicer") and The First
National Bank of Chicago, as trustee (the "Trustee"). The assets
of the Trust will include (i) premium finance agreements between
either AFCO Credit or AFCO Acceptance (each in its capacity as an
originator, an "Originator") and commercial borrowers to finance
the payment of insurance premiums on insurance and related sums
regarding insurance policies under which the borrowers are the
insureds and are governed by the law of a State in the United
States of America or the District of Columbia ("Premium
Finance Agreements"), which Premium Finance Agreements are
transferred from time to time by either of the Originators
to the Transferor and by the Transferor to the Trustee for
the benefit of Trust (the "Receivables"); (ii) all monies
due or to become due with respect to the Receivables,
including all monies received from insurance companies
and state insurance guaranty funds representing
returns of unearned portions of insurance premiums, up
to the amount of principal, interest and other charges
due on the related Receivables; (iii) such amounts as
may be from time to time held in one or more trust
accounts, which will be established and maintained
by the Trustee pursuant to the Agreement; (iv) any
Enhancement issued with respect to any Series;
(v) all of the Transferor's rights under a
receivables purchase agreement (the
"Receivables Purchase Agreement"), dated as of
December 1, 1996, among the Transferor and
each Originator and (vi) the proceeds of all
of the foregoing.
(Continued on next page)
------------------------
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE CERTIFICATES, AND THERE IS NO
ASSURANCE THAT ONE WILL DEVELOP. POTENTIAL INVESTORS SHOULD CONSIDER, AMONG
OTHER THINGS, THE INFORMATION SET FORTH IN "RISK FACTORS" COMMENCING ON PAGE 24.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF MELLON BANK, N.A., ANY OF THE ORIGINATORS OR
ANY AFFILIATE THEREOF. A CERTIFICATE IS NOT A DEPOSIT AND NEITHER
THE CERTIFICATES NOR THE UNDERLYING RECEIVABLES ARE INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is to be used by Mellon Financial Markets, Inc., an
affiliate of Mellon Bank, N.A., in connection with offers and sales related to
market-making transactions in the Certificates in which Mellon Financial
Markets, Inc. acts as principal. Mellon Financial Markets, Inc. may also act as
agent in such transactions. Sales will be made at prices related to the
prevailing prices at the time of sale.
------------------------
Mellon Financial Markets, Inc.
The date of this Prospectus is December 12, 1996
<PAGE> 106
[ALTERNATE PAGE]
(Cover continued from previous page)
In addition, the Collateral Interest will be issued to the Collateral
Interest Holder in the initial amount of $35,000,000 and will be subordinated to
the Certificates as described herein. The Transferor will also own the undivided
interest in the Trust not represented by the Certificates or other interests
issued by the Trust from time to time (the "Transferor Interest"). The
Transferor may offer from time to time other Series of certificates which
evidence fractional undivided interests in certain assets of the Trust, which
may have terms significantly different from the Certificates. See "Description
of the Certificates--New Issuances."
Interest will accrue, subject to certain limitations described herein, on
the Class A Certificates from December 19, 1996 (the "Closing Date") through but
excluding March 17, 1997 and during each Interest Period (as defined herein)
thereafter, at the rate of 0.11% per annum above the London interbank offered
rate for three-month United States dollar deposits (or in certain limited
circumstances described herein, one month United States dollar deposits)
("LIBOR"), determined as described herein, prevailing on the LIBOR Determination
Date (as defined herein) with respect to such period. Interest will accrue,
subject to certain limitations described herein, on the Class B Certificates
from the Closing Date through but excluding March 17, 1997 and during each
Interest Period thereafter, at the rate of 0.32% per annum above LIBOR
prevailing on the LIBOR Determination Date with respect to each such period. The
initial LIBOR Determination Date is December 17, 1996. Interest with respect to
the Certificates will be distributed quarterly on the 15th day of March, June,
September and December (or, if such 15th day is not a business day, the next
business day) and on the Class B Scheduled Payment Date (defined below) (each,
an "Interest Payment Date") commencing on the March, 1997 Distribution Date and
ending on the related maturity date or, under certain limited circumstances
described herein, monthly, on or about the 15th day of each calendar month.
Principal on the Class A Certificates is scheduled to be distributed on the
December 2001 Distribution Date (the "Class A Scheduled Payment Date"), but may
be paid earlier or later under the circumstances described herein. Principal on
the Class B Certificates is scheduled to be distributed on the January 2002
Distribution Date (the "Class B Scheduled Payment Date"), but may be paid
earlier or later under the circumstances described herein. See "Maturity
Assumptions."
The Class B Certificates will be subordinated to the Class A Certificates
and the Collateral Interest will be subordinated to the Class A Certificates and
the Class B Certificates, as and to the extent described herein.
------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER OR BY THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO
MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
2
<PAGE> 107
AVAILABLE INFORMATION
The Transferor, as originator of the Trust, has filed a Registration
Statement on Form S-3 (together with all amendments and exhibits thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
(the "Commission") with respect to the Certificates offered pursuant to this
Prospectus. For further information, reference is made to the Registration
Statement which is available for inspection without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048; and Midwest Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates and
electronically through the Commission's Electronic Gathering and Retrieval
system at the Commission's Web site (http://www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued, monthly reports,
containing unaudited information concerning the Trust and prepared by the
Servicer, will be sent on behalf of the Trust only to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Certificates, pursuant to the Agreement. See "Description of the
Certificates--Book-Entry Registration." Such reports will not constitute
financial statements prepared in accordance with generally accepted accounting
principles. The Agreement does not require the sending of, and the Transferor
does not intend to send, any of its financial reports to Certificateholders.
Copies of the monthly reports may be obtained free of charge by calling AFCO
Credit Corporation, at (212) 612-3540. The Servicer (or Transferor, if the
Back-up Servicer is Servicer) will file with the Commission such periodic
reports with respect to the Trust as are required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of
the Commission thereunder. In furtherance of the foregoing, the Servicer will
file on behalf of the Trust a Form 8-K within 15 calendar days following the end
of each calendar month of the Trust, commencing January, 1997, containing the
information specified under the heading "Description of Certificates--Reports to
Certificateholders" and such other material changes to the characteristics of
the Receivables (including Additional Receivables) since the preceding calendar
month. The obligation to file such periodic reports may be suspended under the
Exchange Act as soon as the year after the first year of the Trust.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Servicer on behalf of the Trust referred to
herein with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act on or after the date hereof and prior to the termination of the
offering of the Certificates issued by the Trust shall be deemed to be
incorporated by reference herein 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 all purposes of this Prospectus to the extent that
a statement contained herein 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 statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute a part of this Prospectus.
The Transferor on behalf of the Trust will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such request should be directed to: Mellon Bank
Corporation, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania
15258 (Attention: Corporate Secretarial Services Department).
3
<PAGE> 108
PROSPECTUS SUMMARY
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus. Certain capitalized terms
used in this summary are defined elsewhere in this Prospectus. A listing of the
pages on which the terms are defined is found in the "Index of Terms."
Type of Securities......... Class A Floating Rate Asset Backed Certificates,
Series 1996-1 (the "Class A Certificates") and
Class B Floating Rate Asset Backed Certificates,
Series 1996-1 (the "Class B Certificates," and
together with the Class A Certificates, the
"Certificates").
The Certificates initially will be represented by
Certificates registered in the name of Cede, as the
nominee of DTC. No Certificate Owner will be
entitled to receive a Definitive Certificate,
except under the limited circumstances described
herein. Holders may elect to hold their
Certificates through DTC (in the United States) or
Cedel Bank, Societe Anonyme ("Cedel") or the
Euroclear System (in Europe) ("Euroclear").
Transfers will be made in accordance with the rules
and operating procedures described herein. See
"Description of the Certificates--Definitive
Certificates".
Beneficial interests in the Certificates will be
offered for purchase in denominations of $1,000,
and integral multiples thereof.
Originators................ AFCO Credit Corporation, a New York corporation
("AFCO Credit") and a wholly owned subsidiary of
Mellon Bank, N.A., was formed to originate premium
finance loans throughout the United States, except
California. AFCO Acceptance Corporation, a
California corporation ("AFCO Acceptance") and a
wholly owned subsidiary of AFCO Credit, was formed
to originate premium finance loans in California.
AFCO Credit and AFCO Acceptance are collectively
sometimes referred to herein as the "Originators"
or "AFCO". See "Business of the
Originators--General."
Premium finance loans are typically installment
loans, generally made to a commercial insurance
buyer, the proceeds of which pay premiums which are
due to the insurance company. Financed commercial
insurance policies commonly (a) are for a term of
one year or less, (b) require the full premium to
be paid at or near inception of the policy period
and (c) provide for a return of the unearned
premium to the insured in the event of cancellation
of the related insurance policy.
Transferor................. Mellon Bank, N.A., a national banking association
organized under the laws of the United States of
America (the "Transferor").
Servicer................... Each of AFCO Credit and AFCO Acceptance will
service the Receivables which it originates (each
in such capacity, a "Servicer" and collectively,
the "Servicer").
Back-up Servicer........... Premium Financing Specialists, Inc., a Missouri
corporation ("PFSI") will act as back-up servicer
for all Receivables other than those originated in
California, and Premium Financing Specialists of
California, Inc., a California corporation ("PFSC")
and a subsidiary of PFSI will act as back-up
servicer for the Receivables originated in
California (together with PFSI, the "Back-up
Servicer").
Trustee.................... The First National Bank of Chicago, a national
banking association, as trustee (the "Trustee").
4
<PAGE> 109
Trust...................... The Mellon Bank Premium Finance Loan Master Trust
(the "Trust") will be created as a master trust
under which one or more series of investor
certificates (each a "Series") will be issued. The
Certificates will be the first Series issued. The
Trust will be formed pursuant to a pooling and
servicing agreement dated as of December 1, 1996
(the "Agreement"), among the Transferor, each
Servicer, each Back-up Servicer and the Trustee, as
supplemented by the supplement relating to the
Certificates (the "Series 1996-1 Supplement"). As
used in this Prospectus, the term "Holders" refers
to holders of the Certificates, the term "Class A
Holders" refers to holders of the Class A
Certificates, the term "Class B Holders" refers to
holders of the Class B Certificates and the term
"Agreement" (unless the context requires otherwise)
refers to the Agreement as supplemented by the
Series 1996-1 Supplement.
Trust Assets............... The assets of the Trust include (i) premium finance
agreements between either of the Originators and
commercial borrowers to finance the payment of
insurance premiums on insurance and related sums
regarding insurance policies under which the
borrowers are the insureds governed by the law of a
State in the United States of America or the
District of Columbia (each, a "Premium Finance
Agreement"), which Premium Finance Agreements are
transferred from time to time by either of the
Originators to the Transferor and by the Transferor
to the Trustee for the benefit of the Trust (the
"Receivables"); (ii) all monies due or to become
due with respect to the Receivables, including all
monies received from insurance companies and state
insurance guaranty funds representing returns of
unearned portions of insurance premiums, up to the
amount of principal, interest and other charges due
on the related Receivables; (iii) such amounts as
may be from time to time held in a Collection
Account, Class A Interest Funding Account, Class B
Interest Funding Account, Distribution Account,
Principal Account, Finance Charge Account,
Principal Funding Account, Excess Funding Account
and Reserve Account established and maintained by
the Trustee pursuant to the Agreement, funded by
collections on Receivables and to the extent
described herein investment earnings thereon; (iv)
any Enhancement issued with respect to any Series;
(v) all of the Transferor's rights under a
receivables purchase agreement (the "Receivables
Purchase Agreement"), dated as of December 1, 1996,
among the Transferor and each of the Originators,
including rights to require the Originators to
repurchase certain Receivables in the event of
breaches of certain representations and warranties
and covenants with respect thereto and the right to
enforce certain covenants (see "Description of the
Receivables Purchase Agreement--Representations and
Warranties," "--Certain Covenants" and
--"Repurchase Obligations") and (vi) the proceeds
of all of the foregoing. See "The Receivables."
Pursuant to the Receivables Purchase Agreement, on
the date of issuance of the Certificates (the
"Closing Date"), the Originators will transfer and
assign to the Transferor Premium Finance Agreements
from their portfolio of Premium Finance Agreements
on the day immediately preceding the Closing Date
(the "Calculation Date") to borrowers whose stated
addresses in the Premium Finance Agreements are in
one of the Permitted States (as defined under "The
Receivables") and that satisfy as of the Cut-off
Date (as defined below) the eligibility criteria
specified in the Receivables Purchase Agreement and
the Agreement.
5
<PAGE> 110
The "Cut-off Date" is (x) with respect to Premium
Finance Agreements originated prior to December 1,
1996, December 1, 1996 and (y) with respect to
Premium Financing Agreements originated on or after
December 1, 1996 but through and including the
Calculation Date, the Calculation Date. See "The
Receivables" and "Description of the
Certificates--Eligible Receivables." The selection
of the Permitted States was based on state
regulatory considerations. Each of the Originators
will represent and warrant in the Receivables
Purchase Agreement, and the Transferor will
represent and warrant in the Agreement, that the
Identified Portfolio was not selected in a manner
adverse to Certificateholders. Pursuant to the
Agreement, the Transferor will transfer and assign
such Premium Finance Agreements to the Trustee for
the benefit of the Trust. See "Description of
Certificates--Transfer and Assignment of
Receivables."
As of November 15, 1996 (the "Statistical
Calculation Date"), the Permitted States consisted
of the 36 states set forth in the table "Geographic
Concentration" under the heading "The Receivables"
herein. As of the Statistical Calculation Date,
Aggregate Receivables (as defined under
"--Receivables" below) in the Identified Portfolio
constitute approximately 59.5% of the aggregate
receivables in the Originators' entire portfolio of
Premium Finance Agreements as of the Statistical
Calculation Date. "Identified Portfolio" means, as
of any date of determination, Premium Finance
Agreements (i) with borrowers whose stated address
in the Premium Finance Agreement is in one of the
Permitted States as of such date and (ii) that
satisfy the eligibility criteria for transfer to
the Trust set forth in the Agreement as of such
date.
The statistical information relating to the
Receivables presented in this Prospectus is based
on the Receivables in the Identified Portfolio as
of the Statistical Calculation Date. Receivables
transferred to the Trust on the Closing Date will
include certain additional Premium Finance
Agreements originated by either of the Originators
after the Statistical Calculation Date and on or
prior to the Calculation Date. In addition, the
characteristics of the Receivables included as of
the Statistical Calculation Date will vary as of
the Cut-off Date as a result of payments received
by or on behalf of borrowers after the Statistical
Calculation Date and prior to the Cut-off Date.
There will be no material permissible deviations
from the eligibility criteria used for identifying
the Premium Finance Agreements in the Identified
Portfolio as of the Statistical Calculation Date
from those applied on the Closing Date. However,
certain of the Premium Finance Agreements in the
Identified Portfolio that satisfied the eligibility
criteria as of the Statistical Calculation Date may
not satisfy such criteria on the Cut-off Date
because of a change in circumstances and therefore
will not be permitted to be transferred to the
Trust. While the statistical distribution of the
characteristics of all Receivables transferred to
the Trust on the Closing Date will vary from the
statistical information presented in this
Prospectus, the Transferor does not believe that
the characteristics of the Receivables as of the
Cut-off Date will vary materially from the
information presented herein with respect to the
Receivables as of the Statistical Calculation Date.
Each Originator will be obligated pursuant to the
Receivables Purchase Agreement to transfer and
assign on each day following the Closing Date
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each Premium Finance Agreement with a borrower
whose stated address in such Premium Finance
Agreement is in one of the Permitted States as of
such date originated by it after the Closing Date
(or, if such Permitted State becomes a Permitted
State after the Closing Date, originated by it
after such state became a Permitted State) which
satisfies the eligibility criteria set forth under
"Description of the Certificates--Eligible
Receivables" (the "Additional Receivables") to the
Transferor. The Transferor in turn will be required
pursuant to the Agreement to transfer and assign
all such Additional Receivables to the Trustee for
the benefit of the Trust. See "Risk
Factors--Additional Receivables Considerations." In
the event that sufficient Additional Receivables
are not transferred to the Trustee for the benefit
of the Trust to maintain the Minimum Transferor
Interest as required by the Agreement and as
described herein, a Pay Out Event would occur and
the Rapid Amortization Period will occur. See
"Maturity Assumptions--Pay Out Events" and "--Pay
Out Events."
Receivables................ The Receivables are Rule of 78's Receivables (as
defined herein) and are short-term in duration,
generally with maturities under one year. Each
Receivable bears a fixed interest rate that is
established at the time of origination. Such
interest rate is generally based on a spread over
the estimated London interbank offered rate at the
date of origination of the loan for deposits with a
maturity comparable to the average life of the
loan, which currently is generally 4 1/2 months.
The principal amount of each Receivable is fully
amortized over a fixed number of scheduled
payments. The Originators assign an account number
(each, an "Account") for the borrower under a
Premium Finance Agreement for the related insurance
policy period. A Premium Finance Agreement may
finance premiums relating to more than one
insurance policy or from one or more insurance
carriers. However, there is only one monthly
payment under a Premium Finance Agreement and such
payment is not allocated to the repayment of the
financing of the premiums of any particular
insurance policy.
Each Premium Finance Agreement representing a
Receivable grants the related Originator a security
interest in the borrower's right to receive any
unearned premium from the insurance company upon
cancellation of the related insurance policy prior
to its expiration. Each Premium Finance Agreement
representing a Receivable also contains a power of
attorney granting the related Originator the right
to cancel the insurance policy, if cancelable, and
collect such unearned premium from the insurance
company following a payment default on the related
Receivable. Each Originator will assign its
security interests and related power of attorney to
the Transferor pursuant to the Receivables Purchase
Agreement, and the Transferor will assign such
security interest and such powers of attorney to
the Trustee pursuant to the Agreement. With respect
to Receivables transferred to the Trust prior to
February 1, 1997, neither the Originators nor the
Transferor will notify the related insurance
carriers of the Trustee's security interest in the
related unearned premiums and the Trustee's
security interest in the related unearned premium
of such Receivables will not be perfected. With
respect to each Receivable transferred to the Trust
on or after February 1, 1997, the Originators and
the Transferor will represent that a notice of
finance premium has been delivered to the related
insurance carrier notifying it of the Trustee's
security interest in the
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<PAGE> 112
unearned premium and that the Trust has a first
priority perfected security interest in such
unearned premiums. See "Risk-Factors--Lack of
Perfected Security Interest in Certain Unearned
Premiums" and "Certain Legal Aspects of the
Receivables--Lack of Perfected Security Interest in
Certain Unearned Premiums."
The Aggregate Receivables as of November 30, 1996
was $614,886,198.16, consisting of $14,131,486.55
of Finance Charge Receivables and $600,754,711.61
of Principal Receivables. "Aggregate Receivables"
means, with respect to the Receivables as of any
date of determination, an amount equal to the
aggregate amount of payments owed on the
Receivables from such date (or if such date is the
Statistical Calculation Date, from November 15,
1996) through the respective scheduled final
payment dates of such Receivables (exclusive of
late fees and administrative charges) less certain
net payables as of such date of determination.
"Finance Charge Receivables" means, with respect to
the Receivables as of the first day of any Monthly
Period (as defined below), an amount equal to the
aggregate amount of unearned interest with respect
to such Receivables calculated in accordance with
the Rule of 78's method. For purposes hereof,
collections of Finance Charge Receivables with
respect to any Monthly Period generally will equal
the aggregate amount of interest accrued on such
Receivables for such Monthly Period calculated on
the basis of the Rule of 78's plus late fees and
other administrative charges collected during such
Monthly Period plus recoveries (net of the amounts
thereof applied to defaults) received during such
Monthly Period. "Monthly Period" means each
calendar month, commencing December 1996.
"Principal Receivables" means, with respect to the
Receivables as of any date of determination, an
amount equal to the product of (x) Aggregate
Receivables as of such date of determination and
(y) a fraction, the numerator of which is Beginning
of Month Principal Receivables and the denominator
of which is the Aggregate Receivables as of the
first day of the current Monthly Period. For
purposes hereof, collections of Principal
Receivables with respect to any Monthly Period will
consist of all collections on the Receivables
received during such Monthly Period that are not
treated as collections of Finance Charge
Receivables.
"Beginning of Month Principal Receivables" means,
with respect to the Receivables and any Monthly
Period, an amount equal to the Aggregate
Receivables as of the first day of such Monthly
Period minus Finance Charge Receivables as of such
date.
Under certain circumstances a borrower may have
more than one Account. It is possible that all or a
portion of the Premium Finance Agreements of any
Account will not satisfy the eligibility criteria
for transfer to the Trust resulting in the same
borrower having one or more Premium Finance
Agreements owned by the Trust and one or more
Premium Finance Agreements owned by one of the
Originators. These Premium Finance Agreements may
contain cross-default and cross-collateralization
provisions. Consequently, a default by a borrower
on a Premium Finance Agreement that is not owned by
the Trust may result in the default of the
Receivables of such borrower in the Trust and the
cancellation of the related insurance policies thus
affecting the rate and
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<PAGE> 113
timing of payments under the Receivables. In the
event certain Premium Finance Agreements of the
same borrower are owned by the Trust and by one of
the Originators, the Originators have agreed in the
Receivables Purchase Agreement that to the extent
they receive payments (including from returns of
unearned premiums, recoveries or otherwise) that
are not clearly identified as belonging to Premium
Finance Agreements owned by one of the Originators,
such amounts will be treated first as collections
on the Receivables of such borrower until such
Receivables are paid in full. In no event will
returned unearned premiums or any other payments in
respect of the Receivables be applied to payments
in respect of Premium Finance Agreements owned by
one of the Originators until such Receivables are
paid in full.
Additional Receivables..... All Additional Receivables originated by the
Originators in the Identified Portfolio will be
transferred to the Trust from time to time
following the Closing Date. Such Additional
Receivables may be of different credit quality than
previously transferred Receivables but must be
underwritten in accordance with the Originators'
credit policies and procedures which may not be
materially different from those applied to the
Receivables transferred on the Closing Date (the
"Initial Receivables"). Except for the criteria
described under "Description of
Certificates--Eligible Receivables" and "--Transfer
and Assignment of Receivables," there are no
required characteristics of Additional Receivables.
Because the remaining term to maturity of
substantially all of the Receivables included in
the Trust as of the Statistical Calculation Date is
twelve months or less, it is expected that within
twelve months following the Closing Date
substantially all of the Receivables in the Trust
will consist of Additional Receivables. Additional
Receivables transferred to the Trust may have
characteristics materially different from the
characteristics of the previously transferred
Receivables. See "Risk Factors--Additional
Receivables Considerations."
Certificate Interest
and Principal............ Each of the Certificates represents the right to
receive certain payments from the assets of the
Trust. The Trust assets will be allocated among the
Class A Holders (the "Class A Investor Interest"),
the Class B Holders (the "Class B Investor
Interest"), the Collateral Interest Holder (the
"Collateral Interest," and together with the Class
A Investor Interest and the Class B Investor
Interest, the "Investor Interest"), the interest of
the holders of other undivided interests in the
Trust issued pursuant to the Agreement and
applicable Series Supplements and the Transferor
(the "Transferor Interest"), as described below.
The Collateral Interest in the initial amount of
$35,000,000 (which amount represents 7% of the
amount of the initial Investor Interest)
constitutes Credit Enhancement for Certificates.
The provider of such Credit Enhancement is referred
to herein as the "Collateral Interest Holder").
Allocations will be made to the Collateral Interest
and the Collateral Interest Holder will have voting
and certain other rights as if the Collateral
Interest were a subordinated class of Certificates.
The Collateral Interest is not being offered hereby
and any information contained herein relating to
the Collateral Interest is included in the
Prospectus solely for the purpose of facilitating
an understanding of the Certificates.
The term "Enhancement" means, with respect to any
Series or Class, any Credit Enhancement, guaranteed
rate agreement, maturity liquidity
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<PAGE> 114
facility, interest rate cap agreement, interest
rate swap agreement or other similar arrangement
for the benefit of the certificateholders of that
Series or Class. The term "Credit Enhancement"
means with respect to any Series or Class, any cash
collateral guaranty or account, collateral
interest, letter of credit, surety bond, insurance
policy, spread account, reserve account or other
similar arrangement for the benefit of the
certificateholders of that Series or Class. Credit
Enhancement may also take the form of subordination
of one or more Classes of a Series to any other
Class or Classes of the same or a different Series
or a cross-support feature which requires
collections on Receivables of one Series to be paid
as principal and/or interest with respect to
another Series.
The Transferor Interest will represent the right to
the assets of the Trust not allocated to the
Investor Interest or the holders of other undivided
interests in the Trust. The principal amount of the
Transferor Interest will fluctuate as the amount of
Principal Receivables and the amount on deposit in
the Excess Funding Account change from time to
time.
The Class A Certificates will represent the right
to receive, from the assets of the Trust allocated
to the Class A Certificates, funds up to (but not
in excess of) the amounts required to make (a)
payments of interest accruing from the Closing Date
through but excluding March 17, 1997 and during
each Interest Period thereafter, at the rate of
0.11% per annum above the London interbank offered
rate for three month United States dollar deposits
(or, in certain limited circumstances described
herein, one month United States dollar deposits)
("LIBOR"), determined as described herein,
prevailing on the related LIBOR Determination Date
(such rate, the "Class A LIBOR Rate"), in each
case, subject to the Class A Available Funds Cap
for each related Monthly Period as described under
"--Interest" below, and (b) payments of principal
on the Class A Scheduled Payment Date or, under
certain limited circumstances, during the Principal
Payment Period or the Rapid Amortization Period, to
the extent of the Class A Investor Interest, which
may be less than the unpaid principal balance of
the Class A Certificates in certain circumstances
described herein. If the Class A Investor Interest
is less than the unpaid balance of the Class A
Certificates, the holders of the Class A
Certificates will incur a loss.
The Class B Certificates will represent the right
to receive, from the assets of the Trust allocated
to the Class B Certificates, funds up to (but not
in excess of) the amounts required to make (a)
payments of interest accruing from the Closing Date
through but excluding March 17, 1997 and during
each Interest Period thereafter, at the rate of
0.32% per annum above LIBOR, determined as
described herein, prevailing on the related LIBOR
Determination Date (such rate, the "Class B LIBOR
Rate"), in each case, subject to the Class B
Available Funds Cap for each related Monthly Period
as described under "--Interest" below and (b)
payments of principal on the Class B Scheduled
Payment Date or, under certain limited
circumstances, during the Principal Payment Period
or the Rapid Amortization Period, to the extent of
the Class B Investor Interest, which may be less
than the unpaid principal balance of the Class B
Certificates in certain circumstances described
herein. No principal will be paid to the Class B
Holders until the Class A Investor Interest is paid
in full. If the Class B Investor Interest is less
than the
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<PAGE> 115
unpaid balance of the Class B Certificates, the
holders of the Class B Certificates will incur a
loss.
The aggregate principal amount of the Class A
Investor Interest and the Class B Investor Interest
will, except as otherwise provided herein, remain
fixed at $440,000,000 and $25,000,000,
respectively. The Class A Investor Interest will
decline in certain circumstances if the Default
Amounts allocated to the Class A Certificates
exceed funds allocable thereto as described herein
and the Class B Investor Interest and the
Collateral Interest are zero. The Class B Investor
Interest will decline in certain circumstances as a
result of (a) the reallocation of collections of
Principal Receivables otherwise allocable to the
Class B Investor Interest to fund certain payments
in respect of the Class A Certificates and (b) the
allocation to the Class B Investor Interest of
certain Default Amounts, including such amounts
otherwise allocable to the Class A Investor
Interest when the Collateral Interest is zero.
During the Controlled Accumulation Period, for the
sole purpose of allocating collections of Finance
Charge Receivables and Default Amounts with respect
to each Monthly Period, the Class A Investor
Interest will be further reduced by the amount on
deposit in the Principal Funding Account from time
to time (as so reduced, the "Class A Adjusted
Investor Interest" and together with the Class B
Investor Interest and the Collateral Interest, the
"Adjusted Investor Interest"). See "Description of
Certificates--Reallocation of Cash Flows,"
"--Receivables in Defaulted Accounts; Investor
Charge-offs" and "--Principal Funding Account."
The Class A Certificates, the Class B Certificates
and the Collateral Interest will each include the
right to receive (but only to the extent needed to
make required payments under the Agreement) varying
percentages of collections of Finance Charge
Receivables and Principal Receivables and will be
allocated varying percentages of the amount of
Principal Receivables which are Defaulted
Receivables net of Recoveries for such Monthly
Period (the "Default Amount") during each Monthly
Period. "Defaulted Receivables" means, with respect
to any Monthly Period, Receivables as to which
either (i) the insurance policy or policies
financed thereby has been cancelled for 270 days or
more or (ii) the Servicer has charged off in
accordance with its customary and usual practices.
"Recoveries" means, with respect to the Receivables
and any Monthly Period, all amounts received by the
Servicer in respect of Defaulted Receivables during
such Monthly Period, less related expenses of
outside collection agencies. In the event one of
the Receivables in an Account is a Defaulted
Receivable (a, "Defaulted Account") and for
administrative reasons the Servicer is unable to
identify or segregate which Receivables in such
Defaulted Account are Defaulted Receivable, all of
the Receivables in such Defaulted Account will be
treated as Defaulted Receivables.
Collections of Finance Charge Receivables and
Default Amounts at all times, and collections of
Principal Receivables during the Revolving Period,
will be allocated to the Investor Interest based on
the Floating Investor Percentage and will be
further allocated among the Class A Investor
Interest, the Class B Investor Interest and the
Collateral Interest based on the Class A Floating
Allocation, the Class B Floating Allocation and the
Collateral Floating Allocation, respectively,
applica-
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<PAGE> 116
ble during the related Monthly Period. Collections
of Principal Receivables during the Controlled
Accumulation Period and the Rapid Amortization
Period will be allocated to the Investor Interest
based on the Fixed Investor Percentage and will be
further allocated among the Class A Investor
Interest, the Class B Investor Interest and the
Collateral Interest based on the Class A Fixed
Allocation, the Class B Fixed Allocation and the
Collateral Fixed Allocation, respectively. See
"Description of the Certificates--Allocation
Percentages" and "--Pay Out Events".
Interest................... Interest on the Class A Certificates and the Class
B Certificates will accrue from the Closing Date on
the outstanding principal balance of the Class A
Certificates and the Class B Certificates at the
Class A LIBOR Rate and Class B LIBOR Rate,
respectively, subject to the limitations described
below. Interest will be distributed quarterly on
the 15th day of March, June, September, and
December, (or if any such day is not a business
day, the next succeeding business day) and on the
Class B Scheduled Payment Date (each, an "Interest
Payment Date"), commencing on the March 1997
Distribution Date and, following the occurrence of
a Pay Out Event or Principal Payment Event, on each
Special Payment Date. Interest for any Interest
Payment Date or Special Payment Date will accrue
from and including the preceding Interest Payment
Date or Special Payment Date (or in the case of the
first Interest Payment Date, from and include the
Closing Date) to but excluding the next Interest
Payment Date or Special Payment Date and interest,
with respect to Collateral Monthly Interest, shall
accrue at One Month LIBOR during each Monthly
Interest Period (as defined below) (each, an
"Interest Period").
Interest payments or deposits with respect to the
Class A Certificates for each Distribution Date
will be calculated on the outstanding principal
balance of the Class A Certificates as of the
preceding Record Date (or in the case of the
initial Distribution Date, as of the Closing Date)
based upon, subject to certain limitations
described below, the Class A LIBOR Rate.
"Distribution Date" means the 15th day of each
calendar month (or if any such day is not a
business day, the next succeeding business day)
commencing January 15, 1997; however, the first
Interest Payment Date will not occur until March
17, 1997. Interest payments or deposits with
respect to each Distribution Date will be
calculated on the basis of the actual number of
days in the period (each, a "Monthly Interest
Period") from and including the preceding
Distribution Date (or in the case of the initial
Distribution Date, the Closing Date) to but
excluding such Distribution Date and a 360-day
year. On each Distribution Date, Class A Monthly
Interest (as defined below) and Class A Monthly
Interest previously due but not deposited in the
Class A Interest Funding Account (as defined below)
or paid to the Class A Certificateholders and any
Class A Additional Interest (as defined below) will
be (i) paid to the Class A Certificateholders, if
such Distribution Date is an Interest Payment Date
or a Special Payment Date, or (ii) deposited in the
Class A Interest Funding Account (the "Class A
Interest Funding Account"), an administrative
subaccount of an eligible trust account in the name
of Trustee and for the benefit of the
Certificateholders, if such Distribution Date is
not an Interest Payment Date or a Special Payment
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<PAGE> 117
Date. Payments to the Class A Certificateholders or
deposits into the Class A Interest Funding Account
in respect of interest on the Class A Certificates
on any Distribution Date will be funded from Class
A Available Funds for the related Monthly Period.
See "Description of the Certificates--Application
of Collections--Allocations" and "--Commingling."
Interest payments or deposits with respect to the
Class B Certificates for each Distribution Date
will be calculated on the outstanding principal
balance of the Class B Certificates as of the
preceding Record Date (or in the case of the
initial Distribution Date, on the Closing Date)
based upon the Class B LIBOR Rate and the actual
number of days in the Monthly Interest Period and a
360-day year. On each Distribution Date, Class B
Monthly Interest and Class B Monthly Interest
previously due but not deposited in the Class B
Interest Funding Account (as defined below) or paid
to the Class B Certificateholders and any Class B
Additional Interest (as defined below) will be (i)
paid to the Class B Certificateholders, if such
Distribution Date is an Interest Payment Date or a
Special Payment Date, or (ii) deposited in the
Class B Interest Funding Account (the "Class B
Interest Funding Account"), an administrative
subaccount of an eligible trust account in the name
of the Trustee for the benefit of the
Certificateholders, if such Distribution Date is
not an Interest Payment Date or a Special Payment
Date. Payments to the Class B Certificateholders or
deposits into the Class B Interest Funding Account
in respect of interest on the Class B Certificates
on any Distribution Date will be funded from Class
B Available Funds for the related Monthly Period.
Class A Monthly Interest and Class B Monthly
Interest for any Distribution Date due but not paid
on such Distribution Date will be payable on the
next succeeding Distribution Date, together with
additional interest on such amount at the
applicable Class A LIBOR Rate or Class B LIBOR Rate
plus 2% per annum (such amount, as applicable,
"Class A Additional Interest" and "Class B
Additional Interest"). Any such amounts will not be
distributed until the related Interest Payment Date
or Special Payment Date. See "Description of the
Certificates--Application of
Collections--Allocations" and "--Commingling."
"Class A Monthly Interest" means for any
Distribution Date an amount equal to the lesser of
(x) the product of (i) the actual number of days in
the related Monthly Interest Period divided by 360,
(ii) the Class A LIBOR Rate and (iii) the
outstanding principal balance of the Class A
Certificates as of the preceding Record Date (or in
the case of the first Distribution Date, as of the
Closing Date) and (y) the Class A Available Funds
Cap for the related Monthly Period.
"Class B Monthly Interest" means for any
Distribution Date, an amount equal to the lesser of
(x) the product of (i) the actual number of days in
the related Monthly Interest Period divided by 360,
(ii) the Class B LIBOR Rate and (iii) the
outstanding principal balance of the Class B
Certificates as of the preceding Record Date (or in
the case of the first Distribution Date, as of the
Closing Date) and (y) the Class B Available Funds
Cap for the related Monthly Period.
"Class A Available Funds Cap" means, with respect
to any Monthly Period, Class A Available Funds for
such Monthly Period less, if the
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<PAGE> 118
Originators are not the Servicer, the Class A
Servicing Fee for such Monthly Period.
"Class A Available Funds" means, with respect to
any Monthly Period, an amount equal to the sum of
(a) the Class A Floating Allocation of collections
of Finance Charge Receivables allocated to the
Investor Interest with respect to such Monthly
Period, (b) Principal Funding Investment Proceeds,
if any, with respect to the related Transfer Date
and (c) amounts, if any, to be withdrawn from the
Reserve Account which are required to be included
in Class A Available Funds pursuant to the Series
1996-1 Supplement with respect to such Transfer
Date. "Transfer Date" is the business day preceding
each Distribution Date.
"Class B Available Funds Cap" means, with respect
to any Monthly Period, Class B Available Funds for
such Monthly Period less, if the Originators are
not the Servicer, the Class B Servicing Fee for
such Monthly Period.
"Class B Available Funds" means, with respect to
any Monthly Period, an amount equal to the Class B
Floating Allocation of collections of Finance
Charge Receivables allocated to the Investor
Interest with respect to such Monthly Period.
Class A Monthly Interest and Class B Monthly
Interest will be funded from the portion of
collection of Finance Charge Receivables during the
preceding Monthly Period (or with respect to the
first Distribution Date, from and including the
Cut-off Date through December 31, 1996) and certain
other available amounts (a) with respect to the
Class A Certificates, allocated to the Class A
Investor Interest, and, if necessary, from Excess
Spread and Reallocated Principal Collections (to
the extent available), (b) with respect to the
Class B Certificates, allocated to the Class B
Investor Interest and, if necessary, from Excess
Spread and Reallocated Principal Collections (to
the extent available) and (c) with respect to the
Collateral Interest, from Excess Spread. See
"Description of the Certificates--Reallocation of
Cash Flows" and "--Application of
Collections--Payment of Interest, Fees and Other
Items" and "Risk Factors--Risk of Limitations on
Subordination."
If and to the extent on any Distribution Date, the
amount of interest payable on the Class A
Certificates based on the Class A LIBOR Rate for
the related Monthly Interest Period exceeds the
Class A Available Funds Cap for the related Monthly
Period, then such excess (the "Class A Shortfall
Amount") will be carried forward to the next
Distribution Date together with interest thereon at
the applicable Class A LIBOR Rate plus 2% per annum
(the "Class A Carry Over Amount") and will be
funded on a subordinated basis solely from Excess
Spread, if any, available therefor as described
under "Description of the Certificates--Application
of Collections--Excess Spread."
If and to the extent on any Distribution Date, the
amount of interest payable on the Class B
Certificates based on the Class B LIBOR Rate for
the related Monthly Interest Period exceeds the
Class B Available Funds Cap for the related Monthly
Period, then such excess (the "Class B Shortfall
Amount") will be carried forward to the next
Distribution Date together with interest thereon at
the applicable Class B LIBOR Rate plus 2% per annum
(the "Class B Carry Over Amount") and will be
funded on a subordinated basis solely from Excess
Spread, if
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<PAGE> 119
any, available therefor as described under
"Description of the Certificates--Application of
Collections--Excess Spread." The Class B Carry Over
Amount is subordinated to the Class A Carry Over
Amount. The Class A Carry Over Amount and Class B
Carry Over Amount are subordinated to payments in
respect of the Collateral Interest. See "Risk
Factors--Basis Risk."
Revolving Period........... The "Revolving Period" for the Certificates means
the period from and including the Closing Date to,
but not including, the commencement of the earlier
of (a) the Controlled Accumulation Period (b) the
Principal Payment Period and (c) the Rapid
Amortization Period. During the Revolving Period,
collections on Principal Receivables otherwise
allocable to the Investor Interest will, subject to
certain limitations and unless a reduction in the
required Collateral Interest has occurred, be
treated as Shared Principal Collections and
allocated to the holders of other Series of
certificates issued and outstanding or, subject to
certain limitations, paid to the Transferor or
deposited into the Excess Funding Account. See
"Description of the Certificates--Principal
Payments." See also "Description of the
Certificates--Pay Out Events" and "Extension of
Initial Principal Payment Date" for a discussion of
the events which might lead to the termination of
the Revolving Period prior to the commencement of
the Controlled Accumulation Period.
Controlled Accumulation
Period................... Unless a Pay Out Event or Principal Payment Event
occurs, the controlled accumulation period for the
Certificates (the "Controlled Accumulation Period")
is scheduled to begin at the close of business on
February 28, 2001. Subject to the conditions set
forth under "Description of the
Certificates--Postponement of Controlled
Accumulation Period," the day on which the
Revolving Period ends and the Controlled
Accumulation Period begins may be delayed to not
later than the close of business on October 31,
2001. The Controlled Accumulation Period will end
on the earliest of (i) the commencement of the
Rapid Amortization Period or Principal Payment
Period, (ii) payment of the Investor Interest in
full and (iii) the Series 1996-1 Termination Date.
On each Transfer Date during the Controlled
Accumulation Period, prior to the payment of the
Class A Investor Interest in full, amounts equal to
the least of (a) Available Investor Principal
Collections for the related Monthly Period, (b) the
sum of the Controlled Accumulation Amount for such
Monthly Period and any portion of the Controlled
Accumulation Amount for any prior Monthly Period
that has not yet been deposited (such sum, the
"Controlled Deposit Amount" for such Monthly
Period) and (c) the Class A Investor Interest on
such Transfer Date will be deposited monthly in a
trust account established by the Servicer (the
"Principal Funding Account") on each Transfer Date
beginning with the Transfer Date in the month
following the commencement of the Controlled
Accumulation Period until the Principal Funding
Account Balance is equal to the Class A Investor
Interest. On each Transfer Date during the
Controlled Accumulation Period after the
Distribution Date on which the Class A Investor
Interest has been paid in full, an amount equal to
the lesser of (a) Available Investor Principal
Collections for the related Monthly Period and (b)
the Class B Investor Interest on such Transfer Date
will be deposited into the Distribution Account for
distribution to the Class B Holders on the Class B
Sched-
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<PAGE> 120
uled Payment Date. If, for any Monthly Period, the
Available Investor Principal Collections for such
Monthly Period exceed the applicable Controlled
Deposit Amount, the amount of such excess will be
first paid to the Collateral Interest Holder to the
extent that the Collateral Interest exceeds the
Required Collateral Interest and then will be
treated as Shared Principal Collections and
allocated to the holders of other Series of
certificates issued and outstanding or, subject to
certain limitations, paid to the Transferor or
deposited into the Excess Funding Account. See
"Description of the Certificates--Application of
Collections."
"Available Investor Principal Collections" means,
with respect to any Monthly Period in the
Controlled Accumulation Period, Principal Payment
Period or the Rapid Amortization Period, an amount
equal to the sum of (a) (i) the Fixed Investor
Percentage of collections of Principal Receivables
received during such Monthly Period and certain
other amounts allocable to the Investor Interest,
minus (ii) the amount of Reallocated Principal
Collections with respect to such Monthly Period
used to fund interest on the Certificates or the
Servicing Fee, plus (b) any Shared Principal
Collections with respect to other Series that are
allocated to Series 1996-1. Unless a Pay Out Event
or Principal Payment Event occurs, prior to the
payment of the Class A Investor Interest in full,
all funds on deposit in the Principal Funding
Account will be invested at the direction of the
Servicer by the Trustee in certain Permitted
Investments. Investment earnings (net of investment
losses and expenses) on funds on deposit in the
Principal Funding Account (the "Principal Funding
Investment Proceeds") during the Controlled
Accumulation Period will be used to pay interest on
the Class A Certificates in an amount up to, for
each Transfer Date, the product of (a) a fraction,
the numerator of which is the actual number of days
in the related Interest Period and the denominator
of which is 360, (b) the Class A LIBOR Rate in
effect with respect to the related Interest Period
and (c) the Principal Funding Account Balance as of
the Record Date preceding such Transfer Date (the
"Class A Covered Amount"). If, for any Transfer
Date, the Principal Funding Investment Proceeds are
less than the Class A Covered Amount, the amount of
such deficiency (the "Class A Principal Funding
Investment Shortfall") shall be paid, to the extent
available, from the Reserve Account and, if
necessary, from Excess Spread and Reallocated
Principal Collections. See "Description of the
Certificates--Principal Funding Account."
Funds on deposit in the Principal Funding Account
will be available to pay the Class A Holders in
respect of the Class A Investor Interest on the
Class A Scheduled Payment Date. If the aggregate
principal amount of deposits made to the Principal
Funding Account is insufficient to pay the Class A
Investor Interest in full on the Class A Scheduled
Payment Date, the Rapid Amortization Period will
commence. Although it is anticipated that during
the Controlled Accumulation Period prior to the
payment of the Class A Investor Interest in full,
funds will be deposited in the Principal Funding
Account in an amount equal to the applicable
Controlled Deposit Amount on each Transfer Date and
that scheduled principal will be available for
distribution to the Class A Holders on the Class A
Scheduled Payment Date, no assurance can be given
in that regard. See "Maturity Assumptions."
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On the Class B Scheduled Payment Date, provided
that the Class A Investor Interest is paid in full
on the Class A Scheduled Payment Date and the Rapid
Amortization Period has not commenced, Available
Investor Principal Collections will be used to pay
the Class B Holders in respect of the Class B
Investor Interest as described herein. If the
Available Investor Principal Collections are
insufficient to pay the Class B Investor Interest
in full on the Class B Scheduled Payment Date, the
Rapid Amortization Period will commence. Although
it is anticipated that scheduled principal will be
available for distribution to the Class B Holders
on the Class B Scheduled Payment Date, no assurance
can be given in that regard. See "Maturity
Assumptions".
If a Pay Out Event or Principal Payment Event
occurs during the Controlled Accumulation Period,
the Principal Payment Period or the Rapid
Amortization Period may commence, and any amounts
on deposit in the Principal Funding Account will be
paid to the Class A Holders on the Distribution
Date in the month following the commencement of the
Principal Payment Period or the Rapid Amortization
Period, as the case may be.
Other Series offered by the Trust may or may not
have amortization or accumulation periods like the
Controlled Accumulation Period for the
Certificates, and such periods may have different
lengths and begin on different dates than such
Controlled Accumulation Period. Thus, certain
Series may be in their revolving periods while
others are in periods during which collections of
Principal Receivables are distributed to or held
for the benefit of certificateholders of such other
Series. In addition, other Series may allocate
Principal Receivables based upon different investor
percentages. See "Description of the
Certificates--New Issuances."
Initial Principal Payment
Date; Principal Payment
Period................... Unless a Pay Out Event has occurred, principal with
respect to the Class A Certificates is expected to
be paid on the Class A Scheduled Payment Date. If
the Transferor elects not to extend the Initial
Principal Payment Date (a "Principal Payment
Event"), the Revolving Period or the Controlled
Accumulation Period, as applicable, will end
beginning on the first day of the Monthly Period
following the Principal Payment Event and the
Principal Payment Period will commence. On each
Distribution Date with respect to the Principal
Payment Period, amounts then on deposit in the
Principal Funding Account, if any, and Available
Investor Principal Collections with respect to each
Distribution Date will be paid first to the Class A
Holders until the earlier of the date on which the
Class A Investor Interest is paid in full or the
Series 1996-1 Termination Date, and, after payment
in full of Class A Investor Interest, then to the
Class B Holders until the earlier of the date on
which the Class B Investor Interest is paid in full
or the Series 1996-1 Termination Date. "Principal
Distribution Date" means each Distribution Date
beginning with the first Distribution Date
following the Monthly Period in which the Principal
Payment Period commenced. The Class B Holders will
not begin to receive payments of principal during
the Principal Payment Period until the principal
balance of the Class A Certificates has been
reduced to zero. The "Initial Principal Payment
Date" will initially be the December 1998
Distribution Date, but will successively be
extended to the next Distribution Date after the
then-
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current Initial Principal Payment Date unless the
Transferor elects not to cause such extension;
provided, however, that the Initial Principal
Payment Date may not be later than the Class A
Scheduled Payment Date. The "Principal Payment
Period" means the period beginning on the Initial
Principal Payment Date following the Transferor's
election not to extend such Initial Principal
Payment Date and ending on the earliest to occur of
(i) the Rapid Amortization Period, (ii) the payment
in full of the Invested Amount and (iii) the Series
1996-1 Termination Date. See "Description of the
Certificates -- Extension of Initial Principal
Payment Date".
Rapid Amortization
Period..................... During the period from the day on which a Pay Out
Event has occurred and ending on the earlier of (a)
the payment of the Investor Interest in full and
(b) the Series 1996-1 Termination Date (the "Rapid
Amortization Period"), Available Investor Principal
Collections will be distributed monthly on each
Distribution Date to the Class A Holders and,
following payment of the Class A Investor Interest
in full, to the Class B Holders and, following
payment of the Class B Investor Interest in full,
to the Collateral Interest Holder beginning with
the Distribution Date in the month following the
commencement of the Rapid Amortization Period. See
"Description of the Certificates--Pay Out Events"
for a discussion of the events which might lead to
the commencement of the Rapid Amortization Period.
Subordination of the
Class B Certificates
and the Collateral
Interest................. The Class B Certificates and the Collateral
Interest will be subordinated, as described herein,
to the extent necessary to fund certain payments
with respect to the Class A Certificates as
described herein. In addition, the Collateral
Interest will be subordinated to the extent
necessary to fund certain payments with respect to
the Class B Certificates. If the Class B Investor
Interest and the Collateral Interest are reduced to
zero, the Class A Holders will bear directly the
credit and other risks associated with their
interest in the Trust. If the Collateral Interest
is reduced to zero, the Class B Holders will bear
directly the credit and other risks associated with
their interest in the Trust. To the extent the
Class B Investor Interest is reduced, the
percentage of collections of Finance Charge
Receivables allocable to the Class B Holders in
subsequent Monthly Periods will be reduced. Such
reductions of the Class B Investor Interest will
thereafter be reimbursed and the Class B Investor
Interest increased on each Transfer Date by the
amount, if any, of Excess Spread for such Transfer
Date available for that purpose. To the extent the
amount of such reduction in the Class B Investor
Interest is not reimbursed, the amount of principal
and interest distributable to the Class B Holders
will be reduced. See "Risk Factors--Risk of
Limitations on Subordination" and "Description of
the Certificates-- Subordination."
Additional Amounts
Available
to Holders............... With respect to any Transfer Date, Excess Spread
will be applied to fund the Class A Required Amount
and the Class B Required Amount, if any. The "Class
A Required Amount" means the amount, if any, by
which the sum of (a) the Class A Monthly Interest
due on the related Distribution Date and any
overdue Class A Monthly Interest and Class A
Additional Interest thereon, (b) the Class A
Servicing Fee for the
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<PAGE> 123
related Monthly Period and any overdue Class A
Servicing Fee and (c) the Class A Investor Default
Amount, if any, for the related Monthly Period
exceeds the Class A Available Funds for the related
Monthly Period. The Class A Required Amount does
not include any Class A Shortfall Amount or Class A
Carry Over Amount. The "Class B Required Amount"
means an amount, if any, equal to the sum of (a)
the amount, if any, by which the sum of (i) Class B
Monthly Interest due on the related Distribution
Date and any overdue Class B Monthly Interest and
Class B Additional Interest thereon, and (ii) the
Class B Servicing Fee for the related Monthly
Period and any overdue Class B Servicing Fee
exceeds the Class B Available Funds for the related
Monthly Period and (b) the Class B Investor Default
Amount, if any, for the related Monthly Period. The
Class B Required Amount does not include any Class
B Shortfall Amount or Class B Carry Over Amount.
"Excess Spread" for any Transfer Date will equal
the sum of (1) the excess of (A) Class A Available
Funds for the related Monthly Period over (B) the
sum of the amounts referred to in clauses (a), (b),
and (c) in the definition of "Class A Required
Amount" above, (2) the excess of (A) Class B
Available Funds for the related Monthly Period over
(B) the sum of the amounts referred to in clauses
(a)(i) and (a)(ii) in the definition of "Class B
Required Amount" above and (3) Collateral Available
Funds for the related Monthly Period not used under
certain circumstances to pay the Collateral
Interest Servicing Fee, as described herein.
If, on any Transfer Date, Excess Spread is less
than the Class A Required Amount, Reallocated
Principal Collections allocable first to the
Collateral Interest and then to the Class B
Investor Interest with respect to the related
Monthly Period will be used to fund the remaining
Class A Required Amount. If Reallocated Principal
Collections with respect to such Monthly Period are
insufficient to fund the remaining Class A Required
Amount for the related Transfer Date, then the
Collateral Interest (after giving effect to
reductions for any Collateral Charge-Offs and any
Reallocated Principal Collections allocable to the
Collateral Interest on such Transfer Date) will be
reduced by the amount of such deficiency (but not
by more than the Class A Investor Default Amount
for such Monthly Period). In the event that such
reduction would cause the Collateral Interest to be
a negative number, the Collateral Interest will be
reduced to zero and the Class B Investor Interest
(after giving effect to reductions for any Class B
Investor Charge-Offs and Reallocated Principal
Collections allocable to the Class B Investor
Interest) will be reduced by the amount by which
the Collateral Interest would have been reduced
below zero (but not by more than the excess of the
Class A Investor Default Amount, if any, for such
Monthly Period over the amount, if any, of the
Collateral Interest with respect to such Monthly
Period). In the event that such reduction would
cause the Class B Investor Interest to be a
negative number, the Class B Investor Interest will
be reduced to zero and the Class A Investor
Interest will be reduced by the amount by which the
Class B Investor Interest would have been reduced
below zero (but not by more than the excess, if
any, of the Class A Investor Default Amount for
such Monthly Period over such reductions in the
Collateral Interest and the Class B Investor
Interest with respect to such Monthly Period) (such
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<PAGE> 124
reduction, a "Class A Investor Charge-Off"). If the
Collateral Interest and the Class B Investor
Interest are reduced to zero, the Class A Holders
will bear directly the credit and other risks
associated with their undivided interest in the
Trust. See "Description of the Certificates--
Reallocation of Cash Flows" and "--Receivables in
Defaulted Accounts; Investor Charge-Offs."
If, on any Transfer Date, Excess Spread not
required to pay the Class A Required Amount and to
reimburse Class A Investor Charge-Offs is less than
the Class B Required Amount, Reallocated Principal
Collections allocable to the Collateral Interest
for the related Monthly Period not required to pay
the Class A Required Amount will be allocated to
fund the remaining Class B Required Amount. If such
remaining Reallocated Principal Collections
allocable to the Collateral Interest with respect
to such Monthly Period are insufficient to fund the
remaining Class B Required Amount for the related
Transfer Date, then the Collateral Interest (after
giving effect to reductions for any Collateral
Charge-Offs, Reallocated Principal Collections
allocable to the Collateral Interest and any
adjustments made thereto for the benefit of the
Class A Holders) will be reduced by the amount of
such deficiency (but not by more than the Class B
Investor Default Amount for such Monthly Period).
If such reduction would cause the Collateral
Interest to be a negative number, the Collateral
Interest will be reduced to zero, and the Class B
Investor Interest will be reduced by the amount by
which the Collateral Interest would have been
reduced below zero (but not by more than the
excess, if any, of the Class B Investor Default
Amount for such Monthly Period over such reduction
in the Collateral Interest with respect to such
Monthly Period) (such reduction, a "Class B
Investor Charge-Off"). In the event of a reduction
of the Class A Investor Interest, the Class B
Investor Interest or the Collateral Interest, the
amount of principal and interest available to fund
payments with respect to the Class A Certificates
and the Class B Certificates will be decreased. See
"Description of the Certificates--Reallocation of
Cash Flows" and "-- Receivables in Defaulted
Accounts; Investor Charge-Offs."
Required Collateral
Interest................... The "Required Collateral Interest" with respect to
any Transfer Date means (a) initially, $35,000,000
(the "Initial Collateral Interest") and (b) on any
Transfer Date thereafter, an amount equal to 7% of
the Adjusted Investor Interest on such Transfer
Date, after taking into account deposits into the
Principal Funding Account on such Transfer Date and
payments to be made on the related Distribution
Date, and the Collateral Interest on the prior
Transfer Date after any adjustments made on such
Transfer Date, but not less than $15,000,000;
provided however, (i) that if certain reductions in
the Collateral Interest occur or if a Pay Out Event
occurs, the Required Collateral Interest for such
Transfer Date shall equal the Required Collateral
Interest for the Transfer Date immediately
preceding the occurrence of such reduction or Pay
Out Event; (ii) in no event shall the Required
Collateral Interest exceed the unpaid principal
amount of the Certificates as of the last day of
the Monthly Period preceding such Transfer Date
after taking into account payments to be made on
the related Distribution Date; and (iii) the
Required Collateral Interest may be reduced at any
time to a lesser amount if the Rating Agency
Condition is satisfied. See "Description of the
Certificates--Required Collateral Interest."
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<PAGE> 125
If on any Transfer Date, the Collateral Interest is
less than the Required Collateral Interest, certain
Excess Spread amounts, if available, will be used
to increase the Collateral Interest to the extent
of such shortfall. If on any Transfer Date the
Collateral Interest equals or exceeds the Required
Collateral Interest, any such Excess Spread amounts
will first be deposited into the Reserve Account as
described herein and second, to the extent
available, be applied in accordance with the Loan
Agreement among the Trustee, the Transferor, each
Servicer and the Collateral Interest Holder (the
"Loan Agreement") and will not be available to the
Holders.
Shared Excess Finance
Charge Collections......... To the extent that collections of Finance Charge
Receivables allocated to the Investor Interest (and
certain other amounts that are to be treated as
collections of Finance Charge Receivables allocated
to the Investor Interest) are not needed to make
payments in respect of the Investor Interest as
described herein under "Description of the
Certificates-- Application of Collections," such
Excess Finance Charge Collections will be applied
to make payments with respect to other Series
entitled to share therein in accordance with the
Agreement. In addition, Excess Finance Charge
Collections otherwise allocable to certain other
Series, to the extent not required to make payments
in respect of such Series, may be applied to cover
shortfalls in amounts payable from Excess Spread as
described herein under "Description of the
Certificates-- Application of Collections."
Shared Principal
Collections................ To the extent that collections of Principal
Receivables allocated to the Investor Interest are
not needed to make payments on the Investor
Interest or to be deposited in the Principal
Funding Account, such collections ("Shared
Principal Collections") will be allocated to cover
certain principal payments due to or for the
benefit of certificateholders of other Series or,
under certain circumstances, deposited into the
Excess Funding Account or paid to the Transferor.
Any such reallocation or deposit will not result in
a reduction in the Investor Interest with respect
to Series 1996-1. In addition, collections of
Principal Receivables and certain other amounts
otherwise allocable to other Series, to the extent
such collections are not needed to make payments to
or deposits for the benefit of the
certificateholders of such other Series, may be
applied to cover principal payments due to or for
the benefit of the holders of the Certificates or
the holder of the Collateral Interest. See
"Description of the Certificates--Shared Principal
Collections."
Servicing Fee.............. The Servicers will receive a monthly fee as
servicing compensation from the Trust on each
Transfer Date. On each Transfer Date, the Class A
Servicing Fee, the Class B Servicing Fee and the
Collateral Interest Servicing Fee will be paid as
described under "Description of the
Certificates--Servicing Compensation, Back-up
Servicing Compensation and Payment of Expenses."
Optional Repurchase........ The Investor Interest will be subject to optional
repurchase by the Transferor on any Distribution
Date on or after the Distribution Date on which the
Investor Interest is reduced to an amount less than
or equal to $25,000,000 (5% of the initial Investor
Interest), if certain conditions set forth in the
Agreement are met. The repurchase price will be
equal to the sum of the Investor Interest and all
accrued and unpaid interest on the Certificates and
the Collateral Interest through the day preceding
the
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Distribution Date on which the repurchase occurs.
See "Description of the Certificates--Final Payment
of Principal; Termination."
New Issuances.............. Pursuant to any one or more supplements to the
Agreement (each, a "Series Supplement"), the
Transferor may require the Trustee to issue one or
more new Series in exchange for a reduction in the
Transferor Interest. In addition, if provided in
the relevant Series Supplement (and subject to any
applicable requirements under the Exchange Act and
the rules and regulations thereunder, including
Rule 13E-4), Certificates representing any Series
issued by that trust may be tendered to the trustee
in exchange for one or more new Series. Any
issuance or tender and issuance pursuant to either
of the above procedures is referred to as a "New
Issuance."
A New Issuance may occur only upon delivery to the
trustee of the following: (i) a Series Supplement
specifying the principal terms (the "Principal
Terms") of the new Series, (ii) (a) an opinion of
counsel to the effect that, unless otherwise stated
in the related Series Supplement, the certificates
of that Series will be characterized as
indebtedness for Federal income tax purposes and
(b) an opinion of counsel to the effect that, for
Federal income tax purposes, (1) such issuance will
not adversely affect the tax characterization as
debt of Certificates of any outstanding Series or
Class that were characterized as debt at the time
of their issuance, (2) such issuance will not cause
the Trust to be classified as an association (or
publicly traded partnership) taxable as a
corporation and (3) such issuance will not cause or
constitute an event in which gain or loss would be
recognized by any Certificateholder, other than the
Transferor (an opinion of counsel to this effect
with respect to any action being a "Tax Opinion"),
(iii) if Credit Enhancement is required by the
Series Supplement, an appropriate Credit
Enhancement agreement with respect thereto, (iv)
written confirmation from each Rating Agency that
the New Issuance will not result in that Rating
Agency reducing or withdrawing its rating on any
then outstanding Series rated by it, (v) an
officer's certificate of the Transferor to the
effect that after giving effect to the New Issuance
the Transferor Interest would be at least equal to
the Minimum Transferor Interest and (vi) the
Certificates representing the Series to be
exchanged, if applicable. See "Description of the
Certificates--New Issuances."
The Transferor also may from time to time cause the
Trustee to sell purchased interests in the
Receivables and other assets of the Trust to one or
more purchasers. Any purchased interest will
represent an interest in the Trust's assets similar
to the interest of a Series of Certificates, and
will represent a reduction in the Transferor
Interest, and will not reduce the Investor
Interest. No Series will be subordinated to any
purchased interest, and no purchased interest will
have any interest in the Enhancement or series
accounts specified for any Series, except as
specified in the prospectus relating to that
Series. Any such sale will take place pursuant to
one or more agreements which will specify terms
similar to Principal Terms for the applicable
purchased interests and may grant the purchasers of
such interests notice and consultation rights with
respect to rights or actions of the Trustee. Any
sale of purchased interests in the assets of a
Trust will be subject to the satisfaction of the
same conditions (including Rating Agency
confirmations) as for a New Issuance, as
appropriately modified to refer to a purchased
interest rather than a New
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Issuance. The modification of conditions would not
result in any substantive change in such
conditions, but would simply change the conditions
to refer to the contemplated sale of a purchased
interest rather than a New Issuance. See "Risk
Factors--Master Trust Considerations."
Tax Status................. Special Tax Counsel to the Transferor will opine on
the Closing Date that under existing law the
Certificates will be characterized as debt for
Federal income tax purposes and the Trust will not
be an association or publicly traded partnership
taxable as a corporation. Under the Agreement, the
Transferor, the Servicer, the Holders and the
Certificate Owners will agree to treat the
Certificates as debt for Federal, state, local and
foreign income and franchise tax purposes. See
"U.S. Federal Income Tax Consequences" for
additional information concerning the application
of Federal income tax laws.
ERISA Considerations....... Under a regulation issued by the Department of
Labor, the Trust's assets would not be deemed "plan
assets" of an employee benefit plan or other
retirement arrangement holding such Certificates if
certain conditions are met, including that the
Class of such Certificates must be held, upon
completion of the public offering made hereby, by
at least 100 investors who are independent of the
Transferor and of one another. The Underwriters do
not expect that the Class A or Class B Certificates
will be held by at least 100 such persons and,
therefore, do not expect that such Certificates
will qualify as publicly-offered securities under
the regulation. If the Trust's assets were deemed
to be "plan assets" of an employee benefit plan
investor (e.g., if the 100 independent investor
critera are not satisfied with respect to the Class
of Certificates held by the plan investor),
violations of the "prohibited transaction" rules of
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), could result and
generate excise tax and other liabilities under
ERISA and section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"), unless a
statutory, regulatory or administrative exemption
is available. It is uncertain whether existing
exemptions from the "prohibited transaction" rules
of ERISA would apply to all transactions involving
the Trust's assets.
Accordingly, no investor which is (a) an employee
benefit plan that is subject to ERISA, (b) a plan
or other arrangement (including an individual
retirement account or Keogh plan) that is subject
to section 4975 of the Code or (c) an entity whose
underlying assets include "plan assets" under the
regulation by reason of any such plan's investment
in the entity may acquire either a Class A
Certificate or a Class B Certificate. See "ERISA
Considerations."
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RISK FACTORS
Limited Liquidity. There is currently no market for the Certificates. The
Underwriters intend to make a market in the Certificates but are not obligated
to do so. There is no assurance that a secondary market will develop or, if it
does develop, that it will provide Certificateholders with liquidity of
investment or that it will continue until the Certificates are paid in full.
Nonrecourse Obligations. No Certificateholder will have recourse for
payment of its Certificates to any assets of the Originators, the Transferor,
the Back-up Servicer, the Trustee or any of their affiliates. Consequently,
Certificateholders must rely solely upon payments on or in respect of the
Receivables for the payment of principal of and interest on the Certificates and
the Collateral Interest. Furthermore, under the Agreement, the
Certificateholders will have an interest in the Receivables and collections with
respect thereto only to the extent of the Invested Amount. Should the
Certificates not be paid in full on a timely basis, Certificateholders may not
look to any assets of the Originators, the Transferor, the Back-up Servicer, the
Trustee or any of their affiliates to satisfy their claims.
Lack Of Perfected Security Interests in Certain Unearned Premiums. Each
Receivable includes a grant by the borrower to the applicable Originator of a
security interest in the unearned portion of the premium of the financed
commercial insurance policy (the "Unearned Premium"). The perfection of a
security interest in an unearned premium is not governed by the Uniform
Commercial Code. In many states, state statutes and common law govern the
perfection of a security interest in the unearned premiums and generally require
for the perfection of such security interest, a notice informing the applicable
insurance company of the identity of the person entitled to the payment of such
unearned premium. In other states and in foreign jurisdictions, there is no case
law or statute that governs the perfection of security interests in unearned
premiums and in those states the method of perfecting such a security interest
is not free from doubt; however, it is industry practice to follow the same
procedures for perfection in those jurisdictions by notifying the applicable
insurance carrier of the person entitled to receive payment of such unearned
premiums. It is standard practice for the Originators to send such a notice to
the applicable insurance company or its agent at or about the time the insurance
policy premium is financed. Each Originator will represent and warrant in the
Receivables Purchase Agreement to the Transferor and the Transferor will
represent and warrant to the Trust, in each case, as of the date of transfer,
that the applicable Originator has a first priority perfected security interest
in the Unearned Premiums relating to the Receivables so transferred.
Each Originator will assign its security interest in the Unearned Premiums
to the Transferor, who will in turn assign its security interest in the Unearned
Premiums to the Trust. Due to the administrative burden and expense of mailing a
notice for each Receivable to the applicable insurance company and the
administrative burden and expense of the related insurance companies, which
would have to process such notices, neither the Transferor nor the Trustee will
send notices to the related insurance companies, with respect to the Trust's
security interests in the Unearned Premiums relating to the Receivables
transferred to the Trust on or prior to February 1, 1997. In the absence of such
procedures neither the Transferor nor the Trust will have a perfected security
interest in the Unearned Premiums relating to such Receivables.
With respect to the Receivables transferred to the Trust on or after
February 1, 1997, the applicable Originator will represent and warrant in the
Receivables Purchase Agreement to the Transferor, and the Transferor will
represent and warrant in the Agreement, that a notice of finance premium has
been delivered to the related insurance carrier notifying it of the Trustee's
security interest in the related Unearned Premiums and that the Trust has a
perfected security interest in such Unearned Premiums.
In the event the representations and warranties relating to the perfection
of security interests in Unearned Premiums are breached and as a result of such
breach the related Account becomes a Defaulted Account or the Trust's rights in,
to or under the Receivables or its proceeds are impaired or the proceeds of such
Receivable are not free and clear of any lien, then upon the expiration of the
applicable cure period specified in the Agreement such Receivable (and, in
certain circumstances, all of the Receivables in such Defaulted Account) shall
be removed from the Trust as described under "Description of the
Certificates--Representations and Warranties."
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If an Originator becomes the subject of a bankruptcy or insolvency
proceeding and the Trust does not have a perfected security interest in the
Unearned Premiums, the Trust's interest in such Unearned Premiums would be
subordinate to the interest of a bankruptcy trustee of such Originator. As a
result, Certificateholders might not be able to obtain the proceeds of any
returned Unearned Premiums.
Transferor Bankruptcy Risk. While the Transferor will transfer Receivables
to the Trust, a court could treat such transfers as an assignment of collateral
as security for the benefit of holders of certificates issued by the Trust. The
Transferor represents and warrants in the Agreement that the transfer of the
Receivables to the Trust is either a valid transfer and assignment of the
Receivables to the Trust or the grant to the Trust of a security interest in the
Receivables. The Transferor has taken and will take certain actions as are
required to perfect the Trust's security interest in the Receivables and
warrants that if the transfer to the Trust is deemed to be a grant to the Trust
of a security interest in the Receivables, the Trustee will have a first
priority perfected security interest therein. Nevertheless, if the transfer of
the Receivables to the Trust is deemed to create a security interest therein, a
tax or government lien on property of the Transferor arising before Receivables
come into existence may have priority over the Trust's interest in such
Receivables, and, if the FDIC were appointed receiver of the Transferor, the
receiver's administrative expenses may also have priority over the Trust's
interest in such Receivables. See "Certain Legal Aspects of the
Receivables--Transfer of Receivables."
To the extent that the Transferor has granted a security interest in the
Receivables to the Trust and that security interest was validly perfected before
any insolvency of the Transferor and was not granted or taken in contemplation
of insolvency or with the intent to hinder, delay or defraud the Transferor or
its creditors, that security interest should not be subject to avoidance in the
event of insolvency and receivership, and payments to the Trust with respect to
the Receivables should not be subject to recovery by a conservator or receiver
for the Transferor. If, however, the conservator or receiver were to assert a
contrary position, or were to require the Trustee to establish its right to
those payments by submitting to and completing the administrative claims
procedure established under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), or the conservator or receiver were to
request a stay of proceedings with respect to the Transferor as provided under
FIRREA, delays in payments on the Certificates and possible reductions in the
amount of those payments could occur. If a conservator or receiver were
appointed for the Transferor pursuant to the Agreement, new Receivables would
not be transferred to the Trust and the Trustee would sell the portion of the
Receivables allocable in accordance with the Agreement to each Series (unless
holders of more than 50% of the principal amount of each class of such Series
instruct otherwise), thereby causing early termination of the Trust and a loss
to the Certificateholders if the net proceeds allocable to the
Certificateholders from such sale, if any, were insufficient to pay the
Certificateholders in full. Upon the occurrence of a Pay Out Event, if a
conservator or receiver is appointed for the Transferor and no Pay Out Event
other than such conservatorship, receivership or insolvency of the Transferor
exists, the conservator or receiver may have the power to prevent the early
sale, liquidation or disposition of the Receivables and the commencement of the
Rapid Amortization Period. In addition, a conservator or receiver for the
Transferor may have the power to cause early payment of the Certificates. See
"Certain Legal Aspects of the Receivables--Certain Matters Relating to
Receivership."
Originators' Bankruptcy Risk. Each of the Originators intends that each
transfer of Receivables to the Transferor pursuant to the Receivables Purchase
Agreement will constitute a sale, rather than a pledge of such Receivables to
secure indebtedness of such Originator. However, if such Originator were to
become a debtor under the federal bankruptcy code or similar applicable state
laws (collectively, "Insolvency Laws"), a creditor or trustee in bankruptcy of
such Originator or such Originator as debtor-in-possession might argue that such
sale of Receivables by such Originator was a pledge of such Receivables rather
than a sale. This position, if presented to, or accepted by a court, could cause
among other things, the Trust to experience a delay in or reduction of
collections on the Receivables. In addition, upon the occurrence of certain
insolvency events relating to either Originator, Additional Receivables will not
be conveyed to the Trust and a Pay Out Event will occur which may cause early
payment of the Certificates.
Premium Finance Loan Credit and Related Risks. Commercial premium finance
loans entail several different risks, including (a) the creditworthiness of the
borrower, (b) the creditworthiness of the insurance
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company, and (c) the capabilities and operating procedures of the insurance
agent or broker that (i) places the insurance policy, (ii) serves as a source of
significant information concerning the loan transaction and (iii) may pay the
loan proceeds to insurance companies or their agents or collect unearned premium
funds. Application of federal and state bankruptcy, debtor relief or insolvency
laws to an insolvency of a borrower, insurance company or insurance agent or
broker involved with a loan would affect the interests of the Certificateholders
in the Receivables if such laws result in any Receivables being written off as
uncollectible or prevent the cancellation of such borrower's insurance policy or
the collection of related Unearned Premium, if any, which may serve as
collateral for such borrower's loan. Moreover, the amount of the unearned
premium required to be returned to the insured is dependent on state law and
varies depending on when the notice of cancellation becomes effective.
Additionally, at the time of the origination of a Receivable, the Unearned
Premium will not fully collateralize the borrower's obligations. Generally,
depending on the amount of the borrower's downpayment, the payment terms of the
Receivable and applicable state law, the Unearned Premium will fully
collateralize the Receivable after four or five scheduled payments have been
made; although in some circumstances the Unearned Premium may never fully
collateralize the Receivable. The Receivables Purchase Agreement and the
Agreement do not require (i) the Unearned Premium of any Receivable to represent
a minimum percentage of such Receivable or (ii) the Unearned Premium of any
Receivable at any time to fully collateralize such Receivable. Consequently, in
certain circumstances, the Trust will have to rely on payments and recoveries
from borrowers as its sole source of payment on the Receivables. See "Business
of the Originators--General" and "Description of the Certificates--Receivables
in Defaulted Accounts; Investor Charge-Offs."
Dependence on Business of Originators. The premium finance loan industry
is competitive and includes banks as well as other premium finance lending
companies that offer financing to companies that purchase commercial insurance.
Insurance premium lenders may compete on the basis of loan pricing and terms,
underwriting criteria and servicing quality. If commercial insurance consumers
choose to utilize competing sources of credit, the amount of available
Additional Receivables generated may be reduced. The size of the Trust will be
dependent upon the Originators' continued ability to generate and transfer
Additional Receivables to the Transferor, who in turn will transfer such
Receivables to the Trustee for the benefit of the Trust. While the Receivables
only represent a portion of the Originators' total portfolio and the Originators
have generated a relatively stable dollar volume of premium finance loans on a
year-to-year basis over the past five fiscal years, due to state regulatory
considerations, the Additional Receivables eligible to be transferred to the
Trustee for the benefit of the Trust must be originated with borrowers located
in Permitted States. In addition, certain eligibility criteria relating to
concentration limits on insurance carriers or obligors will further limit that
portion of the Originators' portfolio that is eligible for transfer to the
Trust. Moreover, because a Premium Finance Agreement may finance premiums of
more than one insurance carrier and the obligations of a borrower under a
Premium Finance Agreement relate to the financing of all premiums financed
thereunder, if a concentration limit would be breached as a result of the
addition of such Premium Finance Agreement, the aggregate receivables under such
Premium Finance Agreement (including those relating to the financing of premiums
of other insurance carriers unless the Transferor can segregate such premiums)
will not be eligible for transfer to the Trust. See "The Receivables." As of the
Statistical Calculation Date Aggregate Receivables in the Identified Portfolio
constitute approximately 59.5% of the aggregate receivables in the Originators'
entire portfolio of Premium Finance Agreements as of the Statistical Calculation
Date. If the amount of Additional Receivables originated with borrowers located
in Permitted States declines significantly or the amount of Additional
Receivables that satisfy the eligibility criteria for transfer to the Trust
materially declines (including as a result of material changes in the
concentration of certain insurance carriers or obligors in the Originators'
portfolio), Additional Receivables available to be transferred to the Trustee
for the benefit of the Trust will decline. If the amount of Additional
Receivables originated and eligible for transfer to the Trust declines to such
an extent that the Transferor is unable to maintain the Minimum Transferor
Interest as required by the Agreement and described herein, a Pay Out Event
would occur, in which event the Rapid Amortization Period would commence. If the
Rapid Amortization Period commences, Certificateholders are likely to be repaid
principal on the Certificates earlier than anticipated which would affect the
anticipated average life of the Certificates and could result in reinvestment
risk with respect to such earlier repayments. See "Description of the
Certificates--Pay Out Events."
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Risk of Limitations on Subordination. Although the probability of payment
of amounts due with respect to the Certificates is intended to be enhanced by
the subordination described herein of payments on the Collateral Interest as
described herein and, in the case of the Class A Certificates, also by the
subordination of payments on the Class B Certificates to the Class A
Certificates as described herein, the amount of such enhancement is limited and
may decline during any Rapid Amortization Period or as a result of Receivables
in Defaulted Accounts. If the subordination of payments on the Collateral
Interest are insufficient to protect the Class B Certificates from shortfalls or
delays in collections on the Receivables, then the Class B Certificateholders
will bear directly the credit risk associated with their undivided interests in
the Trust. If the subordination of payments on the Collateral Interest and the
Class B Certificates are insufficient to protect the Class A Certificates from
shortfalls or delays in collections on the Receivables, then the Class A
Certificateholders will bear directly the credit risk associated with their
undivided interests in the Trust. The credit risk associated with the
Certificateholders' undivided interests in the Trust is the risk that the Trust
will not receive full and timely payment of the Receivables. Series of
certificates issued in the future may share with the Class A Certificates and
the Class B Certificates in the benefits of the subordination of the Collateral
Interest, and any amounts deposited into the Excess Funding Account. See
"--Basis Risk", "Description of the Certificates--Excess Funding Account."
Geographic Concentration and Adverse Economic Factors. As of the
Statistical Calculation Date, 23.12% of the Aggregate Receivables were related
to Premium Finance Agreements with borrowers whose stated address in the related
Premium Finance Agreement are in California. After giving effect to the transfer
of Additional Receivables this percentage may increase or decrease. Economic
factors, including the occurrence of a recession, the rate of inflation, and
relative interest rates, may have an adverse impact upon the performance of the
Receivables and on the Originators' ability to generate Additional Receivables.
In particular, negative economic developments in California could have an
adverse impact on the timing and amounts of payments made by borrowers in
respect of Receivables and could cause such borrowers to become bankrupt or
insolvent. See "--Premium Finance Loan Credit and Related Risks" and "Maturity
Assumptions."
Additional Receivables Considerations. Each Originator will be obligated
pursuant to the Receivables Purchase Agreement to transfer all Additional
Receivables originated by it in the Identified Portfolio to the Transferor, who
in turn will be obligated pursuant to the Agreement to transfer such Additional
Receivables to the Trustee for the benefit of the Trust. Such Additional
Receivables may include Receivables originated using criteria different from
those which were applied to the Receivables assigned to the Trustee for the
benefit of the Trust on the Closing Date or to previously transferred Additional
Receivables, because such Receivables were originated at a different date.
Consequently there can be no assurance that Additional Receivables transferred
to the Trust in the future will be of the same credit quality as previously
transferred Receivables. The transfer of Additional Receivables will be subject
to the satisfaction of certain criteria described herein under "Description of
Certificates--Eligible Receivables" and "--Transfer and Assignment of
Receivables." Except for the criteria described thereunder, there are no
required characteristics of Additional Receivables. Additionally, because the
remaining term to maturity of substantially all of the Receivables included in
the Trust as of the Statistical Calculation Date is twelve months or less, it is
expected that within twelve months following the Closing Date substantially all
of the Receivables in the Trust will consist of Additional Receivables.
Following the transfer of Additional Receivables to the Trust, the aggregate
characteristics of the entire pool of Receivables included in the Trust may vary
from those of the Receivables included in the Trust on the Closing Date. See
"The Receivables."
Risk of Pay Out Event Upon Sale of Back-up Servicer. In the event that no
earlier than six months following the Closing Date a Sale Notice has been
delivered to the Transferor, the Servicer and the Trustee, and if after ninety
days following receipt of such Sale Notice, the Transferor is unable to find a
replacement Back-up Servicer to assume the obligations of the Back-up Servicer
under the Agreement which satisfies the Rating Agency Condition, a Pay Out Event
will occur and the Rapid Amortization Period will commence. In addition, in the
event that no earlier than six months following the Closing Date, a third party
acquires the Back-up Servicer and assumes the obligations of Back-up Servicer in
accordance with the Agreement and, within 10 days of the assumption of such
obligations the successor Back-up Servicer delivers a Successor Back-up Servicer
Termination Notice to the Transferor, the Servicer and the Trustee, if after
ninety days
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following receipt of such Back-up Servicer Termination Notice, the Transferor is
unable to find a replacement Back-up Servicer to assume the obligations of such
successor Back-up Servicer under the Agreement which satisfies the Rating Agency
Condition, a Pay Out Event will occur and the Rapid Amortization Period will
commence. The Back-up Servicer has advised the Transferor that it is not
currently in negotiations with any third party in connection with any
transaction that may result in the delivery of a Sale Notice or Successor
Back-up Servicer Termination Notice. However, there can be no assurance that
either a Sale Notice or Successor Back-up Servicer Termination Notice will not
be delivered in the future, or that if any such notice is delivered, that the
Transferor will be able to find a successor Back-up Servicer to assume the
obligations of Back-up Servicer which satisfies the Rating Agency Condition. Any
reinvestment risk resulting from the commencement of the Rapid Amortization
Period will be borne by Certificateholders.
"Sale Notice" means an officer's certificate signed by the President or
chief executive officer of the Back-up Servicer certifying (i) the Back-up
Servicer has agreed to consolidate with or merge with a third party or a third
party has agreed to acquire the Back-up Servicer's properties and assets
substantially as an entirety (other than assets conveyed or transferred through
a financing or securitization program) or purchase all or substantially all of
the capital stock of the Back-up Servicer and (ii) such agreement is conditioned
on the Back-up Servicer being released from its obligations under this Agreement
or the purchase price included in such agreement is subject to downward
adjustment unless the Back-up Servicer is released from its obligations under
this Agreement. "Successor Back-up Servicer Termination Notice" means a written
notice signed by the President or chief executive officer of a successor Back-up
Servicer that became Back-up Servicer as a result of acquiring the prior Back-up
Servicer in accordance with the Agreement in a transaction as to which no Sale
Notice was given stating that it is terminating its obligations and duties under
the Agreement. If a Sale Notice has been given with respect to a transaction it
will not be necessary for a Successor Back-up Servicer Termination Notice to be
given with respect to such transaction.
Basis Risk. Each Receivable bears a fixed rate of interest that is
established at the time of origination. Such interest rate is based on a spread
over the estimated London interbank offered rate at the date of origination of
the loan for deposits with a maturity comparable to the average life of the
loan, which currently is generally 4 1/2 months. The Class A LIBOR Rate and
Class B LIBOR Rate are established for each quarterly Interest Period once on
the related LIBOR Determination Date. As a result, there may be a mismatch
between collections of Finance Charge Receivables and interest accruing at the
Class A LIBOR Rate or Class B LIBOR Rate, as applicable, on the Certificates.
The amount of interest required to be paid or deposited in respect of the Class
A Certificates or Class B Certificates on any Distribution Date is subject to
the Class A Available Funds Cap and Class B Available Funds Cap, respectively.
If as a result there exists a Class A Shortfall Amount, Class A Carry Over
Amount, Class B Shortfall Amount or Class B Carry Over Amount, such amounts will
be funded on a subordinated basis from Excess Spread, if any, available therefor
as described under "Description of the Certificates--Application of
Collections--Excess Spread." The Class B Shortfall Amount and Class B Carry Over
Amount are subordinated to the Class A Shortfall Amount and Class A Carry Over
Amount. Interest on the Collateral Interest is not subject to any similar
available funds cap. Payments of the Class A Shortfall Amount, Class A Carry
Over Amount, Class B Shortfall Amount and Class B Carry Over Amount are
subordinated to payments in respect of the Collateral Interest. Each Originator
will covenant in the Receivables Purchase Agreement not to decrease the interest
rates payable under its Premium Finance Agreements (other than as a result of a
decrease in LIBOR) so as to materially increase the likelihood that the Class A
Available Funds Cap or Class B Available Funds Cap will be met but there can be
no assurance that such Class A or Class B Available Funds Cap will not be met on
any Distribution Date.
Risk of State Regulation of Premium Finance Lending. On occasion, Congress
has introduced bills that would limit the fees and finance charges that
financial institutions may impose on the purchase of insurance policies, or
which would require additional disclosure to borrowers. In some cases, the rates
proposed have been substantially below the rate at which the Originators assess
fees and finance charges on most of the Receivables. In addition, the
Originators are subject to state laws and regulations which impose requirements
on the making, enforcement and collection of insurance premium loans. The states
may enact additional laws and regulations and amendments to existing laws and
regulations to regulate further the premium loan industry or to reduce finance
charges or other fees or charges applicable to insurance premium loans.
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Currently the Originators do not expect the enactment of any such legislation.
However, if any such laws were adopted, the Servicer's ability to collect on the
Receivables or maintain the required level of finance charges and other fees and
charges would be impaired. In addition, the Servicer (so long as the Originator
is a Servicer) will covenant in the Agreement to comply with applicable
licensing and regulatory laws of any Receivable State and to cause the
Transferor, the Trustee and the Trust to at all times be in compliance with such
licensing and regulatory laws. Under certain circumstances, a breach of such
covenant will result in an obligation of the Servicer to cure such breach by
either removing Receivables from the affected Receivable State or indemnifying
the Trust, Trustee and Transferor for any losses arising from such Receivables
as described under "Description of the Certificates -- Certain Covenants." A
failure of the Servicer to either remove such Receivables in a timely manner or
indemnify such parties in a timely manner will cause a Pay Out Event to occur
and the Rapid Amortization Period to commence.
Limitations on State Insurance Guaranty Funds. All states have state
insurance guaranty funds that support the obligations of insurance companies
regulated by that state, including the obligation of such insurance companies to
return unearned premiums to their insureds upon cancellation of the related
insurance policies. Some state insurance guaranty funds impose dollar limits,
exclude certain types of coverage and do not operate with reference to surplus
and excess lines insurance companies, including in most states, foreign
insurance companies (the "State Fund Refund"). Additionally, state legislation
may be enacted imposing additional limitations or restrictions on State Fund
Refunds. There is also a possibility that a state insurance guaranty fund will
become underfunded which could cause an additional delay in the Trust receiving
a State Fund Refund, or could ultimately result in a failure by the state
insurance guaranty fund to pay to the Trust any State Fund Refund. In addition,
certain of the Premium Finance Agreements finance premiums of foreign insurance
carriers that do not have the benefit of any state insurance guaranty funds.
Commingling Risk. For as long as an Originator remains a Servicer under
the Agreement, no Pay Out Event has occurred and (a)(i) such Servicer provides
to the Trustee a letter of credit or other credit enhancement covering the risk
of collection of such Servicer acceptable to the Rating Agencies and (ii) the
Transferor shall not have received a notice from the Rating Agency that reliance
on such letter of credit or other credit enhancement would result in the
lowering of such Rating Agency's then-existing rating of any Series then
outstanding or (b) the certificates of deposit or unsecured short-term debt
obligations of such Servicer (or, if neither such certificates of deposit nor
obligations of such Servicer are rated by Moody's or Standard & Poor's, then the
certificates of deposit or unsecured short-term debt obligations of Mellon Bank,
N.A.) are rated P-1 by Moody's and at least A-1 by Standard & Poor's and insured
by either BIF or SAIF or such Servicer makes other arrangements satisfactory to
each Rating Agency rating any Series then outstanding, then such Servicer may
make deposits and payments described in "Description of the
Certificates--Application of Collections" on the business day immediately prior
to the Distribution Date in an amount equal to the net amount of such deposits
and payments which would have been required to be made on each day during the
related Monthly Period had the conditions set forth above not applied. In the
event that a Servicer commingles collections, the Certificateholders will be
subject to the risk of loss of such collections, including as a result of the
bankruptcy or insolvency of such Servicer. Because Mellon Bank, N.A.'s unsecured
short-term debt obligations are currently rated P-1 by Moody's and A-1 by
Standard & Poor's, the Servicer will initially make such deposits and payments
monthly on a net basis and expects to continue to do so (subject to the
requirements described above) for as long as the Certificates are outstanding.
See "Description of the Certificates--Application of Collections."
Master Trust Considerations. The Trust, as a master trust, will issue the
Certificates and may issue additional Series of certificates. While the
principal terms of any Series will be specified in a series supplement, the
provisions of a Supplement and, therefore, the terms of any additional Series,
will not be subject to the prior review or consent of holders of the
certificates of any previously issued Series, including Series 1996-1. Such
principal terms may include methods for determining applicable investor
percentages and allocating collections, provisions creating different or
additional security or other Enhancement, provisions subordinating such Series
to another Series (if the Series Supplement relating to such Series so permits;
the Series 1996-1 Supplement will not permit the subordination of the
Certificates to any other Series). It is a condition precedent to the issuance
of any additional Series that either (a) each Rating Agency deliver written
confirmation to the Trustee that such New Issuance will not result in such
Rating Agency reducing or
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withdrawing its then-existing rating on any outstanding Series or (b) if at the
time of the New Issuance there is no outstanding Series which is currently rated
by a Rating Agency, a nationally recognized investment banking firm or
commercial bank delivers a certificate to the trustee to the effect that the New
Issuance will not have an adverse effect on the timing or distribution of
payments to such other Series. There can be no assurance, however, that the
principal terms of any Series issued from time to time hereafter might not have
an impact on the timing and amount of payments received by a Certificateholder,
including as a result of the refixing of the percentage utilized with respect to
the allocation of the Principal Receivables. See "Description of the
Certificates--New Issuances" and "--Allocation Percentages."
If the Trust issues any additional Series in a future public offering, the
Trust will do so pursuant to a registration statement (and prospectus) under the
Securities Act that is separate from this Prospectus and its related
registration statement.
Certificateholder Control Limitations. Subject to certain exceptions, the
certificateholders of each Series may take certain actions, or direct certain
actions to be taken, under the Agreement or the related Series Supplement.
However, under certain circumstances, the consent or approval of a specified
percentage of the aggregate certificateholders ownership interest of all Series
or of the certificateholders ownership interest of each Series or of Classes
within a Series will be required to take or direct certain actions, including
requiring the appointment of a successor Servicer following a Servicer Default,
amending the Agreement in certain circumstances and directing a repurchase by
the Transferor of all outstanding Receivables upon the breach of certain
representations and warranties by the Transferor. In such instances, the
interests of the holders of the Certificates may not be aligned with the
interests of the holders of certificates of such other Series. Thus, even if the
requisite majority of Certificateholders votes to take or direct such action,
the certificateholders of such other Series may control whether or not such
action occurs.
Limitations on Certificate Rating; Risk of Downgrade. Any rating assigned
to the Certificates by a Rating Agency will reflect such Rating Agency's
assessment of the likelihood that Certificateholders will receive the payments
of interest, subject to the Class A Available Funds Cap in the case of the Class
A Certificates and the Class B Available Funds Cap in the case of the Class B
Certificates, and principal required to be made under the Agreement and will be
based primarily on the value of the Receivables in the Trust and the Collateral
Interest. However, any such rating will not, unless otherwise specified herein
with respect to any Class offered hereby, address the likelihood that the
principal of, or interest on, any Certificates will be paid on a scheduled date.
In addition, any such rating will not address the likelihood of payment of any
Class A Shortfall Amount, Class A Carry Over Amount, Class B Shortfall Amount or
Class B Carry Over Amount, the possibility of the occurrence of a Pay Out Event
with respect to such Class or the possibility of the imposition of the United
States withholding tax with respect to non-U.S. Certificateholders. The rating
will not be a recommendation to purchase, hold or sell Certificates, and such
rating will not comment as to the marketability of such Certificates, any market
price or suitability for a particular investor. There is no assurance that any
rating will remain for any given period of time or that any rating will not be
lowered or withdrawn entirely by a Rating Agency if in such Rating Agency's
judgment circumstances so warrant.
The Transferor will request a rating of the Certificates offered hereby by
each of Moody's Investor Services, Inc. ("Moody's") and Standard & Poor's
Ratings Services, a Division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's and together with, the "Rating Agencies"). There can be no assurance as
to whether any rating agency not requested to rate the Certificates will
nonetheless issue a rating with respect to any Certificates, and, if so, what
such rating would be. A rating assigned to any of the Certificates by a rating
agency that has not been requested by the Transferor to do so may be lower than
the rating assigned by the Rating Agencies pursuant to the Transferor's request.
Book-Entry Registration. The Certificates initially will be represented by
one or more certificates registered in the name of Cede, the nominee for DTC,
and will not be registered in the names of the Certificate Owners or their
nominees. Unless and until Definitive Certificates are issued for a Series, the
owners of the beneficial interests of the Certificates ("Certificate Owners")
will not be recognized by the Trustee as Certificateholders. Hence, until such
time, Certificate Owners will only be able to exercise the rights of
Certificateholders indirectly through DTC, Cedel or Euroclear and their
participating organizations. See "Description of the Certificates--Book-Entry
Registration" and "--Definitive Certificates."
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BUSINESS OF THE ORIGINATORS
GENERAL
AFCO Credit Corporation, a New York corporation ("AFCO Credit"), was formed
in 1954 as a wholly owned subsidiary of Continental Insurance Company and was
subsequently purchased by Mellon Bank, N.A. in 1993. The principal business of
AFCO Credit consists of making loans to commercial borrowers to finance property
and casualty insurance premiums throughout the United States, other than in
California. AFCO Acceptance Corporation ("AFCO Acceptance") was formed in
California in 1968 for the purpose of making loans to commercial borrowers to
finance property and casualty insurance premiums in California. For the purpose
of this "Business of the Originators" section, AFCO Credit and AFCO Acceptance
will be referred to collectively as "AFCO". AFCO finances premiums for most
lines of property and casualty insurance and is the largest insurance premium
finance company in the United States. AFCO financed insurance premiums during
1995 in excess of $3.3 billion, and during the first nine months of 1996, in
excess of $2.4 billion. The principal executive offices of AFCO Credit are
located at 10 Hanover Street, New York, New York 10004, telephone number (212)
612-3500 and of AFCO Acceptance Corporation are located at 21800 Oxnard Street,
P.O. Box 1260, Woodland Hills, California 91365-1260, telephone number (818)
227-2900.
A Premium Finance Agreement typically is an installment loan made to a
commercial insurance buyer, the proceeds of which pay premiums which are due to
the insurance company. Financed commercial insurance policies commonly (a) are
for a term of one year or less, (b) require the full premium to be paid at or
near inception of the policy period and (c) provide for a return of the unearned
premium to the insured in the event of cancellation of the related insurance
policy. Borrowers generally make fixed scheduled payments which include a
finance charge that is established at the time of origination of the loan. Such
finance charge is based on a spread over the estimated London interbank offered
rate at the date of origination of the loan for deposits with a maturity
comparable to the average life of the loan, which currently is generally 4 1/2
months.
The finance charges on Premium Finance Agreements made by AFCO may vary
considerably, depending on the term and amount of the loan, the insured's credit
payment history, the size of the premium down payment and other considerations.
AFCO utilizes standardized Premium Finance Agreements that give AFCO a
limited power of attorney allowing it to cancel the insurance coverage upon
non-payment of a loan installment by the borrower, to collect from the insurance
company any unearned premium that may secure the loan and to take certain
limited actions in furtherance of the Premium Finance Agreement. Depending on
the terms of the loan and of the related insurance policy, the unearned premium
may or may not be sufficient to pay off the outstanding balance of the loan.
AFCO also has a right to recover any unpaid loan balance directly from the
borrower if any returned premium is insufficient.
A common premium finance loan structure may include a 20% down payment on
the premium paid by the borrower with the remaining 80% funded by a loan from
the insurance premium finance company to be repaid by the borrower in nine equal
monthly installments. AFCO's premium finance loans generally have terms that
range from 6 to 12 months with higher or lower down payment percentages
depending upon insured's needs and AFCO's applicable credit and underwriting
policies. Certain loans do not have level repayment requirements, usually to
accommodate a borrower's cash flow; however, all of the Receivables have monthly
repayment requirements. Given the relatively short duration of most premium
finance loans, such loans are generally not prepaid prior to the scheduled
payment dates although the loan terms and controlling regulations do not
prohibit prepayments or provide for penalties in the event of prepayment.
Financed commercial insurance policies usually require that the full
insurance premium be paid at or near the commencement of the policy period. The
insurance company customarily earns the full premium over the course of the
policy period. If the insured cancels the policy prior to the end of the policy
period, the insured is commonly entitled to a repayment of the portion of
premium payment that is unearned by the insurance company at the time of
cancellation. Depending on the type of insurance coverage and the terms of the
particular insurance policy, the amount of unearned premium available upon
cancellation will vary in light of relevant factors such as (a) the applicable
method for measuring unearned premium which may be by proration over the policy
term or, as required by some states, by an accelerated method under which more
31
<PAGE> 136
premium is earned in the earlier portion of the policy period, (b) the extent of
the policy period that has expired at the time of cancellation, (c) the loss
experience under the policy prior to cancellation and (d) variations after the
commencement of the policy period in the scope of the risks covered. The
insurance company may, depending on the terms of the policy, be entitled to
retroactively review and evaluate factors (c) and (d) above after cancellation
which may result in a reduction of the amount, and affect the timing, of
repayment of any unearned premiums. Also, in certain cases the insurance company
may earn the entire premium or a portion thereof at inception of the policy or
upon the occurrence of an insured loss under the policy, in either of which case
there would be either less or no unearned premium to be returned.
Premium finance lending activities are regulated by most states. Among
other matters, many states regulate various terms of the premium finance loans
such as refund policies and rates of interest and late charges that may be
charged an insured. Premium finance loans are made by AFCO on standardized loan
forms, the provisions and format of which are also usually subject to state
regulation. AFCO regards its relations with state regulatory agencies as good.
See "--Risk of State Regulation of Premium Finance Lending Activities."
PREMIUM FINANCE LOAN ORIGINATION; COLLECTION POLICY
AFCO generally locates premium finance borrowers through independent
insurance agents and brokers that are licensed under state laws, who offer
premium loan programs to enable their commercial customers to purchase the full
amount of insurance coverage needed and spread out the premium payments over
time. Thus, origination is usually dependent on relationships with insurance
brokers and agents and knowledge of the insurance marketplace. The origination
by AFCO of insurance premium finance loans is commonly commenced by an agent or
broker contacting AFCO to initiate the premium loan process and outlining to
AFCO the proposed loan transaction, including borrower and insurance company
information and coverage types and amounts. AFCO then reviews the information
submitted by such agent or broker in light of its underwriting procedures. See
"--Premium Finance Loan Underwriting Procedures" below. After AFCO approval, the
borrower executes a standard Premium Finance Agreement which contains a limited
power of attorney giving AFCO the authority in the event of default on the loan
to contact the insurance company directly and cancel coverage, and a collateral
assignment to AFCO of the unearned insurance premium, if any, returnable
following such cancellation or for any other reason.
Following receipt and acceptance of the signed Premium Finance Agreement,
AFCO either sends the loan proceeds to the insurance company to pay the premium
balance due or releases funds to the insurance agent or broker who then pays the
insurance company. AFCO bills the borrower directly. Each borrower is directed
to remit payments to the appropriate regional lockbox account maintained by AFCO
or in some cases to one of AFCO's processing centers. While most premium finance
loans are repaid in equal monthly installments, AFCO may enter into transactions
in which payments are to be made quarterly or in some other fashion; however all
of the Receivables are required to be repaid in equal monthly installments.
Finance charges on AFCO's premium finance loans are generally calculated based
on the Rule of 78's and finance charges on all of the Receivables will be
calculated in accordance with the Rule of 78's. See "The Receivables".
Since the insurance company generally earns a portion of the premium each
day, thereby reducing unearned premium amounts for loans secured by such
collateral, prompt action on loan defaults is critical. On defaulted loans, most
states require premium finance companies such as AFCO to issue to the borrower a
"Notice of Intent to Cancel" the related insurance policy after the premium loan
installment due date on which the borrower defaulted. A "Notice of Cancellation"
can then be issued to the applicable insurance company generally ten days after
a Notice of Intent to Cancel has been mailed. AFCO's policy for defaulted loans
is to mail a Notice of Intent to Cancel 10 days after the loan installment due
date and to mail a notice of cancellation 28 days after the loan installment due
date. Once a Notice of Cancellation has been issued, AFCO will customarily
proceed to collect any unearned premium available from the insurance company and
apply it to the loan balance and to seek direct collection from the borrower.
The Originators continue to earn interest on a cancelled loan, which has
unearned interest, until the maturity date of such loan.
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<PAGE> 137
Generally, the policy cancellation date occurs within one month of the
related loan installment default. The current policy of AFCO is to generally
charge off as a loss the unpaid defaulted loan balance 270 days after the
effective date of the cancellation. Following cancellation, AFCO will process
the collection of any unearned premium with the appropriate insurance company
and may pursue collection against the borrower. Under the terms of the
Agreement, any recoveries with respect to Receivables that have been written off
will be included in the assets of the Trust and considered Finance Charge
Receivables to the extent not applied against Default Amounts. See "The
Receivables."
PREMIUM FINANCE LOAN UNDERWRITING PROCEDURES
AFCO considers and evaluates a variety of risks in evaluating each
insurance premium finance loan transaction. These include (a) the loan structure
(the loan term, the amount of down payment and the availability of unearned
premium as collateral), (b) the creditworthiness of the borrower, (c) the
creditworthiness of the insurance company, and (d) the capabilities and
operating procedures of the insurance agent or broker that (i) places the
insurance policy, (ii) serves as a source of significant information regarding
the loan transaction, and (iii) may pay the loan proceeds or collect unearned
premium funds for AFCO. These factors may be given different weight in the case
of any particular loans. See "Risk Factors--Premium Finance Loan Credit and
Related Risks."
If a prospective loan is less than $150,000, the amount of down payment
made by the prospective borrower is at least 10% of the financed premium,
unearned premium under the insurance policy is available as collateral, and the
insurance carrier is acceptable, AFCO sales representatives can approve the loan
without additional action. If the loan fails to meet one or more of these
criteria, analysis of the transaction is conducted by AFCO's home or regional
office depending on the amount of the unsecured exposure. If the loan amount is
$150,000 or more, an AFCO regional manager will conduct a detailed credit review
of the borrower before approval of the loan. If the loan amount is more than
$500,000, credit review of the borrower is conducted by AFCO's New York office,
including obtaining a Dun & Bradstreet report on the borrower and financial
statements, as needed and under certain circumstances the creditworthiness of
the borrower is reviewed by representatives of Mellon Bank, N.A.
In addition to AFCO's internal review of the credit of an insurance
carrier, AFCO's general guideline for approval of an insurance carrier is a
rating of at least B+ by A.M. Best Company. No insurance carrier group accounted
for more than 15% of the Aggregate Receivables in the Identified Portfolio as of
the Statistical Calculation Date. Based upon AFCO's own credit determination, it
may finance insurance policies issued by insurance carriers that have a lower
rating or, in the case of foreign insurers and certain domestic insurers that
meet AFCO credit requirements, that are unrated. On an annual basis AFCO sets an
exposure limit with respect to each insurance carrier and in cases where AFCO's
approved exposure with respect to a particular insurance carrier exceeds $25
million, a credit committee conducts a special review of the insurance carrier.
The Rating Agencies and the provider of Enhancement have imposed certain
concentration limits on insurance carriers relating to the Receivables, some of
which are based on the Standard & Poor's and Moody's credit ratings of such
insurance carriers. See "Description of the Certificates--Pay Out Events."
STATE REGULATION OF PREMIUM FINANCE LENDING ACTIVITIES
The making, enforcement and collection of insurance premium loans is
subject to extensive regulation by many states' laws. Such laws vary widely by
state, but often (i) require that premium finance lenders be licensed by the
state, (ii) restrict the content of premium finance loan agreements, and impose
certain disclosure requirements on such agreements, (iii) limit the amount of
finance charges that may be lawfully imposed, (iv) regulate the amount of
refunds due an obligor who prepays the premium finance loan prior to maturity,
(v) regulate the amount of late fees, if any, and finance charges that may be
charged upon a premium finance loan becoming overdue, (vi) regulate the manner
and method of canceling an insurance policy upon non-payment of the premium
finance loan, including a requirement that the premium finance lender provide
the obligor with appropriate notice prior to such cancellation, and (vii) allow
imposition of penalties, which may be significant, upon premium finance lenders
for violations of the state's premium finance laws. See "Risk Factors--Risk of
State Regulation of Premium Finance Lending."
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<PAGE> 138
In order to increase the likelihood of the payment of claims and unearned
premiums in the event that an insurance carrier becomes insolvent, the insurance
industry created self-funded state guaranty associations. All States have state
insurance guaranty funds that cover the return of some or all unearned insurance
premiums in the event an insurance carrier becomes insolvent or is placed in
receivership. However, there is no guaranty of payment in the event the state
insurance guaranty fund is underfunded or legislation changes the terms and
conditions of its refund program. In addition, certain of the Premium Finance
Agreements finance premiums of foreign insurance carriers that do not have the
benefit of any state insurance guaranty fund. See "Risk Factors--Limitations on
State Insurance Guaranty Funds."
State insurance guaranty funds differ by the types of insurance policies
covered and by deductible amounts required or maximum refunds allowed.
Generally, state insurance guaranty funds have successfully responded to claims
for refunds in a timely manner if access to the liquidation estate is readily
accessible and their premium assessments on fund members are accurate.
Generally, the timing of payment of a State Fund Refund by a state insurance
guaranty fund ranges from a few months to one year.
AS SERVICER
Each Originator will act as a Servicer for the Receivables it transferred
to the Transferor in accordance with the Agreement. In certain limited
circumstances, a Servicer may resign or be removed as Servicer, in which case a
Pay Out Event will occur and the Back-up Servicer will automatically be
appointed as the successor Servicer. See "Risk Factors--Risk of State Regulation
of Premium Finance Lending" and "Description of the Certificates--Servicer
Default."
THE RECEIVABLES
The assets of the Trust will include (i) Premium Finance Agreements between
either of the Originators and commercial borrowers to finance the payment of
insurance premiums on insurance and related sums regarding insurance policies
under which the borrowers are the insureds governed by the law of a State in the
United States of America or the District of Columbia, which Premium Finance
Agreements are transferred from time to time by either of the Originators to the
Transferor and by the Transferor to the Trustee for the benefit of the Trust
(the "Receivables"); (ii) all monies due or to become due with respect to the
Receivables, including all monies received from insurance companies and state
insurance guaranty funds representing returns of unearned portions of insurance
premiums, the proceeds of any guarantees issued by insurance agents with respect
to the Receivables and other charges due on the related Receivables; (iii) such
amounts as may be from time to time held in one or more trust accounts, which
will be established and maintained by the Trustee pursuant to the Agreement;
(iv) any Enhancement issued with respect to any Series; (v) all of the
Transferor's rights under a receivables purchase agreement (the "Receivables
Purchase Agreement"), dated as of December 1, 1996, among the Transferor and the
Originators and (vi) the proceeds of all of the foregoing.
Each Receivable will have been originated by the Originators to finance
commercial insurance premiums. The Receivables are not guaranteed by AFCO
Credit, AFCO Acceptance, the Transferor, PFSI, the Trustee or any affiliate
thereof, and the Trust, as holder of the Receivables, has no recourse against
AFCO Credit, AFCO Acceptance, the Transferor, PFSI, the Trustee or any affiliate
thereof for the non-collectibility of the Receivables, except that, under
certain limited circumstances, AFCO Credit or AFCO Acceptance, as the case may
be, and the Transferor will be required to repurchase certain Receivables from
the Trust and to provide indemnification to the Trust in certain events. AFCO
Credit and AFCO Acceptance will each act as Servicer with respect to the
Receivables it originated and transferred to the Transferor, who in turn will
transfer such Receivables to the Trust. PFSI and PFSC will initially act as
Back-up Servicer.
Receivables provide for allocation of payments according to the "sum of
periodic balances" or "sum of monthly payments" method, similar to the "Rule of
78's" ("Rule of 78's Receivables"). A Rule of 78's Receivable provides for the
payment by the obligor of a specified total amount of payments, payable in equal
monthly installments on each due date, which total represents the principal
amount financed and add-on interest in an amount calculated on the basis of the
stated annual percentage rate for the term of the
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<PAGE> 139
Receivable. The fraction used in the calculation of add-on interest earned each
month has as its denominator a number equal to the sum of the series of numbers
(the sum of the numbers of payments) and the numerator of the fraction for a
given month is the number of payments before giving effect to the payment to be
made in that month. For example, in the case of a Rule 78's Receivable providing
for twelve payments, the denominator of each month's fraction will be 78, the
sum of the series of numbers from one to twelve. The fraction for the first
payment would be 12/78, the fraction for the second payment would be 11/78 and
the faction for the last payment would be 1/78. The applicable fraction is then
multiplied by the total add-on interest payable over the entire term of the
Receivable, and the resulting amount is the amount of add-on interest "earned"
that month. The difference between the amount of the monthly payment and the
amount of add-on interest earned for the month is applied to reduce the
outstanding principal balance of the Receivable. Interest accrues more rapidly
and principal is amortized more slowly on Rule of 78's Receivables than if
interest on the Receivables were calculated using the actuarial method. The rate
at which such amount of add-on interest is earned and, correspondingly, the
amount of each fixed monthly payment allocated to reduction of the outstanding
principal are calculated in accordance with the "Rule of 78's".
Generally, in the event of the prepayment in full (voluntarily or by
acceleration) of a Rule of 78's Receivable, under the terms of the contract, a
"refund" or "rebate" will be made to the obligor of the portion of the total
amount of payments under the contract allocable to "unearned" add-on interest,
calculated in accordance with a method equivalent to the Rule of 78's.
Each Receivable bears a fixed interest rate that is established at the time
of origination. Such interest rate is generally based on a spread over the
estimated London interbank offered rate at the date of origination of the loan
for deposits with a maturity comparable to the average life of the loan, which
currently is generally 4 1/2 months. The principal amount of each Receivable is
fully amortized over a fixed number of scheduled payments. The Originators
assign an account number (each, an "Account") for the borrower under a Premium
Finance Agreement for the related insurance policy period. A Premium Finance
Agreement may finance premiums relating to more than one insurance policy or
from one or more insurance carriers. However, there is only one monthly payment
under a Premium Finance Agreement and such payment is not allocated to the
repayment of the financing of the premiums of any particular insurance policy.
Each Premium Finance Agreement representing a Receivable grants the related
Originator a security interest in the borrower's right to receive any unearned
premium from the insurance company upon cancellation of the related insurance
policy prior to its expiration. Each Premium Finance Agreement representing a
Receivable also contains a power of attorney granting the related Originator the
right to cancel the insurance policy, if cancelable, and collect such unearned
premium from the insurance company following a payment default on the related
Receivable. Each Originator will assign its security interests and related power
of attorney to the Transferor pursuant to the Receivables Purchase Agreement,
and the Transferor will assign such security interest and such powers of
attorney to the Trustee pursuant to the Agreement. With respect to Receivables
transferred to the Trust prior to February 1, 1997, neither the Originators nor
the Transferor will notify the related insurance carriers of the Trustee's
security interest in the related unearned premiums and the Trustee's security
interest in the related unearned premium of such Receivables will not be
perfected. With respect to each Receivable transferred to the Trust on or after
February 1, 1997, the Originators and the Transferor will represent that a
notice of finance premium has been delivered to the related insurance carrier
notifying it of the Trustee's security interest in the unearned premium and that
the Trust has a first priority perfected security interest in such unearned
premiums. See "Risk Factors--Lack of Perfected Security Interests in Certain
Unearned Premiums" and "Certain Legal Aspects of the Receivables--Lack of
Perfected Security Interests in Certain Unearned Premiums."
Pursuant to the Receivables Purchase Agreement, on the date of issuance of
the Certificates (the "Closing Date"), the Originators will transfer and assign
to the Transferor Premium Finance Agreements from their portfolio of Premium
Finance Agreements on the day immediately preceding the Closing Date (the
"Calculation Date") with borrowers whose stated addresses in the Premium Finance
Agreements are in one of the Permitted States (as defined below) and that
satisfy as of the Cut-off Date (as defined below) the eligibility criteria
specified in the Receivables Purchase Agreement and the Agreement. The "Cut-off
Date" is (x) with respect to Premium Finance Agreements originated prior to
December 1, 1996, December 1, 1996
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<PAGE> 140
and (y) with respect to Premium Finance Agreements originated after December 1,
1996 but through and including the Calculation Date, the Calculation Date. See
"Description of the Certificates--Eligible Receivables." The selection of the
Permitted States was based on state regulatory considerations. Each of the
Originators will represent and warrant in the Receivables Purchase Agreement,
and the Transferor will represent and warrant in the Agreement, that the
Identified Portfolio was not selected in a manner adverse to Certificateholders.
Pursuant to the Agreement, the Transferor will transfer and assign such Premium
Finance Agreements to the Trustee for the benefit of the Trust. See "Description
of Certificates--Transfer and Assignment of Receivables."
As of November 15, 1996 (the "Statistical Calculation Date"), the Permitted
States consisted of the 36 states set forth in the table "Geographic
Concentration" under the heading "The Receivables" herein. As of the Statistical
Calculation Date, Aggregate Receivables in the Identified Portfolio constitute
approximately 59.5% of the aggregate receivables in the Originators' entire
portfolio of Premium Finance Agreements as of the Statistical Calculation Date.
"Permitted State" means (i) any state listed in the chart entitled
"Geographic Concentration" appearing below or (ii) any other state with respect
to which each of the Originators, the Transferor and the Trust has either
complied with such state's applicable licensing laws or is not required to be
licensed under such state's applicable licensing laws, in each case, as
evidenced by (x) an opinion of counsel or (y) written correspondence from the
applicable state regulatory authority. Any such written correspondence shall be
attached to an officer's certificate certifying that such written correspondence
evidences compliance with clause (ii) of the definition of Permitted States.
Following the Closing Date, a state that is not a Permitted State as of the
Closing Date will not become a Permitted State unless and until such opinion or
officer's certificate is delivered to the Trustee. Thereafter, the Originators
will be obligated to transfer to the Transferor, and the Transferor will be
obligated to transfer to the Trust, all Premium Finance Agreements originated in
such state after such state becomes a Permitted State that otherwise satisfy the
eligibility criteria as of the date of origination.
Each Originator will be required pursuant to the Receivables Purchase
Agreement to transfer and assign all Additional Receivables from the Identified
Portfolio to the Transferor, who in turn will be required pursuant to the
Agreement to transfer and assign all such Additional Receivables to the Trustee
for the benefit of the Trust. Such Additional Receivables may include
Receivables originated using criteria different from those which were applied to
the Receivables assigned to the Trustee for the benefit of the Trust on the
Closing Date or to previously Additional Receivables, because such Receivables
were originated at a different date. Consequently there can be no assurance that
Additional Receivables transferred to the Trust in the future will be of the
same credit quality as previously transferred Receivables. Additionally, because
the remaining term to maturity of substantially all of the Receivables included
in the Trust as of the Statistical Calculation Date is twelve months or less, it
is expected that within twelve months following the Closing Date substantially
all of the Receivables in the Trust will consist of Additional Receivables. See
"Risk Factors--Additional Receivables Considerations". In addition, there are
many legal, economic and competitive factors that could adversely affect the
amount and collectibility of the Receivables, including insureds' decisions to
use new sources of credit, which would affect the Originators' ability to
generate Additional Receivables, and changes in usage of credit, payment
patterns and general economic conditions. Because the impact of these and other
factors (including the composition of the Receivables and the interest rates,
fees and charges assessed thereon) may change in the future, the text and tables
set forth below are not necessarily indicative of the future performance of the
Receivables that are transferred to the Trust. In the event that sufficient
Additional Receivables are not transferred to the Trustee for the benefit of the
Trust to maintain the Minimum Transferor Interest as required by the Agreement
and as described herein, a Pay Out Event would occur and the Rapid Amortization
Period will commence. See "Description of the Certificates--Pay Out Events."
The statistical information relating to the Receivables presented in this
Prospectus is based on the Receivables in the Identified Portfolio as of the
Statistical Calculation Date. Receivables transferred to the Trust on the
Closing Date will include certain other Premium Finance Agreements originated by
either of the Originators after the Statistical Calculation Date and on or prior
to the Calculation Date. In addition, the characteristics of the Receivables
included as of the Statistical Calculation Date will vary as of the Cut-off
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<PAGE> 141
Date as a result of payments received by or on behalf of borrowers after the
Statistical Calculation Date and prior to the Cut-off Date. There will be no
material permissible deviations from the eligibility criteria used for
identifying the Premium Finance Agreements in the Identified Portfolio as of the
Statistical Calculation Date from those applied on the Closing Date. However,
certain of the Premium Finance Agreements in the Identified Portfolio that
satisfied the eligibility criteria as of the Statistical Calculation Date may
not satisfy such criteria on the Closing Date because of a change in
circumstances and therefore will not be permitted to be transferred to the
Trust. While the statistical distribution of the characteristics of all
Receivables transferred to the Trust on the Closing Date will vary from the
statistical information presented in this Prospectus, the Transferor does not
believe that the characteristics of the Receivables as of the Cut-off Date will
vary materially from the information presented herein with respect to the
Receivables as of the Statistical Calculation Date.
The Aggregate Receivables as of November 30, 1996 was $614,886,198.16,
consisting of $14,131,486.55 of Finance Charge Receivables and $600,754,711.61
of Principal Receivables. "Aggregate Receivables" means, with respect to the
Receivables as of any date of determination, an amount equal to the aggregate
amount of payments owed on the Receivables from such date (or, if such date is
the Statistical Calculation Date, from November 15, 1996) through the respective
scheduled final payment dates of such Receivables (exclusive of late fees and
administrative charges) less certain net payables as of such date of
determination.
AGGREGATE RECEIVABLES BALANCE BY AMOUNT
IDENTIFIED PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE AGGREGATE
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
AGGREGATE RECEIVABLES BALANCE(1) ACCOUNTS ACCOUNTS BALANCE BALANCE
- -------------------------------- -------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
$5,000 or less.................. 43,865 71.07% $ 72,347,473.30 11.70%
$5,001 to $10,000............... 7,586 12.29 53,601,224.21 8.67
$10,001 to $25,000.............. 6,102 9.89 94,450,056.92 15.28
$25,001 to $50,000.............. 2,216 3.59 76,547,667.53 12.38
$50,001 to $75,000.............. 764 1.24 46,456,649.27 7.51
$75,001 to $100,000............. 341 0.55 29,307,237.64 4.74
$100,001 to $250,000............ 605 0.98 91,211,347.78 14.75
$250,001 to $500,000............ 159 0.26 54,519,494.55 8.82
$500,001 to $1,000,000.......... 53 0.09 35,436,226.75 5.73
$1,000,001 to $5,000,000........ 28 0.05 58,186,198.68 9.41
Over $5,000,000................. 1 0.00 6,127,376.50 0.99
------ ------ ------------ ------
Total........................... 61,720 100.00% $ 618,190,953.13 100.00%
====== ====== ============ ======
</TABLE>
- ---------
(1) Includes the aggregate amount owed (including unearned finance charges
calculated based on the Rule of 78's) from the Statistical Calculation Date
through the scheduled final payment date of the premium finance loan
(exclusive of the late fees, administrative charges and net payables).
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<PAGE> 142
COMPOSITION OF RECEIVABLES BY REMAINING INSTALLMENT TERM
IDENTIFIED PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE AGGREGATE
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
REMAINING INSTALLMENT TERM ACCOUNTS ACCOUNTS BALANCE(1) BALANCE
- -------------------------------- -------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
3 months or less................ 22,574 36.57% $ 95,807,270.68 15.50%
4 to 6 months................... 22,371 36.25 224,664,602.22 36.34
7 to 9 months................... 16,382 26.54 246,606,890.66 39.89
10 to 12 months................. 273 0.44 32,710,771.85 5.29
13 to 18 months................. 49 0.08 5,093,387.00 0.82
More than 18 months............. 71 0.12 13,308,030.72 2.15
------ ------ ------------ ------
Total 61,720 100.00% $ 618,190,953.13 100.00%
====== ====== ============ ======
</TABLE>
- ---------
(1) Includes the aggregate amount owed (including unearned finance charges
calculated based on the Rule of 78's) from the Statistical Calculation Date
through the scheduled final payment date of the premium finance loan
(exclusive of the late fees, administrative charges and net payables).
GEOGRAPHIC CONCENTRATION
The Identified Portfolio as of the Statistical Calculation Date includes
Premium Finance Agreements with borrowers whose stated address in the related
Premium Finance Agreement is in one of the 36 states listed below.
GEOGRAPHIC CONCENTRATION
IDENTIFIED PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
RECEIVABLES RECEIVABLES
STATES(1) BALANCE(2) BALANCE
- ------------------------------------------------------------- --------------- -------------
<S> <C> <C>
California................................................... $142,939,062.92 23.12%
Texas........................................................ 78,954,323.48 12.77
New York..................................................... 77,084,390.67 12.47
Florida...................................................... 62,317,119.78 10.08
New Jersey................................................... 40,266,729.97 6.51
Pennsylvania................................................. 22,553,696.01 3.65
Massachusetts................................................ 20,096,040.78 3.25
Ohio......................................................... 16,205,043.28 2.62
Michigan..................................................... 15,342,506.64 2.48
Utah......................................................... 13,886,039.87 2.25
Louisiana.................................................... 12,437,516.00 2.01
Colorado..................................................... 11,350,277.71 1.84
Maryland..................................................... 10,058,567.51 1.63
Connecticut.................................................. 9,956,253.97 1.61
Arkansas..................................................... 9,450,332.39 1.53
Alabama...................................................... 8,750,046.53 1.42
South Carolina............................................... 6,934,386.80 1.12
Arizona...................................................... 6,523,501.92 1.06
Hawaii....................................................... 6,180,970.39 1.00
Oklahoma..................................................... 5,687,370.46 0.92
North Carolina............................................... 5,453,566.25 0.88
Indiana...................................................... 5,275,869.16 0.85
Nevada....................................................... 4,511,265.17 0.73
West Virginia................................................ 4,385,827.93 0.71
</TABLE>
38
<PAGE> 143
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
RECEIVABLES RECEIVABLES
STATES(1) BALANCE(2) BALANCE
- ------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Wisconsin.................................................... 4,230,364.89 0.68
Minnesota.................................................... 3,795,514.03 0.61
Kentucky..................................................... 3,295,101.46 0.53
Idaho........................................................ 2,167,552.77 0.35
New Hampshire................................................ 1,761,494.59 0.28
Rhode Island................................................. 1,702,746.77 0.28
Maine........................................................ 1,431,707.34 0.23
Montana...................................................... 947,145.28 0.15
Iowa......................................................... 864,239.39 0.14
Nebraska..................................................... 623,064.87 0.10
Wyoming...................................................... 414,677.75 0.07
South Dakota................................................. 356,638.40 0.06
--------------- -------------
Total........................................................ $618,190,953.13 100.00%
============== ==========
</TABLE>
- ---------
(1) Indicates the states where the insured's stated address in the related
Premium Finance Agreement is located.
(2) Includes the aggregate amount owed (including unearned finance charges
calculated based on the Rule of 78's) from the Statistical Calculation Date
through the scheduled final payment date of the premium finance loan
(exclusive of the late fees, administrative charges and net payables).
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth the historical loss and delinquency
experience with respect to Premium Finance Agreements in the Originators' entire
portfolio of Premium Finance Agreements for each of the periods or at each of
the dates shown, as applicable. As a result, the historical loss and delinquency
experience set forth in the tables below includes Premium Finance Agreements
with borrowers whose stated addresses therein are in all 50 states (including
states that are one of the Permitted States as of the Statistical Calculation
Date) or which otherwise would not satisfy the eligibility criteria for transfer
to the Trust pursuant to the Agreement. As of the Statistical Calculation Date,
Aggregate Receivables in the Identified Portfolio constituted approximately
59.5% of the aggregate receivables in the Originators' entire portfolio of
Premium Finance Agreements. It is likely that Premium Finance Agreements in the
Identified Portfolio at any time will represent only a portion of the
Originators' entire portfolio of Premium Finance Agreements. The Originators do
not believe that the historical performance of Premium Finance Agreements in the
Identified Portfolio differs materially from the historical performance of their
entire portfolio of Premium Finance Agreements. There can be no assurance that
the loss or delinquency experience for the Trust with respect to the Receivables
will be similar to the historical experience set forth below.
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<PAGE> 144
LOAN LOSS EXPERIENCE
The following table sets forth loss experience with respect to payments by
borrowers on commercial premium finance loans in the Originator's entire
portfolio of Premium Finance Agreements for each of the periods shown. Neither
the Originators nor the Transferor believe that changes of amounts from period
to period reflect any material trends.
LOAN LOSS EXPERIENCE
ENTIRE PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
OCTOBER YEAR ENDED DECEMBER 31,
31, --------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Outstanding Principal
Balance(1).............................. $1,016,716 $1,036,464 $1,105,789 $1,067,703
Gross Charge-Offs(2)...................... 3,435 3,230 2,836 3,614
Recoveries(3)............................. 1,804 1,153 966 0
Net Charge-Offs........................... 1,631 2,077 1,870 3,614
Net Charge-Offs as Percentage of Average
Aggregate Outstanding Principal
Balance................................. 0.19 %(4) 0.20% 0.17% 0.34%
</TABLE>
- ---------
(1) Calculated as the average of the Principal Balance (aggregate receivables
less unearned interest) at the beginning of each month in the period
indicated.
(2) Since December 1993, loans have been generally charged off if uncollected
270 days after cancellation of the related insurance policy. Prior to
December 1993, loans were charged off when deemed to be uncollectible.
Charge-offs in 1993 exclude a one-time cumulative charge-off to reflect the
change in charge-off procedures in December.
(3) A recovery occurs if, after a loan is written off, AFCO receives additional
funds to pay in whole or in part the outstanding balance due.
(4) Calculated on an annualized basis.
LOAN DELINQUENCY EXPERIENCE FOLLOWING CANCELLATION
The following table sets forth the delinquency experience with respect to
payments on Premium Finance Agreements in the Originators' entire portfolio of
Premium Finance Agreements at each of the dates shown. In conformity with state
requirements regarding cancellation notification, insurance policies are
generally cancelled within one month following a borrower's failure to make a
related scheduled loan installment payment. The loan delinquency data presented
in the following table are measured from the date of issuance of a Notice of
Cancellation. The percentages presented for each aging category reflect the sum
of the balance of principal and unearned finance charges (including the overdue
installment(s) as well as all of the remaining installment payments not yet due)
on all cancelled accounts within each category divided by the aggregate
principal loan balance (excluding unearned finance charges). Since the table
reflects percentages calculated by including unearned finance charges in the
cancelled accounts, but not including such amounts in the aggregate loan
balances, the resulting percentages may reflect higher percentages of
delinquencies than actually experienced. Variations from one measurement date to
another measurement date within aging categories are primarily a reflection of
the variability of time required to collect the unearned insurance premium from
the insurance carrier or, alternatively, the remaining loan balance from the
borrower, on a revolving pool of loans. Neither the Originators nor the
Transferor believe the changes in amounts from period to period in the
categories in the table reflect any material trend. There can be no assurance
that the delinquency experience with respect to the Receivables will be similar
to the historical experience set forth below. The Originators and Transferor
have no knowledge of any trends which are expected to materially change future
delinquency experience.
40
<PAGE> 145
LOAN DELINQUENCY EXPERIENCE FOLLOWING CANCELLATION
ENTIRE PORTFOLIO
<TABLE>
<CAPTION>
AT DECEMBER
31,
AT OCTOBER 31, --------------
1996 1995 1994
--------------- ----- -----
<S> <C> <C> <C>
Number of days a loan remains overdue after
cancellation of the related insurance policy:
31-89 days........................................ 0.80% 0.80 % 1.07 %
90-270 days....................................... 0.82% 0.69 % 0.63 %
Over 270 days(1).................................. 0.00% 0.00 % 0.01 %
----- ----- -----
Total........................................... 1.62% 1.49 % 1.71 %
============== ====== ======
</TABLE>
- ---------
(1) A loan is generally written off to the extent it is uncollected 270 days
after the effective date of cancellation of the related insurance policy.
See "Business of the Originators--Premium Finance Loan Origination;
Collection Policy."
ORIGINATORS' PORTFOLIO YIELD
ENTIRE PORTFOLIO
(DOLLARS IN THOUSANDS)
The following table sets forth the total revenues from finance charges
accrued and fees collected with respect to the Originators' entire portfolio of
Premium Finance Agreements for each of the periods shown. The figures in the
table do not include deductions for charge-offs or other expenses.
<TABLE>
<CAPTION>
FOR THE TEN
MONTHS FOR THE FISCAL YEAR ENDED DECEMBER 31,
ENDED
OCTOBER 31, --------------------------------------
1996 1995 1994 1993
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Outstanding Principal Balance
Receivables(1)........................ $1,016,716 $1,036,464 $1,105,789 $1,067,703
Interest and Fee Income(2).............. 86,959 108,551 100,010 93,982
Average Revenue Yield................... 10.26 %(3) 10.47% 9.04% 8.80%
</TABLE>
- ---------
(1) Calculated as the average of the Principal Balance (aggregate receivables
less unearned interest) at the beginning of each month in the period
indicated.
(2) Includes interest income, late fees, cancellation fees, returned check
charges, and other fees.
(3) Calculated on an annualized basis.
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<PAGE> 146
USE OF PROCEEDS
The net proceeds from the sale of the Certificates, approximately
$463,386,250 before deduction of expenses, will be applied to the purchase of
the Receivables from the Originators.
MATURITY ASSUMPTIONS
The Agreement provides that Class A Holders will not receive payments of
principal until the Class A Scheduled Payment Date, or earlier in the event of a
Principal Payment Event which results in the commencement of the Principal
Payment Period or a Pay Out Event which results in the commencement of the Rapid
Amortization Period. Class A Holders will receive payments of principal (i) on
each Distribution Date following the Monthly Period in which a Pay Out Event
occurs and (ii) on each Principal Distribution Date during the Principal Payment
Period (each such Distribution Date, a "Special Payment Date") until the Class A
Investor Interest has been paid in full or the Series 1996-1 Termination Date.
The Class B Holders will not begin to receive payments of principal until the
final principal payment on the Class A Certificates has been made.
CONTROLLED ACCUMULATION PERIOD. On each Transfer Date during the
Controlled Accumulation Period prior to the payment of the Class A Investor
Interest in full, an amount equal to, for each Monthly Period, the least of (a)
the Available Investor Principal Collections, (b) the "Controlled Deposit
Amount" for such Monthly Period (which equals the sum of the Controlled
Accumulation Amount for such Monthly Period and any portion of the Controlled
Accumulation Amount for any prior Monthly Period that was not deposited in the
Principal Funding Account) and (c) the Class A Adjusted Investor Interest prior
to any deposits on such day, will be deposited in the Principal Funding Account
(as defined herein) established by the Trustee until the principal amount on
deposit in the Principal Funding Account (the "Principal Funding Account
Balance") equals the Class A Investor Interest. After the Class A Investor
Interest has been paid in full, Available Investor Principal Collections, to the
extent required, will be distributed to the Class B Holders on each Distribution
Date until the earlier of the date the Class B Investor Interest has been paid
in full and the Series 1996-1 Termination Date. After the Class A Investor
Interest and the Class B Investor Interest have each been paid in full,
Available Investor Principal Collections, to the extent required, will be
distributed to the Collateral Interest Holder on each Transfer Date until the
earlier of the date the Collateral Interest has been paid in full and the Series
1996-1 Termination Date. Amounts in the Principal Funding Account are expected
to be available to pay the Class A Investor Interest on the Class A Scheduled
Payment Date. After the payment of the Class A Investor Interest in full,
Available Investor Principal Collections are expected to be available to pay the
Class B Investor Interest on the Class B Scheduled Payment Date. Although it is
anticipated that collections of Principal Receivables will be available on each
Transfer Date during the Controlled Accumulation Period to make a deposit of the
applicable Controlled Deposit Amount and that the Class A Investor Interest will
be paid to the Class A Holders on the Class A Scheduled Payment Date and the
Class B Investor Interest will be paid to the Class B Holders on the Class B
Scheduled Payment Date, respectively, no assurance can be given in this regard.
If the amount required to pay the Class A Investor Interest or the Class B
Investor Interest in full is not available on the Class A Scheduled Payment Date
or the Class B Scheduled Payment Date, respectively, a Pay Out Event will occur
and the Rapid Amortization Period will commence. The ability of
Certificateholders to receive payments of principal on the Class A Scheduled
Payment Date or the Class B Scheduled Payment Date, as applicable, depends on
the amount and schedule of installments of outstanding Receivables,
delinquencies, charge-offs and the timing of the origination and transfer of
Additional Receivables, which may vary from month to month due to seasonal
variations, regulatory factors, general economic conditions and conditions in
the insurance premium finance market.
PRINCIPAL PAYMENT PERIOD. If a Principal Payment Event occurs, the
Principal Payment Period will commence and the amount on deposit in the
Principal Funding Account, if any, will be paid to the Class A Holders on the
Distribution Date in the month following the commencement of the Principal
Payment Period. In addition, to the extent that the Class A Investor Interest
has not been paid in full, the Class A Holders will be entitled to monthly
payments of principal on each Principal Distribution Date equal to the Available
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<PAGE> 147
Investor Principal Collections until the earlier of the date on which the Class
A Certificates have been paid in full and the Series 1996-1 Termination Date.
After the Class A Certificates have been paid in full and if the Series 1996-1
Termination Date has not occurred, Available Investor Principal Collections will
be paid to the Class B Certificates on each Distribution Date until the earlier
of the date on which the Class B Certificates have been paid in full and the
Series 1996-1 Termination Date. If a Principal Payment Event occurs, the average
life and maturity of the Certificates could be significantly reduced. No
prepayment premium will be payable on account of any prepayment of the
Certificates as a result of the occurrence of the Principal Payment Event and
any reinvestment risk will be borne by the Certificateholders.
RAPID AMORTIZATION PERIOD. If a Pay Out Event occurs, the Rapid Amortization
Period may commence and, if commenced, any amount on deposit in the Principal
Funding Account will be paid to the Class A Holders on the Distribution Date in
the month following the commencement of the Rapid Amortization Period. In
addition, to the extent that the Class A Investor Interest has not been paid in
full, the Class A Holders will be entitled to monthly payments of principal on
each Special Payment Date equal to the Available Investor Principal Collections
until the earlier of the date on which the Class A Certificates have been paid
in full and the Series 1996-1 Termination Date. After the Class A Certificates
have been paid in full and if the Series 1996-1 Termination Date has not
occurred, Available Investor Principal Collections will be paid to the Class B
Certificates on each Distribution Date until the earlier of the date on which
the Class B Certificates have been paid in full and the Series 1996-1
Termination Date.
PAY OUT EVENTS. A Pay Out Event occurs, either automatically or after
specified notice, upon (a) certain insolvency events involving the Transferor or
either Originator; (b) the Trust becoming an "investment company" within the
meaning of the Investment Company Act of 1940, as amended; (c) the Back-up
Servicer becomes legally unable to act as successor Servicer or has been
terminated as Back-up Servicer and, within 90 days of such event, a successor
Back-up Servicer has not assumed the obligations of Back-up Servicer and the
Rating Agency Condition has not been satisfied with respect to the appointment
of such Back-up Servicer; (d) the failure of the Transferor to make certain
payments or transfers of funds for the benefit of the Holders within the time
periods stated in the Agreement; (e) material breaches of certain
representations, warranties or covenants of the Transferor; (f) a reduction in
the average of the Portfolio Yields for any three consecutive Monthly Periods to
a rate that is less than the average of the Base Rates for such period; (g) (i)
the average Transferor Interest during any 10 consecutive days being below the
Minimum Transferor Interest for the same period and (ii) during any 10
consecutive days the sum of (x) the Principal Receivables and (y) the principal
amount on deposit in the Excess Funding Account being less than the Minimum
Aggregate Principal Receivables for the same period; (h) the failure of either
Originator to transfer Additional Receivables to the Transferor when required by
the Receivables Purchase Agreement or the failure of the Transferor to convey
Additional Receivables when required by the Agreement; (i) the occurrence of a
Servicer Default which would have a material adverse effect on the Holders; (j)
the Class A Investor Interest or the Class B Investor Interest not being paid in
full on the Class A Scheduled Payment Date or the Class B Scheduled Payment
Date, respectively; (k) the Monthly Payment Rate averaged for three consecutive
Monthly Periods is less than 12%; (l) the third consecutive Determination Date
on which (i) there exists an Excess Obligor Concentration Amount, (ii) there
exists an Excess Insurer Concentration, (iii) the Investment Grade Insurer
Percentage is less than the Required Investment Grade Insurer Percentage, (iv)
the Investment Grade Insurer Percentage to be decreased, if on such day the
Investment Grade Insurer Percentage is equal to or less than the Required
Investment Grade Insurer Percentage, (v) there are less than 300 insurance
carriers whose insurance premiums have been financed by the Receivables in the
Identified Portfolio, or (vi) the Top 10 Insurer Percentage is greater than the
Maximum Top 10 Insurer Percentage; (m) the Originators cease to be the Servicer
under the Agreement; (n) the failure to appoint a successor Back-up Servicer by
a date which is ninety days after the receipt by the Servicer, the Trustee and
the Transferor of either a Sale Notice or Successor Back-up Servicer Termination
Notice in accordance with the Agreement; or (o) the failure of the Servicer (so
long as the Originator is a Servicer) to remove Receivables from the Trust or
indemnify for certain losses resulting from the breach of the Servicer's
covenant to maintain certain licenses and regulatory approvals as described
under "Description of the Certificates -- Certain Covenants." See "Description
of the Certificates--Pay Out Events." If a Pay Out Event occurs, the average
life and maturity of the Certificates could be significantly reduced. No
prepayment premium will be payable
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<PAGE> 148
on account of any prepayment of the Certificates as the result of the occurrence
of the Rapid Amortization Period and any reinvestment risk will be borne by the
Certificateholders.
The Pay Out Event described in clause (l) may be amended at any time by the
Transferor, the Trustee and the Servicer, with the consent of each provider of
Enhancement, but without the consent of any certificateholder, if the Rating
Agency Condition is satisfied.
As of the Statistical Calculation Date (i) the amount of the Aggregate
Receivables related to any single borrower was not greater than 2.1% of the
amount of Aggregate Receivables in the Identified Portfolio as of the
Statistical Calculation Date; (ii) the amount of the portion of the Aggregate
Receivables relating to the financing of insurance premiums of any Tier 1
Insurer was not greater than 5.2% of the amount of Aggregate Receivables as of
the Statistical Calculation Date; (iii) the amount of the portion of the
Aggregate Receivables relating to the financing of insurance premiums of any
Tier 2 Insurer was not greater than 6.7% of the amount of Aggregate Receivables
as of the Statistical Calculation Date; (iv) the amount of the portion of the
Aggregate Receivables relating to the financing of insurance premiums of any
Tier 3 Insurer was not greater than 2.9% of the amount of Aggregate Receivables
as of the Statistical Calculation Date; (v) the Investment Grade Insurer
Percentage equaled 94.2%; (vi) the Top 10 Insurer Percentage equaled 49.3%; and
(vii) there were at least 486 insurance carriers whose insurance premiums have
been financed by the 61,720 Premium Finance Agreements in the Identified
Portfolio as of the Statistical Calculation Date.
Because there may be a slowdown in the payment rate below the payment rates
used to determine the Controlled Accumulation Amounts, a Principal Payment Event
may occur which would initiate the Principal Payment Period or a Pay Out Event
may occur which would initiate the Rapid Amortization Period, there can be no
assurance that the actual number of months elapsed from the date of issuance of
the Class A Certificates and the Class B Certificates to their respective final
Distribution Dates will equal the expected number of months. In addition, as
described under "Description of the Certificates--Postponement of Controlled
Accumulation Period," the Servicer may shorten the Controlled Accumulation
Period and, in such event, there can be no assurance that there will be
sufficient time to accumulate all amounts necessary to pay the Class A Investor
Interest and the Class B Investor Interest on the Class A Scheduled Payment Date
and the Class B Scheduled Payment Date, respectively.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. Pursuant to the
Agreement, the Transferor and the Trustee may execute further series supplements
in order to issue additional Series. The following summary of the Certificates
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the Agreement.
GENERAL
The Certificates will represent the right to receive certain payments from
the assets of the Trust, including the right to the applicable allocation
percentage of all borrower payments on the Receivables in the Trust. Each Class
A Certificate represents the right to receive payments of interest at the
applicable Class A LIBOR Rate for the related Interest Period, subject to the
Class A Available Funds Cap for each related Monthly Period, and payments of
principal on the Class A Scheduled Payment Date or, to the extent of the Class A
Investor Interest, on each Special Payment Date during the Principal Payment
Period or Rapid Amortization Period, funded from collections of Finance Charge
Receivables and Principal Receivables, respectively, allocated to the Class A
Investor Interest and certain other available amounts. Each Class B Certificate
represents the right to receive payments of interest at the applicable Class B
LIBOR Rate for the related Interest Period, subject to the Class B Available
Funds Cap for each related Monthly Period, and payments of principal on the
Class B Scheduled Payment Date or, to the extent of the Class B Investor
Interest, on each Special Payment Date during the Principal Payment Period or
the Rapid Amortization Period after the Class A Certificates have been paid in
full, funded from collections of Finance Charge Receivables and Principal
Receivables, respectively, allocated to the Class B Investor Interest and
certain other available amounts. In addition to representing the right to
payment from collections of Finance Charge
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<PAGE> 149
Receivables and Principal Receivables, each Class A Certificate also represents
the right to receive payments from Excess Spread, funds on deposit in the
Principal Funding Account and the Reserve Account and certain investment
earnings thereon, Reallocated Principal Collections and Shared Principal
Collections and certain other available amounts (including, under certain
circumstances, amounts on deposit in the Excess Funding Account). In addition to
representing the right to payment from collections of Finance Charge Receivables
and Principal Receivables, each Class B Certificate also represents the right to
receive payments from Excess Spread, Reallocated Collateral Principal
Collections and Shared Principal Collections and certain other available amounts
(including, under certain circumstances, amounts on deposit in the Excess
Funding Account). Payments of interest and principal will be made, to the extent
of funds available therefor, on each Distribution Date on which such amounts are
due to Holders in whose names the Certificates were registered on the last
business day of the calendar month preceding such Distribution Date (each, a
"Record Date").
The Transferor initially will own the Transferor Interest. The Transferor
Interest will represent the right to receive certain payments from the assets of
the Trust, including the right to a percentage (the "Transferor Percentage") of
all payments on the Receivables in the Trust equal to 100% minus the sum of the
applicable Investor Percentages for all Series of certificates then outstanding.
The Transferor Interest may be transferred in whole or in part subject to
certain limitations and conditions set forth in the Agreement. See "--Certain
Matters Regarding the Transferor and the Servicer."
The Class A Certificates and the Class B Certificates initially will be
represented by certificates registered in the name of Cede, as nominee of DTC.
Unless and until Definitive Certificates are issued, all references herein to
actions by Class A Holders and/or Class B Holders shall refer to actions taken
by DTC upon instructions from DTC Participants and all references herein to
distributions, notices, reports and statements to Class A Holders and/or Class B
Holders shall refer to distributions, notices, reports and statements to DTC or
Cede, as the registered holder of the Class A Certificates and the Class B
Certificates, as the case may be, for distribution to Certificate Owners in
accordance with DTC procedures. Holders may hold their Certificates 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
Certificates. Cede and Euroclear will hold omnibus positions on behalf of the
Cedel Participants and the Euroclear Participants, respectively, through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective Depositaries which in turn will hold such positions in
customers' securities accounts in the Depositaries' names on the books of DTC.
See "--Book-Entry Registration."
BOOK-ENTRY REGISTRATION
Certificateholders may hold their certificates 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 Certificates. Cedel and
Euroclear will hold omnibus positions on behalf of the Cedel Participants and
the Euroclear Participants, respectively, through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositories
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities for its Participants ("DTC Participants") and facilitates the
clearance and settlement among DTC Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic book-entry
changes in DTC Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to the DTC system is also available to others
such
45
<PAGE> 150
as securities brokers and dealers, banks, and trust companies that clear through
or maintain a custodial relationship with a DTC Participant, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its DTC
Participants are on file with the Securities and Exchange Commission.
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.
Purchases of Certificates under the DTC system must be made by or through
DTC Participants, which will receive a credit for the Certificates on DTC's
records. The ownership interest of each actual Certificate Owner is in turn to
be recorded on the DTC Participants' and Indirect Participants' records.
Certificate Owners will not receive written confirmation from DTC of their
purchase, but Certificate Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the DTC Participant or Indirect Participant through which the
Certificate Owner entered into the transaction. Transfers of ownership interests
in the Certificates are to be accomplished by entries made on the books of DTC
Participants acting on behalf of Certificate Owners. Certificate Owners will not
receive certificates representing their ownership interest in Certificates,
except in the event that use of the book-entry system for the Certificates is
discontinued.
To facilitate subsequent transfers, all Certificates deposited by DTC
Participants with DTC are registered in the name of DTC's nominee, Cede & Co.
The deposit of Certificates with DTC and their registration in the name of Cede
& Co. effects no change in beneficial ownership. DTC has no knowledge of the
actual Certificate Owners of the Certificates; DTC's records reflect only the
identity of the DTC Participants to whose accounts such Certificates are
credited, which may or may not be the Certificate Owners. The DTC Participants
will remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect Participants, and by DTC Participants and
Indirect Participants to Certificate Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to
Certificates. Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date, which assigns Cede & Co.'s
consenting or voting rights to those DTC Participants to whose accounts the
Certificates are credited on the record date (identified in a listing attached
thereto).
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<PAGE> 151
Principal and interest payments on the Certificates will be made to DTC.
DTC's practice is to credit DTC Participants' accounts on the applicable
Distribution Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such Distribution Date. Payments by DTC Participants to Certificate Owners will
be governed by standing instructions and customary practices, as is the case
with securities held for the accounts of customers in bearer form or registered
in "street name" and will be the responsibility of such DTC Participant and not
of DTC, the Trustee or the Transferor, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal and
interest to DTC is the responsibility of the Trustee, disbursement of such
payments to DTC Participants shall be the responsibility of DTC, and
disbursement of such payments to Certificate Owners shall be the responsibility
of DTC Participants and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Certificates at any time by giving reasonable notice to the
Transferor or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Certificates are
required to be printed and delivered. The Transferor may decide to discontinue
use of the system of book-entry transfers through DTC (or a successor securities
depository). In that event, Definitive Certificates will be delivered to
Certificateholders. See "--Definitive Certificates."
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Transferor believes to be reliable, but
the Transferor takes no responsibility for the accuracy thereof.
Cedel Bank, Societe Anonyme ("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 32 currencies, including United States dollars. Cedel
provides to its Cedel Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel interfaces with domestic
markets in several countries. As a professional depository, Cedel is subject to
regulation by the Luxembourg Monetary Institute. Cedel Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the underwriters of any Series
of Certificates. 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.
The Euroclear System 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 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in 25 countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, Societe Cooperative, a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative Board establishes policy for the Euroclear System. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any Series of Certificates. Indirect access to the Euroclear
System is also available to other firms that maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
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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 (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 or relationship
with persons holding through Euroclear Participants.
Distributions with respect to Certificates held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "U.S. Federal Income Tax Consequences." Cedel or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Certificateholder under the Agreement on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
Certificates will be issued as Definitive Certificates in fully registered,
certificated form to Certificate Owners or their nominees rather than to DTC or
its nominee, only if (i) the Transferor advises the Trustee for such Series in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as Depositary with respect to such Series of Certificates, and
the Trustee or the Transferor is unable to locate a qualified successor, (ii)
the Transferor, at its option, advises the Trustee in writing that it elects to
terminate the book-entry system through DTC or (iii) after the occurrence of a
Servicer Default, Certificate Owners representing not less than 50% of the
Investor Interest advise the Trustee and DTC through DTC Participants in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interest of the Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all DTC Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive certificate representing the Certificates and instructions for
registration, the Trustee will issue the Certificates as Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as holders under the Agreement ("Holders").
Distribution of principal and interest on the Certificates will be made by
the Trustee directly to Holders of Definitive Certificates in accordance with
the procedures set forth herein and in the Agreement. Interest payments and any
principal payments on each Distribution Date will be made to Holders in whose
names the Definitive Certificates were registered at the close of business on
the related Record Date. The final payment on any Certificate (whether
Definitive Certificates or the Certificates registered in the name of Cede
representing the Certificates), will be made only upon presentation and
surrender of such Certificate at the office or agency specified in the notice of
final distribution to Certificateholders. The Trustee will provide such notice
to registered Certificateholders not later than the fifth day of the month of
such final distributions.
Definitive Certificates will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar, which shall initially be the
Trustee. No service charges will be imposed for any registration of
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transfer or exchange, but the Transfer Agent and Registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith. The Transfer Agent and Registrar shall not be required to
register the transfer or exchange of Definitive Certificates for a period of
fifteen days preceding the due date for any payment with respect to such
Definitive Certificates.
INTEREST PAYMENTS
Interest on the Class A Certificates and the Class B Certificates will
accrue from the Closing Date on the outstanding principal balance of the Class A
Certificates and the Class B Certificates at the Class A LIBOR Rate and Class B
LIBOR Rate, respectively, subject to the limitations described below. Interest
will be distributed quarterly on the 15th day of March, June, September, and
December (or if any such day is not a business day, the next succeeding business
day) and on the Class B Scheduled Payment Date (each, an "Interest Payment
Date"), commencing on the March 17, 1997 Distribution Date and, following the
occurrence of a Principal Payment Event or a Pay Out Event, on each Special
Payment Date to the Certificateholders in whose names the Certificates were
registered at the close of business on the last day of the calendar month
preceding such Interest Payment Date or Special Payment Date. Interest for any
Interest Payment Date or Special Payment Date will accrue from and including the
preceding Interest Payment Date or Special Payment Date (or in the case of the
first Interest Payment Date, from and include the Closing Date) to but excluding
the next Interest Payment Date or Special Payment Date and interest, with
respect to Collateral Monthly Interest, shall accrue at One Month LIBOR during
such Monthly Interest Period (each, an "Interest Period").
Interest payments or deposits with respect to the Class A Certificates for
each Distribution Date will be calculated on the outstanding principal balance
of the Class A Certificates as of the preceding Record Date (or in the case of
the initial Distribution Date, as of the Closing Date) based upon, subject to
certain limitations described below, the Class A LIBOR Rate. "Distribution Date"
means the 15th day of each calendar month (or if any such day is not a business
day, the next succeeding business day) commencing January 15, 1997; however, the
first Interest Payment Date will not occur until March 17, 1997. Interest
payments or deposits with respect to each Distribution Date will be calculated
on the basis of the actual number of days in the period (each, a "Monthly
Interest Period") from and including the preceding Distribution Date (or in the
case of the initial Distribution Date, the Closing Date) to but excluding such
Distribution Date and a 360-day year. On each Distribution Date, Class A Monthly
Interest (as defined below) and Class A Monthly Interest previously due but not
deposited in the Class A Interest Funding Account (as defined below) or paid to
the Class A Certificateholders and any Class A Additional Interest will be (i)
paid to the Class A Certificateholders, if such Distribution Date is an Interest
Payment Date or a Special Payment Date, or (ii) deposited in the Class A
Interest Funding Account (the "Class A Interest Funding Account"), an
administrative subaccount of an eligible trust account in the name of Trustee
and for the benefit of the Certificateholders, if such Distribution Date is not
an Interest Payment Date or a Special Payment Date. Payments to the Class A
Certificateholders or deposits into the Class A Interest Funding Account in
respect of interest on the Class A Certificates on any Distribution Date will be
funded from Class A Available Funds for the related Monthly Period. See
"Description of the Certificates--Application of Collections--Allocations."
Interest payments or deposits with respect to the Class B Certificates for
each Distribution Date will be calculated on the outstanding principal balance
of the Class B Certificates as of the preceding Record Date (or in the case of
the initial Distribution Date, on the Closing Date) based upon the Class B LIBOR
Rate and the actual number of days in the Monthly Interest Period and a 360-day
year. On each Distribution Date, Class B Monthly Interest and Class B Monthly
Interest previously due but not deposited in the Class B Interest Funding
Account (as defined below) or paid to the Class B Certificateholders and any
Class B Additional Interest will be (i) paid to the Class B Certificateholders,
if such Distribution Date is an Interest Payment Date or a Special Payment Date,
or (ii) deposited in the Class B Interest Funding Account (the "Class B Interest
Funding Account"), an administrative subaccount of an eligible trust account in
the name of the Trustee for the benefit of Certificateholders, if such
Distribution Date is not an Interest Payment Date or a Special Payment Date.
Payments to the Class B Certificateholders or deposits into the Interest Funding
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Account in respect of interest on the Class B Certificates on any Distribution
Date will be funded from Class B Available Funds for the related Monthly Period.
Class A Monthly Interest and Class B Monthly Interest for any Distribution Date
due but not paid on such Distribution Date will be payable on the next
succeeding Distribution Date, together with additional interest on such amount
at the applicable Class A LIBOR Rate or Class B LIBOR Rate plus 2% per annum
(such amount, as applicable, "Class A Additional Interest" and "Class B
Additional Interest"). Any such amounts will not be distributed until the
related Interest Payment Date. See "Description of the Certificates--Application
of Collections--Allocations."
"Class A Monthly Interest" means for any Distribution Dates an amount equal
to the lesser of (x) the product of (i) the actual number of days in the related
Monthly Interest Period divided by 360, (ii) the Class A LIBOR Rate and (iii)
the outstanding principal balance of the Class A Certificates as of the
preceding Record Date (or in the case of the first Distribution Date, as of the
Closing Date) and (y) the Class A Available Funds Cap for the related Monthly
Period.
"Class B Monthly Interest" means for any Distribution Date, an amount equal
to the lesser of (x) the product of (i) the actual number of days in the related
Monthly Interest Period divided by 360, (ii) the Class B LIBOR Rate and (iii)
the outstanding principal balance of the Class B Certificates as of the
preceding Record Date (or in the case of the first Distribution Date, as of the
Closing Date) and (y) the Class B Available Funds Cap for the related Monthly
Period.
"Class A Available Funds Cap" means, with respect to any Monthly Period,
Class A Available Funds for such Monthly Period less, if the Originators are not
the Servicer, the Class A Servicing Fee for such Monthly Period.
"Class A Available Funds" means, with respect to any Monthly Period, an
amount equal to the sum of (a) the Class A Floating Allocation of collections of
Finance Charge Receivables allocated to the Investor Interest with respect to
such Monthly Period, (b) Principal Funding Investment Proceeds, if any, with
respect to the related Transfer Date and (c) amounts, if any, to be withdrawn
from the Reserve Account which are required to be included in Class A Available
Funds pursuant to the Series 1996-1 Supplement with respect to such Transfer
Date.
"Class B Available Funds Cap" means, with respect to any Monthly Period,
Class B Available Funds for such Monthly Period less, if the Originators are not
the Servicer, the Class B Servicing Fee for such Monthly Period.
"Class B Available Funds" means, with respect to any Monthly Period, an
amount equal to the Class B Floating Allocation of collections of Finance Charge
Receivables allocated to the Investor Interest with respect to such Monthly
Period.
Interest payments or deposits on each Distribution Date (other than any
payments or deposits relating to any Class A or Class B Shortfall Amounts or
Class A or Class B Carry Over Amounts) will be funded from the portion of
Finance Charge Receivables collected during the preceding Monthly Period (or
with respect to the first Distribution Date, from and including the Cut-off Date
through December 31, 1996) and certain other available amounts (a) with respect
to the Class A Certificates, allocated to the Class A Investor Interest, and, if
necessary, from Excess Spread and Reallocated Principal Collections (to the
extent available), (b) with respect to the Class B Certificates, allocated to
the Class B Investor Interest and, if necessary, from Excess Spread and
Reallocated Principal Collections (to the extent available) and (c) with respect
to the Collateral Interest, from Excess Spread. See "Description of the
Certificates--Reallocation of Cash Flows" and "--Application of
Collections--Payment of Interest, Fees and Other Items" and "Risk Factors--Risk
of Limitations on Subordination."
If and to the extent on any Distribution Date, the amount of interest
payable on the Class A Certificates based on the Class A LIBOR Rate for the
related Monthly Interest Period exceeds the Class A Available Funds Cap for the
related Monthly Period, then such excess (the "Class A Shortfall Amount") will
be carried forward to the next Distribution Date together with interest thereon
at the applicable Class A LIBOR Rate plus 2% per annum (the "Class A Carry Over
Amount") and will be funded on a subordinated basis solely
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from Excess Spread, if any, available therefor as described under "Description
of the Certificates-- Application of Collections--Excess Spread."
If and to the extent on any Distribution Date, the amount of interest
payable on the Class B Certificates based on the Class B LIBOR Rate for the
related Monthly Interest Period exceeds the Class B Available Funds Cap for the
related Monthly Interest Period, then such excess (the "Class B Shortfall
Amount") will be carried forward to the next Distribution Date together with
interest thereon at the applicable Class B LIBOR Rate plus 2% per annum (the
"Class B Carry Over Amount") and will be funded on a subordinated basis solely
from Excess Spread, if any, available therefor as described under "Description
of the Certificates--Application of Collections--Excess Spread." The Class B
Carry Over Amount is subordinated to the Class A Carry Over Amount. The Class A
Carry Over Amount and Class B Carry Over Amount are subordinated to payments in
respect of the Collateral Interest. See "Risk Factors--Basis Risk."
The Trustee will determine LIBOR and One Month LIBOR on December 12, 1996
for the period from the Closing Date (x) through March 17, 1997 in the case of
the Certificates and (y) January 15, 1997, for the Collateral Interest, and for
each applicable Interest Period thereafter, on the second business day prior to
the Distribution Date on which such Interest Period commences (each, a "LIBOR
Determination Date"). For purposes of calculating LIBOR, a business day is any
business day on which dealings in deposits in United States dollars are
transacted in the London interbank market.
"Class A LIBOR Rate" means, with respect to each Interest Period, a per
annum rate equal to .11% per annum in excess of LIBOR, as determined on the
related LIBOR Determination Date.
"Class B LIBOR Rate" means, with respect to each Interest Period, a per
annum rate equal to .32% per annum in excess of LIBOR, as determined on the
related LIBOR Determination Date.
"LIBOR" means, as of any LIBOR Determination Date, the rate for deposits in
United States dollars for a period equal to the related Interest Period which
appears on Telerate Page 3750 as of 11:00 a.m., London time, on such date. If
such rate does not appear on Telerate Page 3750, the rate for that LIBOR
Determination Date will be determined on the basis of the rates at which
deposits in United States dollars are offered by the Reference Banks at
approximately 11:00 a.m., London time, on that day to prime banks in the London
interbank market for a period equal to the relevant Interest Period. The Trustee
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that LIBOR Determination Date will be the arithmetic mean of the
quotations. If fewer than two quotations are provided as requested, the rate for
that LIBOR Determination Date will be the arithmetic mean of the rates quoted by
major banks in New York City, selected by the Servicer, at approximately 11:00
a.m., New York City time, on that day for loans in United States dollars to
leading European banks for a period equal to the relevant Interest Period.
"One Month LIBOR" is calculated in the same manner as LIBOR with the
related Interest Period being one month.
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the Servicer.
The Class A LIBOR Rate and the Class B LIBOR Rate applicable to the current
and immediately preceding Interest Period may be obtained by telephoning the
Trustee at its Corporate Trust Office at One First National Plaza, Suite 0126,
Chicago, Illinois 60670-0126 Attention: Corporate Trust Servicer Division.
Interest on the Certificates will be calculated on the basis of the actual
number of days in the Interest Period and a 360-day year.
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PRINCIPAL PAYMENTS
On each Transfer Date relating to the Revolving Period (which begins on the
Closing Date and ends at the commencement of the Controlled Accumulation Period
or, if earlier, the Principal Payment Period or the Rapid Amortization Period),
unless a reduction in the Required Collateral Interest has occurred, collections
of Principal Receivables allocable to the Investor Interest will, subject to
certain limitations, including the allocation of any Reallocated Principal
Collections with respect to the related Monthly Period to pay the Class A
Required Amount and the Class B Required Amount, be treated as Shared Principal
Collections or, under certain circumstances, deposited into the Excess Funding
Account.
On each Transfer Date relating to the Controlled Accumulation Period, the
Trustee will deposit in the Principal Funding Account an amount equal to the
least of (a) Available Investor Principal Collections with respect to such
Transfer Date, (b) the applicable Controlled Deposit Amount and (c) the Class A
Adjusted Investor Interest prior to any deposits on such date. Amounts in the
Principal Funding Account will be paid to the Class A Holders on the Class A
Scheduled Payment Date. After the Class A Investor Interest has been paid in
full, on each Transfer Date during the Controlled Accumulation Period, amounts
equal to the lesser of (a) Available Investor Principal Collections with respect
to such Transfer Date and (b) the Class B Investor Interest will be deposited in
the Distribution Account for distribution to the Class B Holders until the Class
B Investor Interest has been paid in full. Such amounts in the Distribution
Account will be paid to the Class B Holders on the Class B Scheduled Payment
Date. During the Controlled Accumulation Period until the final principal
payment to the Class B Holders, the portion of Available Investor Principal
Collections not applied to Class A Monthly Principal, Class B Monthly Principal
or Collateral Monthly Principal on a Transfer Date will generally be treated as
Shared Principal Collections or, under certain circumstances, deposited into the
Excess Funding Account.
"Available Investor Principal Collections" means, with respect to any
Monthly Period in the Controlled Accumulation Period or the Rapid Amortization
Period, an amount equal to the sum of (a) (i) the Fixed Investor Percentage of
collections of Principal Receivables received during such Monthly Period and
certain other amounts allocable to the Investor Interest, minus (ii) the amount
of Reallocated Principal Collections with respect to such Monthly Period used to
fund interest on the Certificates or Servicing Fee, plus (b) any Shared
Principal Collections with respect to other Series that are allocated to Series
1996-1.
On each Distribution Date during the Principal Payment Period or the Rapid
Amortization Period, the Class A Holders will be entitled to receive Available
Investor Principal Collections for the related Monthly Period in an amount up to
the Class A Investor Interest until the earlier of the date the Class A
Certificates are paid in full and the Series 1996-1 Termination Date. After
payment in full of the Class A Investor Interest, the Class B Holders will be
entitled to receive on each Distribution Date during the Principal Payment
Period or the Rapid Amortization Period Available Investor Principal Collections
until the earlier of the date the Class B Certificates are paid in full and the
Series 1996-1 Termination Date. After payment in full of the Class B Investor
Interest, the Collateral Interest Holder will be entitled to receive on each
Transfer Date (other than the Transfer Date prior to the Series 1996-1
Termination Date) and on the Series 1996-1 Termination Date, Available Investor
Principal Collections until the earlier of the date the Collateral Interest is
paid in full and the Series 1996-1 Termination Date. See "--Pay Out Events"
below for a discussion of events which might lead to the commencement of the
Rapid Amortization Period.
EXTENSION OF INITIAL PRINCIPAL PAYMENT DATE
Unless a Pay Out Event has occurred, principal with respect to the Class A
Certificates is expected to be paid on the Class A Scheduled Payment Date and
principal with respect to the Class B Certificates is expected to be paid on the
Class B Scheduled Payment Date, provided, that the Investor Certificateholders
will receive payments of principal earlier than such dates if the Transferor
elects not to extend the Initial Principal Payment Date. The Initial Principal
Payment Date for the Series 1996-1 Certificates will initially be the December
1998 Distribution Date, but will successively be extended to the next
Distribution Date after the then-current Initial Principal Payment Date unless
the Transferor, as of the first day of the Monthly Period preceding the Monthly
Period in which the then-current Initial Principal Payment Date occurs, elects
not to cause such extension. Such election may be made by the Transferor by
giving written notice thereof to the Trustee no earlier than the Distribution
Date second preceding the then-current Initial Principal Payment
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Date and no later than the first day of the Monthly Period preceding the Monthly
Period in which the then-current Initial Principal Payment Date occurs. In the
event that the Transferor elects not to extend the Initial Principal Payment
Date, the Revolving Period or the Controlled Accumulation Period, as applicable,
will end beginning on the first day of the Monthly Period following the
Principal Payment Event, and the Principal Payment Period will commence. During
the Principal Payment Period, interest will be paid monthly on each Distribution
Date, and amounts then on deposit in the Principal Funding Account, if any, and
Available Investor Principal Collections with respect to each Distribution Date
will be paid first to the Class A Certificateholders until the earlier of the
date on which the Class A Invested Amount is paid in full or the Series
Termination Date, and, after payment in full of the Class A Invested Amount,
then to the Class B Certificateholders until the earlier of the date on which
the Class B Invested Amount is paid in full or the Series Termination Date.
The payment in full of the Invested Amount on the first Principal
Distribution Date is dependent on Available Investor Principal Collections with
respect to such date and, if applicable, any amounts then on deposit in the
Principal Funding Account. With respect to certain principal payments to be made
prior to the Class A Scheduled Payment Date, other Series will have priority
over the Investor Certificates in the allocation of Shared Principal
Collections, as described under "-- Shared Principal Collections".
The Transferor will cause the Trustee to provide written notice to each
Certificateholder, the Servicer, each Rating Agency and the Collateral Interest
Holder of any election by the Transferor not to extend the Initial Principal
Payment Date. The Transferor will cause the Trustee to provide such notice not
more than 60 nor less than 30 days prior to the then-current Initial Principal
Payment Date.
POSTPONEMENT OF CONTROLLED ACCUMULATION PERIOD
Upon written notice to the Trustee, the Servicer may elect to postpone the
commencement of the Controlled Accumulation Period, and extend the length of the
Revolving Period, subject to certain conditions including those set forth below.
The Servicer may make such election only if the Accumulation Period Length
(determined as described below) is less than nine months. On each Determination
Date on and after the Determination Date preceding the March 2001 Monthly
Period, until the Controlled Accumulation Period begins, the Servicer will
determine the "Accumulation Period Length," which is a number of months such
that the amount available for distribution of principal on the Class A
Certificates on the Class A Scheduled Payment Date is expected to equal or
exceed the Class A Investor Interest, assuming (a) the expected monthly
collections of Principal Receivables expected to be distributable to the Holders
of all Series have a principal payment rate no greater than the lowest monthly
principal payment rate on the Receivables for the preceding nine months, (b) the
amount of principal expected to be distributable to Holders of all Series
remains constant at the level on such date of determination, (c) no Pay Out
Event with respect to any Series will subsequently occur and (d) no additional
Series will be subsequently issued. If the Accumulation Period Length is less
than nine months, the Servicer may, at its option, postpone the commencement of
the Controlled Accumulation Period such that the number of months included in
the Controlled Accumulation Period will be equal to or exceed the Accumulation
Period Length. The effect of the foregoing calculation is to permit the
reduction of the length of the Controlled Accumulation Period based on the
investor interest of certain other Series which are scheduled to be in their
revolving periods during the Controlled Accumulation Period and on increases in
the principal payment rate occurring after the Closing Date. The length of the
Controlled Accumulation Period will not be determined to be less than one month.
SUBORDINATION
The Class B Certificates and the Collateral Interest will be subordinated
to the extent necessary to fund certain payments with respect to the Class A
Certificates. In addition, the Collateral Interest will be subordinated to the
extent necessary to fund certain payments with respect to the Class B
Certificates. Certain principal payments otherwise allocable to the Class B
Holders may be reallocated to cover amounts in respect of the Class A
Certificates and the Class B Investor Interest may be reduced if the Collateral
Interest is equal to zero. Similarly, certain principal payments allocable to
the Collateral Interest may be reallocated to cover amounts in respect of the
Class A Certificates and the Class B Certificates and the Collateral Interest
may be reduced. To the extent the Class B Investor Interest is reduced, the
percentage of collections of Finance
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Charge Receivables allocated to the Class B Certificates in subsequent Monthly
Periods will be reduced. Moreover, to the extent the amount of such reduction in
the Class B Investor Interest is not reimbursed, the amount of principal and
interest distributable to the Class B Holders will be reduced. See "--Allocation
Percentages," "--Reallocation of Cash Flows" and "--Application of
Collections--Excess Spread."
TRANSFER AND ASSIGNMENT OF RECEIVABLES
Pursuant to the Receivables Purchase Agreement, on the Closing Date, the
Originators will transfer and assign to the Transferor Premium Finance
Agreements from their portfolio of Premium Finance Agreements on the Calculation
Date to borrowers whose stated addresses in the Premium Finance Agreements are
in one of the Permitted States (as defined under "The Receivables") and that
satisfy as of the Cut-off Date (as defined below) the eligibility criteria
specified in the Receivables Purchase Agreement and the Agreement. The selection
of the Permitted States was based on state regulatory considerations. Each of
the Originators will represent and warrant in the Receivables Purchase
Agreement, and the Transferor will represent and warrant in the Agreement, that
the Identified Portfolio was not selected in a manner adverse to
Certificateholders. Pursuant to the Agreement, the Transferor will transfer and
assign such Premium Finance Agreements to the Trustee for the benefit of the
Trust.
Each Originator will be obligated pursuant to the Receivables Purchase
Agreement to transfer and assign on each day following the Closing Date each
Premium Finance Agreement with a borrower whose stated address in such Premium
Finance Agreement is in one of the Permitted States originated by it after the
Closing Date (or, if such Permitted State becomes a Permitted State after the
Closing Date, originated by it after such state became a Permitted State) which
satisfies the eligibility criteria set forth under "--Eligible Receivables"
below (the "Additional Receivables") to the Transferor. The Transferor in turn
will be required pursuant to the Agreement to transfer and assign all such
Additional Receivables to the Trustee for the benefit of the Trust. See "Risk
Factors--Additional Receivables Considerations." In the event that sufficient
Additional Receivables are not transferred to the Trustee for the benefit of the
Trust to maintain the Minimum Transferor Interest as required by the Agreement
and as described herein, a Pay Out Event would occur and the Rapid Amortization
Period will occur. See "Maturity Assumptions--Pay Out Events" and "--Pay Out
Events."
In connection with the transfer of the Receivables to the Trust, the
Originators will indicate in their respective computer files that the
Receivables have been conveyed to the Transferor who will in turn convey such
Receivables to the Trust. In addition, the Transferor has provided to the
Trustee or its bailee computer files or microfiche lists containing a true and
complete list showing each Receivable, identified by account number and by
aggregate receivable balance on the Closing Date. On each Addition Date, the
Transferor will provide the Trustee with an updated list of each Receivable
transferred to the Trust on such Addition Date, identified by account number and
indicating the aggregate receivable balance as of the Addition Date. Neither the
Originators nor the Transferor will deliver to the Trustee any other records or
agreements relating to the Receivables and documents and agreements maintained
by an Originator will not be segregated by such Originator from other documents
and agreements relating to other Premium Finance Agreements and will not be
stamped or marked to reflect the transfer and assignment of the related
Receivables to the Trustee on behalf of the Trust, but the Originators are
required to indicate on their computer records that the Receivables have been
transferred and assigned to the Transferor, who in turn will transfer and assign
such Receivables to the Trustee on behalf of the Trust. The Originators have not
taken and will not be obligated to take any actions in order to perfect for the
benefit of the Transferor a security interest in the Receivables, other than
filing in the appropriate filing offices in the states of New York and
California a financing statement on Form UCC-1. The Transferor has not taken and
will not be obligated to take any actions in order to perfect for the benefit of
the Trust a security interest in the Receivables, other than filing in the
appropriate filing offices in the Commonwealth of Pennsylvania a financing
statement on Form UCC-1. See "Risk Factors--Transferor Bankruptcy Risk."
The Transferor shall covenant in the Agreement that it shall not transfer
on any day any Premium Finance Agreement to the Trust which would cause as of
such day after giving effect to such transfer (i) an Excess Obligor
Concentration Amount to exist or be increased; (ii) an Excess Insurer
Concentration Amount to exist or be increased; (iii) the Investment Grade
Insurer Percentage to be less than the Required
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Investment Grade Insurer Percentage; (iv) the Investment Grade Insurer
Percentage to be decreased, if on such day the Investment Grade Insurer
Percentage is equal to or less than the Required Investment Grade Insurer
Percentage; (v) the Top 10 Insurer Percentage to exceed the Maximum Top Insurer
Percentage and (vi) the Top 10 Insurer Percentage to be increased, if on such
day the Top 10 Insurer Percentage is equal to or greater than the Maximum Top 10
Insurer Percentage.
The covenants described above may be amended at any time by the Transferor,
the Trustee and the Servicer, with the consent of each provider of Enhancement
but without the consent of any certificateholder, if the Rating Agency Condition
is satisfied.
In the event any transfer of a Receivable results in a breach of any of the
covenants described in clauses (i) through (vi) above and such breach continues
for a period of 15 days after discovery of such breach by the Transferor or by
the Servicer or receipt by the Transferor of written notice by the Trustee of
such event, then such Receivable shall be an "Ineligible Receivable" and shall
be removed from the Trust on the same terms and conditions as Ineligible
Receivables are removed from the Trust as described under "--Representations and
Warranties." In the event for administrative reasons the Transferor is unable to
segregate or identify the Ineligible Receivable from other Receivables in the
related Account (an, "Ineligible Account"), then the Transferor shall be
obligated to accept reassignment of all of the Receivables in such Ineligible
Account and such other Receivables as may be necessary so as to cure the breach
of any of the foregoing covenants. Currently, the Transferor is unable to
segregate Receivables in an Account.
NEW ISSUANCES
The Agreement will authorize the Trustee to issue one or more Series of
Certificates which are transferable and have the characteristics described
below. The Transferor Interest will initially be held by the Transferor and will
be transferable only as provided in the Agreement. The Transferor may require
the Trustee to issue one or more new Series in exchange for a reduction in the
Transferor Interest. Pursuant to the Agreement, the Transferor may define, with
respect to any newly issued Series, all Principal Terms of such new Series. Upon
the issuance of an additional Series of Certificates, none of the Transferor,
the Servicer, the Trustee or the related Trust will be required or will intend
to obtain the consent of any Certificateholder of any other Series previously
issued by such Trust. However, as a condition of a New Issuance, the Transferor
will deliver to the Trustee written confirmation that the New Issuance will not
result in the reduction or withdrawal by any Rating Agency of its rating of any
outstanding Series, including Series 1996-1. The Transferor may offer any Series
to the public or other investors in transactions either registered or under the
Securities Act or exempt from registration thereunder, directly, through the
Underwriters or one or more other underwriters or placement agents, in
fixed-price offerings, in negotiated transactions, or otherwise. Any such Series
may be issued in fully registered or book-entry form in minimum denominations
determined by the Transferor.
The Transferor may require New Issuances and define Principal Terms such
that a Series issued under the Trust has a period during which amortization or
accumulation of the principal amount thereof is intended to occur which may have
a different length and begin on a different date than such period for the
Certificates. Further, one or more Series may be in their amortization or
accumulation periods while the Certificates are not. Moreover, each Series may
have the benefit of a Credit Enhancement which is available only to such Series.
Under the Agreement, the Trustee shall hold any such form of Credit Enhancement
only on behalf of the Series to which it relates. The Transferor may deliver a
different form of Credit Enhancement agreement with respect to any Series. The
Transferor may specify different certificate rates and monthly servicing fees
with respect to each Series (or a particular Class within such Series). The
Transferor will also have the option under the Agreement to vary between Series
the terms upon which a Series (or a particular Class within such Series) may be
repurchased by the Transferor or remarketed to other investors. There will be no
limit to the number of New Issuances that may be performed under the Agreement.
Under the Agreement, the Transferor may commence a New Issuance by
notifying the Trustee at least five days in advance of the date upon which the
New Issuance is to occur stating the Series to be issued on the date of the New
Issuance and, with respect to each such Series (and, if applicable, each Class
thereof): (1) its
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initial principal amount (or method for calculating such amount), (2) its
certificate rate (or method of calculating such rate) and (3) the provider of
Credit Enhancement, if any, which is expected to provide support with respect to
it. The Agreement will provide that on the date of the New Issuance the Trustee
will authenticate any such Series only upon delivery to it of at least the
following: (i) a Series Supplement specifying the Principal Terms of such
Series; (ii)(a) an opinion of counsel to the effect that, unless otherwise
stated in the related Series Supplement, the certificates of such Series will be
characterized as indebtedness for Federal income tax purposes and (b) a Tax
Opinion; (iii) if Credit Enhancement is required by the Series Supplement, an
appropriate Credit Enhancement agreement executed by the Transferor and the
Credit Enhancement Provider; (iv) written confirmation from each Rating Agency
that the New Issuance will not result in such Rating Agency's reducing or
withdrawing its rating on any then outstanding Series rated by it; (v) an
officer's certificate of the Transferor to the effect that after giving effect
to the New Issuance the Transferor would not be required to add Additional
Receivables pursuant to the Agreement and the Transferor Interest would be at
least equal to the Minimum Transferor Interest; and (vi) the certificates
representing the Series to be exchanged, if applicable. Upon satisfaction of
such conditions, the Trustee will reduce the Transferor Interest and/or cancel
the certificates of the exchanged Series, as applicable, and authenticate the
new Series.
The Transferor also may from time to time cause the Trustee to sell
purchased interests in the Receivables and other assets of a Trust to one or
more purchasers. Any purchased interest will represent an interest in the
applicable Trust's assets similar to the interest of a Series of Certificates.
No Series will be subordinated to any purchased interest, and no purchased
interest will have any interest in the Enhancement or series accounts specified
for any Series, except as specified in the prospectus relating to that Series.
Any such sale will take place pursuant to one or more agreements which will
specify terms similar to Principal Terms for the applicable purchased interests
and may grant the purchasers of such interests notice and consultation rights
with respect to rights or actions of the Trustee. Any sale of purchased
interests in the assets of a Trust will be subject to the satisfaction of the
same conditions (including Rating Agency confirmations) as for a New Issuance,
as appropriately modified to refer to a purchased interest rather than a New
Issuance. The modifications of conditions would not result in any substantive
change in such conditions, but would simply change the conditions to refer to
the contemplated sale of a purchased interest rather than a New Issuance.
REPRESENTATIONS AND WARRANTIES
The Transferor will represent and warrant in the Agreement on the Closing
Date that as of the Cut-off Date, with respect to Initial Receivables conveyed
to the Trust on the Closing Date and on each date Additional Receivables are
transferred to the Trust (each, an "Addition Date") with respect to Additional
Receivables that (a) the Agreement and the Receivables Purchase Agreement will
constitute a legal, valid and binding obligation of the Transferor, (b) the
transfer of Receivables by it to the Trust under the Agreement will constitute
either a valid transfer and assignment to the Trust of all right, title and
interest of the Transferor in and to the Receivables, whether then existing or
thereafter created and the proceeds thereof (including amounts in any of the
accounts established for the benefit of Certificateholders) or the grant of a
first priority perfected security interest in such Receivables (except for
certain tax and other governmental liens) and the proceeds thereof (including
amounts in any of the accounts established for the benefit of
Certificateholders), which is effective as to each such Receivable upon the
creation thereof, (c) the Agreement and the Receivables Purchase Agreement
constitute legal, valid and binding obligations of Transferor, enforceable
against Transferor in accordance with their terms, except (A) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
affecting the enforcement of creditors' rights in general and the rights of
creditors of national banking associations, and (B) as such enforceability may
be limited by general principles of equity (whether considered in a suit at law
or in equity), (d) the execution and delivery of the Agreement, the Certificates
and the Receivables Purchase Agreement, the performance of the transactions
contemplated by the Agreement, the Certificates and the Receivables Purchase
Agreement and the fulfillment of the terms hereof and thereof will not conflict
with or result in any breach of any of the material terms and provisions of any
material agreement to which Transferor is a party or by which it or any of its
properties are bound, (e) the
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execution and delivery of the Agreement, the Certificates and the Receivables
Purchase Agreement, the performance of the transactions contemplated by the
Agreement and the fulfillment of the terms thereof will not conflict with or
violate any requirements of law applicable to Transferor, (f) each Receivable
then existing has been conveyed to the Trust free and clear of any Lien (as
defined in the Agreement) of any Person claiming through or under Transferor or
any of its Affiliates (other than any Liens for municipal and other local taxes
if such taxes shall not at the time be due and payable or if Transferor shall
currently be contesting the validity thereof in good faith by appropriate
proceedings and shall have set aside on its books adequate reserves with respect
thereto) and in compliance, in all material respects, with all Requirements of
Law (as defined in the Agreement) applicable to Transferor, and (g) each such
Receivable transferred on such date is an Eligible Receivable (as defined under
"--Eligible Receivables" below) as of the related Cut-off Date or Addition Date.
In the event of a material breach of the representation and warranty
described in clause (f) above, and if any of the following two conditions is
met: (A) as a result of such breach such Receivable is charged off as
uncollectible or the Trust's rights in, to or under such Receivable or its
proceeds are impaired or the proceeds of such Receivable are not available for
any reason to the Trust free and clear of any Lien or (B) the Lien upon the
subject Receivable (1) arises in favor of the United States of America or any
State or any agency or instrumentality thereof and involves taxes or liens
arising under Title IV of ERISA or (2) has been consented to by Transferor;
then, upon the earlier to occur of the discovery of such breach or event by
Transferor or Servicer or receipt by Transferor of written notice of such breach
given by Trustee, each such Receivable shall be an Ineligible Receivable and
shall be automatically removed from the Trust on the terms are conditions set
forth below. In the event of a material breach of the representation and
warranty described in clause (g) above, as a result of such breach, the related
Receivable becomes a Defaulted Receivable or the Trust's rights in, to or under
the Receivable or its proceeds are impaired or the proceeds of such Receivable
are not available for any reason to the Trust free and clear of any Lien, then,
upon the expiration of 60 days (or such longer period as may be agreed to by
Trustee in its sole discretion, but in no event later than 120 days) from the
earlier to occur of the discovery of any such event by either Transferor or
Servicer, or receipt by Transferor of written notice of any such event given by
Trustee, then each such Receivable shall be removed from the Trust on the terms
and conditions set forth below; provided that no such removal shall be required
to be made if, on any day within such applicable period, such representations
and warranties with respect to such Receivable shall then be true and correct in
all material respects as if such Receivable had been created on such day. In the
event that for administrative reasons the Transferor is unable to segregate or
identify the Ineligible Receivables from other Receivables in the related
Ineligible Account, then the Transferor shall be obligated to accept
reassignment of all of the Receivables in such Ineligible Account. Currently,
the Transferor is unable to segregate Receivables within an Account.
The Transferor will accept reassignment of each Receivable conveyed to the
Trust in breach of clauses (f) and (g) above (a "Transferor Ineligible
Receivable") on the terms and conditions set forth below. The Transferor will
accept reassignment of Transferor Ineligible Receivables by directing the
Servicers to deduct the amount of the principal amount of each Transferor
Ineligible Receivable from the aggregate amount of Principal Receivables used to
calculate the Transferor Interest. If the exclusion of an Ineligible Receivable
from the calculation of the Transferor Interest would cause the Transferor
Interest to be less than zero, on the date of reassignment of such Ineligible
Receivable, the Transferor will make a deposit in the Excess Funding Account in
immediately available funds in an amount equal to the amount by which the
Transferor Interest would be reduced below zero. Any such deduction or deposit
shall be considered a repayment in full of the Transferor Ineligible Receivable.
The obligation of the Transferor to accept reassignment of any Transferor
Ineligible Receivable is the sole remedy respecting any breach of the
representations and warranties or covenants set forth in this paragraph with
respect to such Receivable available to the Certificateholders or the Trustee on
behalf of Certificateholders. In the event of a material breach of any of the
representations and warranties described in clauses (a) through (e) above,
either the Trustee or the Holders of Certificates evidencing undivided interests
in the Trust aggregating more than 50% of the aggregate Investor Interest of all
Series outstanding under such Trust may direct the Transferor to accept
reassignment of the entire Identified Portfolio within 60 days of such notice,
or within such longer period specified in such notice. The Transferor will be
obligated to accept reassignment of such Receivables on a Distribution Date
occurring within such
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applicable period. Such reassignment will not be required to be made, however,
if at any time during such applicable period, or such longer period, the
representations and warranties are true and correct in all material respects.
The deposit amount for such reassignment will equal the Investor Interest and
the Invested Amount of any Enhancement, if any, plus accrued and unpaid interest
for each Series outstanding under the Trust on the last day of the Monthly
Period preceding the Distribution Date on which the reassignment is scheduled to
be made less the amount, if any, previously allocated for payment of principal
and interest to such Certificateholders or such holders of the Invested Amount
of any Enhancement or the Collateral Interest, if any, on such Distribution
Date. The payment of the reassignment deposit amount and the transfer of all
other amounts deposited for the preceding month in the Distribution Account will
be considered a payment in full of the Investor Interest and the Invested Amount
of any Enhancement, if any, for each such Series required to be repurchased and
will be distributed upon presentation and surrender of the Certificates for each
such Series. The obligation of the Transferor to make any such deposit will
constitute the sole remedy respecting a breach of the representations and
warranties available to the Trustee or Certificateholders.
CERTAIN COVENANTS
Pursuant to the Agreement, the Transferor covenants that, among other
things, subject to specified exceptions and limitations, (i) it will take no
action to cause any Receivable to be evidenced by any "instruments" or to be
anything other than a "general intangible", in each case, as defined in the
Uniform Commercial Code as in effect in the State of New York and the
Commonwealth of Pennsylvania (the "UCC"), (ii) except for the conveyances under
the Agreement, it will not sell any Receivable or grant a lien on any
Receivable, (iii) it will comply with and perform its obligations under, and
will cause each Originator to comply with and perform its obligations under, any
Receivable to which it is a party and its credit and collection policies and it
will not change the terms of such agreements or policies except as provided in
the Agreement, (iv) in the event it is unable for any reason to transfer
Receivable to the Trust, it will nevertheless continue to allocate and pay all
collections from all Receivables to the Trust, (v) it will notify the Trust
promptly after becoming aware of any Lien on any Receivable and (vi) it will
take all actions necessary to enforce its rights and claims under the Receivable
Purchase Agreement.
Pursuant to the Agreement, the Servicer covenants (a) that it shall not
take any action which would impair, with respect to each Receivable originated
on or before February 1, 1997, each Originator's first priority perfected
security interest in the Unearned Premiums securing such Receivables and with
respect to each Receivable originated after February 1, 1997, the Trust's first
priority perfected security interest in the Unearned Premiums securing such
Receivables, (b) not to impair the rights of the Certificateholders in any
Receivable, (c) so long as the Originators are the Servicer, to make reasonable
efforts to collect all payments called for under the terms and provisions of the
Receivables as and when the same shall become due and Servicer (including
Back-up Servicer, if Servicer) shall follow such collection procedures as it
follows with respect to all comparable insurance premium finance loans that it
services and (d) not to voluntarily increase or decrease the number or amount of
any scheduled payment, or the principal balance of a Receivable or the annual
percentage rate of a Receivable, or extend, rewrite or otherwise modify the
payment terms; provided, however, Servicer may (i) extend the term of any
Receivable, but not past the maturity date of the related insurance policies and
(ii) change the installment due date in the related Premium Finance Agreement
one time during the term of a Receivable, provided that such a change does not
result in extending the maturity of such Receivable for more than 30 days or
past the maturity date of the related insurance policies.
In the event of a breach of any of the covenants set forth in (i) clauses
(b), (c) and (d) above and as a result of such breach the related Receivable
becomes a Defaulted Receivable or the Trust's rights in, to or under such
Receivable or its proceeds are impaired or the proceeds of such Receivable are
not available for any reason to the Trust free and clear of any Lien, then, upon
the expiration of 60 days (or such longer period as may be agreed to by the
Trustee in its sole discretion, but in no event later than 120 days) from the
earlier to occur of the discovery of any such event by either Transferor or
Servicer, or receipt by Servicer of written notice of any such event given by
Trustee or (ii) clause (a) above then, upon the expiration of 15 days from the
earlier to occur of the discovery of any such event by either Transferor or
Servicer, or receipt by Servicer of written notice of any such event given by
Trustee, then each such Receivable (each, a "Servicer Ineligible
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Receivable") shall be removed from the Trust on the terms and conditions set
forth below. When the above provisions require removal of a Receivable, Servicer
shall accept assignment of such Servicer Ineligible Receivable by depositing
into the Collection Account on the applicable Determination Date an amount equal
to the principal portion of each Servicer Ineligible Receivable and deducting
such amount from the Principal Receivables in the Trust (to the extent
previously included therein). Deposits of any amounts into the Collection
Account shall be treated for all purposes of the Agreement as collections of
Principal Receivables. Upon the removal of Servicer Ineligible Receivables (and
the mailing of any deposit required above), the Trust shall automatically and
without further action be deemed to transfer, assign, and otherwise convey to
Servicer, without recourse, representation or warranty, all the right, title and
interest of the Trust in and to each Servicer Ineligible Receivable, all monies
due or to become due with respect to each such Servicer Ineligible Receivable
and all proceeds of such Servicer Ineligible Receivable and Recoveries relating
to such Servicer Ineligible Receivable. Such assigned Receivables shall be
treated by the Trust as collected in full as of the date on which it was
transferred. Trustee shall execute such documents and instruments of transfer or
assignment and take other actions as shall reasonably be requested by Servicer
to evidence the conveyance of each such Servicer Ineligible Receivable. The
obligation of Servicer set forth above shall constitute the sole remedy
respecting any breach set forth above with respect to such Receivable available
to the Holders or Trustee on behalf of the Holders.
In addition, the Servicer (so long as the Originator is a Servicer) will
covenant in the Agreement to comply with applicable licensing and regulatory
laws of any Receivable State and to cause the Transferor, the Trustee and the
Trust to at all times be in compliance with such licensing and regulatory laws.
In the event of a breach of such covenant that (x) results in Receivables in
such state being unenforceable, (y) results in the Transferor, Trustee or the
Trust being subjected to any civil or criminal penalties, sanctions or taxes or
(z) materially and adversely affects the ability of the Servicer, the
Transferor, the Trustee or the Trust to perform their respective obligations
under the Agreement, then either the Servicer shall remove such Receivables as
if they were Servicer Ineligible Receivables so as to cure such breach within 15
days from the earlier to occur of the discovery of any such breach by the
Servicer or receipt by the Servicer of written notice of such breach or
indemnify the Transferor, the Trustee and the Trust for any losses suffered by
any of them as a result of such noncompliance within 15 days of receipt of
notice of any such loss. Any removal of Receivables shall be accomplished in the
manner specified in the preceding paragraph.
In the event for administrative reasons the Servicer is unable to segregate
or identify Servicer Ineligible Receivables from other Receivables in the
related Account (a "Servicer Ineligible Account"), then the Servicer will be
obligated to remove all of the Receivables in the Servicer Ineligible Account to
cure the foregoing covenants and each such Receivable shall be treated as a
Servicer Ineligible Receivable. Currently, the Servicer is unable to segregate
Receivables in an Account.
If the Back-up Servicer is Servicer in lieu of accepting such assignment of
Receivable, it may indemnify the Trust for its losses in connection with the
related breach and deposit the amount of such losses into the Collection Account
on the applicable date. The related Receivables shall not be removed from the
Trust if such option is exercised by the Servicer.
The Back-up Servicer will covenant in the Pooling and Servicing Agreement
that it will use its best efforts to be licensed or exempt from licensing with
respect to its ability to service the Receivables in the Permitted States in
which it is presently licensed. Upon the discovery by the Back-up Servicer that
it is not so licensed or exempt in any Permitted State for a period of 30 days,
the Back-up Servicer shall deliver written notice of such fact to the
Transferor, the Servicer and the Trustee. The Transferor shall terminate the
Back-up Servicer 15 days after receipt of such notice, unless prior to such time
the Transferor is furnished with an opinion of counsel which states that the
absence of such license or exemption would not, if the Back-up Servicer were the
Servicer on such date, (x) cause any of the Receivables in such state to be
unenforceable, (y) subject the Trust or the Trustee to any civil or criminal
penalties, sanctions or taxes or (z) materially and adversely affects the
ability of the Transferor, the Trustee or the Back-up Servicer to perform their
obligations under the Agreement. If the Back-up Servicer is terminated, the
Trust would have 90 days to find a successor Back-up Servicer or a Pay Out Event
will occur. Back-up Servicer is not obligated, but has the option, to deliver
such opinion.
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ELIGIBLE RECEIVABLES
"Eligible Receivable" means, with respect to each Receivable conveyed to
the Trust on the Closing Date (the "Initial Receivables") each Receivable, as of
the Cut-Off Date and with respect to each Additional Receivable each Additional
Receivable, as of the date of origination of such Receivable: (a) which is
payable in United States dollars; (b) which has been funded by the related
Originator in whole or in part or which relates to an Account that has been
funded in whole or in part; (c) which does not finance premiums of any insurance
policy (i) of Lloyds of London, subject to the limitations described below, or
any other foreign insurance carrier (except up to 3% of the Aggregate
Receivables, after giving effect to such transfer, may finance premiums of other
foreign insurance carriers) or (ii) of any insurance carrier known to any of the
Originators or the Transferor to be the subject of any insolvency, receivership
or other similar proceedings; (d) which does not relate to a Premium Finance
Agreement under which the Obligor is a Governmental Authority (as defined in the
Agreement); (e) which (i) in the case of the Initial Receivables, is
underwritten in accordance with the Originators' policies and procedures
relating to the creditworthiness of borrowers and insurance carriers and the
extension of credit to borrowers ("Guidelines") in effect at the time of
origination of such Receivables and (ii) in the case of Additional Receivables,
is underwritten in accordance with Guidelines that are not materially different
from the Guidelines that were used by the Originators with respect to the
Initial Receivables; (f) which the related Obligor used all the proceeds of such
Receivable to pay premiums and related items with respect to commercial property
or casualty insurance policies, governed by the law of any state or territory of
the United States or the District of Columbia, under which such Obligor is the
insured; (g) with respect to which all materials consents, licenses, approvals
or authorizations of, or registrations or declarations with, any Governmental
Authority required to be obtained, effected or given in connection with the
creation of such Receivable or the execution, delivery and performance by the
related Originator of the related Premium Finance Agreement, have been duly
obtained, effected or given and are in full force and effect as of the date of
transfer of such Receivable to the Trust; (h) which, at the time of transfer of
such Receivables to the Trust, the terms of the related Premium Finance
Agreement have not been waived or modified except for waivers or modifications
that were made by the Originators in accordance with the Guidelines; (i) with
respect to which the related Premium Finance Agreement is not subject to any
right of rescission, setoff, counterclaim, defense arising out of the violations
of usury laws or any other defenses of any Obligor at the time of the transfer
of such Receivable to the Trust, other than defenses that may arise after the
time of transfer out of applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights in
general and general equity principles; (j) with respect to which, at the time of
transfer of such Receivable to the Trust, the related Originator has not taken
any action which would impair, or failed to take any action necessary to avoid
impairing, the rights of the Trust or the Certificateholders therein; (k) which
is not delinquent for more than 30 days; (l) which if an Initial Receivable,
provides the related Originator with a limited power of attorney allowing it to
cancel the related insurance policy, if cancelable, in accordance with state law
upon non-payment of a loan installment by the related Obligor; (m) which if an
Additional Receivable, provides the related Originator with a limited power of
attorney allowing it to cancel the related insurance policy, in accordance with
state law upon non-payment of a loan installment by the related Obligor; (n)
which (i) with respect to the Initial Receivables and Additional Receivables
conveyed to the Trust prior to February 1, 1997, grants the related Originator a
first priority perfected security interest in the related Unearned Premium and
allows such Originator to direct the related insurance company to pay such
Originator any such Unearned Premium calculated as of the time of cancellation
of the related insurance policy, if cancelable and (ii) with respect to
Additional Receivables conveyed to the Trust on or after February 1, 1997 only,
the Trust has a first priority perfected security interest in the Unearned
Premiums relating to such Additional Receivable and a notice of financed premium
has been delivered to the applicable insurance company or companies; (o) with
respect to which any related insurance policy has not been canceled; (p) with
respect to which the stated address of the Obligor in the related Premium
Finance Agreement is in a Permitted State; (q) which was originated in
compliance, in all material respects, with all Requirements of Law (as defined
in the Agreement) applicable to the applicable Originator and pursuant to loan
documents which comply, in all material respects, with all Requirements of Law
applicable to the applicable Originator; (r) which is the legal, valid and
binding payment obligation of the related Obligor, legally enforceable against
such Obligor in accordance with its terms; (s) with respect to
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which the related Obligor is not the subject of a bankruptcy or insolvency
proceeding; (t) with respect to which the related Premium Finance Agreement
provides for monthly payments by the related Obligor; (u) which is a "general
intangible" under the UCC; and (w) which after giving effect to the transfer of
such Receivable would not cause any Excess Insurer Concentration Amount to exist
assuming that immediately prior to such transfer each insurance carrier which
has premiums financed by such Receivable was downgraded by any Rating Agency by
one rating category (giving effect to pluses or minuses). Under certain
circumstances, Additional Receivables relating to an Account under which an
Initial Receivable or another Additional Receivable was previously transferred
to the Trust may finance premiums of an insurance policy issued by Lloyds of
London; however all such Additional Receivables will be subject to the insurance
carrier concentration limits and will not be an Eligible Receivable if the
transfer of such Additional Receivable would result in more than 3% of the
Aggregate Receivables, after giving effect to such transfer, financing premiums
of foreign insurance carriers.
REMOVAL OF ACCOUNTS
The Transferor may, but shall not be obligated to, designate from time to
time certain Accounts for deletion and removal ("Removed Accounts") from the
Trust. The Transferor will, however, be permitted to designate and require
reassignment to it of the Receivables in Removed Accounts only if: (i) the
removal of any Receivables will not, in the reasonable belief of the Transferor,
cause a Pay Out Event to occur; (ii) the Transferor shall have delivered to the
Trustee for execution a written assignment and a computer file or microfiche
list containing a true and complete list of all Receivables in Removed Accounts;
(iii) the Transferor represents and warrants that no selection procedures
believed by the Transferor to be materially adverse to the interests of the
holders of any Series of Certificates outstanding under such Trust were used in
selecting the Removed Accounts to be removed from such Trust; (iv) the
Transferor shall have notified each such Rating Agency of such proposed removal
and shall have received notice from each such Rating Agency that such proposed
removal will not result in a downgrade of its then-current rating for any such
Series; (v) the principal balance of the Receivables in Removed Accounts to be
reassigned to the Transferor shall not equal or exceed 5% of the amount of
Principal Receivables in the Trust at such time; and (vi) the Transferor shall
have delivered to the Trustee an officers certificate confirming the items set
forth in clauses (i) through (v) above. Notwithstanding the above, the
Transferor will be permitted to designate as a Receivable in a Removed Account
without the consent of the Trustee, Certificateholders or Rating Agencies any
Receivable that has a zero balance and which the Transferor will remove from its
computer file.
COLLECTION AND OTHER SERVICING PROCEDURES
For each Series of Certificates, the Servicer will be responsible for
servicing and administering the Receivables in accordance with the Servicer's
policies and procedures for servicing insurance premium finance loans comparable
to the Receivables. The Servicer will be required to maintain fidelity bond
coverage insuring against losses through wrongdoing of its officers and
employees who are involved in the servicing of insurance premium Finance loans
covering such actions and in such amounts as the Servicer believes to be
reasonable from time to time.
TRUST ACCOUNTS
The Servicer will establish and maintain in the name of the Trust a
"Finance Charge Account," an "Excess Funding Account" and a "Principal Funding
Account" as segregated trust accounts or with a Qualified Institution, for the
benefit of the Certificateholders of all related Series, including any Series
offered pursuant to this Prospectus. The Trustee will also establish a
non-interest bearing segregated demand deposit account to serve as the
"Distribution Account" for the Trust. The Servicer will establish and maintain,
in the name of the Trust, for the benefit of Certificateholders of all Series
issued thereby, a non-interest bearing segregated account to serve as the
Collection Account for the Trust. The Distribution Account and Collection
Account will each be established as a segregate trust account or with a
"Qualified Institution," defined as a depository institution or trust company,
which may include the Trustee, organized under the laws of the United States or
any one of the states thereof, which at all times has a certificate of deposit,
short-term deposit
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or commercial paper rating of P-1 by Moody's Investors Service, Inc. ("Moody's")
and of at least A-1 by Standard & Poor's Ratings Services, a division of The
McGraw Hill Companies, Inc. ("Standard & Poor's") or long-term unsecured debt
obligation (other than such obligation the rating of which is based on
collateral or on the credit of a person other than such institution (or trust
company) rating of at least Aa3 by Moody's and AA-- by Standard & Poor's and
deposit insurance provided by either the Bank Insurance Fund ("BIF") or the
Savings Association Insurance Fund ("SAIF"), each administered by the FDIC, or a
depository institution, which may include the Trustee, which is acceptable to
each Rating Agency. Funds in the Excess Funding Account and the Finance Charge
Account for each Trust will be invested, at the direction of the Servicer, in
(i) obligations fully guaranteed by the United States of America, (ii) demand
deposits, time deposits or certificates of deposit of depository institutions or
trust companies, the certificates of deposit of which have the highest rating
from Moody's and Standard & Poor's, (iii) commercial paper having, at the time
of the Trust's investment, a rating in the highest rating category from Moody's
and Standard & Poor's, (iv) bankers' acceptances issued by any depository
institution or trust company described in clause (ii) above, (v) money market
funds which have the highest rating from, or have otherwise been approved in
writing by, Moody's and Standard & Poor's (so long as such investment will not
require the Trust to register as an "investment company" under the Investment
Company Act of 1940, as amended), (vi) repurchase obligations with respect to
any security described in clause (i) above or with respect to any other security
issued or guaranteed by an agency or instrumentality of the United States of
America, in either case entered into with a depository institution or trust
company described in clause (ii) above and (vii) any other investment if (a)
Standard & Poor's confirms in writing that such investment will not adversely
affect its then current rating or ratings of the Certificates (b) after 10
business days prior written notice to Moody's of the proposed Investment.
Moody's has not informed the Transferor that such investment will cause the then
current rating of the Certificates to be downgraded or withdrawn and (c) making
such investment will not require the related Trust to register as an investment
company under the Investment Company Act of 1940, as amended (such investments,
"Permitted Investments"). Any earnings (net of losses and investment expenses)
on funds in the Finance Charge Account or the Excess Funding Account will be
paid to the Transferor. The Servicer will have the revocable power to withdraw
funds from the Collection Account and to instruct the Trustee to make
withdrawals and payments from the Finance Charge Account and the Excess Funding
Account for the purpose of carrying out the Servicer's duties under the
Agreement. The Trustee will be the paying agent and will have the revocable
power to withdraw funds from the Distribution Account for the purpose of making
distributions to the Certificateholders.
EXCESS FUNDING ACCOUNT
If on any date the Transferor Interest is less than zero (after giving
effect to any addition of Principal Receivables to the applicable Trust), the
Servicer will not distribute to the holder of the Transferor Interest any
collections of Principal Receivables that otherwise would be distributed to the
holder of the Transferor Interest, but shall instead deposit such funds in a
segregated account established and maintained by the Servicer, in the name of
the Trust, for the benefit of Certificateholders of all Series issued by such
Trust, as a trust account or with the Servicer or with a Qualified Institution
(the "Excess Funding Account") until the Transferor Interest equals zero. Funds
on deposit in the Excess Funding Account will be withdrawn and paid to the
Transferor on any date to the extent that the Transferor Interest is greater
than zero on such date.
Funds on deposit in the Excess Funding Account will be invested by the
Trustee, at the direction of the Servicer, in Permitted Investments. Any
earnings (net of losses and investment expenses) earned on amounts on deposit in
the Excess funding Account during any Monthly Period will be withdrawn from the
Excess Funding Account and turned over to or at the direction of the Servicer.
ALLOCATION OF COLLECTIONS
The Aggregate Receivables as of November 30, 1996 was $614,886,198.16,
consisting of $14,131,486.55 of Finance Charge Receivables and $600,754,711.61
of Principal Receivables. "Aggregate Receivables" means, with respect to the
Receivables as of any date of determination, an amount equal to the aggregate
amount of payments owed on the Receivables from such date (or, if such date is
the Statistical Calculation
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Date, from November 15, 1996) through the respective scheduled final payment
dates of such Receivables (exclusive of late fees and administrative charges)
less certain net payables as of such date of determination.
"Finance Charge Receivables" means, with respect to the Receivables as of
the first day of any Monthly Period (as defined below), an amount equal to the
aggregate amount of unearned interest with respect to such Receivables
calculated in accordance with the Rule of 78's method. For purposes hereof,
collections of Finance Charge Receivables with respect to any Monthly Period
generally will equal the aggregate amount of interest accrued on such
Receivables for such Monthly Period calculated on the basis of the Rule of 78's
plus late fees and other administrative charges collected during such Monthly
Period plus Recoveries (net of the amounts thereof applied to defaults) received
during such Monthly Period. "Monthly Period" means each calendar month,
commencing December 1996.
"Principal Receivables" means as of any date of determination, an amount
equal to the product of (x) Aggregate Receivables as of such date of
determination and (y) a fraction, the number of which is Beginning of Month
Principal Receivables and the denominator of which is the Aggregate Receivables
as of the first day of the current Monthly Period. For purposes hereof,
collections of Principal Receivables with respect to any Monthly Period will
consist of all collections on the Receivables received during such Monthly
Period that are not treated as collections of Finance Charge Receivables.
"Beginning of Month Principal Receivables" means, with respect to the
Receivables and any Monthly Period, an amount equal to the Aggregate Receivables
as of the first day of such Monthly Period (or, in the case of the Monthly
Period commencing December 1996, as of December 1, 1996) minus Finance Charge
Receivables as of such date.
Under certain circumstances a borrower may have more than one Account. It
is possible that all or a portion of the Premium Finance Agreements of any
Account will not satisfy the eligibility criteria for transfer to the Trust
resulting in the same borrower having one or more Premium Finance Agreements
owned by the Trust and one or more Premium Finance Agreements owned by one of
the Originators. These Premium Finance Agreements may contain cross-default and
cross-collateralization provisions. Consequently, a default by a borrower on a
Premium Finance Agreement that is not owned by the Trust may result in the
default of the Receivables of such borrower in the Trust and the cancellation of
the related insurance policies thus affecting the rate and timing of payments
under the Receivables. In the event certain Premium Finance Agreements of the
same borrower are owned by the Trust and by one of the Originators, the
Originators have agreed in the Receivables Purchase Agreement that to the extent
they receive payments (including from returns of unearned premiums, recoveries
or otherwise) that are not clearly identified as belonging to Premium Finance
Agreements owned by one of the Originators, such amounts will be treated first
as collections on the Receivables of such borrower until such Receivables are
paid in full. In no event will returned unearned premiums or any other payments
in respect of the Receivables be applied to payments in respect of Premium
Finance Agreements owned by one of the Originators until such Receivables are
paid in full.
ALLOCATION PERCENTAGES
Pursuant to the Agreement, with respect to each Monthly Period the Servicer
will allocate among the Investor Interest, the investor interest for all other
Series issued and outstanding and the Transferor Interest, all amounts collected
and allocated to Finance Charge Receivables, all amounts collected and allocated
to Principal Receivables and all Default Amounts with respect to such Monthly
Period.
Default Amounts and collections of Finance Charge Receivables at any time
and collections of Principal Receivables during the Revolving Period will be
allocated to the Investor Interest based on the Floating Investor Percentage.
The "Floating Investor Percentage" means, with respect to any Monthly Period,
the percentage equivalent of a fraction, the numerator of which is the Adjusted
Investor Interest as of the close of business on the last day of the preceding
Monthly Period (or with respect to the first Monthly Period, the initial
Investor Interest) and the denominator of which is the greater of (a) the
aggregate amount of Beginning of Month Principal Receivables for the related
Monthly Period and (b) the sum of the numerators used to calculate the Investor
Percentages for allocations with respect to Finance Charge Receivables, Default
Amounts or Principal Receivables, as applicable, for all outstanding Series on
such date of determination;
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provided, however, that with respect to any Monthly Period in which a Reset Date
occurs, the amount in clause (a) above shall be (i) the aggregate amount of
Principal Receivables in the Trust as of the close of business on the last day
of the prior Monthly Period for the period from and including the first day of
such Monthly Period to but excluding the Reset Date and (ii) the aggregate
amount of Principal Receivables in the Trust as of the beginning of the day on
the Reset Date after adjusting for the aggregate amount of Principal Receivables
added to or, in certain circumstances, removed from the Trust on the Reset Date,
if any, for the period from and including the Reset Date to and including the
last day of such Monthly Period. The amounts so allocated will be further
allocated between the Class A Holders, Class B Holders and the Collateral
Interest Holder based on the Class A Floating Allocation, the Class B Floating
Allocation and the Collateral Floating Allocation, respectively. The "Class A
Floating Allocation" means, with respect to any Monthly Period, the percentage
equivalent (which percentage shall never exceed 100%) of a fraction, the
numerator of which is equal to the Class A Adjusted Investor Interest as of the
close of business on the last day of the preceding Monthly Period and the
denominator of which is equal to the Adjusted Investor Interest as of the close
of business on such day. The "Class B Floating Allocation" means, with respect
to any Monthly Period, the percentage equivalent (which percentage shall never
exceed 100%) of a fraction, the numerator of which is equal to the Class B
Investor Interest as of the close of business on the last day of the preceding
Monthly Period (or with respect to the first Monthly Period, as of the Closing
Date) and the denominator of which is equal to the Adjusted Investor Interest as
of the close of business on such day. The "Collateral Floating Allocation"
means, with respect to any Monthly Period, the percentage equivalent (which
percentage shall never exceed 100%) of a fraction, the numerator of which is
equal to the Collateral Interest as of the close of business on the last day of
the preceding Monthly Period (or with respect to the first Monthly Period, as of
the Closing Date) and the denominator of which is equal to the Adjusted Investor
Interest as of the close of business on such day.
Collections of Principal Receivables during the Controlled Accumulation
Period, Principal Payment Period and Rapid Amortization Period will be allocated
to the Investor Interest based on the Fixed Investor Percentage. The "Fixed
Investor Percentage" means, with respect to any Monthly Period, the percentage
equivalent of a fraction, the numerator of which is the Investor Interest as of
the close of business on the last day of the Revolving Period and the
denominator of which is the greater of (a) the aggregate amount of Beginning of
Month Principal Receivables for such Monthly Period and (b) the sum of the
numerators used to calculate the Investor Percentages for allocations with
respect to Principal Receivables for all outstanding Series for such Monthly
Period; provided, however, that with respect to any Monthly Period in which a
Reset Date occurs, the amount in clause (a) above shall be (i) the aggregate
amount of Beginning of Month Principal Receivables for such Monthly Period for
the period from and including the first day of such Monthly Period to but
excluding the Reset Date and (ii) the aggregate amount of Principal Receivables
in the Trust at the beginning of the day on the Reset Date after adjusting for
the aggregate amount of Principal Receivables added to or, in certain
circumstances, removed from the Trust on the Reset Date, if any, for the period
from and including the Reset Date to and including the last day of such Monthly
Period. The amounts so allocated will be further allocated between the Class A
Holders, the Class B Holders and the Collateral Interest Holder based on the
Class A Fixed Allocation, the Class B Fixed Allocation and the Collateral Fixed
Allocation, respectively. The "Class A Fixed Allocation" means, with respect to
any Monthly Period, the percentage equivalent (which percentage shall never
exceed 100%) of a fraction, the numerator of which is equal to the Class A
Investor Interest as of the close of business on the last day of the Revolving
Period, and the denominator of which is equal to the Investor Interest as of the
close of business on the last day of the Revolving Period. The "Class B Fixed
Allocation" means, with respect to any Monthly Period, the percentage equivalent
(which percentage shall never exceed 100%) of a fraction, the numerator of which
is equal to the Class B Investor Interest as of the close of business on the
last day of the Revolving Period, and the denominator of which is equal to the
Investor Interest as of the close of business on the last day of the Revolving
Period. The "Collateral Fixed Allocation" means, with respect to any Monthly
Period, the percentage equivalent (which percentage shall never exceed 100%) of
a fraction, the numerator of which is equal to the Collateral Interest as of the
close of business on the last day of the Revolving Period, and the denominator
of which is equal to the Investor Interest as of the close of business on the
last day of the Revolving Period.
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"Class A Adjusted Investor Interest," for any date of determination, means
an amount equal to the then current Class A Investor Interest, minus the
Principal Funding Account Balance on such date.
"Class A Investor Interest" for any date means an amount equal to (a) the
aggregate initial principal amount of the Class A Certificates, minus (b) the
aggregate amount of principal payments made to Class A Holders prior to such
date, minus (c) the excess, if any, of the aggregate amount of Class A Investor
Charge-Offs for all Transfer Dates preceding such date over the aggregate amount
of any reimbursements of Class A Investor Charge-Offs for all Transfer Dates
preceding such date; provided, however, that the Class A Investor Interest may
not be reduced below zero.
"Class B Investor Interest" for any date means an amount equal to (a) the
aggregate initial principal amount of the Class B Certificates, minus (b) the
aggregate amount of principal payments made to Class B Holders prior to such
date, minus (c) the aggregate amount of Class B Investor Charge-Offs for all
prior Transfer Dates, minus (d) the aggregate amount of Reallocated Class B
Principal Collections for all prior Transfer Dates for which the Collateral
Interest has not been reduced, minus (e) an amount equal to the aggregate amount
by which the Class B Investor Interest has been reduced to fund the Class A
Investor Default Amount on all prior Transfer Dates as described under
"--Receivables in Defaulted Accounts; Investor Charge Offs," and plus (f) the
aggregate amount of Excess Spread allocated and available on all prior Transfer
Dates for the purpose of reimbursing amounts deducted pursuant to the foregoing
clauses (c), (d) and (e); provided, however, that the Class B Investor Interest
may not be reduced below zero.
"Collateral Interest" for any date means an amount equal to (a) the Initial
Collateral Interest, minus (b) the aggregate amount of principal payments made
to the Collateral Interest Holder prior to such date, minus (c) the aggregate
amount of Collateral Charge-Offs for all prior Transfer Dates, minus (d) the
aggregate amount of Reallocated Principal Collections for all prior Transfer
Dates, minus (e) an amount equal to the aggregate amount by which the Collateral
Interest has been reduced to fund the Class A Investor Default Amount and the
Class B Investor Default Amount on all prior Transfer Dates as described under
"--Receivables in Defaulted Accounts; Investor Charge-Offs," plus (f) the
aggregate amount of Excess Spread allocated and available on all prior Transfer
Dates for the purpose of reimbursing amounts deducted pursuant to the foregoing
clauses (c), (d) and (e); provided, however, that the Collateral Interest may
not be reduced below zero.
"Reset Date" means each of (a) any date on which Receivables are removed
from the Trust and on which, if any Series has been paid in full, Principal
Receivables in an aggregate amount approximately equal to the initial investor
interest of such Series are removed from the Trust and (b) a date on which there
is an increase in the Investor Interest under any Variable Interest issued by
the Trust.
"Variable Interest" means either of (a) any certificate that is designated
as a variable funding certificate in the related Series Supplement and (b) any
purchased interest sold as permitted by an Agreement.
REALLOCATION OF CASH FLOWS
With respect to each Transfer Date, the Servicer will determine the amount
(the "Class A Required Amount"), if any, by which the sum of (a) Class A Monthly
Interest due on the related Distribution Date and overdue Class A Monthly
Interest and Class A Additional Interest thereon, if any, (b) the Class A
Servicing Fee for the related Monthly Period and overdue Class A Servicing Fee,
if any, and (c) the Class A Investor Default Amount, if any, for the related
Monthly Period exceeds the Class A Available Funds for the related Monthly
Period. If the Class A Required Amount is greater than zero, Excess Spread
allocated to Series 1996-1 and available for such purpose will be used to fund
the Class A Required Amount with respect to such Transfer Date. If such Excess
Spread is insufficient to fund the Class A Required Amount, first, Reallocated
Collateral Principal Collections and, then, Reallocated Class B Principal
Collections will be used to fund the remaining Class A Required Amount. If
Reallocated Principal Collections with respect to the related Monthly Period,
together with Excess Spread, are insufficient to fund the remaining Class A
Required Amount for such related Monthly Period, then the Collateral Interest
(after giving effect to reductions for any Collateral Charge-Offs and
Reallocated Principal Collections on such Transfer Date) will be reduced by the
amount of such excess (but not by more than the Class A Investor Default Amount
for such Monthly Period).
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In the event that such reduction would cause the Collateral Interest to be a
negative number, the Collateral Interest will be reduced to zero, and the Class
B Investor Interest (after giving effect to reductions for any Class B Investor
Charge-Offs and any Reallocated Class B Principal Collections for which the
Collateral Interest was not reduced on such Transfer Date) will be reduced by
the amount by which the Collateral Interest would have been reduced below zero
(but not by more than the excess of the Class A Investor Default Amount, if any,
for such Monthly Period over the amount of such reduction, if any, of the
Collateral Interest with respect to such Monthly Period). In the event that such
reduction would cause the Class B Investor Interest to be a negative number, the
Class B Investor Interest will be reduced to zero and the Class A Investor
Interest will be reduced by the amount by which the Class B Investor Interest
would have been reduced below zero (but not by more than the excess, if any, of
the Class A Investor Default Amount for such Monthly Period over the amount of
the reductions, if any, of the Collateral Interest and the Class B Investor
Interest with respect to such Monthly Period). Any such reduction in the Class A
Investor Interest will have the effect of slowing or reducing the return of
principal and interest to the Class A Holders. In such case, the Class A Holders
will bear directly the credit and other risks associated with their interests in
the Trust. See "--Receivables in Defaulted Accounts; Investor Charge-Offs."
With respect to each Transfer Date, the Servicer will determine the amount
(the "Class B Required Amount"), which will be equal to the sum of (a) the
amount, if any, by which the sum of (i) Class B Monthly Interest due on the
related Distribution Date and overdue Class B Monthly Interest and Class B
Additional Interest thereon, if any, and (ii) the Class B Servicing Fee for the
related Monthly Period and overdue Class B Servicing Fee, if any, exceeds the
Class B Available Funds for the related Monthly Period and (b) the Class B
Investor Default Amount, if any, for the related Monthly Period. If the Class B
Required Amount is greater than zero, Excess Spread allocated to Series 1996-1
not required to pay the Class A Required Amount or reimburse Class A Investor
Charge-Offs will be used to fund the Class B Required Amount with respect to
such Transfer Date. If such Excess Spread is insufficient to fund the Class B
Required Amount, Reallocated Collateral Principal Collections not required to
fund the Class A Required Amount for the related Monthly Period will be used to
fund the remaining Class B Required Amount. If such Reallocated Collateral
Principal Collections with respect to the related Monthly Period are
insufficient to fund the remaining Class B Required Amount, then the Collateral
Interest (after giving effect to reductions for any Collateral Charge-Offs and
Reallocated Principal Collections on such Transfer Date and after any
adjustments made thereto for the benefit of the Class A Holders) will be reduced
by the amount of such deficiency (but not by more than the Class B Investor
Default Amount for such Monthly Period). In the event that such a reduction
would cause the Collateral Interest to be a negative number, the Collateral
Interest will be reduced to zero, and the Class B Investor Interest will be
reduced by the amount by which the Collateral Interest would have been reduced
below zero (but not by more than the excess of the Class B Investor Default
Amount for such Monthly Period over the amount of such reduction of the
Collateral Interest), and the Class B Holders will bear directly the credit and
other risks associated with their interests in the Trust. See "--Receivables in
Defaulted Accounts; Investor Charge-Offs."
Reductions of the Class A Investor Interest or Class B Investor Interest
described above will be reimbursed by, and the Class A Investor Interest or
Class B Investor Interest increased to the extent of, Excess Spread available
for such purposes on each Transfer Date. See "--Application of
Collections--Excess Spread." When such reductions of the Class A Investor
Interest and Class B Investor Interest have been fully reimbursed, reductions of
the Collateral Interest shall be reimbursed until reimbursed in full in a
similar manner.
"Reallocated Class B Principal Collections" for any Monthly Period means
collections of Principal Receivables allocable to the Class B Investor Interest
for the related Monthly Period in an amount not to exceed the amount applied to
fund the Class A Required Amount, if any; provided, however, that such amount
will not exceed the Class B Investor Interest after giving effect to any Class B
Investor Charge-Offs for the related Transfer Date.
"Reallocated Collateral Principal Collections" for any Monthly Period means
collections of Principal Receivables allocable to the Collateral Interest for
the related Monthly Period in an amount not to exceed the amount applied to fund
the Class A Required Amount and the Class B Required Amount, if any; provided,
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however, that such amount will not exceed the Collateral Interest after giving
effect to any Collateral Charge-Offs for the related Transfer Date.
"Reallocated Principal Collections" for any Monthly Period means the sum of
(a) the Reallocated Class B Principal Collections for such Monthly Period, if
any, and (b) the Reallocated Collateral Principal Collections such Monthly
Period, if any.
APPLICATION OF COLLECTIONS
ALLOCATIONS. Except as otherwise provided below, the Servicer will deposit
into the Collection Account, no later than the second business day following the
date of processing, any payment collected by the Servicer on the Receivables. On
the same day as any such deposit is made, the Servicers will make the deposits
and payments to the accounts and parties as indicated below; provided, however,
that for as long as an Originator remains the Servicer under the Agreement, no
Pay Out Event has occurred and (a) (i) such Servicer provides to the Trustee a
letter of credit or other credit enhancement covering the risk of collection of
such Servicer acceptable to the Rating Agency and (ii) the Transferor shall not
have received a notice from the Rating Agency that reliance on such letter of
credit or other credit enhancement would result in the lowering of such Rating
Agency's then-existing rating of any Series then outstanding, or (b) the
certificate of deposit or unsecured short-term debt obligations of the
Transferor (or, if neither such certificates of deposit nor obligations of the
Transferor are rated by Moody's or Standard & Poor's, then the certificate of
deposit or unsecured short-term debt obligations of Mellon Bank, N.A.) are rated
P-1 by Moody's and at least A-1 by Standard & Poor's and insured by either BIF
or SAIF or such Servicer makes other arrangements satisfactory to each Rating
Agency rating any Series then outstanding, then such Servicer may make such
deposits and payments on the Transfer Date in an amount equal to the net amount
of such deposits and payments which would have been made during the related
Monthly Periods had the conditions of this proviso not applied. Because Mellon
Bank, N.A.'s unsecured short-term debt obligations are currently rated P-1 by
Moody's and A-1 by Standard & Poor's, the Servicer will initially make such
deposits and payments monthly on a net basis and expects to continue to do so
(subject to the requirements described above) for as long as the Certificates
are outstanding.
With respect to the Certificates and any Monthly Period, and
notwithstanding anything in the Agreement to the contrary, whether the Servicer
is required to make monthly or daily deposits from the Collection Account into
the Finance Charge Account or the "Principal Account", (i) the Servicer will
only be required to deposit Collections from the Collection Account into the
Finance Charge Account or the Principal Account up to the required amount to be
deposited into any such deposit account or, without duplication, distributed on
or prior to the related Distribution Date to Holders or to the Collateral
Interest Holder and (ii) if at any time prior to such Distribution Date the
amount of Collections deposited in the Collection Account exceeds the amount
required to be deposited pursuant to clause (i) above, the Servicer will be
permitted to withdraw the excess from the Collection Account.
PAYMENT OF INTEREST, FEES AND OTHER ITEMS. On each Transfer Date, the
Trustee, acting pursuant to the Servicer's instructions, will apply the Class A
Available Funds, Class B Available Funds and Collateral Available Funds in the
Finance Charge Account in the following manner:
(a) On each Transfer Date, an amount equal to the Class A Available
Funds will be distributed or deposited in the following priority:
(i) an amount equal to Class A Monthly Interest for the related
Distribution Date, plus the amount of any overdue Class A Monthly
Interest and Class A Additional Interest thereon, if any, will be (x)
deposited into the Distribution Account for distribution to Class A
Holders on such Distribution Date if such Distribution Date is an
Interest Payment Date or a Special Payment Date or (y) deposited into
the Class A Interest Funding Account, if such Distribution Date is not
an Interest Payment Date or a Special Payment Date, for distribution to
the Class A Holders on the next Interest Payment Date or Special Payment
Date;
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(ii) an amount equal to the Class A Servicing Fee for the related
Monthly Period, plus the amount of any overdue Class A Servicing Fee,
will be paid to the Servicer;
(iii) an amount equal to the Class A Investor Default Amount, if
any, for the related Monthly Period will be treated as a portion of
Available Investor Principal Collections and deposited into the
Principal Account for such Transfer Date; and
(iv) the balance, if any, will constitute a portion of Excess
Spread and will be allocated and distributed as described under
"--Excess Spread."
If the Back-up Servicer is the Servicer, the amounts described in clause
(ii) above shall be paid prior to the amounts described in clause (i) above.
(b) On each Transfer Date, an amount equal to the Class B Available
Funds will be distributed or deposited in the following priority:
(i) an amount equal to Class B Monthly Interest for the related
Distribution Date, plus the amount of any overdue Class B Monthly
Interest and Class B Additional Interest thereon, if any, will be (x)
deposited into the Distribution Account for distribution to Class B
Holders on such Distribution Date if such Distribution Date is an
Interest Payment Date or a Special Payment Date or (y) deposited into
the Class B Interest Funding Account, if such Distribution Date is not
an Interest Payment Date, or a Special Payment Date, for distribution to
the Class B Holders on the next Interest Payment Date or Special Payment
Date therefor;
(ii) an amount equal to the Class B Servicing Fee for the related
Monthly Period, plus the amount of any overdue Class B Servicing Fee,
will be paid to the Servicer; and
(iii) the balance, if any, will constitute a portion of Excess
Spread and will be allocated and distributed as described under
"--Excess Spread."
If the Back-up Servicer is the Servicer, the amounts described in clause
(ii) above shall be paid prior to the amounts described in clause (i) above.
(c) On each Transfer Date, an amount equal to the Collateral Available
Funds will be distributed or deposited in the following priority:
(i) if AFCO Credit and AFCO Acceptance are no longer the Servicers,
an amount equal to the Collateral Interest Servicing Fee for the related
Monthly Period, plus the amount of any overdue Collateral Interest
Servicing Fee, will be paid to the Servicer; and
(ii) the balance, if any, will constitute a portion of Excess
Spread and will be allocated and distributed or deposited as described
under "--Excess Spread."
"Collateral Available Funds" means, with respect to any Monthly Period, an
amount equal to the Collateral Floating Allocation of collections of Finance
Charge Receivables allocated to the Investor Interest with respect to such
Monthly Period.
"Excess Spread" means, with respect to any Transfer Date, an amount equal
to the sum of the amounts described in clause (a)(iv), clause (b)(iii) and
clause (c)(ii) above. To the extent such amounts are insufficient to make the
distributions required by subparagraphs (a) through (l) below under "--Excess
Spread," Excess Spread shall also be deemed to include any Excess Finance Charge
Collections allocable to other Series available to Series 1996-1 in accordance
with the Agreement.
EXCESS SPREAD. On each Transfer Date, the Trustee, acting pursuant to the
Servicer's instructions, will apply Excess Spread with respect to the related
Monthly Period, to make the following distributions or deposits in the following
priority:
(a) an amount equal to the Class A Required Amount, if any, with
respect to such Transfer Date will be used to fund the Class A Required
Amount; provided, that in the event the Class A Required Amount for such
Transfer Date exceeds the amount of Excess Spread, such Excess Spread shall
be
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applied first to pay amounts due with respect to such Transfer Date
pursuant to clause (a)(i) above under "--Payment of Interest, Fees and
Other Items", second to pay amounts due with respect to such Transfer Date
pursuant to clause (a)(ii) above under "--Payment of Interest, Fees and
Other Items," and third to pay amounts due with respect to such Transfer
Date pursuant to clause (a)(iii) above under "--Payment of Interest, Fees
and Other Items";
(b) an amount equal to the aggregate amount of Class A Investor
Charge-Offs which have not been previously reimbursed (after giving effect
to the allocation on such Transfer Date of certain other amounts applied
for that purpose) will be deposited into the Principal Account and treated
as a portion of Available Investor Principal Collections for such Transfer
Date as described under "--Payments of Principal" below;
(c) an amount equal to the Class B Required Amount, if any, with
respect to such Transfer Date will be used to fund the Class B Required
Amount and will be applied first to pay amounts due with respect to such
Transfer Date pursuant to clause (b) (i) above under "--Payment of
Interest, Fees and Other Items," second to pay amounts due with respect to
such Transfer Date pursuant to clause (b) (ii) above under "--Payment of
Interest, Fees and Other Items," and third, the amount remaining, up to the
Class B Investor Default Amount, will be deposited into the Principal
Account and treated as a portion of Available Investor Principal
Collections for such Transfer Date as described under "--Payments of
Principal" below;
(d) an amount equal to the aggregate amount by which the Class B
Investor Interest has been reduced below the initial Class B Investor
Interest for reasons other than the payment of principal to the Class B
Holders (but not in excess of the aggregate amount of such reductions which
have not been previously reimbursed) will be deposited into the Principal
Account and treated as a portion of Available Investor Principal
Collections for such Transfer Date as described under "--Payments of
Principal" below;
(e) an amount equal to the Collateral Monthly Interest for such
Transfer Date, plus the amount of any Collateral Monthly Interest
previously due but not distributed to the Collateral Interest Holder on a
prior Transfer Date, will be distributed to the Collateral Interest Holder
for distribution in accordance with the Loan Agreement;
(f) if AFCO Credit and AFCO Acceptance are the Servicers, an amount
equal to the Collateral Interest Servicing Fee for the related Monthly
Period, plus the amount of any overdue Collateral Interest Servicing Fee,
will be paid to the Servicer;
(g) an amount equal to the aggregate Collateral Default Amount, if
any, for such Transfer Date will be deposited into the Principal Account
and treated as a portion of Available Investor Principal Collections for
such Transfer Date as described under "--Payments of Principal" below;
(h) an amount equal to the aggregate amount by which the Collateral
Interest has been reduced below the Required Collateral Interest for
reasons other than the payment of principal to the Collateral Interest
Holder (but not in excess of the aggregate amount of such reductions which
have not been previously reimbursed) will be deposited into the Principal
Account and treated as a portion of Available Investor Principal
Collections for such Transfer Date as described under "--Payments of
Principal" below;
(i) on each Transfer Date from and after the Reserve Account Funding
Date, but prior to the date on which the Reserve Account terminates as
described under "--Reserve Account," an amount up to the excess, if any, of
the Required Reserve Account Amount over the Available Reserve Account
Amount will be deposited into the Reserve Account;
(j) an amount equal to all other amounts due under the Loan Agreement
(to the extent payable out of Excess Spread or Excess Finance Charge
Collections) shall be distributed in accordance with the Loan Agreement;
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(k) an amount equal to the sum of (x) any Class A Shortfall Amount for
the current Distribution Date and (y) any accrued and unpaid Class A
Carry-Over Amount from a prior Distribution Date shall be deposited by
Servicer or Trustee in the Class A Interest Funding Account for payment to
the Class A Holders on the applicable Interest Payment Date;
(l) an amount equal to the sum of (x) any Class B Shortfall Amount for
the current Distribution Date and (y) any accrued and unpaid Class B
Carry-Over Amount from a prior Distribution Date shall be deposited by
Servicer or Trustee into the Class B Interest Funding Account for payment
to the Class B Holders on the applicable Interest Payment Date; and
(m) the balance, if any, after giving effect to the payments made
pursuant to subparagraphs (a) through (m) above, will constitute "Excess
Finance Charge Collections" to be applied with respect to other Series in
accordance with the Agreement.
"Collateral Monthly Interest" with respect to any Transfer Date will equal
the product of (a) an amount equal to One Month LIBOR plus 1.00% per annum, or
such lesser amount as may be designated in the Loan Agreement (the "Collateral
Rate"), (b) the actual number of days in the related Interest Period divided by
360 and (c) the Collateral Interest as of the related Record Date, or with
respect to the first Transfer Date, the Initial Collateral Interest.
PAYMENTS OF PRINCIPAL. On each Transfer Date, the Trustee, acting pursuant
to the Servicer's instructions, will distribute Available Investor Principal
Collections (see "--Principal Payments" above) on deposit in the Principal
Account in the following manner:
(a) on each Transfer Date with respect to the Revolving Period, all
such Available Investor Principal Collections will be distributed or
deposited in the following priority:
(i) an amount equal to the Collateral Monthly Principal will be
paid to the Collateral Interest Holder in accordance with the Loan
Agreement; and
(ii) the balance will be treated as Shared Principal Collections
and applied as described under "--Shared Principal Collections";
(b) on each Transfer Date with respect to the Controlled Accumulation
Period, Principal Payment Period or the Rapid Amortization Period, all such
Available Investor Principal Collections will be distributed or deposited
in the following priority:
(i) an amount equal to Class A Monthly Principal will be deposited
in the Principal Funding Account (during the Controlled Accumulation
Period) or distributed to the Class A Holders (during the Principal
Payment Period or the Rapid Amortization Period); and
(ii) for each Transfer Date after the Class A Investor Interest has
been paid in full (after taking into account payments to be made on the
related Distribution Date), an amount equal to the Class B Monthly
Principal for such Transfer Date will be distributed to the Class B
Holders;
(c) on each Transfer Date with respect to the Controlled Accumulation
Period, Principal Payment Period and the Rapid Amortization Period in which
a reduction in the Required Collateral Interest has occurred, Available
Investor Principal Collections not applied to Class A Monthly Principal or
Class B Monthly Principal will be applied to reduce the Collateral Interest
to the Required Collateral Interest; and
(d) on each Transfer Date with respect to the Controlled Accumulation
Period, Principal Payment Period and Rapid Amortization Period, the balance
of Available Investor Principal Collections not applied pursuant to (b) and
(c) above, if any, will be treated as Shared Principal Collections and
applied as described under "--Shared Principal Collections".
"Class A Monthly Principal" with respect to any Transfer Date relating to
the Controlled Accumulation Period, Principal Payment Period or the Rapid
Amortization Period, prior to the payment in full of the Class A Investor
Interest, will equal the least of (i) the Available Investor Principal
Collections on deposit in
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the Principal Account with respect to such Transfer Date, (ii) for each Transfer
Date with respect to the Controlled Accumulation Period, prior to the payment in
full of the Class A Investor Interest, and on or prior to the Class A Scheduled
Payment Date, the applicable Controlled Deposit Amount for such Transfer Date
and (iii) the Class A Adjusted Investor Interest prior to any deposits on such
Transfer Date.
"Class B Monthly Principal" with respect to any Transfer Date relating to
the Controlled Accumulation Period, Principal Payment Period or the Rapid
Amortization Period, after the Class A Certificates have been paid in full
(after taking into account payments to be made on the related Distribution
Date), will equal the lesser of (i) the Available Investor Principal Collections
on deposit in the Principal Account with respect to such Transfer Date (minus
the portion of such Available Investor Principal Collections applied to Class A
Monthly Principal on such Transfer Date) and (ii) the Class B Investor Interest
for such Transfer Date.
"Collateral Monthly Principal" means (a) with respect to any Transfer Date
relating to the Revolving Period following any reduction of the Required
Collateral Interest pursuant to clause (3) of the proviso in the definition
thereof an amount equal to the lesser of (i) the excess, if any, of the
Collateral Interest (after giving effect to reductions for any Collateral
Charge-Offs and Reallocated Principal Collections on such Transfer Date and
after giving effect to any adjustments thereto for the benefit of the Class A
Holders and the Class B Holders on such Transfer Date) over the Required
Collateral Interest on such Transfer Date, and (ii) the Available Investor
Principal Collections on such Transfer Date or (b) with respect to any Transfer
Date relating to the Controlled Accumulation Period, Principal Payment Period or
Rapid Amortization Period an amount equal to the lesser of (i) the excess, if
any, of the Collateral Interest (after giving effect to reductions for any
Collateral Charge-Offs and Reallocated Principal Collections on such Transfer
Date and after giving effect to any adjustments thereto for the benefit of the
Class A Holders and the Class B Holders on such Transfer Date) over the Required
Collateral Interest on such Transfer Date, and (ii) the excess, if any, of (A)
the Available Investor Principal Collections on such Transfer Date over (B) the
sum of the Class A Monthly Principal and the Class B Monthly Principal for such
Transfer Date.
"Controlled Accumulation Amount" means (a) for any Transfer Date with
respect to the Controlled Accumulation Period, prior to the payment in full of
the Class A Investor Interest, $48,888,888.89; provided, however, that if the
commencement of the Controlled Accumulation Period is modified as described
above under "--Postponement of Controlled Accumulation Period," (i) the
Controlled Accumulation Amount for each Transfer Date with respect to the
Controlled Accumulation Period shall mean the amount determined in accordance
with the Agreement on the date on which the Controlled Accumulation Period has
most recently been modified and (ii) the sum of the Controlled Accumulation
Amounts for all Transfer Dates with respect to the modified Controlled
Accumulation Period shall not be less than the Class A Investor Interest.
SHARED EXCESS FINANCE CHARGE COLLECTIONS
To the extent that collections of Finance Charge Receivables allocated to
the Investor Interest (and any other amounts that are to be treated as
collections of Finance Charge Receivables allocated to the Investor Interest)
are not needed to make payment in respect of the Investor Interest as described
above under "--Application of Collections--Payment of Interest, Fees and Other
Items" and "--Excess Spread," such Excess Finance Charge Collections will be
applied to make payments in respect of other Series entitled to share therein in
accordance with the Agreement. In addition, Excess Finance Charge Collections
with respect to certain other Series, to the extent not required to make
payments in respect of such Series, may be applied to cover shortfalls in
amounts payable from Excess Spread as described above under "--Application of
Collections--Excess Spread" (as well as shortfalls experienced by other Series).
SHARED PRINCIPAL COLLECTIONS
Collections of Principal Receivables for any Monthly Period allocated to
the Investor Interest will first be used to cover, with respect to any Monthly
Period during the Controlled Accumulation Period, deposits of the applicable
Controlled Deposit Amount to the Principal Funding Account or the Distribution
Account, and during the Rapid Amortization Period, payments to the Holders and
then under certain circumstances payments to the Collateral Interest Holder. The
Servicer will determine the amount of collections of Principal
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Receivables for any Monthly Period allocated to the Investor Interest remaining
after covering required payments to the Holders and any similar amount remaining
for any other Series ("Shared Principal Collections"); provided that in such
allocation, all other Series will have priority over any Series whose terms
permit the Servicer to extend the Initial Principal Payment Date, and then only
to the extent that the Principal Shortfall for such Series is greater than such
Principal Shortfall would otherwise have been due to the election by the
Transferor not to extend the Initial Principal Payment Date. The Servicer will
allocate the Shared Principal Collections to cover any scheduled or permitted
principal distributions to certificateholders and deposits to principal funding
accounts, if any, for any Series entitled thereto which have not been covered
out of the Collections of Principal Receivables allocable to such Series and
certain other amounts for such Series ("Principal Shortfalls"). Shared Principal
Collections will not be used to cover investor charge-offs for any Series. If
Principal Shortfalls exceed Shared Principal Collections for any Monthly Period,
Shared Principal Collections will be allocated pro rata among the applicable
Series based on the relative amounts of Principal Shortfalls. To the extent that
Shared Principal Collections exceed Principal Shortfalls, the balance will be
paid to the Transferor or, under certain circumstances, deposited into the
Excess Funding Account.
REQUIRED COLLATERAL INTEREST
The "Required Collateral Interest" with respect to any Transfer Date means
(i) initially $35,000,000 and (ii) thereafter on each Transfer Date an amount
equal to 7% of the sum of (x) the Class A Adjusted Investor Interest and the
Class B Investor Interest on such Transfer Date, after taking into account
deposits into the Principal Funding Account on such Transfer Date and payments
to be made on the related Distribution Date, and (y) the Collateral Interest on
the prior Transfer Date after any adjustments made on such Transfer Date, but
not less than $15,000,000; provided, however, (1) that if certain reductions in
the Collateral Interest are made or if a Pay Out Event occurs, the Required
Collateral Interest for such Transfer Date shall equal the Required Collateral
Interest for the Transfer Date immediately preceding the occurrence of such
reduction or Pay Out Event, (2) in no event shall the Required Collateral
Interest exceed the unpaid principal amount of the Certificates as of the last
day of the Monthly Period preceding such Transfer Date after taking into account
payments to be made on the related Distribution Date and (3) the Required
Collateral Interest may be reduced to a lesser amount at any time if the Rating
Agency Condition is satisfied.
"Rating Agency Condition" means the notification in writing by each Rating
Agency that a proposed action will not result in such Rating Agency reducing or
withdrawing its then existing rating of the investor certificates of any
outstanding Series or class with respect to which it is a Rating Agency.
With respect to any Transfer Date, if the Collateral Interest is less than
the Required Collateral Interest, certain Excess Spread, if available, will be
allocated to increase the Collateral Interest to the extent of such shortfall.
Any of such Excess Spread not required to be so allocated or deposited into the
Reserve Account with respect to any Transfer Date will be applied in accordance
with the Loan Agreement. See "--Application of Collections--Excess Spread."
RECEIVABLES IN DEFAULTED ACCOUNTS; INVESTOR CHARGE-OFFS
On or before each Transfer Date, the Servicer will calculate the Investor
Default Amount for the preceding Monthly Period. The term "Investor Default
Amount" means, for any Monthly Period, the product of (a) the Floating Investor
Percentage with respect to such Monthly Period and (b) the aggregate Default
Amount for such Monthly Period. The "Default Amount" for any Monthly Period will
equal the amount of Principal Receivables which are Defaulted Receivables net of
Recoveries for such Monthly Period. "Defaulted Receivables" means, with respect
to any Monthly Period, Receivables as to which either (i) the insurance policy
or policies financed thereby has been cancelled for 270 days or more or (ii) the
Servicer has charged off in accordance with its customary and usual practices.
"Recoveries" means, with respect to the Receivables and any Monthly Period, all
amounts received by the Servicer in respect of Defaulted Receivables during such
Monthly Period, less related expenses of outside collection agencies. In the
event one of the Receivables in an Account is a Defaulted Receivable (a,
"Defaulted Account") and for administrative reasons the Servicer is unable to
identify or segregate which Receivables in a Defaulted Account are Defaulted
Receivables, all of the Receivables in such Defaulted Account will be treated as
Defaulted Receivables. A
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portion of the Investor Default Amount will be allocated to the Class A Holders
(the "Class A Investor Default Amount") on each Transfer Date in an amount equal
to the product of the Class A Floating Allocation applicable during the related
Monthly Period and the Investor Default Amount for such Monthly Period. A
portion of the Investor Default Amount will be allocated to the Class B Holders
(the "Class B Investor Default Amount") on each Transfer Date in an amount equal
to the product of the Class B Floating Allocation applicable during the related
Monthly Period and the Investor Default Amount for such Monthly Period. A
portion of the Investor Default Amount will be allocated to the Collateral
Interest Holder (the "Collateral Default Amount") on each Transfer Date in an
amount equal to the product of the Collateral Floating Allocation applicable
during the related Monthly Period and the Investor Default Amount for such
Monthly Period.
On each Transfer Date, if the Class A Investor Default Amount for such
Transfer Date exceeds the amount of Excess Spread and Reallocated Principal
Collections available to fund such amount with respect to the Monthly Period
immediately preceding such Transfer Date, the Collateral Interest (after giving
effect to reductions for any Collateral Charge-Offs and any Reallocated
Principal Collections on such Transfer Date) will be reduced by the amount of
such excess, but not more than the lesser of the Class A Investor Default Amount
and the Collateral Interest (after giving effect to reductions for any
Collateral Charge-Offs and any Reallocated Principal Collections on such
Transfer Date) for such Transfer Date. In the event that such reduction would
cause the Collateral Interest to be a negative number, the Collateral Interest
will be reduced to zero, and the Class B Investor Interest (after giving effect
to reductions for any Class B Investor Charge-Offs and any Reallocated Class B
Principal Collections on such Transfer Date) will be reduced by the amount by
which the Collateral Interest would have been reduced below zero. In the event
that such reduction would cause the Class B Investor Interest to be a negative
number, the Class B Investor Interest will be reduced to zero, and the Class A
Investor Interest will be reduced by the amount by which the Class B Investor
Interest would have been reduced below zero, but not more than the Class A
Investor Default Amount for such Transfer Date (a "Class A Investor
Charge-Off"), which will have the effect of slowing or reducing the return of
principal and interest to the Class A Holders. If the Class A Investor Interest
has been reduced by the amount of any Class A Investor Charge-Offs, it will be
reimbursed on any Transfer Date (but not by an amount in excess of the aggregate
Class A Investor Charge-Offs) by the amount of Excess Spread allocated and
available for such purpose as described under "--Application of
Collections--Excess Spread."
On each Transfer Date, if the Class B Investor Default Amount for such
Transfer Date exceeds the amount of Excess Spread and Reallocated Collateral
Principal Collections which are allocated and available to fund such amount with
respect to the Monthly Period preceding such Transfer Date, the Collateral
Interest (after giving effect to reductions for any Collateral Charge-Offs and
any Reallocated Principal Collections on such Transfer Date and after giving
effect to any adjustments with respect thereto as described in the preceding
paragraph) will be reduced by the amount of such excess but not more than the
lesser of the Class B Investor Default Amount and the Collateral Interest (after
giving effect to reductions for any Collateral Charge-Offs and any Reallocated
Principal Collections on such Transfer Date and after giving effect to any
adjustments with respect thereto as described in the preceding paragraph) for
such Transfer Date. In the event that such reduction would cause the Collateral
Interest to be a negative number, the Collateral Interest will be reduced to
zero and the Class B Investor Interest will be reduced by the amount by which
the Collateral Interest would have been reduced below zero, but not more than
the Class B Investor Default Amount for such Transfer Date (a "Class B Investor
Charge-Off"). The Class B Investor Interest will also be reduced by the amount
of Reallocated Class B Principal Collections in excess of the Collateral
Interest (after giving effect to reductions for any Collateral Charge-Offs and
any Reallocated Collateral Principal Collections on such Transfer Date) and the
amount of any portion of the Class B Investor Interest allocated to the Class A
Certificates to avoid a reduction in the Class A Investor Interest. The Class B
Investor Interest will thereafter be reimbursed (but not in excess of the unpaid
principal balance of the Class B Certificates) on any Transfer Date by the
amount of Excess Spread allocated and available for that purpose as described
under "--Application of Collections--Excess Spread."
On each Transfer Date, if the Collateral Default Amount for such Transfer
Date exceeds the amount of Excess Spread which is allocated and available to
fund such amount as described under "--Application of
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Collections--Excess Spread," the Collateral Interest will be reduced by the
amount of such excess but not more than the lesser of the Collateral Default
Amount and the Collateral Interest for such Transfer Date (a "Collateral
Charge-Off"). The Collateral Interest will also be reduced by the amount of
Reallocated Principal Collections and the amount of any portion of the
Collateral Interest allocated to the Class A Certificates to avoid a reduction
in the Class A Investor Interest or to the Class B Certificates to avoid a
reduction in the Class B Investor Interest. The Collateral Interest will
thereafter be reimbursed on any Transfer Date by the amount of Excess Spread
allocated and available for that purpose as described under "--Application of
Collections--Excess Spread."
PRINCIPAL FUNDING ACCOUNT
Pursuant to the Series 1996-1 Supplement, the Trustee will establish and
maintain a segregated account held for the benefit of the Holders (the
"Principal Funding Account"). The Principal Funding Account will be established
as a segregated trust account or with a Qualified Institution. During the
Controlled Accumulation Period, the Trustee at the direction of the Servicer
will transfer collections in respect of Principal Receivables (other than
Reallocated Principal Collections) and Shared Principal Collections from other
Series, if any, allocated to Series 1996-1 from the Principal Account to the
Principal Funding Account as described under "--Application of Collections."
Funds on deposit in the Principal Funding Account will be invested to the
following Transfer Date by the Trustee at the direction of the Servicer in
Permitted Investments. Investment earnings (net of investment losses and
expenses) on funds on deposit in the Principal Funding Account (the "Principal
Funding Investment Proceeds") will be used to pay interest on the Class A
Certificates in an amount up to, for each Transfer Date, the product of (a) a
fraction, the numerator of which is the actual number of days in the related
Interest Period and the denominator of which is 360, (b) the Class A LIBOR Rate
in effect with respect to the related Interest Period and (c) the Principal
Funding Account Balance as of the Record Date preceding such Transfer Date (the
"Class A Covered Amount"). If, for any Transfer Date, the Principal Funding
Investment Proceeds are less than the Class A Covered Amount, the amount of such
deficiency (the "Class A Principal Funding Investment Shortfall") shall be
withdrawn, to the extent available, from the Reserve Account and deposited in
the Finance Charge Account and included in collections of Finance Charge
Receivables to be applied to the payment of Class A Monthly Interest.
RESERVE ACCOUNT
Pursuant to the Series 1996-1 Supplement, the Trustee will establish and
maintain a segregated account held for the benefit of the Holders (the "Reserve
Account") in order to assist with the subsequent distribution of interest on the
Certificates during the Controlled Accumulation Period. The Reserve Account will
be established as a segregated trust account or with a Qualified Institution. On
each Transfer Date from and after the Reserve Account Funding Date, but prior to
the termination of the Reserve Account, the Trustee, acting pursuant to the
Servicer's instructions, will apply Excess Spread allocated to the Certificates
(to the extent described above under "--Application of Collections--Excess
Spread") to increase the amount on deposit in the Reserve Account (to the extent
such amount is less than the Required Reserve Account Amount). The "Reserve
Account Funding Date" will be the Transfer Date with respect to the Monthly
Period which commences no later than three months prior to the commencement of
the Controlled Accumulation Period, or such earlier date as the Servicer may
determine. The "Required Reserve Account Amount" for any Transfer Date on or
after the Reserve Account Funding Date will be equal to (a) 0.50% of the
outstanding principal balance of the Class A Certificates or (b) any other
amount designated by the Transferor; provided, that if such designation is of a
lesser amount, the Transferor shall have provided the Servicer, the Collateral
Interest Holder and the Trustee with evidence that the Rating Agency Condition
has been satisfied and the Transferor shall have delivered to the Trustee a
certificate of an authorized officer to the effect that, based on the facts
known to such officer at such time, in the reasonable belief of the Transferor,
such designation will not cause a Pay Out Event or an event that, after the
giving of notice or the lapse of time, would cause a Pay Out Event to occur with
respect to Series 1996-1. On each Transfer Date, after giving effect to any
deposit to be made to, and any withdrawal to be made from, the Reserve Account
on such Transfer Date, the Trustee will withdraw
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from the Reserve Account an amount equal to the excess, if any, of the amount on
deposit in the Reserve Account over the Required Reserve Account Amount and
distribute such excess to the Collateral Interest Holder for application in
accordance with the terms of the Loan Agreement.
Provided that the Reserve Account has not terminated as described below,
all amounts on deposit in the Reserve Account on any Transfer Date (after giving
effect to any deposits to, or withdrawals from, the Reserve Account to be made
on such Transfer Date) will be invested to the following Transfer Date by the
Trustee at the direction of the Servicer in Permitted Investments. The interest
and other investment income (net of investment expenses and losses) earned on
such investments will be retained in the Reserve Account (to the extent the
amount on deposit is less than the Required Reserve Account Amount) or deposited
in the Finance Charge Account and treated as Class A Available Funds.
On or before each Transfer Date with respect to the Controlled Accumulation
Period and on the first Transfer Date with respect to the earlier of the
Principal Payment Period or the Rapid Amortization Period, a withdrawal will be
made from the Reserve Account, and the amount of such withdrawal will be
deposited in the Finance Charge Account and included in collections of Finance
Charge Receivables to be applied to the payment of the Class A Monthly Interest
for such Transfer Date in an amount equal to the lesser of (a) the Available
Reserve Account Amount with respect to such Transfer Date and (b) the Class A
Principal Funding Investment Shortfall with respect to such Transfer Date;
provided, that the amount of such withdrawal shall be reduced to the extent that
funds otherwise would be available to be deposited in the Reserve Account on
such Transfer Date. On each Transfer Date, the amount available to be withdrawn
from the Reserve Account (the "Available Reserve Account Amount") will be equal
to the lesser of the amount on deposit in the Reserve Account (before giving
effect to any deposit to be made to the Reserve Account on such Transfer Date)
and the Required Reserve Account Amount for such Transfer Date.
The Reserve Account will be terminated upon the earlier to occur of (a) the
termination of the Trust pursuant to the Agreement and (b) if the Controlled
Accumulation Period has not commenced, the first Transfer Date with respect to
the Principal Payment Period or Rapid Amortization Period or, if the Controlled
Accumulation Period has commenced, the earlier to occur of (a) the first
Transfer Date with respect to the Principal Payment Period or Rapid Amortization
Period and (ii) the Transfer Date immediately preceding the Class A Scheduled
Payment Date. Upon the termination of the Reserve Account, all amounts on
deposit therein (after giving effect to any withdrawal from the Reserve Account
on such date as described above) will be distributed to the Collateral Interest
Holder for application in accordance with the terms of the Loan Agreement. Any
amounts withdrawn from the Reserve Account and distributed to the Collateral
Interest Holder as described above will not be available for distribution to the
Holders.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Certificates will be subject to optional repurchase by the Transferor
on any Distribution Date after the Investor Interest is reduced to an amount
less than or equal to 5% of the initial Investor Interest, if certain conditions
set forth in the Agreement are met. The repurchase price will be equal to the
Investor Interest (less the amount, if any, on deposit in any Principal Funding
Account), plus accrued and unpaid interest on the Certificates and interest or
other amounts payable on the Collateral Interest, through the day preceding the
Distribution Date on which the repurchase occurs.
The Certificates will be retired on the day following the Distribution Date
on which the final payment of principal is scheduled to be made to the
Certificateholders, whether as a result of optional reassignment to the
Transferor or otherwise. Subject to prior termination as provided above, the
Agreement provides that the final distribution of principal and interest on the
Certificates will be made on the January 2003 Distribution Date (the "Series
1996-1 Termination Date"). In the event that the Invested Amount is greater than
zero on the Series 1996-1 Termination Date, the Trustee will sell or cause to be
sold (and apply the proceeds first to the Class A Certificates until paid in
full, then to the Class B Certificates and finally to the Collateral Interest to
the extent necessary to pay such remaining amounts to all Certificateholders pro
rata within each class as final payment of the Certificates) interests in the
Receivables or certain Receivables, as specified in the Agreement in an amount
equal to up to 110% of the Investor Interest at the close of business on such
date (but not more
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than the total amount of Receivables allocable to the Certificates). The net
proceeds of such sale and any collections on the Receivables allocable to the
Certificates). The net proceeds of such sale and any collections on the
Receivables, up to an amount equal to the Investor Interest plus accrued
interest due on the Certificates, will be paid on the Series 1996-1 Termination
Date, first to the Class A Certificateholders until the Class A Invested Amount
is paid in full, then to the Class B Certificateholders until the Class B
Invested Amount is paid in full.
Unless the Servicer and the Transferor instruct the Trustee otherwise, the
Trust will terminate on the earlier of (a) the day after the Distribution Date
on which the aggregate Investor Interest and, Collateral Interest, with respect
to each Series issued by such Trust is zero, (b) April 7, 2020 or (c) if the
Receivables are sold, disposed of or liquidated following the occurrence of an
Insolvency Event, immediately following such sale, disposition or liquidation
(such date, the "Trust Termination Date"). Upon the termination of each Trust
and the surrender of the Transferor Interest, the Trustee shall convey to the
holder of the Transferor Interest all right, title and interest of the Trust in
and to the Receivables and other funds of the Trust.
PAY OUT EVENTS
As described above, the Revolving Period will continue through February 28,
2001 (unless such date is postponed as described under "--Postponement of
Controlled Accumulation Period"), unless a Principal Payment Event or a Pay Out
Event occurs prior to such date. A "Pay Out Event" refers to any of the
following events:
(a) certain insolvency events involving the Transferor or either
Originator;
(b) the Trust becoming an "investment company" within the meaning of
the Investment Company Act of 1940, as amended;
(c) the Back-up Servicer becomes legally unable to act as Successor
Servicer or has been terminated as Back-up Servicer and, within 90 days of
such event, a successor Back-up Servicer has not assumed the obligations of
Back-up Servicer and the Rating Agency Condition has not been satisfied
with respect to the appointment of such Back-up Servicer;
(d) the failure of the Transferor to make certain payments or
transfers of funds for the benefit of the Holders within the time periods
stated in the Agreement;
(e) material breaches of certain representations, warranties or
covenants of the Transferor;
(f) a reduction in the average of the Portfolio Yields for any three
consecutive Monthly Periods to a rate that is less than the average of the
Base Rates for such period;
(g) (i) the average Transferor Interest during any 10 consecutive days
being below the Minimum Transferor Interest for the same period and (ii)
during any 10 consecutive days the sum of (x) the Principal Receivables and
(y) the principal amount on deposit in the Excess Funding Account being
less than the Minimum Aggregate Principal Receivables for the same period;
(h) the failure of either Originator to transfer Additional
Receivables to the Transferor when required by the Receivables Purchase
Agreement or the failure of the Transferor to convey Additional Receivables
when required by the Agreement;
(i) the occurrence of a Servicer Default which would have a material
adverse effect on the Holders;
(j) the Class A Investor Interest or the Class B Investor Interest not
being paid in full on the Class A Scheduled Payment Date or the Class B
Scheduled Payment Date, respectively;
(k) the Monthly Payment Rate averaged for three consecutive Monthly
Periods is less than 12%;
(l) the third consecutive Determination Date on which (i) there exists
an Excess Obligor Concentration Amount, (ii) there exists an Excess Insurer
Concentration Amount, (iii)the Investment Grade Insurer Percentage is less
than the Required Investment Grade Insurer Percentage, (iv) the Investment
Grade Insurer Percentage to be decreased, if on such day the Investment
Grade Insurer
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Percentage is equal to or less than the Required Investment Grade Insurer
Percentage, (v) there are less than 300 insurance carriers whose insurance
premiums have been financed by the Receivables in the Identified Portfolio,
or (vi) the Top 10 Insurer Percentage is greater than the Maximum Top 10
Insurer Percentage;
(m) the Originators cease to be the Servicer under the Agreement;
(n) the failure to appoint a successor Back-up Servicer by a date
which is ninety days after the receipt by the Servicer, Trustee and
Transferor of either a Sale Notice or Successor Back-up Servicer
Termination Notice in accordance with the Agreement; or
(o) the failure of the Servicer (so long as the Originator is a
Servicer) to remove Receivables from the Trust or indemnify for certain
losses resulting from the breach of the Servicer's covenant to maintain
certain licenses and regulatory approvals as described under "-- Certain
Covenants."
In the case of any event described in clause (d), (e), or (i) above, a Pay
Out Event will be deemed to have occurred with respect to the Certificates only
if, after any applicable grace period, either the Trustee or Holders and the
Collateral Interest Holder evidencing undivided interests aggregating more than
50% of the Investor Interest, by written notice to the Transferor and the
Servicer (and to the Trustee if given by the Holders) declare that a Pay Out
Event has occurred with respect to the Certificates as of the date of such
notice. In the case of any event described in clause (a), (b), (c), (h), (m),
(n) or (o), a Pay Out Event with respect to all Series then outstanding, and in
the case of any event described in clause (f), (g), (j), (k) or (l), a Pay Out
Event with respect to only the Certificates, will be deemed to have occurred
without any notice or other action on the part of the Trustee or the Holders,
the Collateral Interest Holder or all certificateholders, as appropriate,
immediately upon the occurrence of such event. On the date on which a Pay Out
Event is deemed to have occurred, the Rapid Amortization Period will commence.
In such event, distributions of principal to the Holders will begin on the first
Distribution Date following the month in which such Pay Out Event occurred.
The Pay Out Event described in clause (l) may be amended at any time by the
Transferor, the Trustee and the Servicer, with the consent of each provider of
Enhancement, but without the consent of any certificateholder, if the Rating
Agency Condition is satisfied.
In addition to the consequences of a Pay Out Event discussed above, if
pursuant to certain provisions of Federal law, the Transferor voluntarily enters
liquidation or a receiver is appointed for the Transferor, on the day of such
event the Transferor will immediately cease to transfer Receivables to the Trust
and promptly give notice to the Trustee of such event. Within 15 days, the
Trustee will publish a notice of the liquidation or the appointment stating that
the Trustee intends to sell, dispose of, or otherwise liquidate the Receivables
in a commercially reasonable manner. Unless otherwise instructed within a
specified period by Certificateholders representing undivided interests
aggregating more than 50% of the Investor Interest of each Series (or if any
Series has more than one Class, of each Class, and any other Person specified in
the Agreement or a Series Supplement) issued and outstanding, the Trustee will
sell, dispose of, or otherwise liquidate the Receivables in a commercially
reasonable manner and on commercially reasonable terms. The Proceeds from the
sale, disposition or liquidation of the Receivables will be treated as
collections of the Receivables and applied as specified above in "--Application
of Collections".
If the only Pay Out Event to occur is either the insolvency of the
Transferor or the appointment of a conservator or receiver for the Transferor,
the conservator or receiver may have the power to prevent the early sale,
liquidation or disposition of the Receivables and the commencement of a Rapid
Amortization Period. In addition, a conservator or receiver may have the power
to cause the early sale of the Receivables and the early retirement of the
Certificates. See "Risk Factors--Transferor Bankruptcy Risk" and "Certain Legal
Aspects of the Receivables--Certain Matters Relating to Receivership."
As of the Statistical Calculation Date (i) the amount of the Aggregate
Receivables related to any single borrower was not greater than 2.1% of the
amount of Aggregate Receivables in the Identified Portfolio as of the
Statistical Calculation Date; (ii) the amount of the portion of the Aggregate
Receivables relating to the financing of insurance premiums of any Tier 1
Insurer was not greater than 5.2% of the amount of Aggregate
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Receivables as of the Statistical Calculation Date; (iii) the amount of the
portion of the Aggregate Receivables relating to the financing of insurance
premiums of any Tier 2 Insurer was not greater than 6.7% of the amount of
Aggregate Receivables as of the Statistical Calculation Date; (iv) the amount of
the portion of the Aggregate Receivables relating to the financing of insurance
premiums of any Tier 3 Insurer was not greater than 2.9% of the amount of
Aggregate Receivables as of the Statistical Calculation Date; (v) the Investment
Grade Insurer Percentage equaled 94.2%; (vi) the Top 10 Insurer Percentage
equaled 49.3%; and (vii) there were at least 486 insurance carriers whose
insurance premiums have been financed by the 61,720 Premium Finance Agreements
in the Identified Portfolio as of the Statistical Calculation Date.
"Base Rate" means, with respect to any Monthly Period, the annualized
percentage equivalent of a fraction, the numerator of which is the sum of the
Class A Monthly Interest, the Class B Monthly Interest and the Collateral
Monthly Interest, each for the related Distribution Date, and the Investor
Servicing Fee for such Monthly Period, and the denominator of which is the
Investor Interest as of the close of business on the last day of such Monthly
Period.
"Portfolio Yield" means, with respect to any Monthly Period, the annualized
percentage equivalent of a fraction, the numerator of which is the sum of
collections of Finance Charge Receivables, Principal Funding Investment Proceeds
and amounts withdrawn from the Reserve Account deposited into the Finance Charge
Account and, in each case, allocable to the Certificates and the Collateral
Interest for such Monthly Period, after subtracting the Investor Default Amount
for such Monthly Period, and the denominator of which is the Investor Interest
as of the close of business on the last day of such Monthly Period.
"Excess Obligor Concentration Amount" means, as of any date of
determination, the Aggregate Receivables related to a single borrower (or an
affiliated group of borrowers), but only to the extent such amount is in excess
of 3% of the amount of the Aggregate Receivables as of such date of
determination.
"Excess Insurer Concentration Amount" means as of any date of determination
an amount equal to the sum of (i) with respect to each Tier 1 Insurer, the
amount by which the portion of the Aggregate Receivables relating to the
financing of insurance premiums of such Tier 1 Insurer exceeds 25% of the amount
of the Aggregate Receivables as of such date of determination (ii) with respect
to each Tier 2 Insurer, the amount by which the portion of the Aggregate
Receivables relating to the financing of insurance premiums of such Tier 2
Insurer exceeds 10% of the Aggregate Receivables as of such date of
determination and (iii) with respect to each Tier 3 Insurer, the amount by which
the portion of the Aggregate Receivables relating to the financing of insurance
premiums of any single Tier 3 Insurer exceeds 5% of the Aggregate Receivables as
of such date of determination.
"Investment Grade Insurer Percentage" means as of any date of determination
a fraction (expressed as a percentage) the numerator of which is the portion of
the Aggregate Receivables relating to the financing of insurance premiums of the
Top Ten Investment Grade Insurers as of such date of determination and the
denominator of which is the portion of the Aggregate Receivables relating to the
financing of insurance premiums of the Top Ten Insurers as of such date of
determination.
"Maximum Top 10 Insurer Percentage" means 60%.
"Minimum Aggregate Principal Receivables" means, as of any date of
determination, an amount equal to the sum of the numerators used to calculate
the Investor Percentage with respect to the allocation of collections of
Principal Receivables for each Series outstanding on such date. "Minimum
Transferor Interest" means 5% of the sum of the aggregate amount of Principal
Receivables and the principal amount on deposit in the Excess Funding Account at
the end of the day immediately prior to the date of determination; provided that
Transferor may increase or reduce the percentage used to determine the Minimum
Transferor Interest (but not below 2%) upon (a) 30 day's prior notice to
Trustee, each Rating Agency and Credit Enhancement Provider, (b) satisfaction of
the Rating Agency Condition, and (c) delivery to Trustee and each such Credit
Enhancement Provider of an Officer's Certificate stating that Transferor
reasonably believes that such reduction will not, based on the facts known to
such officer at the time of such certification, then or thereafter cause a Pay
Out Event to occur with respect to any Series.
Required Investment Grade Percentage means 90%.
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"Monthly Payment Rate" means, in respect of any Monthly Period, a fraction
(expressed as a percentage), the numerator of which shall equal the aggregate
collections received by the Servicer during such Monthly Period and the
denominator of which shall equal the aggregate amount of Principal Receivables
in the Trust at the beginning of such Monthly Period.
"Receivable State" means any State where the stated address of a borrower
under any Receivable conveyed to the Trust is located (excluding Receivables
with zero balances, Receivables in Defaulted Accounts or Receivables that have
been removed from the Trust).
"Tier 1 Insurer" means as of any date of determination, an insurance
carrier which has a then current (i) claims-paying ability rating from Standard
& Poor's of at least A-, but below AAA and (ii) insurance financial strength
rating from Moody's of at least A3, but below Aaa.
"Tier 2 Insurer" means as of any date of determination, an insurance
carrier which has a then current (i) claims-paying ability rating from Standard
& Poor's of at least BBB-, but below A- and (ii) insurance financial strength
rating from Moody's of at least Baa3, but below A3.
"Tier 3 Insurer" means as of any date of determination, an insurance
carrier that did not have (i) a claims-paying ability rating of at least
investment grade (i.e., in one of the top four generic rating categories,
irrespective of any plus or minus) from Standard & Poor's and (ii) an insurance
financial strength rating of at least investment grade (i.e., in one of the top
four generic rating categories, irrespective of any plus or minus) by Moody's.
Notwithstanding the definitions of Tier 1 Insurer, Tier 2 Insurer and Tier
3 Insurer, in the event an insurance carrier has a split rating from Standard &
Poor's and Moody's, the lower of the two ratings will govern for purposes of
determining whether such insurance carrier is a Tier 1 Insurer, Tier 2 Insurer
or Tier 3 Insurer.
"Top 10 Insurer" means as of any date of determination any insurance
carrier with insurance premiums financed by the Receivables and the aggregate
amount of all such premiums are at least the 10th largest relative to any other
insurance carrier's aggregate amount of insurance premiums financed by the
Receivables.
"Top 10 Investment Grade Insurer" means as of any date of determination any
Top 10 Insurer which is an Investment Grade Insurer.
"Top 10 Insurer Percentage" means with respect to any Top 10 Insurer and as
of any date of determination a fraction (expressed as a percentage), the
numerator of which is the portion of the aggregate amount of Receivables
relating to the financing of insurance premiums of such Top Ten Insurer and the
denominator of which is the aggregate amount of Receivables.
SERVICING COMPENSATION, BACK-UP SERVICING COMPENSATION AND PAYMENT OF EXPENSES.
The share of the Servicing Fee allocable to the Investor Interest with
respect to any Transfer Date (the "Investor Servicing Fee") shall be equal to
one-twelfth of the product of (a) .50% and (b) the Adjusted Investor Interest as
of the last day of the Monthly Period preceding such Transfer Date.
The share of the Investor Servicing Fee allocable to the Class A Holders
with respect to any Transfer Date (the "Class A Servicing Fee") shall be equal
to one-twelfth of the product of (a) the Class A Floating Allocation, (b) 0.50%
(the "Servicing Fee Rate") and (c) the Adjusted Investor Interest as of the last
day of the Monthly Period preceding such Transfer Date. The share of the
Investor Servicing Fee allocable to the Class B Holders with respect to any
Transfer Date (the "Class B Servicing Fee") shall be equal to one-twelfth of the
product of (a) the Class B Floating Allocation, (b) the Servicing Fee Rate and
(c) the Adjusted Investor Interest as of the last day of the Monthly Period
preceding such Transfer Date. The share of the Investor Servicing Fee allocable
to the Collateral Interest Holder with respect to any Transfer Date (the
"Collateral Interest Servicing Fee") shall be equal to one-twelfth of the
product of (a) the Collateral Floating Allocation, (b) the Servicing Fee Rate
and (c) the Adjusted Investor Interest as of the last day of the Monthly Period
preceding such Transfer Date. The remainder of the Servicing Fee shall be paid
by the Transferor or other Series (as provided in the related Series
Supplements). The Class A Servicing Fee and the
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Class B Servicing Fee shall be payable to the Servicer solely to the extent
amounts are available for distribution in respect thereof as described under
"--Application of Collections."
The Servicer (or the Transferor, if the Back-up Servicer is Servicer) will
pay from its servicing compensation certain expenses incurred in connection with
servicing the Receivables including, without limitation, payment of the fees and
disbursements of the Trustee and independent certified public accountants and
other fees which are not expressly stated in the Agreement to be payable by the
Trust or the Holders other than federal, state and local income and franchise
taxes, if any, of the Trust.
The Back-up Servicer will receive a fee from the Transferor for agreeing to
act as successor Servicer hereunder.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The Servicer may not resign from their obligations and duties under the
Agreement, except upon determination that performance of their duties are no
longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor or successors to the Servicer has
assumed the Servicer's responsibilities and obligations under the Agreement.
The Agreement provides that, subject to the limitations on the Servicer's
liability described below, the Servicer will indemnify the Trust from and
against any loss, liability, reasonable expense, damage, or injury suffered or
sustained by reason of any acts or omissions or alleged acts or omissions which
(i) constitute gross negligence on the part of the Servicer with respect to the
activities of the Trust or the Trustee for which the Servicer is responsible
pursuant to the Agreement or (ii) the Servicer's (if the Servicer is not a
Back-up Servicer) wrongful cancellation of an insurance policy financed by a
Receivable under which an insured subsequently makes a claim; provided, however,
that the Servicer will not indemnify (a) the Trust if such acts, omissions, or
alleged acts or omissions constitute or are caused by fraud, negligence, or
willful misconduct by, the Trustee (or any of its officers, directors,
employees, or agents), or the Certificateholders, (b) the Trust, the
Certificateholders, or the Certificate Owners for losses, liabilities, expenses,
damages, or injuries arising from actions taken by the Trustee at the request of
Certificateholders, (c) except as required by the Agreement as described under
"-- Certain Covenants," the Trust, the Certificateholders, or the Certificate
Owners for any losses, liabilities, expenses, damages, or injuries incurred by
any of them in their capacities as investors, including without limitation
losses incurred as a result of Receivables in Defaulted Accounts or Defaulted
Receivables which are written off as uncollectible, or (d) the Trust, the
Certificateholders, or the Certificate Owners for any losses, liabilities,
expenses, damages, or injuries suffered or sustained by the Trust, the
Certificateholders, or the Certificate Owners arising under any tax law,
including without limitation any federal, state, local, or foreign income or
franchise tax or any other tax imposed on or measured by income (or any interest
or penalties with respect thereto or arising from a failure to comply therewith)
required to be paid by the Trust, the Certificateholders, or the Certificate
Owners in connection with the Agreement to any taxing authority. The Agreement
also provides that the Servicer (or, if the Servicer is the Back-up Servicer,
the Transferor) will indemnify the Trustee and its officers, directors,
employees, or agents from and against any loss, liability, reasonable expense,
damage, or injury suffered or sustained by reason of the acceptance of the Trust
by the Trustee, the issuance by the Trust of certificates , or any of the other
matters contemplated in the Agreement; provided, however, that the Servicer will
not indemnify the Trustee or its officers, directors, employees, or agents for
any loss, liability, expense, damage, or injury caused by the fraud, negligence,
or willful misconduct of any of them.
In addition, the Agreement provides that, subject to certain exceptions,
the Transferor will indemnify and the Trust and the Trustee from and against any
reasonable loss, liability, expense, damage, or injury (other than to the extent
that any of the foregoing relate to any tax law or any failure to comply
therewith) suffered or sustained by reason of any acts or omissions or alleged
acts or omissions arising out of or based upon the arrangement created by the
Agreement as though the Agreement created a partnership under the Delaware
Uniform Partnership Law in which the Transferor is a general partner.
The Agreement provides that, except for obligations specifically undertaken
by the Transferor and the Servicer pursuant to the Agreement, neither the
Transferor nor the Servicer nor any of their respective
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directors, officers, employees, or agents will be under any liability to the
Trust, the Trustee, its officers, directors, employees, or agents, the
Certificateholders, or any other person for any action taken, or for refraining
from taking any action pursuant to the Agreement provided that neither the
Transferor nor the Servicer will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith, or gross
negligence of the Transferor or the Servicer in the performance of its duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the Agreement provides that the Servicer is not under
any obligation to appear in, prosecute, or defend any legal action which is not
incidental to its servicing responsibilities under the Agreement and which in
its opinion may expose it to any expense or liability.
Any person into which, in accordance with the Agreement, the Transferor or
any of the Servicers may be merged or consolidated or any person resulting from
any merger or consolidation to which the Transferor or the Servicer is a party,
or any person succeeding to the business of the Transferor or any of the
Servicers, upon execution of a Series Supplement and delivery of an opinion of
counsel with respect to the compliance of the transaction with the applicable
provisions of the Agreement, will be the successor to the Transferor or the
applicable Servicer, as the case may be, under the Agreement.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the Trustee
or Certificateholders representing undivided interests aggregating more than 50%
of the Investor Interests for all Series of certificates of the Trust, by
written notice to the applicable Servicer (and to the Trustee if given by the
certificateholders), may terminate all of the rights and obligations of the
applicable Servicer as servicer under the Agreement and in and to the
Receivables and the proceeds thereof and the Trustee may appoint a new Servicer
(a "Service Transfer"). The rights and interest of the Transferor under the
Agreement and in the Transferor Interest will not be affected by such
termination. The Trustee will as promptly as possible appoint a successor
Servicer. If no such Servicer has been appointed and has accepted such
appointment by the time a Servicer ceases to act as Servicer, all authority,
power and obligations of such Servicer under the Agreement will pass to and be
vested in the Trustee. If the Trustee is unable to obtain any bids from eligible
servicers and the Servicer delivers an officer's certificate to the effect that
it cannot in good faith cure the Servicer Default which gave rise to a transfer
of servicing, and if the Trustee is legally unable to act as successor Servicer,
then the Trustee will give the Transferor the right of first refusal to purchase
the Receivables on terms equivalent to the best purchase offer as determined by
the Trustee.
"Servicer Default" under the Agreement refers to any of the following
events:
(a) failure by the Servicer to make any payment, transfer or deposit,
or to give instructions to the Trustee to make certain payments, transfers
or deposits, on the date such Servicer is required to do so under the
Agreement (or within the applicable grace period, which shall not exceed 10
business days);
(b) failure on the part of the Servicer to duly observe or perform in
any respect any other covenants or agreements of the Servicer which has a
material adverse effect on the certificateholders of any Series issued and
outstanding under the Trust and which continues unremedied for a period of
60 days after written notice and continues to have a material adverse
effect on such certificateholders; or the delegation by a Servicer of its
duties under the Agreement, except as specifically permitted thereunder;
(c) any representation, warranty or certification made by the Servicer
in the Agreement, or in any certificate delivered pursuant to the
Agreement, proves to have been incorrect when made which has a material
adverse effect on the certificateholders of any Series issued and
outstanding under the Trust, and which continues to be incorrect in any
material respect for a period of 60 days after written notice and continues
to have a material adverse effect on such certificateholders; or
(d) the occurrence of certain insolvency events with respect to the
Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to in clause (a) above for a period of 10 business days, or referred to
under clause (b) or (c) for a period of 60 business days, will not constitute a
Servicer Default if such delay or failure could not be prevented by the exercise
of reasonable
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diligence by the Servicer or if such delay or failure caused by an act of God or
other similar occurrence. Upon the occurrence of any such event, the Servicer
will not be relieved from using their best efforts to perform their obligations
in a timely manner in accordance with the terms of Agreement, and the Servicer
will provide the Trustee, any provider of Enhancement, the Transferor and the
holders of certificates of each Series issued and outstanding under the Trust
prompt notice of such failure or delay by it, together with a description of the
cause of such failure or delay and its efforts to perform its obligations.
If a conservator or receiver is appointed for the Servicer, and no Servicer
Default other than such conservatorship or receivership or the insolvency of
such Servicer exists, the conservator or receiver may have the power to prevent
either the Trustee or the majority of the certificateholders from effecting a
Service Transfer.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each
Certificateholder of record a statement prepared by the Servicers setting forth,
among other things: (a) the total amount distributed or deposited, (b) the
amount of the distribution or deposit on such Distribution Date allocable to
principal on the Class A Certificates, the Class B Certificates and the
Collateral Interest, (c) the amount of such distribution or deposit allocable to
interest on the Class A Certificates, the Class B Certificates and the
Collateral Interest, (d) the amount of collections of Principal Receivables
processed during the preceding Monthly Period and allocated in respect of the
Class A Certificates, the Class B Certificates, the Collateral Interest and the
Transferor's Interest, (e) the aggregate amount of Principal Receivables, as of
the end of the first day of the current Monthly Period, (f) the amount of
Aggregate Receivables which are 30-59, 60-89 and 90 or more days delinquent (or
a similar classification of delinquency) as of the first day of the current
Monthly Period, (g) the Class A Investor Default Amount, Class B Investor
Default Amount and the Collateral Default Amount for the preceding Monthly
Period, (h) the amount of Class A Investor Charge-Offs, Class B Investor Charge-
Offs and Collateral Charge-Offs for the preceding Monthly Period and the amount
of reimbursements of previous Investor Charge-Offs for the preceding Monthly
Period, (i) the amount of the Class A Servicing Fee, the Class B Servicing Fee
and the Collateral Interest Servicing Fee for the preceding Monthly Period, (j)
the Class A Adjusted Investor's Interest, the Class B Investor's Interest, the
Collateral Interest and the Transferor's Interest, as of the close of business
on such Distribution Date, (k) the aggregate amount of collections of Finance
Charge Receivables processed during the preceding Monthly Period and the amount
of such collections allocated in respect of the Class A Certificates, the Class
B Certificates, the Collateral Interest and the Transferor's Interest,
respectively, (l) the Portfolio Yield for the preceding Monthly Period, (m) the
amount deposited in the Principal Funding Account and the balance in such
Account, (n) the amount deposited in the Reserve Account and the balance in such
account, (o) the amount of investment income since the previous report, (p) any
Class A Shortfall Amount, any Class B Shortfall Amount, any Class A Carry Over
Amount and any Class B Carry Over Amount, and (q) any Accumulation Shortfall.
On or before January 31 of each calendar year the Trustee will furnish to
each person who at any time during the preceding calendar year was a
Certificateholder of record, a statement prepared by the Servicer containing the
information required to be contained in the regular monthly report to
Certificateholders, as set forth in clauses (a), (b) and (c) above aggregated
for such calendar year or the applicable portion thereof during which such
person was a Certificateholder, together with such other customary information
(consistent with the treatment of the Certificates as debt) as the Trustee or
the Servicer deems necessary or desirable to enable the Certificateholders to
prepare their United States tax returns.
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that on or before March 31 of each calendar
year, commencing March 31, 1998, will cause a firm of independent certified
public accountants (who may also render other services to the Servicer or the
Bank) to furnish a report to the effect that such accounting firm has examined
certain documents and records relating to the servicing of the Receivables,
compared the information contained in the Servicer's certificates delivered
during the period covered by the report with such documents and records and
that, on the basis of such examination, such firm is of the opinion that such
servicing was conducted in
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compliance with the Agreement except for such exceptions or errors as such firm
shall believe to be immaterial and such other exceptions as shall be set forth
in such statement.
The Agreement will provide for delivery to the Trustee on or before March
31 of each calendar year commencing in 1998, of an annual statement signed by an
officer of each Servicer to the effect that each Servicer has fully performed
its obligations under the Agreement throughout the preceding year, or, if there
has been a default in the performance of any such obligation, specifying the
nature and status of the default.
AMENDMENTS
The Agreement may be amended by the Transferor, the Servicer and the
Trustee, without the consent of Certificateholders of any Series then
outstanding, for any purpose, so long as (i) the Transferor delivers to the
Trustee an opinion of counsel to the effect that such amendment will not
adversely affect in any material respect the interest of such Certificateholders
and (ii) such amendment will not result in a withdrawal or reduction of the
rating of any outstanding Series under the Trust by any Rating Agency; provided
that if such amendment provides for additional or substitute Credit Enhancement
for a Series, changes the definition of Eligible Receivable or provides for the
addition of a Participation to the Trust, the matters to be covered by the
opinion of counsel described in clause (i) may instead be covered by a
certificate of an authorized officer of the Transferor. Such an amendment may be
entered into in order to comply with or obtain the benefits of certain future
tax legislation (such as legislation creating FASIT, as described below under
"U.S. Federal Income Tax Consequences--FASIT Legislation").
The Agreement may also be amended by the Transferor, the Servicer and the
Trustee with the consent of the holders of certificates evidencing undivided
interests aggregating not less than 66 2/3% of the Investor Interests for all
Series of the Trust, for the purpose of adding any provisions to, changing in
any manner or eliminating any of the provisions of, the Agreement or the related
Series Supplement or of modifying in any manner the rights of Certificateholders
of any outstanding Series of the Trust. No such amendment, however, may (a)
reduce in any manner the amount of, or delay the timing of, distributions
required to be made on any Series, (b) change the definition of or the manner of
calculating the interest of any certificateholder of any Series issued by the
Trust or (c) reduce the aforesaid percentage of undivided interests the holders
of which are required to consent to any such amendment, in each case without the
consent of all certificateholders of the related Series and of all Series
adversely affected. Promptly following the execution of any amendment to the
Agreement, the Trustee will furnish written notice of the substance of such
amendment to each certificateholder. Any Series Supplement and any amendments
regarding the addition or removal of Receivables or Participations from the
Trust will not be considered an amendment requiring Certificateholders consent
under the provisions of the Agreement. Notwithstanding anything to the contrary
contained in the prior two paragraphs, the Agreement may not be amended without
the written consent of the Back-up Servicer, if such amendment would adversely
affect the Back-up Servicer, including without limitation any amendment to
clause (m) described under " -- Pay Out Events" above.
LIST OF CERTIFICATEHOLDERS
Upon written request of Certificateholders of record representing undivided
interests in the Trust aggregating not less than 10% of the Investor Interest,
the Trustee will afford such Certificateholders access during business hours to
the current list of Certificateholders of the Trust for purposes of
communicating with other Certificateholders with respect to their rights under
the Agreement. The Trustee may, however, refuse to supply such list until it has
been adequately indemnified by such Certificateholders for its costs and
expenses, and will give the Servicers notice that such request has been made.
See "--Book-Entry Registration" and "--Definitive Certificates" above.
THE TRUSTEE
The First National Bank of Chicago is the Trustee under the Agreement. The
Transferor, the Servicer and their respective affiliates may from time to time
enter into normal banking and trustee relationships with the Trustee and its
affiliates. The Trustee, the Transferor, the Servicer and any of their
respective affiliates
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may hold Certificates in their own names (except that the Trustee may not hold a
Certificate issued by the related Trust for its own account). In addition, for
purposes of meeting the legal requirements of certain local jurisdictions, the
Trustee shall have the power to appoint a co-trustee or separate trustees of all
or part of the Trust. In the event of such appointment, all rights, powers,
duties and obligations conferred or imposed upon the Trustee by the Agreement
shall be conferred or imposed upon the Trustee and such separate trustee or co-
trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee.
The Trustee may resign at any time, in which event the Transferor will be
obligated to appoint a successor Trustee. The Transferor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. In such circumstances, the
Transferor will be obligated to appoint a successor Trustee. Any resignation or
removal of the Trustee and appointment of a successor Trustee does not become
effective until acceptance of the appointment by the successor Trustee.
BACK-UP SERVICER
Premium Financing Specialists, Inc., a Missouri corporation, will act as
back-up servicer for all Receivables other than those originated in California
and Premium Financing Specialists of California, Inc., a California corporation,
will act as back-up servicer for the Receivables originated in California
(together, the "Back-up Servicer"). The Back-up Servicer will act as such until
the earlier to occur of (a) the appointment of a successor Back-up Servicer that
assumes the obligations of the Back-up Servicer under the Agreement, including
the circumstances described under "Risk Factors--Risk of Pay Out Event Upon Sale
of Back-up Servicer", (b) the removal of the Back-up Servicer by the Transferor
pursuant to the Agreement, and (c) the Series 1996-1 Termination Date.
DESCRIPTION OF THE RECEIVABLES PURCHASE AGREEMENT
PURCHASES OF RECEIVABLES
The Receivables transferred to the Trust pursuant to the Agreement are
purchased by the Transferor pursuant to a Receivables Purchase Agreement.
Pursuant to the Receivables Purchase Agreement, the Transferor purchases
Receivables from the Originators from time to time. The purchase price of such
Receivables is equal to the outstanding principal balance of such Receivables,
and is payable by the Transferor in cash or by a note. See "Description of the
Certificates." Pursuant to the Agreement, such Receivables are thereafter
transferred immediately by the Transferor to the Trust. Pursuant to the
Agreement, the Transferor assigned its rights in, to, and under the Receivables
Purchase Agreement with respect to such Receivables to the Trust.
REPRESENTATIONS AND WARRANTIES
Pursuant to the Receivables Purchase Agreement, each of the Originators
jointly and severally represent and warrant that as of the Closing Date, with
respect to Receivables conveyed to the Transferor on such date, and the related
Addition Date with respect to Additional Receivables that (a) each Receivable
then existing has been conveyed to the Transferor free and clear of any Lien of
any Person claiming through or under Originator or any of its Affiliates (other
than any Liens for municipal and other local taxes if such taxes shall not at
the time be due and payable or if Originator shall currently be contesting the
validity thereof in good faith by appropriate proceedings and shall have set
aside on its books adequate reserves with respect thereto) and in compliance, in
all material respects, with all Requirements of Law applicable to Originator,
and (b) each such Receivable is an Eligible Receivable. In the event of a
material breach of the representation and warranty described in clause (a)
above, and if any of the following two conditions is met: (A) as a result of
such breach such Receivable is charged off as uncollectible or the Transferor's
rights in, to or under such Receivable or its proceeds are impaired or the
proceeds of such Receivable are not available for any reason to the Transferor
free and clear of any Lien or (B) the Lien upon the subject Receivable (1)
arises in favor of the United States of America or any State or any agency or
instrumentality thereof and involves taxes or liens
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arising under Title IV of ERISA or (2) has been consented to by Originator; and
as a result thereof, the Transferor is required to repurchase any Receivable
from the Trust pursuant to the Pooling and Servicing Agreement, then the
Originator of the repurchased Receivable shall be obligated to pay to the
Transferor immediately upon the Transferor's demand therefor an amount equal to
the amount of all losses, damages and liabilities of the Transferor that result
from such breach, including but not limited to the cost of the Transferor's
repurchase obligations pursuant to the Pooling and Servicing Agreement. In the
event of a material breach of the representation and warranty described in
clause (b) above, and as a result of such breach, the related Account becomes a
Defaulted Account or the Transferor's rights in, to or under the Receivable or
its proceeds are impaired or the proceeds of such Receivable are not available
for any reason to the Transferor free and clear of any Lien, then, upon the
expiration of 60 days (or such longer period as may be agreed to by Transferor
in its sole discretion, but in no event later than 120 days) from the earlier to
occur of the discovery of any such event by either Originator or Servicer, or
receipt by Originator of written notice of any such event given by Transferor,
and as a further result thereof, if the Transferor is required to repurchase any
Receivable from the Trust pursuant to the Pooling and Servicing Agreement, then
the Originator of the repurchased Receivable shall be obligated to pay to the
Transferor immediately upon the Transferor's demand therefor an amount equal to
the amount of all losses, damages and liabilities of the Transferor that result
from such breach, including but not limited to the cost of the Transferor's
repurchase obligations pursuant to the Pooling and Servicing Agreement; provided
that no such removal shall be required to be made if, on any day within such
applicable period, such representations and warranties with respect to such
Receivable shall then be true and correct in all material respects as if such
Receivable had been created on such day.
CERTAIN COVENANTS
Pursuant to the Receivables Purchase Agreement, each Originator jointly and
severally covenants that, among other things, subject to specified exceptions
and limitations, it will take no action to cause (i) any Receivable to be
evidenced by any instruments or to be anything other than a "general intangible"
as defined in the UCC, (ii) in the event any Originator is unable for any reason
to transfer Receivables to the Transferor, it will nevertheless continue to
allocate and pay all collections from all Receivables to the Transferor, (ii)
any Excess Obligor Concentration Amount to exist or be increased; (iii) any
Excess Insurer Concentration Amount to exist or be increased; (iv) the
Investment Grade Insurer Percentage to be less than the Required Investment
Grade Insurer Percentage; (v) the Investment Grade Insurer Percentage to be
decreased, if on such day the Investment Grade Insurer Percentage is equal to or
less than the Required Investment Grade Insurer Percentage; (vi) the Top 10
Insurer Percentage to exceed the Maximum Top Insurer Percentage and (vii) the
Top 10 Insurer Percentage to be increased, if on such day the Top 10 Insurer
Percentage is equal to or greater than the Maximum Top 10 Insurer Percentage.
REPURCHASE OBLIGATIONS
If (i) any of the representations and warranties contained in clauses (v)
and (vi) in "--Representations and Warranties" was not true with respect to such
Originator or any Receivable, as applicable, at the time such representation or
warranty was made or (ii) if the Originators breach any of the covenants
contained in clauses (iii) through (vii) in "--Certain Covenants", and as a
result thereof, the Transferor is required to repurchase any Receivable from the
Trust pursuant to the Agreement, then the Originator of the repurchased
Receivable shall be obligated to pay to the Transferor immediately upon the
Transferor's demand therefor an amount equal to the amount of all losses,
damages and liabilities of the Transferor that result from such breach,
including but not limited to the cost of the Transferor's repurchase obligations
pursuant to the Agreement.
PURCHASE TERMINATION
If any of the Originators becomes insolvent, the Transferor's obligations
under the Receivables Purchase Agreement to purchase Receivables from such
Originator will automatically be terminated. In addition, if the Transferor
becomes insolvent, the Originator's obligations to transfer Receivables to the
Transferor will automatically be terminated.
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The Transferor will represent and warrant in the Agreement that the
transfer of Receivables by it to the related Trust is either a valid transfer
and assignment to such Trust of all right, title and interest of the Transferor
in and to the related Receivables, except for the Transferor Interest, or the
grant to the Trust of a security interest in such Receivables. The Transferor
also will represent and warrant in the Agreement that, if the transfer of
Receivables by the Transferor or the related Trust is deemed to create a
security interest under the UCC, there will exist a valid, subsisting and
enforceable first priority perfected security interest in such Receivables
created thereafter in favor of such Trust on and after their creation and
transfer to the Trust, except for certain tax and other governmental liens. For
a discussion of the Trust's rights arising from a breach of these warranties,
see "Description of the Certificates--Representations and Warranties."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The Transferor is chartered as a national banking association and is
subject to regulation and supervision by the Office of the Comptroller of the
Currency, which is authorized to appoint the FDIC as conservator or receiver of
the Transferor upon the occurrence of certain events relating to the
Transferor's financial condition.
The FDIA, as amended by FIRREA, sets forth certain powers that the FDIC in
its capacity as conservator or receiver for the Transferor could exercise.
Positions taken by the FDIC prior to the passage of FIRREA suggest that the
FDIC, if appointed as conservator or receiver of the Transferor, would not
interfere with the timely transfer to a Trust of payments collected on the
Receivables or interfere with the timely liquidation of related Receivables, as
described below. To the extent that the Transferor has granted a security
interest in related Receivables to a Trust, and that interest was validly
perfected before the Transferor's insolvency and was not taken in contemplation
of the insolvency of the Transferor, or with the intent to hinder, delay or
defraud the Transferor or the creditors of the Transferor, the FDIA provides
that such security interest should not be subject to avoidance. As a result,
payments to such Trust with respect to the Receivables should not be subject to
recovery by the FDIC as conservator or receiver of the Transferor. If, however,
the FDIC, as conservator or receiver for the Transferor, were to assert a
contrary position, or were to require the Trustee to establish its right to
those payments by submitting to and completing the administrative claims
procedure established under the FDIA, or the conservator or receiver were to
request a stay of proceedings with respect to the Transferor as provided under
the FDIA, delays in payments on the related Series of Certificates and possible
reductions in the amount of those payments could occur.
Upon the appointment of a conservator or receiver or upon a voluntary
liquidation with respect to the Transferor, the Transferor will promptly give
notice thereof to each Trustee and a Pay Out Event will occur with respect to
all Series then outstanding under the related Trust. Pursuant to the Agreement,
newly created Principal Receivables will not be transferred to the Trust on and
after any such appointment or voluntary liquidation, and the Trustee will
proceed to sell, dispose of or otherwise liquidate the Receivables in a
commercially reasonable manner and on commercially reasonable terms, unless
otherwise instructed within a specified period by holders of Certificates
representing undivided interests aggregating more than 50% of the Investor
Interest of each Series (or if any Series has more than one Class, of each
Class, and any other Person specified in the related Agreement of a Series
Supplement), or unless otherwise required by the FDIC as receiver or conservator
of the Transferor. Under the Agreement, the proceeds from the sale of the
Receivables would be treated as collections of the Receivables and the Investor
Percentage of such proceeds would be distributed to the Certificateholders. This
procedure could be delayed, as described above. If the only Pay Out Event to
occur is either the insolvency of the Transferor or the appointment of a
conservator or receiver for the Transferor, the conservator or receiver may have
the power to prevent the early sale, liquidation or disposition of the
Receivables and the commencement of a Rapid Amortization Period. In addition, a
conservator or receiver may have the power to cause the early sale of the
Receivables and the early retirement of the Certificates or to prohibit the
continued transfer of Principal Receivables to the Trust. See "Description of
the Certificates--Pay Out Events."
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LACK OF PERFECTED SECURITY INTERESTS IN CERTAIN UNEARNED PREMIUMS
Each Receivable includes a grant by the borrower to the applicable
Originator of a security interest in the related Unearned Premium. The
perfection of a security interest in an unearned premium is not governed by the
UCC. State statutes, common law and industry practice govern the perfection of a
security interest in the unearned premiums and generally require for the
perfection of such security interest, a notice informing the applicable
insurance company of the identity of the person entitled to the payment of such
unearned premium. It is standard practice for the Originators to send such a
notice to the applicable insurance company at or about the time the insurance
policy premium is financed. Each Originator will represent and warrant in the
Receivables Purchase Agreement to the Transferor and the Transferor will
represent and warrant to the Trust, in each case, as of the date of transfers,
that the applicable Originator has a first priority perfected security interest
in the Unearned Premiums relating to the Receivables so transferred.
Each Originator will assign its security interest in the Unearned Premiums
to the Transferor, who will in turn assign its security interest in the Unearned
Premiums to the Trust. Due to the administrative burden and expense of mailing a
notice for each Receivable to the applicable insurance company and the
administrative burden and expense of the related insurance companies, which
would have to process such notices, neither the Transferor nor the Trustee will
send notices to the related insurance companies, with respect to the Trust's
security interests in the Unearned Premiums relating to the Receivables
transferred to the Trust on or prior to February 1, 1997. In the absence of such
procedures neither the Transferor nor the Trust will have a perfected security
interest in the Unearned Premiums relating to such Receivables.
With respect to the Receivables transferred to the Trust on or after
February 1, 1997, the applicable Originator will represent and warrant in the
Receivables Purchase Agreement to the Transferor and the Transferor will
represent and warrant in the Agreement that a notice of finance premium has been
delivered to the related insurance carrier notifying it of the Trustee's
security interest in the Unearned Premium and that the Trust has a perfected
security interest in such Unearned Premiums.
In the event the representations and warranties relating to the perfection
of security interests in Unearned Premiums are breached and as a result of such
breach the related Account becomes a Defaulted Account or the Trust's rights in,
to or under the Receivables or its proceeds are impaired or the proceeds of such
Receivable are not free and clear of any lien, then upon the expiration of the
applicable grace period such Receivable shall be removed from the Trust as
described under "Description of the Certificates--Representations and
Warranties."
If an Originator becomes the subject of a bankruptcy or insolvency
proceeding and the Trust does not have a perfected security interest in the
Unearned Premium, the Trust's interest in such Unearned Premium would be
subordinate to the interest of a bankruptcy trustee of such Originator. As a
result, Certificateholders might not be able to obtain the proceeds of any
returned Unearned Premiums.
U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, summarizing the anticipated material generally
applicable Federal income tax consequences of the purchase, ownership and
disposition of the Certificates of a Series, is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), proposed, temporary and
final Treasury regulations thereunder, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change, possibly
retroactive. This discussion does not address every aspect of the Federal income
tax laws that may be relevant to Certificate Owners in light of their personal
investment circumstances or to certain types of Certificate Owners subject to
special treatment under the Federal income tax laws (for example, banks and life
insurance companies). Accordingly, investors should consult their own tax
advisors regarding Federal, state, local, foreign and any other tax consequences
to them of any investment in the Certificates. PROSPECTIVE INVESTORS ARE ADVISED
TO CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE FEDERAL TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP, OR DISPOSITION OF INTERESTS IN CERTIFICATES, AS WELL AS
THE TAX
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CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, FOREIGN COUNTRY, OR OTHER
TAXING JURISDICTION. For purposes of this section "U.S. Federal Income Tax
Consequences" the term "Certificate Owner" refers to a holder of a beneficial
interest in a Certificate.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Stroock & Stroock & Lavan will act as special tax counsel to the Transferor
("Special Tax Counsel") and will advise the Transferor based on the assumptions
and qualifications set forth in the opinion that the Certificates will be
treated as indebtedness for Federal income tax purposes. However, opinions of
counsel are not binding on the Internal Revenue Service (the "IRS"), and there
can be no assurance that the IRS could not successfully challenge this
conclusion.
The Transferor will express in the Agreement its intent that for Federal,
state and local income and franchise tax purposes, Certificates will be
indebtedness secured by the Receivables. The Transferor agrees and each
Certificateholder and Certificate Owner, by acquiring an interest in a
Certificate, agrees or will be deemed to agree to treat the Certificates 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 Agreement, the
Transferor expects to treat such transaction, for regulatory and financial
accounting purposes, as a sale of an ownership interest in the Receivables and
not as a debt obligation.
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 rather than its form or the manner in
which it is labeled. 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 benefits of ownership thereof. Special 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 Certificate Owners.
In some instances, 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 Special Tax
Counsel will advise that the rationale of those cases will not apply to the
transaction evidenced by a Series of Certificates, because the form of the
transaction, as reflected in the operative provisions of the documents, either
is not inconsistent with the characterization of the Certificates as debt for
Federal income tax purposes or otherwise makes the rationale of those cases
inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATEHOLDERS
As set forth above, it is expected that Special Tax Counsel will advise the
Transferor that the Certificates will constitute indebtedness for Federal income
tax purposes, and accordingly, interest thereon will be includible in income by
Certificate Owners as ordinary income when received (in the case of a cash basis
taxpayer) or accrued (in the case of an accrual basis taxpayer) in accordance
with their respective methods of tax accounting. Interest received on the
Certificates may also constitute "investment income" for purposes of certain
limitations of the Code concerning the deductibility of investment interest
expense.
If the Certificates are issued with original issue discount ("OID"), the
provisions of sections 1271 through 1273 and 1275 of the Code will apply to the
Certificates. Under those provisions, a U.S. Certificate Owner (including a cash
basis holder) generally would be required to accrue the OID on its interest in a
Certificate 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. In general, a Certificate will be treated as having
OID to the extent that its "stated redemption price" exceeds its "issue price,"
if such excess is more than 0.25 percent multiplied by the weighted average life
of the Certificate (determined by taking into account only the number of
complete years following issuance until payment is made for any partial
principal payments). Under section 1272(a)(6) of the Code, special provisions
apply to debt instruments on which
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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
Certificates is unclear. Additionally, the IRS could take the position based on
Treasury Regulations that none of the interest payable on a Certificate is
"unconditionally payable" and hence that all of such interest should be included
in the Certificate's stated redemption price at maturity. Accordingly, Special
Tax Counsel is unable to opine as to whether interest payable on a Certificate
constitutes "qualified stated interest" that is not included in a Certificate's
stated redemption price at maturity. The Transferor intends to take the position
that interest on the Certificates constitutes "qualified stated interest".
A holder who purchases a Certificate at a discount from its adjusted issue
price may be subject to the "market discount" rules of the Code. These rules
provide, in part, for the treatment of gain attributable to accrued market
discount as ordinary income upon the receipt of partial principal payments or on
the sale or other disposition of the Certificate, and for the deferral of
interest deductions with respect to debt incurred to acquire or carry the market
discount Certificate.
A holder who purchases a Certificate at a premium may elect to amortize and
deduct this premium over the remaining term of the Certificate in accordance
with rules set forth in Section 171 of the Code.
SALE OF A CERTIFICATE
In general, a Certificate Owner will recognize gain or loss upon the sale,
exchange, redemption, or other taxable disposition of a Certificate measured by
the difference between (i) the amount of cash and the fair market value of any
property received (other than amounts attributable to, and taxable as, accrued
interest) and (ii) the Certificate Owner's tax basis in the Certificate (as
increased by any OID or market discount previously included in income by the
holder and decreased by any deductions previously allowed for amortizable bond
premium and by any payments reflecting principal or OID received with respect to
such Certificate). Subject to the market discount rules discussed above and to
the more than one-year holding period requirement for long-term capital gain
treatment, any such gain or loss generally will be long-term capital gain,
provided that the Certificate was held as a capital asset. The maximum ordinary
income rate for individuals, estates, and trusts exceeds the maximum long-term
capital gains rate for such taxpayers. In addition, capital losses generally may
be used only to offset capital gains.
TAX CHARACTERIZATION OF TRUST
The Agreement permits the issuance of Classes of Certificates that are
treated for Federal income tax purposes either as indebtedness or as an interest
in a partnership. The Trust could be characterized either as (i) a security
device to hold Receivables securing the repayment of the Certificates or (ii) a
partnership in which the Transferor and certain classes of Certificateholders
are partners, and which has issued debt represented by other classes of
Certificates of such Trust (including the Certificates). In connection with the
issuance of Certificates of any Series, Special Tax Counsel will render an
opinion to the Transferor, based on the assumptions and qualifications set forth
therein, that under then current law, the issuance of the Certificates 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.
FASIT LEGISLATION
Legislation enacted on August 20, 1996 provides for a new entity for
Federal income tax purposes, the "financial asset securitization investment
trust" (or "FASIT"), beginning on September 1, 1997. The Agreement provides that
the Transferor may cause a FASIT election to be made for all or a portion of the
Trust if the Transferor delivers to the Trustee a Tax Opinion.
POSSIBLE CLASSIFICATION OF THE TRANSACTION AS A PARTNERSHIP OR AS AN ASSOCIATION
TAXABLE AS A CORPORATION
The opinion of Special Tax Counsel with respect to Certificates will not be
binding on the courts or the IRS. It is possible that the IRS could assert that,
for purposes of the Code, the transaction contemplated by this Prospectus
constitutes a sale of the Receivables (or an interest therein) to the
Certificate Owners and that the proper classification of the legal relationship
between the Transferor and some or all of the Certificate Owners or
Certificateholders resulting from the transaction is that of a partnership, a
publicly traded
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partnership taxable as a corporation, or an association 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
Certificates were treated as interests in a partnership or corporation (unless,
as is permitted by the Agreement, an interest in the Trust is issued or sold
that is intended to be classified as an interest in a partnership).
If the Trust were treated in whole or in part as a partnership in which
some or all of the holders of interests in the publicly offered Certificates
were partners, that partnership would be classified as a publicly traded
partnership, and so could be taxable as a corporation. Further, if interests in
the Trust other than the publicly offered Certificates are considered to be
equity and are considered to be publicly traded, regulations published by the
Treasury Department on December 4, 1995 could cause the Trust to constitute a
publicly traded partnership even if all holders of interests in the publicly
offered Certificates were treated as debt for tax purposes. The regulations
generally apply to taxable years beginning after December 31, 1995. If the Trust
were classified as a publicly traded partnership, whether by reason of the
treatment of publicly offered Certificates as equity or by reason of the
regulations, it would avoid taxation as a corporation if its income was not
derived in the conduct of a "financial business"; however, whether the income of
the Trust would be so classified is unclear and Special Tax Counsel is unable to
opine as to whether the Trust would be so classified.
Under the Code and the regulations, a partnership will be classified as a
publicly traded partnership if equity interests are traded on an "established
securities market," or are "readily tradeable" on a "secondary market" or its
"substantial equivalent." The Transferor intends to take measures designed to
reduce the risk that the Trust could be classified as a publicly traded
partnership by reason of interests in the Trust other than the publicly offered
Certificates. Although the Transferor expects such measures will ultimately be
successful, certain of the actions that may be necessary for avoiding the
treatment of such interests as "readily tradeable" on a "secondary market" or
its "substantial equivalent" are not fully within the control of the Transferor.
As a result, there can be no assurance that the measures the Transferor intends
to take will in all circumstances be sufficient to prevent the Trust from being
classified as a publicly traded partnership under the regulations.
If a transaction were treated as creating a partnership between the
Transferor and the Certificate Owners or Certificateholders that is not
characterized as a publicly traded partnership taxable as a corporation, the
partnership itself would not be subject to Federal income tax; rather, the
partners of such partnership, including the Certificate Owners or
Certificateholders, 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 Certificate Owner could
differ if the Certificates 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 Certificates. Finally, even assuming a partnership qualifies
for exemption from taxation as a corporation, all or a portion of any taxable
income allocated to a Certificate Owner that is a pension, profit-sharing or
employee benefit plan or other tax-exempt entity (including an individual
retirement account) may, under certain circumstances, constitute "unrelated
business taxable income" which generally would be taxable to the holder under
the Code.
If it were determined that a transaction created an entity classified as an
association or as a publicly traded partnership taxable as a corporation, the
Trust would be subject to Federal income tax at corporate income tax rates on
the income it derives from the Receivables, which would reduce the amounts
available for distribution to the Certificate Owners, possibly including
Certificate Owners of a Class that is treated as indebtedness. Such
classification may also have adverse state and local tax consequences that would
reduce amounts available for distribution to Certificate Owners. Cash
distributions to the Certificate Owners (except any Class not recharacterized as
an equity interest in an association) generally would be treated as dividends
for tax purposes to the extent of such deemed corporation's earnings and
profits.
FOREIGN INVESTORS
As set forth above, it is expected that Special Tax Counsel will render an
opinion, upon issuance, that the Certificates will be treated as debt for U.S.
Federal income tax purposes. The following information describes
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the U.S. Federal income tax treatment of investors that are not U.S. persons
("Foreign Investors") if the Certificates are treated as debt. The term "Foreign
Investor" means any person other than (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 whose income is includable in gross income for United States federal
income taxation regardless of its source, or (iv) a trust for which one or more
United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. For years beginning before January
1, 1997, the term "Foreign Investor" shall include any trust (except a trust
whose income is includable in gross income for United States Federal income
taxation regardless of source), in lieu of trusts described in (iv) above,
unless the trust elects to have its Foreign Investor status determined under the
criteria set forth in (iv) above for tax years ending after August 20, 1996.
Interest, including principal to the extent of accrued OID, paid to a
Foreign Investor will be subject to U.S. withholding taxes at a rate of 30%
unless (i) the income is "effectively connected" with the conduct by such
Foreign Investor of a trade or business in the United States and the investor
provides on a timely basis Form 4224 in which case, the Foreign Investor will
generally be subject to tax at the same rates as a U.S. person or (ii) the
Foreign Investor and each securities clearing organization, bank, or other
financial institution that holds the Certificates on behalf of the customer in
the ordinary course of its trade or business, in the chain between the
Certificate Owner and the U.S. person otherwise required to withhold the U.S.
tax, complies with applicable identification requirements and the Certificate
Owner does not actually or constructively own 10% or more of the voting stock of
the Transferor, or the Collateral Interest (or, upon the issuance of an interest
in the Trust that is treated as a partnership interest, any holder of such
interest) and is not a controlled foreign corporation with respect to the
Transferor. Applicable identification requirements generally will be satisfied
if there is delivered to the securities clearing organization (i) IRS Form W-8
signed under penalties of perjury by the Certificate Owner, stating that the
Certificate Owner is not a U.S person and providing such Certificate Owner's
name and address, or (ii) IRS Form 1001, signed by the Certificate Owner or such
Certificate Owner's agent, claiming exemption from withholding under an
applicable tax treaty that provides for exemption; provided that in any such
case (x) the applicable form is delivered pursuant to applicable procedures and
is properly transmitted to the United States entity otherwise required to
withhold tax and (y) none of the entities receiving the form has actual
knowledge that the Certificate Owner is a U.S. person or that the form is
otherwise inaccurate.
A Certificate Owner that is a nonresident alien or foreign corporation will
not be subject to U.S. Federal income tax on gain realized upon the sale,
exchange, or redemption of a Certificate, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States, (ii) in the case of a Certificate Owner that is an individual, such
Certificate Owner is not present in the United States for 183 days or more
during the taxable year in which such sale, exchange, or redemption occurs, and
(iii) in the case of gain representing accrued interest or OID the conditions
described in the immediately preceding paragraph are satisfied.
If the interests of the Certificate Owners were reclassified as interests
in a partnership (not taxable as a corporation), such recharacterization could
cause a Foreign Investor to be treated as engaged in a trade or business in the
United States. In such event the Certificate Owner would be required to file a
Federal income tax return and, in general, would be subject to Federal income
tax, including branch profits tax in the case of a Certificateholder that is a
corporation, on its net income from the partnership. Further, the partnership
would be required, on a quarterly basis, to pay withholding tax equal to the
sum, for each foreign partner, of such foreign partner's distributive share of
"effectively connected" income of the partnership multiplied by the highest rate
of tax applicable to that foreign partner. The tax withheld from each foreign
partner would be credited against such foreign partner's U.S. income tax
liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
The Trust or a holder holding on behalf of a Certificateholder generally
will be required to report annually to the IRS, the amount of interest paid on a
Certificate (and the amount of accrued OID, if any, and interest
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withheld for Federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, or individual
retirement accounts). Each holder (other than exempt holders who are not subject
to the reporting requirements) will be required to provide, under penalties of
perjury, a certificate containing the holder's name, address, correct Federal
taxpayer identification number and a statement that the holder is not subject to
backup withholding. Should a nonexempt Certificateholder fail to provide the
required certification, the Trust or other intermediary will be required to
withhold 31% 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.
STATE AND LOCAL TAXATION
The discussion above does not address the tax treatment of a Trust, the
Certificates, or the Certificate Owners 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 and the Certificates, and
the consequences of purchase, ownership or disposition of the Certificates under
any state or local tax law.
ERISA CONSIDERATIONS
Section 406 of ERISA and/or Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan or retirement arrangement from
engaging in certain transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to the plan. ERISA also imposes certain duties on persons who are
fiduciaries of plans subject to ERISA and prohibits certain transactions between
such plans and parties in interest with respect to such plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a plan is considered to be a fiduciary of such plan
(subject to certain exceptions not here relevant). A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons.
Plan fiduciaries must determine whether the acquisition and holding of the
Certificates and the operations of the Trust would result in direct or indirect
prohibited transactions under ERISA and the Code. The operations of the Trust
could result in prohibited transactions if Benefit Plans (as defined below) that
purchase the Certificates are deemed to own an interest in the underlying assets
of the Trust. There may also be an improper delegation of the responsibility to
manage Benefit Plan assets if Benefit Plans that purchase the Certificates are
deemed to own an interest in the underlying assets of the Trust.
Pursuant to a final regulation (the "Final Regulation") issued by the
Department of Labor ("DOL") concerning the definition of what constitutes the
"plan assets" of (a) any employee benefit plan that is subject to ERISA, (b) any
plan or other arrangement (including an individual retirement account or Keogh
plan) that is subject to section 4975 of the Code or (c) any entity whose
underlying assets include "plan assets" under the regulation by reason of any
such plan's investment in the entity (collectively referred to as "Benefit
Plans"), the assets and properties of certain entities in which a Benefit Plan
makes an equity investment could be deemed to be assets of the Benefit Plan in
certain circumstances. Accordingly, if Benefit Plans purchase Certificates, the
Trust could be deemed to hold plan assets unless one of the exceptions under the
Final Regulation is applicable to the Trust.
The Final Regulation only applies to the purchase by a Benefit Plan of an
"equity interest" in an entity. Assuming that interests in Certificates are
equity interests, the Final Regulation contains an exception that provides that
if a Benefit Plan acquires a "publicly-offered security," the issuer of the
security is not deemed to hold plan assets. A publicly-offered security is a
security that is (i) freely transferable, (ii) part of a class of securities
that is owned by 100 or more investors independent of the issuer and of one
another (the "100 Investor Requirement") and (iii) either is (A) part of a class
of securities registered under Section 12(b) or 12(g) of the Exchange Act or (B)
sold to the plan as part of an offering of securities to the public pursuant to
an effective registration statement under the Act and the class of securities of
which such security is a part is registered under the Exchange Act within 120
days (or such later time as may be allowed by the Commission) after the end of
the fiscal year of the issuer during which the offering of such securities to
the public occurred. In addition, the Final Regulation provides that if at all
times more than 75% of the value of all classes of equity
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interests in Certificates are held by investors other than benefit plan
investors (which is defined as including plans subject to ERISA, government
plans and IRAs), the investing plan's assets will not include any of the
underlying assets of the applicable Trust.
The Certificates offered hereby will be sold as part of an offering
pursuant to an effective registration statement under the Securities Act and
each Class of Certificates will be timely registered under the Securities
Exchange Act of 1934. The Underwriters do not expect that the Class A or Class B
Certificates will satisfy the 100 Investor Requirement, and, therefore, do not
expect that such Certificates will qualify as publicly-offered securities under
the Final Regulation.
If interests in a Class of Certificates fail to meet the criteria of
publicly-offered securities and the applicable Trust's assets are deemed to
include assets of Benefit Plans acquiring such Class of Certificates
transactions involving the Trust and "parties in interest" or "disqualified
persons" with respect to such Benefit Plans might be prohibited under Section
406 of ERISA and Section 4975 of the Code unless an exemption is applicable. The
Transferor, Servicer, Trustee or any Underwriter of such Certificates may be
considered to be a party in interest, disqualified person or fiduciary with
respect to an investing Benefit Plan. Accordingly, an investment by a Benefit
Plan in such Certificates may be a prohibited transaction under ERISA and the
Code unless such investment is subject to a statutory or administrative
exemption. There is no assurance that any exemption, even if all of the
conditions specified therein are satisfied, will apply to all transactions
involving the Trust's assets.
NO INVESTOR WHICH IS ACQUIRING A CERTIFICATE FOR OR ON BEHALF OF, A BENEFIT
PLAN MAY ACQUIRE EITHER: A CLASS A CERTIFICATE OR A CLASS B CERTIFICATE, AND BY
THE ACQUISITION OF SUCH CERTIFICATE THE INVESTOR WILL BE DEEMED TO HAVE
REPRESENTED AND WARRANTED THAT SUCH INVESTOR IS NOT A BENEFIT PLAN. FIDUCIARIES
OF A BENEFIT PLAN CONSIDERING THE PURCHASE OF INTERESTS IN CERTIFICATES OF ANY
SERIES SHOULD CONSULT THEIR OWN COUNSEL AS TO WHETHER THE ASSETS OF THE TRUST
WHICH ARE REPRESENTED BY SUCH INTERESTS WOULD BE CONSIDERED PLAN ASSETS, AND
WHETHER, UNDER THE GENERAL FIDUCIARY STANDARDS OF INVESTMENT PRUDENCE AND
DIVERSIFICATION, AN INVESTMENT IN CERTIFICATES OF ANY SERIES IS APPROPRIATE FOR
THE BENEFIT PLAN TAKING INTO ACCOUNT THE OVERALL INVESTMENT POLICY OF THE
BENEFIT PLAN AND THE COMPOSITION OF THE BENEFIT PLAN'S INVESTMENT PORTFOLIO. IN
ADDITION, FIDUCIARIES SHOULD CONSIDER THE CONSEQUENCES THAT WOULD APPLY IF THE
TRUST'S ASSETS WERE CONSIDERED PLAN ASSETS, THE APPLICABILITY OF EXEMPTIVE
RELIEF FROM THE PROHIBITED TRANSACTION RULES AND WHETHER ALL CONDITIONS FOR SUCH
EXEMPTIVE RELIEF WOULD BE SATISFIED.
In particular, insurance companies considering the purchase of Certificates
should consult their own benefits or other appropriate counsel with respect to
the United States Supreme Court's decision in John Hancock Mutual Life Insurance
Co. v. Harris Trust & Savings Bank, 114 S. Ct. 517 (1993) ("John Hancock") and
the applicability of PTE 95-60. In John Hancock, the Supreme Court held that
assets held in an insurance company's general account may be deemed to be "plan
assets" under certain circumstances, however, PTE 95-60 may exempt some or all
of the transactions that could occur as the result of the acquisition and
holding of the Certificates by an insurance company general account from the
penalties normally associated with prohibited transactions. In addition, recent
amendments to Section 401 of ERISA enacted under the Small Business Job
Protection Act of 1996 (the "1996 Act") may affect the acquisition of
Certificates by insurance company general accounts. Accordingly, investors
should analyze whether John Hancock and PTE 95-60 or any other exemption may
have an impact with respect to their purchase of the Certificates.
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[ALTERNATE PAGE]
UNDERWRITING
This Prospectus is to be used by Mellon Financial Markets, Inc., an
affiliate of Mellon Bank, N.A., in connection with offers and sales related to
market-making transactions in the Certificates in which Mellon Financial
Markets, Inc. acts as principal. Mellon Financial Markets, Inc. may also act as
agent in such transactions. Sales will be made at prices related to the
prevailing prices at the time of sale. Any obligations of Mellon Financial
Markets, Inc. are the sole obligations of Mellon Financial Markets, Inc., and do
not create any obligations on the part of any affiliate of Mellon Financial
Markets, Inc.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Transferor and the Trust by Carl Krasik, Esq., Associate
General Counsel to Mellon Bank Corporation, Reed Smith Shaw & McClay,
Pittsburgh, Pennsylvania and Stroock & Stroock & Lavan, New York, New York. The
federal income tax matters described under "U.S. Federal Income Tax
Consequences" will be passed upon for the Transferor and the Trust by Stroock &
Stroock & Lavan, New York, New York. Stroock & Stroock & Lavan, New York, New
York will act as counsel for the Underwriters. Certain ERISA matters will be
passed upon for the Transferor and the Trust by Stroock & Stroock & Lavan, New
York, New York. At October 31, 1996, Mr. Krasik held options to purchase 5,950
shares of Mellon Bank Corporation common stock.
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INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
100 Investor Requirement........................................................ 92
1996 Act........................................................................ 93
Account......................................................................... 7, 35
Accumulation Period Length...................................................... 53
Additional Receivables.......................................................... 7
Adjusted Investor Interest...................................................... 11
AFCO............................................................................ 4, 31
AFCO Acceptance................................................................. cover, 4, 31
AFCO Credit..................................................................... cover, 4, 31
Aggregate Receivables........................................................... 8, 37
Agreement....................................................................... 5
Available Investor Principal Collections........................................ 16, 52
Available Reserve Account Amount................................................ 75
Back-up Servicer................................................................ cover, 4
banking organization............................................................ 45
Base Rate....................................................................... 78
Beginning of Month Principal Receivables........................................ 8, 63
Benefit Plans................................................................... 92
BIF............................................................................. 62
Calculation Date................................................................ 5, 35
Cede............................................................................ 3
Cedel........................................................................... 4, 46
</TABLE>
<TABLE>
<S> <C>
Cedel Participants.............................................................. 47
Certificate Owners.............................................................. 30
Certificates.................................................................... cover, 4
Class A Additional Interest..................................................... 13, 50
Class A Adjusted Investor Interest.............................................. 11, 65
Class A Available Funds......................................................... 14, 50
Class A Available Funds Cap..................................................... 13, 50
Class A Carry-Over Amount....................................................... 14, 50
Class A Certificates............................................................ cover, 4
Class A Covered Amount.......................................................... 16, 74
Class A Fixed Allocation........................................................ 64
Class A Floating Allocation..................................................... 64
Class A Holders................................................................. 5
Class A Interest Funding Account................................................ 12, 49
Class A Investor Charge-Off..................................................... 20, 73
Class A Investor Default Amount................................................. 73
Class A Investor Interest....................................................... 9, 65
Class A LIBOR Rate.............................................................. 10, 51
Class A Monthly Interest........................................................ 13, 50
Class A Monthly Principal....................................................... 70
Class A Principal Funding Investment Shortfall.................................. 16, 74
Class A Required Amount......................................................... 19, 65
Class A Scheduled Payment Date.................................................. 2
Class A Servicing Fee........................................................... 79
Class A Shortfall Amount........................................................ 14, 50
Class A Underwriters............................................................ 94
Class A Underwriting Agreement.................................................. 94
Class B Additional Interest..................................................... 13, 50
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Class B Available Funds......................................................... 14, 50
Class B Available Funds Cap..................................................... 14, 50
Class B Carry-Over Amount....................................................... 14, 51
Class B Certificates............................................................ cover, 4
Class B Fixed Allocation........................................................ 64
Class B Floating Allocation..................................................... 64
Class B Holders................................................................. 5
Class B Interest Funding Account................................................ 13, 49
Class B Investor Charge-Off..................................................... 20, 73
Class B Investor Default Amount................................................. 73
Class B Investor Interest....................................................... 10, 65
Class B LIBOR Rate.............................................................. 9, 51
Class B Monthly Interest........................................................ 13, 50
Class B Monthly Principal....................................................... 71
Class B Required Amount......................................................... 19, 65
Class B Scheduled Payment Date.................................................. 2
Class B Servicing Fee........................................................... 79
Class B Shortfall Amount........................................................ 14, 51
Class B Underwriters............................................................ 94
Class B Underwriting Agreement.................................................. 94
clearing agency................................................................. 45
clearing corporation............................................................ 45
Closing Date.................................................................... 2, 5, 35
Code............................................................................ 23, 87
Collateral Available Funds...................................................... 68
Collateral Charge-Off........................................................... 74
Collateral Default Amount....................................................... 73
Collateral Fixed Allocation..................................................... 64
Collateral Floating Allocation.................................................. 64
Collateral Interest............................................................. 9, 65
Collateral Interest Holder...................................................... 9
Collateral Interest Servicing Fee............................................... 79
Collateral Monthly Interest..................................................... 70
Collateral Monthly Principal.................................................... 71
Collateral Rate................................................................. 70
Commission...................................................................... cover, 3
Controlled Accumulation Amount.................................................. 71
Controlled Accumulation Period.................................................. 15
Controlled Deposit Amount....................................................... 15, 42
Cooperative..................................................................... 47
Credit Enhancement.............................................................. 10
Cut-off Date.................................................................... 5, 35
Default Amount.................................................................. 11, 72
Defaulted Account............................................................... 11, 72
Depositories.................................................................... 45
Distribution Account............................................................ 61
Distribution Date............................................................... 12, 49
DOL............................................................................. 92
DTC............................................................................. 3
DTC Participants................................................................ 45
Eligible Receivable............................................................. 60
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Enhancement..................................................................... 10
ERISA........................................................................... 23
Euroclear....................................................................... 4, 47
Euroclear Operator.............................................................. 47
Euroclear Participants.......................................................... 47
Excess Finance Charge Collections............................................... 70
Excess Funding Account.......................................................... 61
Excess Insurer Concentration Amount............................................. 78
Excess Obligor Concentration Amount............................................. 78
Excess Spread................................................................... 68
Exchange Act.................................................................... 3
FASIT........................................................................... 89
Final Regulation................................................................ 92
Finance Charge Account.......................................................... 61
Financed Charge Receivables..................................................... 8, 63
FIRREA.......................................................................... 25
Fixed Investor Percentage....................................................... 64
Floating Investor Percentage.................................................... 63
Foreign Investors............................................................... 91
Governmental Authority.......................................................... 60
Guidelines...................................................................... 60
Holders......................................................................... 5, 48
Identified Portfolio............................................................ 6
Indirect Participants........................................................... 46
Ineligible Account.............................................................. 55
Ineligible Receivable........................................................... 55
Initial Collateral Interest..................................................... 20
Initial Principal Payment Date.................................................. 18
Initial Receivables............................................................. 60
Insolvency Event................................................................ 76
Insolvency Laws................................................................. 25
Interest Payment Date........................................................... 2
Interest Period................................................................. 12, 49
Investment Grade Insurer Percentage............................................. 78
Investor Interest............................................................... 9
Investor Servicing Fee.......................................................... 79
IRA............................................................................. 93
IRS............................................................................. 88
John Hancock.................................................................... 93
LIBOR........................................................................... 2, 10, 51
LIBOR Determination Date........................................................ 51
Loan Agreement.................................................................. 21
Maximum Top 10 Insurer Percentage............................................... 78
Minimum Aggregate Principal Receivables......................................... 78
Minimum Transferor Interest..................................................... 78
Monthly Interest Period......................................................... 12, 49
Monthly Payment Rate............................................................ 79
Monthly Period.................................................................. 8, 63
Moody's......................................................................... 62
New Issuance.................................................................... 22
Notice of Cancellation.......................................................... 32
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Notice of Intent to Cancel...................................................... 32
OID............................................................................. 88
One Month LIBOR................................................................. 51
Originator...................................................................... cover
Originators..................................................................... 4
Pay Out Event................................................................... 43, 76
Permitted Investments........................................................... 62
Permitted State................................................................. 36
PFSI............................................................................ 4
plan assets..................................................................... 23
Pooling and Servicing Agreement................................................. cover
Portfolio Yield................................................................. 78
Premium Finance Agreement....................................................... cover, 5
Principal Account............................................................... 67
Principal Distribution Date..................................................... 17
Principal Funding Account....................................................... 15, 74
Principal Funding Account Balance............................................... 42
Principal Funding Investment Proceeds........................................... 16, 74
Principal Payment Event......................................................... 18
Principal Payment Period........................................................ 18
Principal Receivables........................................................... 8, 63
Principal Shortfalls............................................................ 72
Principal Terms................................................................. 27
PTE............................................................................. 93
Qualified Institution........................................................... 61
Rapid Amortization Period....................................................... 18
Rating Agency Condition......................................................... 72
Reallocated Class B Principal Collections....................................... 66
Reallocated Collateral Principal Collections.................................... 66
Reallocated Principal Collections............................................... 67
Receivables..................................................................... cover, 5, 34
Receivables Purchase Agreement.................................................. cover, 5, 34
Receivable State................................................................ 79
Record Date..................................................................... 45
Reference Banks................................................................. 51
Registration Statement.......................................................... 3
Removed Accounts................................................................ 61
Required Collateral Interest.................................................... 20, 72
Required Reserve Account Amount................................................. 74
Requirements of Law............................................................. 60
Reserve Account................................................................. 74
Reserve Account Funding Date.................................................... 74
Reset Date...................................................................... 65
Revolving Period................................................................ 15
Rule of 78's.................................................................... 34
Rule of 78's Receivables........................................................ 34
SAIF............................................................................ 62
Sale Notice..................................................................... 28
</TABLE>
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<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Series.......................................................................... 5
Series 1996-1 Supplement........................................................ 5
Series 1996-1 Termination Date.................................................. 75
Series Supplement............................................................... 22
Servicer Ineligible Account..................................................... 59
Servicer Ineligible Receivable.................................................. 58
Service Transfer................................................................ 81
Servicer........................................................................ cover, 4
Servicer Default................................................................ 81
Servicing Fee Rate.............................................................. 79
Shared Principal Collections.................................................... 21, 72
Special Payment Date............................................................ 42
Special Tax Counsel............................................................. 88
Standard & Poor's............................................................... 62
State Fund Refund............................................................... 29
Statistical Calculation Date.................................................... 6, 36
Successor Back-up Servicer Termination Notice................................... 28
Telerate Page 3750.............................................................. 51
Terms and Conditions............................................................ 48
Tier 1 Insurer.................................................................. 79
Tier 2 Insurer.................................................................. 79
Tier 3 Insurer.................................................................. 79
Top 10 Insurer.................................................................. 79
Top 10 Investment Grade Insurer................................................. 79
Top 10 Insurer Percentage....................................................... 79
Transfer Date................................................................... 14
Transferor...................................................................... cover, 4
Transferor Ineligible Receivable................................................ 57
Transferor Interest............................................................. 2, 9
Transferor Percentage........................................................... 45
Trust........................................................................... cover, 4
Trust Termination Date.......................................................... 76
Trustee......................................................................... cover, 4
Underwriters.................................................................... 94
Underwriting Agreement.......................................................... 94
Unearned Premium................................................................ 24
Variable Interest............................................................... 65
</TABLE>
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Mellon Bank
Premium Finance Loan Master Trust Asset Backed Certificates (the "Global
Securities") to be issued in Series from time to time (each, a "Series") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ("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 holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to U.S. corporate debt obligations. 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 U.S. corporate
debt obligations 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 purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or
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Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. Payment will then be made by the
respective Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The Global Securities credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Cedel or
Euroclear cash debit will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to pre-position
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the bonds to
the DTC Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. The payment will then be reflected in the
account of the Cedel Participant or Euroclear Participant the following day, and
receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the Cedel
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date. Finally, day traders that use Cedel or
Euroclear and that purchase Global Securities from DTC Participants for delivery
to Cedel Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At lease three techniques should be readily available to eliminate this
potential problem:
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(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner or
his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisers 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 REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRANSFEROR OR ANY AGENT OR UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE TRANSFEROR OR THE RECEIVABLES SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<S> <C>
Available Information.................. 3
Reports to Certificateholders.......... 3
Incorporation of Certain Documents by
Reference............................ 3
Prospectus Summary..................... 4
Risk Factors........................... 24
Business of the Originators............ 31
The Receivables........................ 34
Use of Proceeds........................ 42
Maturity Assumptions................... 42
Description of the Certificates........ 44
Description of the Receivables Purchase
Agreement............................ 84
Certain Legal Aspects of the
Receivables.......................... 86
U.S. Federal Income Tax Consequences... 87
State and Local Taxation............... 92
ERISA Considerations................... 92
Underwriting........................... 94
Legal Matters.......................... 94
Index of Terms......................... 96
Annex I: Global Clearance, Settlement
and Tax Documentation Procedures..... I-1
</TABLE>
UNTIL MARCH 12, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CERTIFICATES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------
- -------------------------------------------------------
Mellon Bank
Premium Finance Loan
Master Trust
$440,000,000 Class A
Floating Rate Asset Backed Certificates,
Series 1996-1
$25,000,000 Class B
Floating Rate Asset Backed Certificates,
Series 1996-1
Mellon Bank, N.A.
Transferor
AFCO Credit Corporation
AFCO Acceptance Corporation
Originators and Servicers
PROSPECTUS
Mellon Financial Markets, Inc.
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