<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998 Commission file number 0-20526
------------
ARCADIA FINANCIAL LTD.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1664848
(State or other jurisdiction (I.R.S. Employer Identification
Of incorporation or organization) Number)
7825 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MN 55439-2435
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 942-9880
------------
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /x/ No / /
The number of shares of the Common Stock of the registrant outstanding
as of May 6, 1998 was 38,991,194.
<PAGE>
FORM 10-Q INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
EXHIBIT INDEX 21
</TABLE>
The financial information for the interim periods presented herein is
unaudited. In the opinion of management, all adjustments necessary (which are
of a normal recurring nature) have been included for a fair presentation of
the results of operations. The results of operations for an interim period
are not necessarily indicative of the results that may be expected for a full
year or any other interim period.
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Form 10-Q constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may be identified by the use of terminology such as "may," "will,"
"expect," "anticipate," "estimate," "should," or "continue" or the negative
thereof or other variations thereon or comparable terminology. Such
forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results
or from those results presently anticipated or projected. Such factors
include, among other things, the following: increased delinquency and loan
loss rates; modifications to the Company's retail disposition program;
accounting and regulatory changes; interest rate fluctuations; difficulties
or delays in the securitization of automobile loans; availability of adequate
short- and long-term financing; general economic and business conditions; and
other matters set forth under the caption "Cautionary Statements" in exhibit
99.1 filed herewith.
2
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) MARCH 31, 1998 DECEMBER 31, 1997
--------------- -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,387 $ 17,274
Due from securitization trust 122,223 107,207
Auto loans held for sale 20,582 49,133
Finance income receivable 410,583 371,985
Restricted cash in spread accounts 261,336 250,297
Furniture, fixtures and equipment 17,157 17,371
Other assets 31,357 32,483
----------- -----------
Total assets $ 869,625 $ 845,750
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Amounts due under warehouse facilities $ 53,919 $ 30,880
Senior notes 365,894 365,640
Subordinated notes 49,845 50,772
Capital lease obligations 4,982 5,368
Deferred income taxes 21,418 18,846
Accounts payable and accrued liabilities 20,437 26,302
----------- -----------
Total liabilities 516,495 497,808
Commitments and contingencies
Shareholders' equity:
Capital stock, $.01 par value, 100,000,000 shares authorized:
Common stock 38,991,194 and 38,813,735 shares issued
and outstanding, respectively 390 388
Additional paid-in capital 323,808 322,819
Retained earnings 28,932 24,735
----------- -----------
Total shareholders' equity 353,130 347,942
----------- -----------
Total liabilities and shareholders' equity $ 869,625 $ 845,750
----------- -----------
----------- -----------
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1998 1997
----------- -------------
<S> <C> <C>
REVENUES:
Net interest margin $ 14,669 $ 16,726
Gain on sale of loans, net of $98.0 million special
charge in March 1997 31,054 (77,887)
Servicing fee income 19,666 13,298
----------- -----------
Total revenues 65,389 (47,863)
EXPENSES:
Salaries and benefits 17,347 14,478
General and administrative and other operating expenses 28,487 26,165
----------- -----------
Total operating expenses 45,834 40,643
Long-term debt and other interest expense 12,785 7,591
----------- -----------
Total expenses 58,619 48,234
----------- -----------
Operating income (loss) before income taxes and
extraordinary item 6,770 (96,097)
Income tax expense (benefit) 2,573 (36,586)
----------- -----------
Income (loss) before extraordinary item 4,197 (59,511)
Extraordinary item, net of tax - (15,828)
----------- -----------
Net income (loss) $ 4,197 $ (75,339)
----------- -----------
----------- -----------
BASIC EARNINGS PER SHARE:
Net income (loss) per share before extrordinary item $ 0.11 $ (1.55)
Extraordinary item per share - (0.41)
----------- -----------
Net income (loss) per share $ 0.11 $ (1.96)
----------- -----------
----------- -----------
DILUTED EARNINGS PER SHARE:
Net income (loss) per share before extraordinary item $ 0.11 $ (1.55)
Extraordinary item per share - (0.41)
----------- -----------
Net income (loss) per share $ 0.11 $ (1.96)
----------- -----------
----------- -----------
Weighted average shares outstanding:
Basic 38,988,885 38,358,743
Diluted 39,360,968 38,358,743
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,197 $ (75,339)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 2,938 1,437
(Increase) decrease in assets:
Automobile loans held for sale:
Purchases of automobile loans (585,583) (781,872)
Sales of automobile loans 588,194 774,744
Repayments of automobile loans 25,939 3,376
Finance income receivable (38,598) 61,871
Restricted cash in spread accounts (11,039) (21,114)
Due from securitization trusts (15,016) 19,382
Prepaid expenses and other assets 500 (1,403)
Increase (decrease) in liabilities:
Deferred income taxes 2,573 (46,287)
Accounts payable and accrued liabilities (5,865) 5,749
--------- ---------
Total cash used in operating activities (31,760) (59,456)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of furniture, fixtures and equipment (1,431) (3,569)
Collections on subordinated certificates 274 248
--------- ---------
Total cash used in investing activities (1,157) (3,321)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 304 2,485
Proceeds from borrowings under warehouse facilities 716,229 500,513
Repayment of borrowings under warehouse facilities (693,190) (580,726)
Unsecured subordinated notes, net (927) (885)
Repayments of long-term debt - (145,000)
Proceeds from issuance of long term debt - 300,000
Deferred debt issuance cost - (5,428)
Reduction of capital lease obligations (386) (643)
--------- ---------
Total cash provided by financing activities 22,030 70,316
--------- ---------
Net increase (decrease) in cash and cash equivalents (10,887) 7,539
Cash and cash equivalents at beginning of period 17,274 16,057
--------- ---------
Cash and cash equivalents at end of period $ 6,387 $ 23,596
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Non cash activities:
Additions to capital leases $ - $ 132
Cash paid for:
Interest $ 39,851 $ 10,693
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
ARCADIA FINANCIAL LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL
COMMON COMMON PAR PAID IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
----------- ---------- ------------ --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 38,813,735 $ 388 $ 322,819 $ 24,735 $ 347,942
Exercise of options and warrants 39,357 1 104 - 105
Issuance of Common Stock:
Benefit plans 138,102 1 198 - 199
Amortization of deferred compensation - - 687 - 687
Net income - - - 4,197 4,197
----------- ------- ---------- -------- ----------
BALANCE, MARCH 31, 1998 38,991,194 $ 390 $ 323,808 $ 28,932 $ 353,130
----------- ------- ---------- -------- ----------
----------- ------- ---------- -------- ----------
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The interim financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form
10-Q. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures present
fairly the financial position of the Company and its subsidiaries for the
periods presented. These financial statements should be read in conjunction
with the audited consolidated financial statements and related notes and
schedules included in the Company's 1997 Annual Report on Form 10-K/A filed
March 30, 1998.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Certain reclassifications have been made to the March 31, 1997 balances
to conform to current period presentation.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, management
utilizes assumptions and estimates that affect the reported value of finance
income receivable and the gain on sale of automobile receivables. Such
assumptions include, but are not limited to, estimates of loan prepayments,
defaults, recovery rates and present value discount. The Company uses a
combination of its own historical experience, industry statistics and
expectation of future performance to determine such estimates. Actual
results may differ from the Company's estimates due to numerous factors both
within and beyond the control of Company management. Changes in these
factors could require the Company to revise its assumptions concerning the
amount of voluntary prepayments, the frequency and/or severity of defaults
and the recovery rates associated with the disposition of repossessed
vehicles. The range of assumptions, as well as actual performance, are
reflective of the allocation of receivables between Premier and Classic loans
within specific securitization pools.
REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's (FASB's) Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Comprehensive income is the total of net income and all nonowner
changes in shareholders' equity. The Company did not have any components of
comprehensive income during any period presented in the accompanying
financial statements, and therefore is not required to report comprehensive
income.
SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION
Effective January 1, 1998, the Company adopted the FASB's Statement No.
131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 superceded SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 establishes standards for
defining operating segments and the reporting of certain information
regarding operating segments. As defined by SFAS 131, the Company continues
to have only one operating and reportable segment, and therefore no
additional disclosures are required.
7
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER ENDED MARCH 31, 1998
2. FINANCE INCOME RECEIVABLE
The following table sets forth the components of finance income receivable:
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
1998 1997
(DOLLARS IN THOUSANDS) ------------- -------------
<S> <C> <C>
Estimated cash flows on loans sold, net of estimated prepayments $ 779,301 $ 735,557
Deferred servicing income (89,589) (88,282)
Reserve for loan losses (236,266) (235,599)
---------- ----------
Undiscounted cash flows on loans sold, net of estimated prepayments 453,446 411,676
Discount to present value (42,863) (39,691)
---------- ----------
$ 410,583 $ 371,985
---------- ----------
---------- ----------
Reserve for loan losses as a percentage of servicing portfolio 4.70% 4.75%
The following represents the roll-forward of the finance income
receivable balance:
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1997 $ 371,985
Estiated cash flows on loans sold, net of estimated prepayments 64,573
Recognition of present value effect of discounted cash flows 6,299
Less:
Excess cash flows deposited to spread accounts (32,274)
----------
BALANCE, MARCH 31, 1998 $ 410,583
----------
----------
</TABLE>
3. RESTRICTED CASH IN SPREAD ACCOUNTS
The following represents the roll-forward of restricted cash in spread accounts:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
BALANCE, DECEMBER 31, 1997 $ 250,297
Excess cash flows deposited to spread accounts 32,274
Interest earned on spread accounts 3,715
Less:
Excess cash flows released to the Company(1) (24,950)
----------
BALANCE, MARCH 31, 1998 $ 261,336
----------
----------
</TABLE>
- --------------
(1) Includes $4.8 million that has been restricted pursuant to an
arrangement between the Company and its provider of asset-backed
securities insurance. Such arrangement provides that, if any
insured securitization trust exceeds the specified portfolio
performance test as defined within the trust agreement, the Company
may, in lieu of retaining excess cash from that securitization
trust in the related spread accounts, pledge an equivalent amount
of cash, which has the effect of preventing the violation of the
portfolio performance test. Such pledged amounts are included in
cash and cash equivalents. Restrictions on the pledged amounts may
be lifted if the portfolio performance tests are met and maintained
for the related securitization trusts as defined in the
arrangement, the violations are waived, or the loans within the
securitization trust are repurchased by the Company.
8
<PAGE>
ARCADIA FINANCIAL LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE QUARTER ENDED MARCH 31, 1998
4. OTHER ASSETS
<TABLE>
<CAPTION>
AT AT
MARCH 31, 1998 DECEMBER 31, 1997
(DOLLARS IN THOUSANDS) ---------------- -------------------
<S> <C> <C>
Advances due to servicer $ 5,375 $ 6,072
Deferred debt issuance costs 11,166 11,518
Investment in subordinated certificates 2,590 2,864
Servicing fee receivable 4,577 4,389
Prepaid expenses 1,811 1,078
Repossessed assets 1,006 1,181
Other assets 4,832 5,381
-------- --------
$ 31,357 $ 32,483
-------- --------
-------- --------
</TABLE>
5. SUBORDINATED NOTES
<TABLE>
<CAPTION>
AT AT
MARCH 31, 1998 DECEMBER 31, 1997
(DOLLARS IN THOUSANDS) ---------------- -------------------
<S> <C> <C>
Senior subordinated notes, Series 1996-A $ 30,000 $ 30,000
Junior subordinated notes 19,845 20,772
-------- -------
$ 49,845 $ 50,772
-------- --------
-------- --------
</TABLE>
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for each of the three month periods ended March 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Net income (loss) before extraordinary item $ 4,197 $ (59,511)
----------- -----------
----------- -----------
Denominator:
Denominator for basic earnings per share - weighted
average shares 38,988,885 38,358,743
Dilutive effect of options and warrants 372,083 838,786
----------- -----------
Denominator for diluted earnings per share - adjusted
weighted average shares 39,360,968 39,197,529
----------- -----------
----------- -----------
Basic earnings (loss) per share before extraordinary item $ 0.11 $ (1.55)
----------- -----------
----------- -----------
Diluted earnings (loss) per share before extraordinary item (1) $ 0.11 $ (1.55)
----------- -----------
----------- -----------
</TABLE>
- -------------------
(1) In 1997, the weighted average shares under the diluted computation have
an anti-dilutive effect; therefore diluted earnings per share are shown
equal to basic earnings per share.
Options and warrants to purchase 5.3 million shares of common stock at
prices between $6.94 and $21.50 per share were outstanding during the first
quarter 1998 but were not included in the computation of diluted earnings per
share because the exercise prices were greater than the average market price
of the common shares and, therefore, the effect would be antidulitive.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Substantially all of the Company's earnings are derived from the
purchase, securitization and servicing of consumer automobile loans
originated in 45 states primarily by car dealers affiliated with major
foreign and domestic manufacturers. Loans are purchased through 18 regional
buying centers (or "hubs") located in 15 states, supplemented by a network
of dealer development representatives ("DDRs") which develop and maintain
relationships with car dealers operating within each "hub's" immediate market
area or in surrounding market areas referred to as "spokes." Credit approval
and loan processing are generally performed at the "hub" or at the Company's
headquarters in Minneapolis, Minnesota. The Company acts as the servicer of
all loans originated and securitized by it in return for a monthly servicing
fee. To perform its servicing responsibilities the Company operates a
national customer service center in Minneapolis, Minnesota and four regional
collection centers located in Charlotte, North Carolina; Dallas, Texas;
Denver, Colorado; and Minneapolis, Minnesota.
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
RESULTS OF OPERATIONS
SPECIAL CHARGES. Included in the Company's financial results during the
three-month period ended March 31, 1997 are two special charges taken in
March 1997. These charges included a non-cash after-tax charge of
approximately $63.9 million, due primarily to a change in accounting estimate
and modifications to the Company's retail disposition strategy, and an
extraordinary charge of approximately $15.8 million, net of tax, due to the
early extinguishment of the Company's 13% Senior Term Notes, due 2000 (see
"EXTRAORDINARY ITEM").
Approximately $60.8 million of the $63.9 million after-tax charge was
due to (i) a change in estimated recovery rates on current repossessed
inventory and anticipated future inventory arising from existing
securitization transactions, and (ii) a change in the Company's accounting
policy with respect to the estimated recovery rate realized upon disposition
of repossessed inventory. The remaining $3.1 million after-tax charge related
to various litigation and severance charges (see "OPERATING EXPENSES").
NET INTEREST MARGIN. The components of net interest margin for each of
the three months ended March 31 were:
<TABLE>
<CAPTION>
1998 1997
(DOLLARS IN THOUSANDS) --------- ----------
<S> <C>
Interest income on loans, net $ 6,279 $ 8,170
Interest income on short-term investments and other cash accounts 3,060 3,018
Recognition of present value discount 6,299 6,196
Provision for credit losses on loans held for sale (969) (658)
-------- -------
Net interest margin $ 14,669 $ 16,726
-------- --------
-------- --------
</TABLE>
Net interest margin declined 12% during the three months ended March 31,
1998, compared with the same period a year ago. The decline in net interest
margin is primarily due to a reduction in the average balance of loans held
for sale pending securitization, partially offset by wider net interest rate
spreads earned on loans held for sale.
A 25% decline in loan purchasing volume (see table below) and the timing
of securitization transactions resulted in a reduction in the average monthly
balance of loans held for sale, on which the Company earns interest income
until such loans are securitized, to $183.1 million from $288.2 million
during the quarter ended March 31, 1998 and 1997, respectively. The decline
in purchasing volume is primarily due
10
<PAGE>
to the Company's emphasis on more selective loan purchases. The weighted
average net interest rate spread earned rose to 11.48% during the first
quarter of 1998 compared with 7.43% during the same period in 1997. The rise
in net interest rate spread earned on loans held for sale is principally due
to higher average annual percentage rates ("APR") paid by obligors primarily
resulting from a greater proportion of loan volume consisting of higher rate
Classic loans.
The Company's loan purchasing and securitization volume for each of the
three months ended March 31 are set forth in the table below.
<TABLE>
<CAPTION>
1998 1997
(DOLLARS IN THOUSANDS) ---------- ---------
<S> <C> <C>
Premier $ 172,283 $ 403,195
Classic 411,690 378,677
--------- ---------
Total automobile loans purchased $ 583,973 $ 781,872
--------- ---------
--------- ---------
Automobile loans securitized $ 588,194 $ 774,744
</TABLE>
GAIN ON SALE OF LOANS. Revenue provided from gain on sale of loans was
$31.1 million during the three months ended March 31, 1998. Included in gain
on sale of loans during the three months ended March 31, 1997 was a
non-recurring pre-tax charge of $98.0 million resulting in a loss on sale of
loans of $77.9 million (see "SPECIAL CHARGES"). Excluding this non-recurring
charge, gain on sale of loans increased 55%. This increase is primarily due
to a widening of the gross interest spread earned on loans securitized (see
table below) and a decline in the average participation rate paid to dealers
for loan originations, partially offset by a 24% decrease in loan
securitization volume.
The following table summarizes the Company's gross interest rate spreads
for each of the three month periods ended March 31:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Weighted average APR of loans securitized 17.04% 15.48%
Weighted average securitization rate 5.98 6.52
--------- ---------
Gross interest rate spread (1) 11.06% 8.96%
--------- ---------
--------- ---------
</TABLE>
(1) Before gains/losses on hedging transactions.
The rise in gross interest rate spread during the three months ended
March 31, 1998 is primarily due to an increased proportion of higher-yielding
Classic loans, resulting in an increased APR earned on loans purchased and
subsequently securitized and to a reduction in the securitization rate
reflecting a decline in market interest rates and the Company's ability to
obtain better pricing.
Any unamortized balance of participations paid to dealers is expensed at
the time the related loans are securitized and recorded as a reduction to
gain on sale. Due to the increased proportion of Classic loan purchases,
which generally require lower participation rates than Premier loans, and a
reduction of the maximum participation rate allowable under the Premier
program, participations paid as a percentage of the principal balance of
loans purchased declined to 2.86% during the three months ended March 31,
1998, from 3.26% in the same period a year ago.
Gain on sale of loans has been adjusted for a $5.8 million net realized
loss and a $1.4 million net realized gain on hedging transactions during the
first quarter of 1998 and 1997, respectively.
11
<PAGE>
SERVICING FEE INCOME. The components of servicing fee income for each
of the three month periods ended March 31 were:
<TABLE>
<CAPTION>
1998 1997
(DOLLARS IN THOUSANDS) --------- ---------
<S> <C> <C>
Contractual servicing fee income $ 13,928 $ 9,478
Other servicing income 5,738 3,820
-------- --------
Total servicing fee income $ 19,666 $ 13,298
-------- --------
-------- --------
</TABLE>
The Company earns contractual servicing fee income for servicing loans
sold to investors through securitizations. The servicing fee is 1% per annum
of the outstanding principal balance of the loans for all securitizations
entered into prior to September 1997 and 1.25% per annum on loans included in
and subsequent to the third quarter 1997 securitization. The growth in
contractual servicing fee income is primarily related to an increase in the
average servicing portfolio outstanding (see table below).
Other servicing income consists primarily of collection fees, such as
late payment fees and insufficient fund charges, and interest on collection
accounts earned by the Company as servicer of the loans. The rise in other
servicing income is principally due to increases in income from late fees and
insufficient fund charges reflecting the increase in delinquency rates from
the first quarter of 1997 and growth in the Company's servicing portfolio
compared to the same period a year ago and increased collection account
interest attributable to the growth in the average servicing portfolio
outstanding and related obligor repayments.
The following table reflects the growth in the Company's servicing
portfolio from March 31, 1997 to March 31, 1998:
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------
1998 1997
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED) --------- ---------
<S> <C> <C>
Principal balance of automobile loans held for sale $ 21,129 $ 41,605
Principal balance of loans serviced under securitizations 5,005,350 4,152,993
----------- -----------
Servicing portfolio $ 5,026,479 $ 4,194,598
----------- -----------
----------- -----------
Average unpaid principal balance (actual dollars) $ 11,775 $ 12,479
Number of loans serviced 426,884 336,129
</TABLE>
The Company's servicing portfolio increased 20% from March 31, 1997 to
March 31, 1998. This increase reflects loan purchases and subsequent
securitizations, partially offset by defaults, prepayments and scheduled
repayments. The decline in average outstanding balance of loans during the
first quarter of 1998 reflects an increase in the proportion of used to new
cars financed by the Company.
The Company's servicing fee approximates adequate compensation as
defined by SFAS 125 and therefore, the Company has not recorded a servicing
asset or liability at March 31, 1998.
OPERATING EXPENSES. Salaries and benefits increased to $17.3 million in
the first quarter of 1998, up 20% from $14.5 million during the same period
in 1997. The increase in salaries and benefits is primarily attributable to
an increase in the average number of employees to 1,579 during the first
quarter of 1998 from 1,360 during the same period in 1997. Increased
staffing primarily reflects additional employees hired in the Company's loan
servicing and collection departments.
Other operating costs, including administrative, occupancy, depreciation
and amortization, origination, servicing and collection expenses, increased
9% during the three months ended March 31, 1998, compared with the same
period in 1997. Included in operating costs during the first quarter of 1997
was a one-time pre-tax charge of approximately $5.0 million primarily related
to legal costs and severance expenses for certain former executives of the
Company. Excluding this one-time charge, other operating
12
<PAGE>
costs increased 35%. The increase in other operating costs is primarily a
result of the higher percentage of Classic program loans in the portfolio,
since these generally require greater collection efforts and related costs
(including increased telephone, fax, postage and repossession expenses) than
Premier program loans. In addition, an overall increase in delinquency rates
during the first quarter of 1998 compared to the same period a year ago
further contributed to an increase in loan and collection expenses.
IMPACT OF YEAR 2000. The Company recognizes that the arrival of the
Year 2000 poses a unique worldwide challenge to the ability of all computer
systems to recognize the date change from December 31, 1999 to January 1,
2000 and, like other companies, is assessing, enhancing and updating its
computer applications and business processes to provide for their continued
functionality after said date. In connection with its initiative to replace
and enhance key operating systems, the Company has engaged outside
consultants to assist in the design and implementation of various systems
that will be Year 2000 compliant. The Company anticipates that the testing
and implementation of such systems will be completed by mid-1999, which is
prior to any anticipated impact on its operating systems. The Company
believes that with conversions to new software, the Year 2000 issue will not
pose significant operational problems for its computer systems. However, if
such conversions are not made, or are not completed in a timely manner, the
Year 2000 issue could have a material impact on the operations of the Company.
The costs associated with the Year 2000 project will be primarily for
the purchase of the new software being developed to replace and enhance the
Company's current operating systems. Consistent with its capitalization
policy, the costs of the Company's new operating software will be capitalized
and amortized over its expected useful life. As such, the Company believes
that the impact of the Year 2000 issue will not have a material effect on the
results of operations.
LONG-TERM DEBT AND OTHER INTEREST EXPENSE. Long-term debt and other
interest expense increased 68% during the three months ended March 31, 1998
compared to the same period in 1997. The increase is primarily due to the
issuance of $300.0 million and $75.0 million of 11.5% Senior Notes "the
Senior Notes" in March 1997 and October 1997, respectively, partially offset
by the concurrent extinguishment of $145.0 million of 13% Senior Term Notes
in March 1997.
EXTRAORDINARY ITEM. In March 1997, the Company issued $300.0 million of
11.5% Senior Notes and utilized approximately $173.5 million to repurchase
and covenant defease the Company's $145.0 million 13% Senior Term Notes,
including accrued interest of $7.9 million and a premium of approximately
$20.3 million. These charges and additional professional fees incurred to
retire such debt were treated as an extraordinary item, net of tax.
FINANCIAL CONDITION
FINANCE INCOME RECEIVABLE. Finance income receivable increased to
$410.6 million at March 31, 1998 from $372.0 million at December 31, 1997.
The increase represents amounts capitalized upon completion of the Company's
first quarter securitization related to the present value of estimated cash
flows.
RESTRICTED CASH IN SPREAD ACCOUNTS. Restricted cash in spread accounts
increased to $261.3 million at March 31, 1998 from $250.3 million at December
31, 1997. This increase reflects the Company's continued securitization of
loan purchases and the related accumulation of excess cash flows in
restricted cash accounts to reach levels defined within each securitization
agreement, partially offset by the release of excess cash flows to the
Company through its wholly-owned subsidiary, Arcadia Receivables Finance Corp.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES. Accounts payable and accrued
liabilities decreased 22% to $20.4 million at March 31, 1998 as compared with
$26.3 million at December 31, 1997. This decrease reflects the semi-annual
payment of accrued interest associated with the Company's Senior Notes in
March 1998.
13
<PAGE>
DELINQUENCY, CREDIT LOSS AND REPOSSESSION EXPERIENCE
The following tables describe the Company's delinquency, credit loss and
repossession experience for the periods indicated. A delinquent loan may
result in the repossession and foreclosure of the collateral for the loan.
Losses resulting from repossession and foreclosure of loans are charged
against applicable allowances.
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE (1):
MARCH 31, 1998 DECEMBER 31, 1997
------------------------ -----------------------
NUMBER OF NUMBER OF
LOANS BALANCE LOANS BALANCE
(DOLLARS IN THOUSANDS) -------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Servicing portfolio at end of period 426,884 $5,026,479 411,429 $4,956,090
Delinquencies:
31-60 days 7,484 $ 90,148 8,297 $ 100,161
61-90 days 3,358 41,363 3,635 45,485
91 days or more 3,967 46,023 3,019 34,047
-------- ---------- ------- ----------
Total loans delinquent 31 or more days 14,809 $ 177,534 14,951 $ 179,693
Delinquencies as a percentage of
number of loans and amount
outstanding at end of period (2) 3.47% 3.53% 3.63% 3.63%
Amount in repossession (3) 5,646 $ 51,482 6,083 $ 55,300
-------- ---------- ------- ----------
Total delinquencies and amount in
repossession (2) (3) 20,455 $ 229,016 21,034 $ 234,993
-------- ---------- ------- ----------
-------- ---------- ------- ----------
</TABLE>
___________
(1) All amounts and percentages are based on the principal amount scheduled
to be paid on each loan. The information in the table includes
previously sold loans which the Company continues to service.
(2) Amounts shown do not include loans which are less than 31 days
delinquent.
(3) Amount in repossession represents financed automobiles which have been
charged-off but not yet liquidated.
CREDIT LOSS/REPOSSESSION EXPERIENCE (1):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average servicing portfolio outstanding during the period $5,001,781 $3,976,446
Average number of loans outstanding during the period 419,179 319,118
Number of charge-offs 7,597 4,966
Gross charge-offs (2) $ 52,479 $ 46,410
Recoveries (3) 3,576 1,880
---------- ----------
Net losses $ 48,903 $ 44,530
---------- ----------
---------- ----------
Annualized gross charge-offs as a percentage of average
servicing portfolio. 4.20% 4.67%
Annualized net losses as a percentage of average
servicing portfolio 3.91% 4.48%
</TABLE>
___________
(1) All amounts and percentages are based on the principal amount scheduled
to be paid on each loan. The information in the table includes previously
sold loans which the Company continues to service.
14
<PAGE>
(2) Gross charge-offs represent principal amounts which management estimated
to be uncollectable after the consideration of anticipated proceeds from
the disposition of repossessed assets and selling expenses.
(3) Includes post-disposition amounts received on previously charged off
loans.
The Company's delinquency rate has declined compared to December 31,
1997, in part because of seasonal pressure on collection efforts which is
generally highest in the fourth quarter of the year. Management also
believes that the decrease in the delinquency rate reflects improvements in
the Company's collections and servicing functions. During the first quarter
of 1998, the Company began incorporating more aggressive use of autodialers
and introduced borrower behavioral scoring information into its collection
calling strategy in order to focus resources where management believes they
will make the most difference in improving collection efforts. The Company
has also begun to move collection personnel out of buying centers to
centralized sites to better leverage collections resources and technology and
control collection processes more tightly.
Gross charge-offs and net losses during the first quarter of 1997
include a special charge of approximately $25 million resulting from a
revision to the Company's inventory valuation policy (SEE "SPECIAL CHARGES").
Excluding the one-time valuation adjustment, gross charge-off and net loss
rates increased during the quarter ended March 31, 1998 from the first
quarter of last year primarily due to the continued rise in Classic loan
volume and the seasoning of the Company's existing servicing portfolio. Net
losses during the first quarter of 1998 have been further affected by selling
an increased proportion of repossessed vehicles through wholesale auctions.
During the first quarter of 1998, the Company liquidated approximately 71% of
all repossessed vehicles sold through wholesale auctions compared with 35% in
the first quarter of 1997. Because recovery rates are generally lower on
vehicles sold at auction compared to those liquidated through retail
channels, the increased utilization of auctions has increased net losses
experienced by the Company. In addition, wholesale recovery rates have
continued to decline during the past few quarters, reflecting a softening in
the used car market.
LIQUIDITY
The Company's business requires substantial cash to support its
operating activities. The principal cash requirements include (i) amounts
necessary to purchase and finance automobile loans pending securitization,
(ii) payment of dealer participations, (iii) cash held from time to time in
restricted spread accounts to support securitizations and warehouse
facilities and other securitization expenses, (iv) interest advances to
securitization trusts, (v) repossessed inventory, and (vi) interest expense.
The Company also uses significant amounts of cash for operating expenses. The
Company receives cash principally from interest on loans held pending
securitization, from excess cash flow received from securitization trusts and
from fees earned through servicing of loans held by such trusts. The Company
has operated on a negative operating cash flow basis and expects to continue
to do so in the near future. The Company has historically funded these
negative operating cash flows principally through borrowings from financial
institutions, sales of equity securities and sales of senior and subordinated
notes. The Company expects that it will require additional capital in the
future to fund continued negative cash flows, although there can be no
assurance that the Company will have access to capital markets in the future
or that financing will be available to satisfy the Company's operating and
debt service requirements or to fund its future growth. See "Capital
Resources."
PRINCIPAL USES OF CASH IN OPERATING ACTIVITIES
PURCHASE AND FINANCING OF AUTOMOBILE LOANS. Automobile loan purchases
represent the Company's most significant cash flow requirement. The Company
funds the purchase price of loans primarily through the use of warehouse
facilities. However, because advance rates under the warehouse facilities
generally provide funds from 93% to 97% of the principal balance of the
loans, the Company is required to fund the remainder of all purchases prior
to securitization with other available cash resources. The Company purchased
$584.0 million of loans during the first three months of 1998 compared to
$781.9 million during the same period in 1997.
15
<PAGE>
DEALER PARTICIPATIONS. Consistent with industry practice, the Company
pays dealers participations for selling loans to the Company. These
participations typically require the Company to advance an up-front amount to
dealers. Participations paid by the Company to dealers during the three
months ended March 31, 1998 were $16.7 million, or approximately 2.86% of
the principal balance of loans purchased, compared with $25.5 million, or
approximately 3.26% of loans purchased, during the same period in 1997. The
decrease in dealer participations as a percentage of loans purchased reflects
the growth in volume in Classic loans (which are generally associated with
lower dealer participations) and a reduction in the maximum allowable
participation paid for Premier loans.
SECURITIZATION OF AUTOMOBILE LOANS. In connection with securitizations,
the Company is required to fund spread accounts related to each transaction.
The Company funds these spread accounts by foregoing receipt of excess cash
flow until these spread accounts exceed predetermined levels. In addition,
for certain securitizations, the Company has been required to provide initial
cash deposits into the spread accounts. The Company had $261.3 million of
restricted cash in spread accounts at March 31, 1998, compared with $250.3
million at December 31, 1997. The increase in restricted cash in spread
accounts reflects the Company's continued securitization of loan purchases
and the related accumulation of excess cash flows to levels defined within
each securitization agreement, partially offset by the release of excess cash
flows.
The Company also incurs certain expenses in connection with
securitizations, including underwriting fees, credit enhancement fees,
trustee fees and other costs, which approximate 0.5% of the principal amount
of the asset-backed securities sold into the securitizations.
ADVANCES DUE TO SERVICER. As the servicer of loans sold in
securitizations, the Company periodically makes interest advances to the
securitization trusts to provide for temporary delays in the receipt of
required interest payments from borrowers. In accordance with the relevant
servicing agreements, the Company makes advances only in the event it expects
to recover such advances through the ultimate payments from the obligor over
the life of the loan.
REPOSSESSED INVENTORY. At March 31, 1998, repossessed inventory managed
or owned by the Company and held for resale was $51.5 million, compared with
$55.3 million at December 31, 1997. The rate of repossessed inventory
turnover impacts cash available for spread accounts under securitization
trusts and, consequently, the excess cash available for distribution to the
Company. At March 31, 1998, repossessed inventory was 1.0% of the total
servicing portfolio compared with 1.1% at December 31, 1997. Any improvement
in excess cash flows due to an increase in the inventory turnover rate may be
partially reduced by lower recoveries realized through an increased use of
wholesale auctions and generally lower wholesale used car prices.
INTEREST EXPENSE. Although the Company records net interest margin as
earned, a significant portion of the interest income component is generally
received in cash from excess cash flow, while the interest expense component
(primarily warehousing interest) is paid prior to securitization. The
Company also incurs interest expense related to both short-term and long-term
debt obligations.
PRINCIPAL SOURCES OF CASH IN OPERATING ACTIVITIES
EXCESS CASH FLOW. The Company receives excess cash flow from
securitization trusts, including the realization of gain on sale, the
recovery of dealer participations, and the recovery of accrued interest
receivable earned, but not yet collected, on loans held for sale prior to
securitization. Recovery of dealer participations and accrued interest
receivable, which occur throughout the life of the securitization, result in
a reduction of the finance income receivable but, because they have been
considered in the original determination of the gain on sale of loans, have
no effect on the Company's results of operations in the year in which the
participations and interest are recovered from the securitization trust.
During the first quarter of 1998, the Company received $25.0 million of
excess cash flow, compared with $15.1 million during the first quarter 1997.
Included in the 1998 cash released from spread accounts is $4.8 million of
cash which is restricted pursuant to an arrangement between the Company and
its asset-backed securities insurance provider.
16
<PAGE>
SERVICING FEES. The Company receives servicing fees for servicing
securitized loans included in various securitization trusts. The servicing
fee for loans in securitization trusts is equal to one percent per annum of
the outstanding principal balance of the loans for all securitizations
entered into prior to September 1997 and 1.25 percent per annum on loans
subsequently securitized. The Company also receives collection fees, such as
late payment fees and insufficient fund charges, and interest on collection
accounts earned by the Company as servicer of the loans. During the three
months ended March 31, 1998 and 1997, the Company received cash for such
servicing in the amount of $19.6 million and $12.8 million, respectively.
Servicing fee income is reflected in the Company's revenues as earned.
CAPITAL RESOURCES
The Company finances the acquisition of automobile loans primarily
through (i) warehouse facilities, pursuant to which loans are sold or
financed generally on a temporary basis, and (ii) the securitization of
loans, pursuant to which loans are sold as asset-backed securities.
Additional financing is required to fund the Company's operations.
WAREHOUSE FACILITIES. Automobile loans held for sale are funded
primarily through warehouse facilities. At March 31, 1998, the Company had
three warehouse facilities in place with various financial institutions and
institutional lenders with an aggregate capacity of $875.0 million, of which
$821.1 million was available. Proceeds from securitizations, generally
received within seven to ten days following the cut-off date established for
the securitization transaction, are applied to repay amounts outstanding
under warehouse facilities.
SECURITIZATION PROGRAM. An important capital resource for the Company
has been its ability to sell automobile loans in the secondary markets
through securitizations. The following table summarizes the Company's
securitization transactions for the three months ended March 31, 1998, all of
which were publicly issued and rated "AAA/Aaa".
<TABLE>
<CAPTION>
REMAINING CURRENT
REMAINING BALANCE AS A CURRENT WEIGHTED GROSS
BALANCE AS PERCENTAGE OF WEIGHTED AVERAGE INTEREST
ORIGINAL OF MARCH 31, ORIGINAL AVERAGE SECURITIZATION RATE
DATE BALANCE 1998 BALANCE APR RATE SPREAD
- ----------------------- ----------- ------------ ------------- ----------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
March 1998 (1) $ 525,000 $ 484,853 92.35% 17.17% 5.93% 11.24%
</TABLE>
- ---------------
(1) As of March 31, 1998, the Company had delivered $489.9 million of
automobile loans and $35.1 million of cash remained in the pre-funded
portion of the trust.
HEDGING STRATEGY
The Company enters into hedging transactions to manage its gross
interest rate spread on loans held for sale. The Company sells forward US
Treasuries that most closely parallel the average life of its portfolio of
loans held for sale. Hedging gains and losses are recognized as a component
of the gain on sale of loans on the date such loans are sold. To the extent
hedging gains or losses are significant, the resulting up-front cash payments
or receipts may impact the Company's liquidity. The Company receives the
up-front gains or losses back over time through a lower or higher spread,
respectively, at the time of securitization. At March 31, 1998, the Company
had unrealized losses on hedge contracts of $2.3 million.
OTHER CAPITAL RESOURCES
Historically, the Company has utilized various debt and equity
financings to offset negative operating cash flows and support its
operations. No such offerings were completed by the Company during the first
quarter of 1998.
17
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Under the applicable Securities and Exchange Commission rules, there is
no new information with respect to legal proceedings that the Company is
required to report in connection with this Quarterly Report on Form 10-Q.
ITEM 2. CHANGES IN SECURITIES
On January 16, 1998, the Company entered into Amendment No. 1 (the
"Amendment") to Rights Agreement, dated as of November 1, 1996 (the "Rights
Agreement") between the Company and Norwest Bank Minnesota, N.A. The Rights
Agreement establishes the terms of the Rights attached to each share of the
Company's Common Stock. The Amendment modified the definition of "Acquiring
Person" contained in the Rights Agreement to increase the percentage
ownership threshold from 15% to 18%.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURING HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed in response to Item 601 of
Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NO. -----------
- -------
<S> <C>
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
3.2 Restated Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
4.1 Rights Agreement dated as of November 1, 1996, between the Company
and Norwest Bank Minnesota, National Association, as Rights Agent
(incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A filed November 7, 1996).
4.2 Amendment No. 1 to Rights Agreement, dated January 16, 1998, to
Rights Agreement, dated as of November 1, 1996 between the Company and
Norwest Bank Minnesota, N.A. (incorporated by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K dated January 8, 1998 and
filed January 20, 1998).
4.3 First Amendment and Restatement, dated as of April 28, 1995 of
Indenture, dated July 1, 1994, between the Company and Norwest Bank
Minnesota, National Association, as Trustee, relating to the Company's
Unsecured Extendible Notes and Fixed Term Notes, including forms of
Notes (incorporated by reference to Exhibit No. 4.8.1 to
Post-Effective Amendment No. 2 on Form S-3 to the Company's
Registration
18
<PAGE>
Statement on Form S-1, File No. 33-81512).
4.4 Indenture dated as of March 15, 1996, between the Company and Norwest
Bank Minnesota, National Association, as Trustee, relating to the
Company's Subordinated Notes, Series 1996-A due 2001 (incorporated by
reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
4.5 First Supplemental Indenture, dated as of March 15, 1996, to
Indenture, dated as of March 15, 1996, between the Company and Norwest
Bank Minnesota, National Association, as Trustee, relating to the
Company's Subordinated Notes, Series 1996-A due 2001 (incorporated by
reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
4.6 Indenture dated as of March 12, 1997, between the Company and Norwest
Bank Minnesota, National Association, as Trustee, relating to the
Company's 11 1/2% Senior Notes due 2007 (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated
March 12, 1997 and filed March 18, 1997).
4.7 First Supplemental Indenture, dated as of March 12, 1997 between the
Company and Norwest Bank Minnesota, National Association, as Trustee,
relating to $300,000,000 of the Company's 11 1/2% Senior Notes due
2007 issued March 12, 1997 (incorporated by reference to Exhibit 4.2
to the Company's Current Report on Form 8-K dated March 12, 1997 and
filed March 18, 1997).
4.8 Warrant Agreement, dated as of March 12, 1997 by and between the
Company and Norwest Bank Minnesota, National Association, as Warrant
Agent (incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K dated March 12, 1997 and filed March 18,
1997).
4.9 Form of Unit (incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K dated March 12, 1997 and filed
March 18, 1997).
4.10 Form of 11 1/2% Senior Notes due March 15, 2007 (incorporated by
reference to Exhibit 4.5 to the Company's Current Report on Form 8-K
dated March 12, 1997 and filed March 18, 1997).
4.11 Form of Initial Warrant Certificate (incorporated by reference to
Exhibit 4.6 to the Company's Current Report on Form 8-K dated
March 12, 1997 and filed March 18, 1997).
4.12 Second Supplemental Indenture, dated as of October 8, 1997, to
Indenture, dated as of March 12, 1997, between the Company and Norwest
Bank Minnesota, National Association, as Trustee, including form of
Notes , relating to $75,000,000 of the Company's 11 1/2% Senior Notes
due 2007 issued October 8, 1997 (incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K dated
October 8, 1997, filed October 15, 1997).
10.1 Series 1998-A Supplement, dated as of March 25, 1998, to Spread
Account Agreement dated as of March 25, 1993, as amended and restated
as of December 16, 1997, among the Company, Arcadia Receivables
Finance Corp., Financial Security Assurance, Inc. and Norwest Bank
Minnesota, N.A. (filed herewith).
10.2 Insurance and Indemnity Agreement, dated as of March 25, 1998, among
Financial Security Assurance, Inc., Arcadia Receivables Trust 1998-A,
Arcadia Receivables Finance Corp. and the Company (filed herewith).
27.1 Financial Data Schedule (filed herewith).
99.1 Cautionary Statement (filed herewith).
</TABLE>
(b) REPORTS ON FORM 8-K
On January 20, 1998, the Company filed a Current Report on Form 8-K
dated January 8, 1998, announcing that the Company had amended its
Shareholder Rights Plan to increase the percentage ownership threshold
contained in the definition of "Acquiring Person" from 15% to 18%.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ARCADIA FINANCIAL LTD.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard A. Greenawalt President, Chief Executive May 14, 1998
- --------------------------- Officer, and Director
Richard A. Greenawalt
/s/ John A. Witham Executive Vice President and May 14, 1998
- --------------------------- Chief Financial Officer
John A. Witham (Principal Financial Officer)
/s/ Brian S. Anderson Senior Vice President, Corporate May 14, 1998
- --------------------------- Controller and Assistant Secretary
Brian S. Anderson (Principal Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997).
3.2 Restated Bylaws of the Company, as amended (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997).
4.1 Rights Agreement dated as of November 1, 1996, between the
Company and Norwest Bank Minnesota, National Association, as
Rights Agent (incorporated by reference to Exhibit 1 to the
Company's Registration Statement on Form 8-A filed November 7,
1996).
4.2 Amendment No. 1 to Rights Agreement, dated January 16, 1998, to
Rights Agreement, dated as of November 1, 1996 between the
Company and Norwest Bank Minnesota, N.A. (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form
8-K dated January 8, 1998 and filed January 20, 1998).
4.3 First Amendment and Restatement, dated as of April 28, 1995 of
Indenture, dated July 1, 1994, between the Company and Norwest
Bank Minnesota, National Association, as Trustee, relating to
the Company's Unsecured Extendible Notes and Fixed Term Notes,
including forms of Notes (incorporated by reference to Exhibit
No. 4.8.1 to Post-Effective Amendment No. 2 on Form S-3 to the
Company's Registration Statement on Form S-1, File
No. 33-81512).
4.4 Indenture dated as of March 15, 1996, between the Company and
Norwest Bank Minnesota, National Association, as Trustee,
relating to the Company's Subordinated Notes, Series 1996-A due
2001 (incorporated by reference to Exhibit 4.5 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996).
4.5 First Supplemental Indenture, dated as of March 15, 1996, to
Indenture, dated as of March 15, 1996, between the Company and
Norwest Bank Minnesota, National Association, as Trustee,
relating to the Company's Subordinated Notes, Series 1996-A due
2001 (incorporated by reference to Exhibit 4.6 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996).
4.6 Indenture dated as of March 12, 1997, between the Company and
Norwest Bank Minnesota, National Association, as Trustee,
relating to the Company's 11 1/2% Senior Notes due 2007
(incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 12, 1997 and filed March
18, 1997).
4.7 First Supplemental Indenture, dated as of March 12, 1997 between
the Company and Norwest Bank Minnesota, National Association, as
Trustee, relating to $300,000,000 of the Company's 11 1/2%
Senior Notes due 2007 issued March 12, 1997 (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K dated March 12, 1997 and filed March 18, 1997).
4.8 Warrant Agreement, dated as of March 12, 1997 by and between the
Company and Norwest Bank Minnesota, National Association, as
Warrant Agent (incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K dated March 12, 1997 and
filed March 18, 1997).
4.9 Form of Unit (incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K dated March 12, 1997 and
filed March 18, 1997).
4.10 Form of 11 1/2% Senior Notes due March 15, 2007 (incorporated by
reference to Exhibit 4.5 to the Company's Current Report on
Form 8-K dated March 12, 1997 and filed March 18, 1997).
4.11 Form of Initial Warrant Certificate (incorporated by reference
to Exhibit 4.6 to the Company's Current Report on Form 8-K dated
March 12, 1997 and filed March 18, 1997).
4.12 Second Supplemental Indenture, dated as of October 8, 1997, to
Indenture, dated as of March 12, 1997, between the Company and
Norwest Bank Minnesota, National Association, as Trustee,
including form of Notes , relating to $75,000,000 of the
Company's 11 1/2% Senior Notes due 2007 issued October 8,
1997 (incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated October 8, 1997, filed October
15, 1997).
10.1 Series 1998-A Supplement, dated as of March 25, 1998, to Spread
Account Agreement dated as of March 25, 1993, as amended and
restated as of December 16, 1997, among the Company, Arcadia
Receivables Finance Corp., Financial Security Assurance, Inc.
and Norwest Bank
21
<PAGE>
Minnesota, N.A. (filed herewith).
10.2 Insurance and Indemnity Agreement, dated as of March 25, 1998,
among Financial Security Assurance, Inc., Arcadia Receivables
Trust 1998-A, Arcadia Receivables Finance Corp. and the Company
(filed herewith).
27.1 Financial Data Schedule (filed herewith).
99.1 Cautionary Statement (filed herewith).
</TABLE>
22
<PAGE>
EXECUTION COPY
SERIES 1998-A SUPPLEMENT
dated as of March 25, 1998
to
SPREAD ACCOUNT AGREEMENT
dated as of March 25, 1993,
as amended and restated
as of December 16, 1997
among
ARCADIA FINANCIAL LTD.
ARCADIA RECEIVABLES FINANCE CORP.
FINANCIAL SECURITY ASSURANCE INC.
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Article I.
DEFINITIONS
Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2 Rules of Interpretation . . . . . . . . . . . . . . . . . . 5
Article II.
CREDIT ENHANCEMENT FEE; SERIES SUPPLEMENTS; THE COLLATERAL
Section 2.1 Series 1998-A Credit Enhancement Fee . . . . . . . . . . 5
Section 2.2 Series Supplements. . . . . . . . . . . . . . . . . . . . 6
Section 2.3 Grant of Security Interest by Arcadia Financial and the
Seller. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Article III.
SPREAD ACCOUNT
Section 3.1 Establishment of Series 1998-A Spread Account; Initial
Deposit into Series 1998-A Spread Account . . . . . . . . 7
Section 3.2 Spread Account Additional Deposits. . . . . . . . . . . . 7
Article IV.
MISCELLANEOUS
Section 4.1 Further Assurances. . . . . . . . . . . . . . . . . . . . 7
Section 4.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.3 Counterparts. . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.4 Headings. . . . . . . . . . . . . . . . . . . . . . . . . 8
Schedule I
</TABLE>
<PAGE>
SERIES 1998-A SUPPLEMENT
SERIES 1998-A SUPPLEMENT, dated as of March 25, 1998 (the "Series 1998-A
Supplement"), by and among ARCADIA FINANCIAL LTD., a Minnesota corporation
("Arcadia Financial"), ARCADIA RECEIVABLES FINANCE CORP., a Delaware
corporation (the "Seller"), FINANCIAL SECURITY ASSURANCE INC., a New York
stock insurance company ("Financial Security"), NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, a national banking association, in its capacity as
Indenture Trustee under the Indenture and as Collateral Agent hereunder.
RECITALS
1. The parties hereto have previously entered into a Spread Account
Agreement, dated as of March 25, 1993, as amended and restated as of December
16, 1997 (the "Spread Account Agreement"), and, as contemplated by Section
2.02 of the Spread Account Agreement, this Series 1998-A Supplement
constitutes a Series Supplement to the Spread Account Agreement so that
hereafter this Series 1998-A Supplement shall form a part of the Spread
Account Agreement for all purposes thereof, and all references herein and
hereafter to the Spread Account Agreement shall mean the Spread Account
Agreement, as supplemented hereby.
2. Arcadia Automobile Receivables Trust, 1998-A (the "Series 1998-A
Trust") is being formed contemporaneously herewith pursuant to the Series
1998-A Trust Agreement (as defined herein).
3. Pursuant to the Series 1998-A Sale and Servicing Agreement, the
Seller is selling to the Series 1998-A Trust all of its right, title and
interest in and to the Initial Receivables (as defined in the Series 1998-A
Sale and Servicing Agreement) and certain other Trust Property (as defined in
the Series 1998-A Trust Agreement).
4. Pursuant to the Series 1998-A Indenture, the Series 1998-A Trust is
issuing the Series 1998-A Notes (as defined herein).
5. The Seller has requested that Financial Security issue the Series
1998-A Note Policy to the Trustee to guarantee payment of the Scheduled
Payments (as deemed in such Policy) on each Payment Date in respect of the
Series 1998-A Notes.
6. In partial consideration of the issuance of the Series 1998-A Note
Policy, the Seller has agreed that Financial Security shall have certain
rights as Controlling Party, to the extent set forth in the Spread Account
Agreement and the Series 1998-A Indenture.
7. The Seller is a wholly owned special purpose subsidiary of Arcadia
Financial. The Series 1998-A Trust has agreed to pay the Series 1998-A Credit
Enhancement Fee to the Seller in consideration of the obligations of the
Seller and Arcadia Financial pursuant hereto and
<PAGE>
in consideration of the obligations of Arcadia Financial pursuant to the
Series 1998-A Insurance Agreement (such obligations forming part of the
Series 1998-A Insurer Secured Obligations as referred to herein). The Series
1998-A Insurer Secured Obligations form part of the consideration to
Financial Security for its issuance of the Series 1998-A Policy.
8. In order to secure the performance of the Series 1998-A Secured
Obligations, to further effect and enforce the subordination provisions to
which the Series 1998-A Credit Enhancement Fee is subject, and in
consideration of the receipt of the Series 1998-A Credit Enhancement Fee,
Arcadia Financial and the Seller have agreed to pledge the Series 1998-A
Collateral as Collateral to the Collateral Agent for the benefit of Financial
Security and for the benefit of the Trustee on behalf of the Trust, upon the
terms and conditions set forth herein.
AGREEMENTS
In consideration of the premises, and for other good and valuable
consideration, the adequacy, receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 DEFINITIONS. All terms defined in Section 1.1 of
the Series 1998-A Sale and Servicing Agreement shall have the same meaning
with respect to this Series 1998-A Supplement. The following terms shall have
the following meanings:
"COLLECTION ACCOUNT SHORTFALL" means, with respect to Series 1998-A and
any Distribution Date, the Deficiency Claim Amount, as defined in the Series
1998-A Sale and Servicing Agreement, with respect to such Distribution Date.
"DEEMED CURED" means with respect to Series 1998-A, (a) with respect to
an event that has occurred pursuant to clause (A)(i) of the definition of
Trigger Event, as of a Determination Date with respect to Series 1998-A, that
no event as specified in clause (A)(i) of the definition thereof with respect
to such Series shall have occurred as of such Determination Date or as of any
of the five consecutively preceding Determination Dates, and (b) with respect
to an event that has occurred pursuant to clause (A)(ii) or clause (A)(iii)
of the definition of Trigger Event, as of the next Determination Date which
occurs in a calendar month which is a multiple of three months succeeding the
Series 1998-A Closing Date, that no event specified in clause (A)(ii) or
clause (A)(iii) of the definition of Trigger Event with respect to such
Series shall have occurred as of such Determination Date.
"INITIAL PRINCIPAL AMOUNT" means $525,000,000 with respect to Series
1998-A.
"INITIAL SPREAD ACCOUNT DEPOSIT" means $0 for Series 1998-A.
2
<PAGE>
"INITIAL SPREAD ACCOUNT MAXIMUM AMOUNT" means, with respect to Series
1998-A and any Distribution Date, an amount equal to the greater of (i) 7% of
the Series 1998-A Balance as of the close of business on such Distribution
Date and (ii) the Spread Account Minimum Amount as of the close of business
on such Distribution Date.
"SERIES 1998-A BALANCE" means, with respect to Series 1998-A and any
Distribution Date, the aggregate principal amount of the Series 1998-A Notes
as of such Distribution Date (after giving effect to the distributions in
respect of principal on the Notes made on such Distribution Date).
"SERIES 1998-A COLLATERAL" has the meaning specified in Section 2.3(a)
hereof.
"SERIES 1998-A CREDIT ENHANCEMENT FEE" means the amount distributable on
each Distribution Date pursuant to Section 4.6(viii) and (ix) of the Series
1998-A Sale and Servicing Agreement.
"SERIES 1998-A INDENTURE" means the Indenture, dated as of March 1,
1998, among the Series 1998-A Trust, the Trustee and the Indenture Collateral
Agent.
"SERIES 1998-A NOTE POLICY" means the financial guaranty insurance
policy issued by Financial Security with respect to the Series 1998-A Notes.
"SERIES 1998-A NOTES" means the Class A-1, Class A-2, Class A-3, Class
A-4, and Class A-5 Notes issued pursuant to the Series 1998-A Indenture.
"SERIES 1998-A OWNER TRUSTEE" means Wilmington Trust Company, not in its
individual capacity but solely as Owner Trustee, or its successor in
interest, and any successor Owner Trustee appointed as provided in the Series
1998-A Trust Agreement.
"SERIES 1998-A RECEIVABLE" means each Receivable referenced on the
Schedule of Receivables attached to the Series 1998-A Sale and Servicing
Agreement, as supplemented from time to time during the Funding Period by one
or more Subsequent Transfer Agreements.
"SERIES 1998-A RESERVE ACCOUNT" means the Reserve Account established
pursuant to Section 4.1(d) of the Series 1998-A Sale and Servicing Agreement.
"SERIES 1998-A SALE AND SERVICING AGREEMENT" means the Sale and
Servicing Agreement, dated as of March 1, 1998, among the Series 1998-A
Trust, Arcadia Financial, in its individual capacity and as Servicer, the
Seller and the Backup Servicer, as such agreement may be supplemented,
amended or modified from time to time.
"SERIES 1998-A SECURED OBLIGATIONS" means the Insurer Secured
Obligations and the Trustee Secured Obligations with respect to Series 1998-A.
"SERIES 1998-A SPREAD ACCOUNT" means the Spread Account established
pursuant to Section 3.1(a) hereof.
3
<PAGE>
"SERIES 1998-A SUPPLEMENT" means this Series 1998-A Supplement which
constitutes a Series Supplement to the Spread Account Agreement.
"SERIES 1998-A TRUST AGREEMENT" means the Trust Agreement, dated as of
March 1, 1998, among the Seller, Financial Security and the Series 1998-A
Owner Trustee.
"SPREAD ACCOUNT ADDITIONAL DEPOSIT" means, with respect to Series 1998-A
and any Subsequent Transfer Date, an amount equal to 0.00% of the aggregate
Principal Balance (as of the related Subsequent Cutoff Date) of the
Subsequent Receivables being transferred to the Series 1998-A Trust on such
Subsequent Transfer Date or such greater amount as required by the Rating
Agencies to confirm that the rating assigned to the Series 1998-A Notes will
be in the highest category by such Rating Agencies.
"SPREAD ACCOUNT MAXIMUM AMOUNT" means, with respect to Series 1998-A and
any Distribution Date:
(i) if no Insurance Agreement Event of Default with respect to Series
1998-A has occurred and is continuing, no Capture Event has occurred and is
continuing, no Trigger Event has occurred on the related Determination
Date, and if any Trigger Event with respect to Series 1998-A has occurred
as of a prior Determination Date, such Trigger Event is Deemed Cured as of
the related Determination Date, the Initial Spread Account Maximum Amount
with respect to Series 1998-A and such Distribution Date;
(ii) if an event specified in clause (A) of the definition of Trigger
Event with respect to Series 1998-A has occurred as of the Determination
Date or has occurred as of a prior Distribution Date (and whether or not a
Trigger Event shall occur or shall have occurred in connection with such
event), and such event is not Deemed Cured as of the related Determination
Date and no Insurance Agreement Event of Default with respect to Series
1998-A has occurred and is continuing and no Capture Event has occurred and
is continuing, the Spread Account Maximum Amount shall be equal to the
greater of (i) 10% of the Series 1998-A Balance as of the close of business
on such Distribution Date and (ii) the Spread Account Minimum Amount as of
the close of business on such Distribution Date; or
(iii) if (A) an Insurance Agreement Event of Default with respect
to Series 1998-A has occurred and is continuing or (B) a Capture Event has
occurred and is continuing as of the related Determination Date, the Spread
Account Maximum Amount shall be equal to the greater of (i) 25% of the
Series 1998-A Balance as of the close of business on such Distribution Date
and (ii) the Spread Account Minimum Amount as of the close of business on
such Distribution Date.
"SPREAD ACCOUNT MINIMUM AMOUNT" means, with respect to Series 1998-A and
any Distribution Date, an amount equal to the greater of:
(i) $100,000, and
(ii) the lesser of:
4
<PAGE>
(A) 2.0% of the Initial Principal Amount of Series 1998-A, and
(B) the Series 1998-A Balance.
"TRIGGER EVENT" means, with respect to Series 1998-A and as of a
Determination Date, the occurrence of any of the events specified in clause
(A) together with the occurrence of the event specified in clause (B):
(A) (i) the Average Delinquency Ratio for such Determination Date shall
be 8.07% or greater;
(ii) with respect to any Determination Date, the Cumulative Default
Rate shall be equal to or greater than the percentage set forth
in Column A of Schedule I attached hereto corresponding to such
Determination Date;
(iii) with respect to any Determination Date, the Cumulative Net
Loss Rate shall be equal to or greater than the percentage set
forth in Column B of Schedule I attached hereto corresponding to
such Determination Date;
(B) The amount specified with respect to such Series in the last sentence
of Section 2.09(d) of the Spread Account Agreement is positive on such
Determination Date, and such amount has not been deposited in the
related Tag Account on such Determination Date.
Section 1.2 RULES OF INTERPRETATION. The terms "hereof,"
"herein," "hereto" or "hereunder," unless otherwise modified by more specific
reference, shall refer to this Series 1998-A Supplement. Unless otherwise
indicated in context, the terms "Article," "Section" or "Exhibit" shall refer
to an Article or Section of, or Exhibit to, this Series 1998-A Supplement.
The definition of a term shall include the singular, the plural, the past,
the present, the future, the active and the passive forms of such term. A
term defined herein and used herein preceded by a Series designation, shall
mean such term as it relates to the Series designated.
ARTICLE II.
CREDIT ENHANCEMENT FEE; SERIES SUPPLEMENTS; THE COLLATERAL
Section 2.1 SERIES 1998-A CREDIT ENHANCEMENT FEE. The Series
1998-A Sale and Servicing Agreement provides for the payment to the Seller of
the Series 1998-A Credit Enhancement Fee, to be paid to the Seller by
distribution of such amounts to the Collateral Agent for deposit and
distribution pursuant to this Agreement. The Seller and Arcadia Financial
hereby agree that payment of the Series 1998-A Credit Enhancement Fee in the
manner and subject to the conditions set forth herein and in the Series
1998-A Sale and Servicing Agreement is adequate consideration and the
exclusive consideration to be received by the Seller or Arcadia Financial for
the obligations of the Seller pursuant hereto and the obligations of Arcadia
Financial pursuant hereto (including, without limitation, the transfer by the
Seller to the Collateral Agent of the Initial Spread Account Deposit with
respect to Series 1998-A) and
5
<PAGE>
pursuant to the Series 1998-A Insurance Agreement. The Seller and Arcadia
Financial hereby agree with the Trustee and with Financial Security that
payment of the Series 1998-A Credit Enhancement Fee to the Seller is
expressly conditioned on subordination of the Series 1998-A Credit
Enhancement Fee to payments on the Notes (if any) and Certificates of any
Series, payments of amounts due to Financial Security and the other
obligations of the Trusts, in each case to the extent provided in Section 4.6
of the Standard Terms and Conditions or Section 4.6 of the related Sale and
Servicing Agreement, as applicable, and Section 3.03 of the Spread Account
Agreement, and the Security Interest of the Secured Parties in the Series
1998-A Collateral is intended to effect and enforce such subordination and to
provide security for the Series 1998-A Secured Obligations and subject to the
terms hereof the Secured Obligations with respect to other Series.
Section 2.2 SERIES SUPPLEMENTS. As provided in and subject to
the conditions specified in Section 2.02 of the Spread Account Agreement, the
parties hereto are entering into this Series 1998-A Supplement with respect
to the Series 1998-A Securities.
Section 2.3 GRANT OF SECURITY INTEREST BY ARCADIA FINANCIAL AND
THE SELLER.
(a) In order to secure the performance of the Secured Obligations
with respect to each Series, the Seller (and Arcadia Financial, to the extent
it may have any rights therein) hereby pledges, assigns, grants, transfers
and conveys to the Collateral Agent, on behalf of and for the benefit of the
Secured Parties to secure the Secured Obligations, a lien on and security
interest in (which lien and security interest is intended to be prior to all
other liens, security interests or other encumbrances), all of its right,
title and interest in and to the following (all being collectively referred
to herein as the "Series 1998-A Collateral"):
(i) the Series 1998-A Credit Enhancement Fee and all rights and
remedies that the Seller may have to enforce payment of the Series 1998-A
Credit Enhancement Fee whether under the Series 1998-A Sale and Servicing
Agreement or otherwise;
(ii) the Series 1998-A Spread Account established pursuant to
Section 3.1 of this Series 1998-A Supplement and Section 3.01 of the Spread
Account Agreement, and each other account owned by the Seller and
maintained by the Collateral Agent (including, without limitation, all
monies, checks, securities, investments and other documents from time to
time held in or evidencing any such accounts);
(iii) all of the Seller's right, title and interest in and to
investments made with proceeds of the property described in clauses (i) and
(ii) above, or made with amounts on deposit in the Series 1998-A Spread
Account; and
(iv) all distributions, revenues, products, substitutions,
benefits, profits and proceeds, in whatever form, of any of the foregoing.
(b) In order to effectuate the provisions and purposes of this
Series 1998-A Supplement, including for the purpose of perfecting the
security interests granted hereunder, the Seller represents and warrants that
it has, prior to the execution of this Series 1998-A
6
<PAGE>
Supplement, executed and filed an appropriate Uniform Commercial Code
financing statement in Minnesota sufficient to ensure that the Collateral
Agent, as agent for the Secured Parties, has a first priority perfected
security interest in all Series 1998-A Collateral which can be perfected by
the filing of a financing statement.
ARTICLE III.
SPREAD ACCOUNT
Section 3.1 ESTABLISHMENT OF SERIES 1998-A SPREAD ACCOUNT;
INITIAL DEPOSIT INTO SERIES 1998-A SPREAD ACCOUNT.
(a) On or prior to the Closing Date, the Collateral Agent shall
establish with respect to Series 1998-A, at its office or at another
depository institution or trust company, an Eligible Account, designated
"Spread Account-Series 1998-A-Norwest Bank Minnesota, National Association,
as Collateral Agent for Financial Security Assurance Inc. and another Secured
Party" (the "Series 1998-A Spread Account").
(b) On the Closing Date relating to Series 1998-A, the Collateral
Agent shall deposit the Initial Spread Account Deposit with respect to Series
1998-A received from the Seller into the Series 1998-A Spread Account.
Section 3.2 SPREAD ACCOUNT ADDITIONAL DEPOSITS. On each
Subsequent Transfer Date, the Series 1998-A Trust will, pursuant to Section
2.4 of the Series 1998-A Sale and Servicing Agreement, deliver on behalf of
the Seller the Spread Account Additional Deposit for such Subsequent Transfer
Date to the Collateral Agent. The Collateral Agent shall deposit each such
Spread Account Additional Deposit received from the Series 1998-A Trust into
the Series 1998-A Spread Account.
ARTICLE IV.
MISCELLANEOUS
Section 4.1 FURTHER ASSURANCES. Each party hereto shall take
such action and deliver such instruments to any other party hereto, in
addition to the actions and instruments specifically provided for herein, as
may be reasonably requested or required to effectuate the purpose or
provisions of this Series 1998-A Supplement or to confirm or perfect any
transaction described or contemplated herein.
Section 4.2 GOVERNING LAW. This Series 1998-A Supplement shall
be governed by and construed, and the obligations, rights and remedies of the
parties hereunder shall be determined, in accordance with the laws of the
State of New York.
Section 4.3 COUNTERPARTS. This Series 1998-A Supplement may be
executed in two or more counterparts by the parties hereto, and each such
counterpart shall be considered an original and all such counterparts shall
constitute one and the same instrument.
7
<PAGE>
Section 4.4 HEADINGS. The headings of sections and paragraphs
and the Table of Contents contained in this Series 1998-A Supplement are
provided for convenience only. They form no part of this Series 1998-A
Supplement and shall not affect its construction or interpretation.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Series 1998-A
Supplement as of the date set forth on the first page hereof.
ARCADIA FINANCIAL LTD.
By /s/ John A. Witham
-------------------------------------
Name: John A. Witham
Title: Executive Vice President and
Chief Financial Officer
ARCADIA RECEIVABLES FINANCE CORP.
By /s/ John A. Witham
-------------------------------------
Name: John A. Witham
Title: Senior Vice President and
Chief Financial Officer
FINANCIAL SECURITY ASSURANCE INC.
By /s/ Raymond Galkowksi
-------------------------------------
Authorized Officer
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By /s/ John C. Weidner
-------------------------------------
Name: John C. Weidner
Title: Corporate Trust Officer
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Collateral Agent
By /s/ John C. Weidner
-------------------------------------
Name: John C. Weidner
Title: Corporate Trust Officer
9
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Determination Date* Cumulative Default Rate Cumulative Net Loss Rate
(month) (Column A) (Column B)
<S> <C> <C>
0 to 3 2.11% 0.88%
3 to 6 4.21% 1.76%
6 to 9 6.10% 2.55%
9 to 12 7.79% 3.26%
12 to 15 10.03% 4.20%
15 to 18 12.07% 5.05%
18 to 21 13.85% 5.80%
21 to 24 15.40% 6.44%
24 to 27 16.21% 6.78%
27 to 30 16.86% 7.05%
30 to 33 17.43% 7.29%
33 to 36 17.92% 7.50%
36 to 39 18.15% 7.60%
39 to 42 18.34% 7.67%
42 to 45 18.49% 7.74%
45 to 48 18.62% 7.79%
48 to 51 18.73% 7.84%
51 to S4 18.81% 7.87%
54 to 57 18.88% 7.90%
57 to 60 18.93% 7.92%
60 to 63 18.96% 7.93%
63 to 66 18.98% 7.94%
66 to 69 18.99% 7.95%
69 and higher 19.00% 7.95%
</TABLE>
________________________
* Such Determination Date occurring after the designated calendar months
succeeding the Series 1998-A Closing Date appearing first in the column
below, and prior to or during the designated calendar months succeeding the
Series 1998-A Distribution Date appearing second in the column below.
<PAGE>
EXECUTION COPY
- -------------------------------------------------------------------------------
INSURANCE AND INDEMNITY AGREEMENT
among
FINANCIAL SECURITY ASSURANCE INC.,
ARCADIA AUTOMOBILE RECEIVABLES TRUST, 1998-A,
ARCADIA RECEIVABLES FINANCE CORP.
and
ARCADIA FINANCIAL LTD.
Dated as of March 25, 1998
- -------------------------------------------------------------------------------
Arcadia Automobile Receivables Trust, 1998-A
$ 55,650,000 -- 5.628% Class A-1 Automobile Receivables-Backed Notes
$175,195,000 -- 5.737% Class A-2 Automobile Receivables-Backed Notes
$141,350,000 -- 5.900% Class A-3 Automobile Receivables-Backed Notes
$100,305,000 -- 6.000% Class A-4 Automobile Receivables-Backed Notes
$ 52,500,000 -- 6.060% Class A-5 Automobile Receivables-Backed Notes
- -------------------------------------------------------------------------------
<PAGE>
EXECUTION COPY
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.01 Definitions. . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II. REPRESENTATIONS, WARRANTIES AND COVENANTS. . . . . . . . . . 7
Section 2.01 Representations and Warranties of the Trust. . . . . 7
Section 2.02 Affirmative Covenants of the Trust . . . . . . . . . 10
Section 2.03 Negative Covenants of the Trust. . . . . . . . . . . 15
Section 2.04 Representations and Warranties of Arcadia Financial
and the Seller . . . . . . . . . . . . . . . . . . . 16
Section 2.05 Affirmative Covenants of Arcadia Financial and the
Seller . . . . . . . . . . . . . . . . . . . . . . . 21
Section 2.06 Negative Covenants of Arcadia Financial and the
Seller . . . . . . . . . . . . . . . . . . . . . . . 26
Section 2.07 Representations and Warranties of Arcadia Financial. 27
Section 2.08 Affirmative Covenants of Arcadia Financial . . . . . 30
Section 2.09 Negative Covenants of Arcadia Financial. . . . . . . 33
ARTICLE III. THE NOTE POLICY; REIMBURSEMENT; INDEMNIFICATION . . . . . . 35
Section 3.01 Conditions Precedent to Issuance of the Note Policy. 35
Section 3.02 Payment of Fees and Premium. . . . . . . . . . . . . 40
Section 3.03 Reimbursement and Additional Payment Obligation. . . 41
Section 3.04 Certain Obligations Not Recourse to Arcadia
Financial; Recourse to Trust Property. . . . . . . . 42
Section 3.05 Indemnification. . . . . . . . . . . . . . . . . . . 42
Section 3.06 Payment Procedure. . . . . . . . . . . . . . . . . . 44
Section 3.07 Subrogation. . . . . . . . . . . . . . . . . . . . . 44
ARTICLE IV. FURTHER AGREEMENTS; MISCELLANEOUS. . . . . . . . . . . . . . 45
Section 4.01 Effective Date: Term of Agreement. . . . . . . . . . 45
Section 4.02 Further Assurances and Corrective Instruments. . . . 45
Section 4.03 Obligations Absolute.. . . . . . . . . . . . . . . . 45
Section 4.04 Assignments; Reinsurance; Third-Party Rights.. . . . 46
Section 4.05 Liability of Financial Security. . . . . . . . . . . 47
ARTICLE V. EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . 47
Section 5.01 Events of Default. . . . . . . . . . . . . . . . . . 47
Section 5.02 Remedies; Waivers. . . . . . . . . . . . . . . . . . 50
ARTICLE VI. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . 51
Section 6.01 Amendments, Etc. . . . . . . . . . . . . . . . . . . 51
Section 6.02 Notices. . . . . . . . . . . . . . . . . . . . . . . 51
Section 6.03 Severability . . . . . . . . . . . . . . . . . . . . 52
Section 6.04 Governing Law. . . . . . . . . . . . . . . . . . . . 52
Section 6.05 Consent to Jurisdiction. . . . . . . . . . . . . . . 52
Section 6.06 Consent of Financial Security. . . . . . . . . . . . 53
Section 6.07 Counterparts . . . . . . . . . . . . . . . . . . . . 53
<PAGE>
Section 6.08 Headings . . . . . . . . . . . . . . . . . . . . . . 53
Section 6.09 Trial by Jury Waived . . . . . . . . . . . . . . . . 54
Section 6.10 Limited Liability. . . . . . . . . . . . . . . . . . 54
Section 6.11 Limited Liability of Wilmington Trust Company. . . . 54
Section 6.12 Entire Agreement . . . . . . . . . . . . . . . . . . 54
Schedule 1
</TABLE>
ii
<PAGE>
INSURANCE AND INDEMNITY AGREEMENT
INSURANCE AND INDEMNITY AGREEMENT dated as of March 25, 1998, among
FINANCIAL SECURITY ASSURANCE INC., a New York stock insurance company
("Financial Security"), ARCADIA AUTOMOBILE RECEIVABLES TRUST, 1998-A, a
Delaware business trust (the "Trust"), ARCADIA RECEIVABLES FINANCE CORP., a
Delaware corporation (the "Seller"), and ARCADIA FINANCIAL LTD., a Minnesota
corporation (when referred to individually hereunder, "Arcadia Financial",
when referred to as servicer under the Sale and Servicing Agreement referred
to below, the "Servicer").
INTRODUCTORY STATEMENTS
1. The Seller is the owner of the Receivables. The Seller
proposes to sell to the Trust all of its right, title and interest in and to
the Receivables and certain other property pursuant to the Sale and Servicing
Agreement. The Trust will issue Notes pursuant to the Indenture.
2. Each Note will be secured by the Indenture Property. The
Trust has requested that Financial Security issue a financial guaranty
insurance policy guarantying respectively certain distributions of interest
and principal on the Notes on each Distribution Date (including any such
distributions subsequently avoided as a preference under applicable
bankruptcy law) upon the terms, and subject to the conditions, provided
herein.
3. Arcadia Financial and the Seller have previously entered into
and may in the future enter into one or more pooling and servicing agreements
or sale and servicing agreements with a trust and Seller has previously
entered into a Repurchase Agreement dated as of December 3, 1996, as amended,
among the Seller and Arcadia Receivables Conduit Corp., in each case,
pursuant to which the Seller sold or will sell all of its right, title and
interest in and to receivables and the other trust property and in connection
therewith Financial Security has and may in the future issue additional
policies with respect to certain guaranteed distributions on the
corresponding certificates, the corresponding notes or both.
4. The parties hereto desire to specify the conditions precedent
to the issuance of the Note Policy by Financial Security, the payment of
premium in respect of the Note Policy, the indemnity and reimbursement to be
provided to Financial Security in respect of amounts paid by Financial
Security under the Note Policy or otherwise and certain other matters.
In consideration of the premises and of the agreements herein
contained, Financial Security, the Trust, Arcadia Financial, individually and
as Servicer, and the Seller hereby agree as follows:
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ARTICLE I.
DEFINITIONS
Section 1.01 DEFINITIONS. All words and phrases defined in the
Trust Agreement, the Sale and Servicing Agreement or in the Spread Account
Agreement shall have the same meanings in this Agreement. Unless otherwise
specified, if a word or phrase defined in the Trust Agreement, the Sale and
Servicing Agreement or in the Spread Account Agreement can be applied with
respect to one or more Series, such a word or phrase shall be used herein as
applied to Series 1998-A. In addition, the following words and phrases shall
have the following respective meanings:
"ACCUMULATED FUNDING DEFICIENCY" shall have the meaning provided in
Section 412 of the Code and Section 302 of ERISA, whether or not waived.
"AGREEMENT" means this Insurance and Indemnity Agreement, as the
same may be amended, modified or supplemented from time to time.
"AUTHORIZED OFFICER" means, with respect to a corporation, the
president, the chief financial officer or any vice president.
"CODE" means the Internal Revenue Code of 1986, including, unless
the context otherwise requires, the rules and regulations thereunder, as
amended from time to time.
"COMMISSION" means the Securities and Exchange Commission.
"COMMONLY CONTROLLED ENTITY" means with respect to the Trust, the
Seller or Arcadia Financial, as the case may be, each entity, whether or not
incorporated, which is affiliated with the Trust, the Seller or Arcadia
Financial, as the case may be, pursuant to Section 414(b), (c), (m) or (o) of
the Code.
"DEFAULT" means any event which results, or which with the giving
of notice or the lapse of time or both would result, in an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of 1974,
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended from time to time.
"EVENT OF DEFAULT" means any event of default specified in Section
5.01 of this Agreement.
"EXPIRATION DATE" means, with respect to the Note Policy, the final
date of the Term of such Note Policy, as specified therein.
"FINANCIAL SECURITY" means Financial Security Assurance Inc., a New
York stock insurance company, its successors and assigns.
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"FINANCIAL STATEMENTS" means with respect to Arcadia Financial the
audited consolidated balance sheets as of December 31, 1997, December 31,
1996, and December 31, 1995 and the related audited consolidated statements
of income, retained earnings and cash flows for the 12-month periods then
ended and the notes thereto.
"FISCAL AGENT" means the Fiscal Agent, if any, designated pursuant
to the terms of the Note Policy.
"INDENTURE COLLATERAL AGENT" means initially, Norwest Bank
Minnesota, National Association, in its capacity as collateral agent on
behalf of Financial Security and the Indenture Trustee on behalf of the
Noteholders pursuant to the Indenture, its successor in interest and any
successor Indenture Collateral Agent under the Indenture.
"INDENTURE PROPERTY" means the property pledged to the Indenture
Collateral Agent on behalf of Financial Security and the Indenture Trustee on
behalf of the Noteholders pursuant to the Indenture.
"INSURANCE AGREEMENT INDENTURE CROSS DEFAULT" means an Event of
Default specified in clause (a), (f), (g), (h) or (i) of Section 5.01.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940,
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended from time to time.
"IRS" means the Internal Revenue Service.
"LATE PAYMENT RATE" means the greater of (i) a per annum rate
equal to 3 percent in excess of Financial Security's cost of funds,
determined on a monthly basis, or (ii) a per annum rate equal to 3 percent
in excess of the arithmetic average of the prime or base lending rates
publicly announced by The Chase Manhattan Bank, N.A. (New York, New York) and
Citibank, N.A. (New York, New York), as in effect on the last day of the
month for which interest is being computed, but, in either case, in no event
greater than the maximum rate permitted by law.
"LIEN" means, as applied to the property or assets (or the income
or profits therefrom) of any Person, in each case whether the same is
consensual or nonconsensual or arises by contract, operation of law, legal
process or otherwise: (a) any mortgage, lien, pledge, attachment, charge,
lease, conditional sale or other title retention agreement, or other security
interest or encumbrance of any kind; or (b) any arrangement, express or
implied, under which such property or assets are transferred, sequestered or
otherwise identified for the purpose of subjecting or making available the
same for the payment of debt or performance of any other obligation in
priority to the payment of the general, unsecured creditors of such Person.
"MATERIAL ADVERSE CHANGE" means, in respect of any Person, a
material adverse change in (i) the business, financial condition, results of
operations, or properties of such Person and its Subsidiaries taken as a
whole, (ii) the ability of such Person to perform its obligations under any
of the Transaction Documents to which it is a party or (iii) the ability of
Financial
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Security or the Trust to realize the benefits or security afforded under the
Transaction Documents.
"MULTIEMPLOYER PLAN" means a multiemployer plan (within the meaning
of Section 4001(a)(3) of ERISA) in respect of which a Commonly Controlled
Entity makes contributions or has liability.
"NOTE POLICY" means the financial guaranty insurance policy,
including any endorsements thereto, issued by Financial Security with respect
to the Notes, substantially in the form attached as Exhibit A hereto.
"NOTICE OF CLAIM" means the Notice of Claim and Certificate in the
form attached as Exhibit A to Endorsement No. 1 to the Note Policy.
"OTHER TRUST PROPERTY" means the property conveyed by the Seller to
the Trust pursuant to the Sale and Servicing Agreement and any Subsequent
Transfer Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor agency, corporation or instrumentality of the United States to
which the duties and powers of the Pension Benefit Guaranty Corporation are
transferred.
"PLAN" means any pension plan (other than a Multiemployer Plan)
covered by Title IV of ERISA, which is maintained by a Commonly Controlled
Entity or in respect of which a Commonly Controlled Entity has liability.
"PORTFOLIO PERFORMANCE EVENT OF DEFAULT" means an Event of Default
specified in clause (j), (k), or (1) of Section 5.01.
"PREMIUM" means the premium payable in accordance with Section 3.02
of this Agreement.
"PREMIUM LETTER" means the side letter between Financial Security
and Arcadia Financial dated the date hereof in respect of the premium payable
by Arcadia Financial in consideration of the issuance of the Note Policy.
"PREMIUM SUPPLEMENT" means a non-refundable premium, in addition to
the premium payable in accordance with Section 3.02 of this Agreement,
payable by Arcadia Financial to Financial Security in monthly installments
commencing on the first Distribution Date following the Premium Supplement
Commencement Date and on each Distribution Date thereafter, payable in
accordance with the terms of the Premium Letter.
"PREMIUM SUPPLEMENT COMMENCEMENT DATE" means the date of occurrence
of an Event of Default in respect of which the Premium Supplement shall have
been declared due and payable in accordance with Section 5.02 of this
Agreement.
"PREVIOUS SERIES TRANSACTION DOCUMENTS" means the transaction
documents as defined in each of the insurance and indemnity agreements
related to Olympic Automobile
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Receivables Trust, 1993-A, Olympic Automobile Receivables Trust, 1993-B,
Olympic Automobile Receivables Trust, 1993-C, Olympic Automobile Receivables
Trust, 1993-D, Olympic Automobile Receivables Trust, 1994-A, Olympic
Automobile Receivables Trust, 1994-B, Olympic Automobile Receivables Trust,
1995-A, Olympic Automobile Receivables Trust, 1995-B, Olympic Automobile
Receivables Trust, 1995-C, Olympic Automobile Receivables Trust, 1995-D,
Olympic Automobile Receivables Trust, 1995-E, Olympic Automobile Receivables
Trust, 1996-A, Olympic Automobile Receivables Trust, 1996-B, Olympic
Automobile Receivables Trust, 1996-C, Olympic Automobile Receivables Trust,
1996-D, Olympic Automobile Receivables Trust, 1997-A, Arcadia Automobile
Receivables Trust, 1997-B, Arcadia Automobile Receivables Trust 1997-C,
Arcadia Automobile Receivables Trust, 1997-D and the Warehousing Notes.
"PROSPECTUS" has the meaning set forth in Section 2.04(o) of this
Agreement.
"RELATED DOCUMENTS" means the Transaction Documents except for the
Sale and Servicing Agreement.
"REGISTRATION STATEMENT" has the meaning set forth in Section
2.04(o) of this Agreement.
"REPORTABLE EVENT" means any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder.
"RESTRICTIONS ON TRANSFERABILITY" means, as applied to the property
or assets (or the income or profits therefrom) of any Person, in each case
whether the same is consensual or nonconsensual or arises by contract,
operation of law, legal process or otherwise, any material condition to, or
restriction on, the ability of such Person or any transferee therefrom to
sell, assign, transfer or otherwise liquidate such property or assets in a
commercially reasonable time and manner or which would otherwise materially
deprive such Person or any transferee therefrom of the benefits of ownership
of such property or assets.
"SALE AND SERVICING AGREEMENT" means the Sale and Servicing
Agreement dated as of March 1, 1998 among the Seller, Arcadia Financial, in
its individual capacity and as Servicer, the Back-up Servicer and the Trust
pursuant to which the Initial Receivables are to be sold, serviced and
administered, as the same may be amended from time to time.
"SECURITIES ACT" means the Securities Act of 1933, including,
unless the context otherwise requires, the rules and regulations thereunder,
as amended from time to time.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of
1934, including, unless the context otherwise requires, the rules and
regulations thereunder, as amended from time to time.
"SENIOR NOTE INDENTURE" means the Indenture dated as of March 12,
1997 between Olympic Financial Ltd. ("OFL") and Norwest Bank Minnesota,
National Association, as amended or supplemented, relating to OFL's
$300,000,000 11 1/2% Senior Notes due 2007.
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"SERIES 1998-A" means the Series of Notes issued on the date hereof
pursuant to the Indenture.
"SERIES OF NOTES" or "SERIES" means Series 1998-A or any, or as the
context may require, all, additional series of notes issued as described in
paragraph 3 of the Introductory Statements hereto.
"SERVICER TERMINATION SIDE LETTER" means the letter from Financial
Security to the Servicer dated as of March 25, 1998, with regard to the
renewal of the term of the Servicer.
"SPREAD ACCOUNT AGREEMENT" means the Spread Account Agreement,
dated as of March 25, 1993, as amended and restated as of December 16, 1997
and supplemented in accordance with the terms thereof, among Arcadia
Financial, the Seller, Financial Security, the Indenture Trustee and the
Collateral Agent.
"STOCK PLEDGE AGREEMENT" means the Third Amended and Restated Stock
Pledge Agreement, dated as of December 3, 1996, as amended and restated,
among Financial Security, Arcadia Financial, and the Collateral Agent, as the
same may be amended from time to time.
"SUBSIDIARY" means, with respect to any Person, any corporation of
which a majority of the outstanding shares of capital stock having ordinary
voting power for the election of directors is at the time owned by such
Person directly or through one or more Subsidiaries.
"TERM OF THE NOTE POLICY" means, with respect to the Note Policy,
the meaning provided therein.
"TERM OF THIS AGREEMENT" shall be determined as provided in Section
4.01 of this Agreement.
"TRANSACTION" means the transactions contemplated by the
Transaction Documents, including the transactions described in the
Registration Statement.
"TRANSACTION DOCUMENTS" means this Agreement, the Sale and
Servicing Agreement, the Trust Agreement, the Certificate of Trust, the
Indenture, the Underwriting Agreement, the Purchase Agreement, the Premium
Letter, the Stock Pledge Agreement, the Lockbox Agreement, the Depository
Agreements, the Custodian Agreement, the Servicer Termination Side Letter,
the Spread Account Agreement and the Administration Agreement.
"TRUST AGREEMENT" means the Trust Agreement, dated as of March 1,
1998, among the Seller, Financial Security and Wilmington Trust Company, as
Owner Trustee.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939,
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended from time to time.
"UNDERFUNDED PLAN" means any Plan that has an Underfunding.
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"UNDERFUNDING" means, with respect to any Plan, the excess, if any,
of (a) the present value of all benefits under the Plan (based on the
assumptions used to fund the Plan pursuant to Section 412 of the Code) as of
the most recent valuation date over (b) the fair market value of the assets
of such Plan as of such valuation date.
"UNDERWRITERS" means , J.P. Morgan Securities Inc., BancAmerica
Robertson Stephens and Donaldson, Lufkin & Jenrette Securities Corporation.
"UNDERWRITING AGREEMENT" means the Pricing Agreement, dated March
11, 1998, among Arcadia Financial and the Seller and the Underwriters.
"WAREHOUSING NOTES" means the Variable Funding Note issued pursuant
to the Warehousing Series Indenture dated as of December 3, 1996, as amended
and supplemented, between Arcadia Receivables Conduit Corp., as the issuer,
and Norwest Bank Minnesota, National Association, as trustee.
ARTICLE II.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01 REPRESENTATIONS AND WARRANTIES OF THE TRUST. The
Trust represents, warrants and covenants, as of the date hereof and as of the
Closing Date, as follows:
(a) DUE ORGANIZATION AND QUALIFICATION. The Trust is duly formed
and validly existing as a Delaware statutory business trust and is in good
standing under the laws of the State of Delaware, with power and authority to
own its properties and to conduct its business. The Trust is duly qualified
to do business, is in good standing and has obtained all necessary licenses,
permits, charters, registrations and approvals (together, "approvals")
necessary for the conduct of its business as described in the Prospectus and
the performance of its obligations under the Transaction Documents, in each
jurisdiction in which the failure to be so qualified or to obtain such
approvals would render the Receivables in such jurisdiction or any
Transaction Document unenforceable in any respect or would otherwise have a
material adverse effect upon the Transaction.
(b) POWER AND AUTHORITY. The Trust has all necessary trust power
and authority to conduct its business as described in the Prospectus, to
execute, deliver and perform its obligations under this Agreement and each
other Transaction Document to which the Trust is a party and to carry out the
terms of each such agreement, and has full power and authority to issue the
Notes and pledge and assign its assets pursuant to the Indenture and has duly
authorized the issuance of the Notes and the assignment of its assets by all
necessary trust proceedings.
(c) DUE AUTHORIZATION. The execution, delivery and performance of
this Agreement and each other Transaction Document to which the Trust is a
party has been duly authorized by all necessary action on the part of the
Trust and does not require any additional approvals or consents or other
action by or any notice to or filing with any Person by or on behalf of the
Trust, including, without limitation, any governmental entity.
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(d) NONCONTRAVENTION. Neither the execution and delivery of this
Agreement and each other Transaction Document to which the Trust is a party,
the consummation of the Transaction nor the satisfaction of the terms and
conditions of this Agreement and each other Transaction Document to which the
Trust is a party,
(i) conflicts with or results in any breach or violation of any
provision of the Certificate of Trust or the Trust Agreement or any law,
rule, regulation, order, writ, judgment, injunction, decree, determination
or award currently in effect having applicability to the Trust or any of
its properties, including regulations issued by an administrative agency or
other governmental authority having supervisory powers over the Trust,
(ii) constitutes a default by the Trust under or a breach of any
provision of any loan agreement, mortgage, indenture or other agreement or
instrument to which the Trust is a party or by which it or any of its
properties is or may be bound or affected, or
(iii) results in or requires the creation of any Lien upon or in
respect of any of the Trust's assets except as otherwise expressly
contemplated by the Transaction Documents.
(e) PENDING LITIGATION OR OTHER PROCEEDING. There is no action,
proceeding or investigation pending, or, to the Trust's best knowledge,
threatened, before any court, regulatory body, administrative agency,
arbitrator or governmental agency or instrumentality having jurisdiction over
the Trust or its properties: (A) asserting the invalidity of this Agreement
or any other Transaction Document to which the Trust is a party, (B) seeking
to prevent the issuance of the Notes or the consummation of the Transaction,
(C) seeking any determination or ruling that might materially and adversely
affect the validity or enforceability of this Agreement or any other
Transaction Document to which the Trust is a party, (D) which might result in
a Material Adverse Change with respect to the Trust or (E) which might
adversely affect the federal or state tax attributes of the Notes or the
Trust.
(f) VALID AND BINDING OBLIGATIONS. Each of the Transaction
Documents to which the Trust is a party, when executed and delivered by the
Trust, and assuming due authorization, execution and delivery by the other
parties thereto, will constitute the legal, valid and binding obligation of
the Trust enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general equitable principles. The Notes, when executed, authenticated and
delivered in accordance with the Indenture, will be entitled to the benefits
of the Indenture and will constitute legal, valid and binding obligations of
the Trust, enforceable in accordance with their terms.
(g) NO CONSENTS. No consent, license, approval or authorization
from, or registration, filing or declaration with, any regulatory body,
administrative agency, or other governmental instrumentality, nor any
consent, approval, waiver or notification of any creditor, lessor or other
non-governmental person, is required in connection with the execution,
delivery and performance by the Trust of this Agreement or of any other
Transaction Document to which
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the Trust is a party, except (in each case) such as have been obtained and
are in full force and effect.
(h) COMPLIANCE WITH LAW, ETC. No practice, procedure or policy
employed or proposed to be employed by the Trust in the conduct of its
business violates any law, regulation, judgment, agreement, order or decree
applicable to the Trust which, if enforced, would result in a Material
Adverse Change with respect to the Trust.
(i) ERISA. The Trust does not maintain or contribute to, or have
any obligation to maintain or contribute to, any Plan. The Trust is not
subject to any of the provisions of ERISA.
(j) COLLATERAL. On the Closing Date, and on each Subsequent
Transfer Date, the Trust will have good and marketable title to each item of
Other Trust Property conveyed on such date and will own each such item free
and clear of any Lien (other than Liens contemplated under the Indenture) or
any equity or participation interest of any other Person.
(k) PERFECTION OF LIENS AND SECURITY INTEREST. On the Closing
Date, the Lien and security interest in favor of the Indenture Collateral
Agent with respect to Indenture Property will be perfected by the filing of
financing statements on Form UCC-1 in each jurisdiction where such recording
or filing is necessary for the perfection thereof, the delivery of the
Receivable Files for the Receivables to the Custodian, and the establishment
of the Collection Account, the Subcollection Account, the Lockbox Account,
the Pre-Funding Account, the Reserve Account and the Note Distribution
Account in accordance with the provisions of the Transaction Documents, and
no other filings in any jurisdiction or any other actions (except as
expressly provided herein) are necessary to perfect the Collateral Agent's
Lien on and security interest in the Collateral as against any third parties.
(l) SECURITY INTEREST IN FUNDS AND INVESTMENTS. Assuming the
retention of funds in the Accounts and the acquisition of Eligible
Investments in accordance with the Transaction Documents, such funds and
Eligible Investments will be subject to a valid and perfected, first priority
security interest in favor of the Collateral Agent on behalf of the Indenture
Trustee (on behalf of the Noteholders) and Financial Security.
(m) COMPLIANCE WITH INVESTMENT COMPANY ACT. The Trust is not
required to be registered as an "investment company" under the Investment
Company Act.
(n) INCORPORATION OF CERTAIN REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Trust set forth in each Transaction
Document are (in each case) true and correct as if set forth herein.
(o) SPECIAL PURPOSE ENTITY.
(i) The capital of the Trust is adequate for the business and
undertakings of the Trust.
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(ii) Except as contemplated by the Transaction Documents, the
Trust is not engaged in any business transactions with Arcadia Financial,
the Seller or any Affiliate of either of them.
(iii) The Trust's funds and assets are not, and will not be,
commingled with the funds of any other Person, except as provided in the
Transaction Documents.
(p) SOLVENCY; FRAUDULENT CONVEYANCE. The Trust is solvent and
will not be rendered insolvent by the Transaction or by the performance of
its obligations under the Transaction Documents and, after giving effect to
such Transaction, the Trust will not be left with an unreasonably small
amount of capital with which to engage in its business. The Trust does not
intend to incur, or believes that it has incurred, debts beyond its ability
to pay such debts as they mature. The Trust does not contemplate the
commencement of insolvency, bankruptcy, liquidation or consolidation
proceedings or the appointment of a receiver, liquidator, conservator,
trustee or similar official in respect of the Trust or any of its assets.
Section 2.02 AFFIRMATIVE COVENANTS OF THE TRUST. The Trust
hereby agrees that during the Term of the Agreement, unless Financial
Security shall otherwise expressly consent in writing:
(a) COMPLIANCE WITH AGREEMENTS AND APPLICABLE LAWS. The Trust
will comply with all terms and conditions of this Agreement and each other
Transaction Document to which it is a party and with all material
requirements of any law, rule or regulation applicable to it. The Trust will
not cause or permit to become effective any amendment to or modification of
any of the Transaction Documents to which it is a party unless (i) (so long
as no Insurer Default shall have occurred and be continuing) Financial
Security shall have previously approved in writing the form of such amendment
or modification or (ii) if an Insurer Default shall have occurred and be
continuing, such amendment would not adversely affect the interests of
Financial Security. The Trust shall not take any action or fail to take any
action that would interfere with the enforcement of any rights under this
Agreement or the other Transaction Documents.
(b) FINANCIAL STATEMENTS; ACCOUNTANTS' REPORTS; OTHER INFORMATION.
The Trust shall keep or cause to be kept in reasonable detail books and
records of account of the Trust's assets and business, which shall be
furnished to Financial Security upon request. The Trust shall furnish to
Financial Security, simultaneously with the delivery of such documents to the
Indenture Trustee or the Noteholders, as the case may be, copies of all
reports, certificates, statements, financial statements or notices furnished
to the Indenture Trustee or the Noteholders, as the case may be, pursuant to
the Transaction Documents.
(i) ANNUAL FINANCIAL STATEMENTS. As soon as available, and in
any event within 90 days after the close of each fiscal year of the Trust,
the audited balance sheets of the Trust as of the end of such fiscal year
and the audited statements of income, changes in equityowners' equity and
cash flows of the Trust for such fiscal year, all in reasonable detail and
stating in comparative form the respective figures for the corresponding
date and period in the preceding fiscal year, prepared in accordance with
generally accepted accounting principles, consistently applied, and
accompanied by the
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certificate of the Trust's independent accountants (who shall be
acceptable to Financial Security) and by the certificate specified in
Section 2.02(c) hereof.
(ii) QUARTERLY FINANCIAL STATEMENTS. As soon as available, and
in any event within 45 days after the close of each of the first three
quarters of each fiscal year of the Trust, the unaudited balance sheets of
the Trust as of the end of such quarter and the unaudited statements of
income, changes in equityowners' equity and cash flows of the Trust for the
portion of the fiscal year then ended, all in reasonable detail and stating
in comparative form the respective figures for the corresponding date and
period in the preceding fiscal year, prepared in accordance with generally
accepted accounting principles consistently applied (subject to normal
year-end adjustments), and accompanied by the certificate specified in
Section 2.02(c) hereof.
(iii) ACCOUNTANTS' REPORTS. Promptly upon receipt thereof, copies
of any reports or comment letters submitted to the Trust by its independent
accountants in connection with any examination of the financial statements
of the Trust.
(iv) CERTAIN INFORMATION. Not less than ten days prior to the
date of filing with the IRS of any tax return or amendment thereto, copies
of the proposed form of such return or amendment and, promptly after the
filing or sending thereof, (i) copies of each tax return and amendment
thereto that the Trust files with the IRS and (ii) copies of all financial
statements, reports, and registration statements which the Trust files
with, or delivers to, any federal government agency, authority or body
which supervises the issuance of securities by the Trust.
(v) OTHER INFORMATION. Promptly upon the request of Financial
Security, copies of all schedules, financial statements or other similar
reports delivered to or by the Trust pursuant to the terms of this
Agreement and the other Transaction Documents and such other data as
Financial Security may reasonably request.
(c) COMPLIANCE CERTIFICATE. The Trust shall deliver to Financial
Security and, upon request, any Noteholder, concurrently with the delivery of
the financial statements required pursuant to Section 2.02(b)(i) and (ii)
hereof, a certificate signed by an Authorized Officer of the Administrator
stating that:
(i) a review of the Trust's performance under the Transaction
Documents during such period has been made under such officer's
supervision;
(ii) to the best of such individual's knowledge following
reasonable inquiry, no Default or Event of Default has occurred and is
continuing or, if a Default or Event of Default has occurred and is
continuing, specifying the nature thereof and, if the Trust has a right to
cure pursuant to Section 5.01, stating in reasonable detail the steps, if
any, being taken by the Trust to cure such Default or Event of Default or
to otherwise comply with the terms of the agreement or agreements to which
such Default or Event of Default relates; and
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(iii) The financial reports submitted in accordance with Section
2.02(b)(i) or (ii) hereof, as applicable, are complete and correct in all
material respects and present fairly the financial condition and results of
operations of the Trust as of the dates and for the periods indicated, in
accordance with generally accepted accounting principles consistently
applied (subject as to interim statements to normal year-end adjustments).
(d) ACCESS TO RECORDS; DISCUSSIONS WITH OFFICERS AND ACCOUNTANTS.
The Trust shall, upon the request of Financial Security, permit Financial
Security or its authorized agents (i) to inspect the books and records of
the Trust as they may relate to the Notes, the Receivables and the Other
Trust Property, the obligations of the Trust under the Transaction Documents,
the Trust's business and the Transaction and (ii) to discuss the affairs,
finances and accounts of the Trust with any of its personnel and
representatives, including its Independent Accountants. Such inspections and
discussions shall be conducted during normal business hours and shall not
unreasonably disrupt the business of the Trust. The books and records of the
Trust will be maintained at the address of the Trust designated herein for
receipt of notices, unless the Trust shall otherwise advise the parties
hereto in writing.
(e) NOTICE OF MATERIAL EVENTS. The Trust shall promptly inform
Financial Security in writing of the occurrence of any of the following:
(i) the submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation against the
Trust involving potential damages or penalties in an uninsured amount in
excess of $100,000 in any one instance or $500,000 in the aggregate;
(ii) any change in the location of Trust's principal office or
any change in the location of the Trust's books and records;
(iii) the occurrence of any Default or Event of Default;
(iv) the commencement or threat of any rule making or
disciplinary proceedings or any proceedings instituted by or against the
Trust in any federal, state or local court or before any governmental body
or agency, or before any arbitration board, or the promulgation of any
proceeding or any proposed or final rule which, if adversely determined,
would result in a Material Adverse Change with respect to the Trust;
(v) the commencement of any proceedings by or against the Trust
under any applicable bankruptcy, reorganization, liquidation,
rehabilitation, insolvency or other similar law now or hereafter in effect
or of any proceeding in which a receiver, liquidator, conservator, trustee
or similar official shall have been, or may be, appointed or requested for
the Trust or any of its assets;
(vi) the receipt of notice that (A) the Trust is being placed
under regulatory supervision, (B) any license, permit, charter,
registration or approval necessary for the conduct of the Trust's business
is to be, or may be, suspended or revoked, or (C) the Trust is to cease and
desist any practice, procedure or policy employed by the Trust in the
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conduct of its business, and such cessation may result in a Material
Adverse Change with respect to the Trust; or
(vii) any other event, circumstance or condition that has
resulted, or has a material possibility of resulting, in a Material Adverse
Change in respect of the Trust.
(f) FURTHER ASSURANCES. The Trust will file all necessary
financing statements, assignments or other instruments, and any amendments or
continuation statements relating thereto, necessary to be kept and filed in
such manner and in such places as may be required by law to preserve and
protect fully the Lien and security interest in, and all rights of the
Indenture Collateral Agent with respect to the Indenture Property, under the
Indenture. In addition, the Trust shall, upon the request of Financial
Security (so long as no Insurer Default has occurred and is continuing), from
time to time, execute, acknowledge and deliver and, if necessary, file such
further instruments and take such further action as may be reasonably
necessary to effectuate the intention, performance and provisions of the
Transaction Documents to which the Trust is a party or to protect the
interest of the Indenture Collateral Agent in the Indenture Property under
the Indenture. The Trust agrees to cooperate with the Rating Agencies in
connection with any review of the Transaction which may be undertaken by the
Rating Agencies after the date hereof.
(g) MAINTENANCE OF LICENSES. The Trust shall maintain all
licenses, permits, charters and registrations which are material to the
performance by the Trust of its obligations under this Agreement and each
other Transaction Document to which the Trust is a party or by which the
Trust is bound.
(h) RETIREMENT OF NOTES. The Trust shall, upon retirement of the
Notes, furnish to Financial Security a notice of such retirement, and, upon
such retirement and the expiration of the term of the Note Policy, surrender
the Note Policy to Financial Security for cancellation.
(i) DISCLOSURE DOCUMENT. Each Prospectus delivered with respect
to the Notes shall clearly disclose that the Note Policy is not covered by
the property/casualty insurance security fund specified in Article 76 of the
New York Insurance Law. In addition, each Prospectus delivered with respect
to the Notes which include financial statements of Financial Security
prepared in accordance with generally accepted accounting principles (other
than a Prospectus that only incorporates such financial statements by
reference) shall include the following statement immediately preceding such
financial statements:
The New York State Insurance Department recognizes only
statutory accounting practices for determining and reporting
the financial condition and results of operations of an
insurance company, for determining its solvency under the
New York Insurance Law, and for determining whether its
financial condition warrants the payment of a dividend to
its stockholders. No consideration is given by the New York
State Insurance Department to financial statements prepared
in accordance with
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generally accepted accounting principles in making such
determinations.
(j) SPECIAL PURPOSE ENTITY.
(i) The Trust shall conduct its business solely in its own name
through its duly authorized officers or agents so as not to mislead others
as to the identity of the entity with which those others are concerned, and
particularly will use its best efforts to avoid the appearance of
conducting business on behalf of Arcadia Financial, the Seller, or any
other Affiliates thereof or that the assets of the Trust are available to
pay the creditors of Arcadia Financial, the Seller, or any other Affiliates
thereof. Without limiting the generality of the foregoing, all oral and
written communications, including, without limitation, letters, invoices,
purchase orders, contracts, statements and loan applications, will be made
solely in the name of the Trust.
(ii) The Trust shall maintain trust records and books of account
separate from those of Arcadia Financial, the Seller and Affiliates of any
of them.
(iii) The Trust shall obtain proper authorization from its equity
owners of all trust action requiring such authorization, and copies of each
such authorization and the minutes or other written summary of each such
meeting shall be delivered to Financial Security within two weeks of such
authorization or meeting as the case may be.
(iv) Although the organizational expenses of the Trust have been
paid by Arcadia Financial, operating expenses and liabilities of the Trust
shall be paid from its own funds.
(v) The annual financial statements of the Trust shall disclose
the effects of the Trust's transactions in accordance with generally
accepted accounting principles and shall disclose that the assets of the
Trust are not available to pay creditors of Arcadia Financial, the Seller
or any Affiliate of any of them.
(vi) The resolutions, agreements and other instruments of the
Trust underlying the transactions described in this Agreement and in the
other Transaction Documents shall be continuously maintained by the Trust
as official records of the Trust separately identified and held apart from
the records of Arcadia Financial, the Seller and each Affiliate of any of
them.
(vii) The Trust shall maintain an arm's-length relationship with
Arcadia Financial, the Seller and each Affiliate of any of them and will
not hold itself out as being liable for the debts of any such Person.
(viii) The Trust shall keep its assets and its liabilities wholly
separate from those of all other entities, including, but not limited to,
Arcadia Financial, the Seller and each Affiliate of any of them except, in
each case, as contemplated by the Transaction Documents.
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(k) CLOSING DOCUMENTS. The Trust shall provide or cause to be
provided to Financial Security an executed original copy of each document
executed in connection with the Transaction within 10 days after the Closing
Date, except that the Seller shall cause a copy of the Trust Agreement, the
Sale and Servicing Agreement, the Series 1998-A Supplement, the Indenture,
the Administration Agreement and each Transaction Document to which Financial
Security is a party to be provided to Financial Security on the Closing Date.
(l) TAX MATTERS. The Trust will take all actions necessary to
ensure that, for federal and state income tax purposes, the Trust is not
taxable as an association (or publicly traded partnership) or taxable as a
corporation.
(m) SECURITIES LAWS. The Trust shall comply in all material
respects with all applicable provisions of state and federal securities laws,
including blue sky laws and the Securities Act, the Exchange Act and the
Investment Company Act and all rules and regulations promulgated thereunder
for which non-compliance would result in a Material Adverse Change with
respect to the Trust.
(n) INCORPORATION OF COVENANTS. The Trust agrees to comply with
each of the covenants of the Trust set forth in the Transaction Documents and
hereby incorporates such covenants by reference as if each were set forth
herein.
Section 2.03 NEGATIVE COVENANTS OF THE TRUST. The Trust hereby
agrees that during the Term of this Agreement, unless Financial Security
shall otherwise give its prior express written consent:
(a) WAIVER; AMENDMENTS; ETC. The Trust shall not waive, modify,
amend, supplement or consent to any waiver, modification, amendment of or
supplement to, any of the provisions of the Certificate of Trust, the Trust
Agreement or any of the other Transaction Documents unless, if no Insurer
Default shall have occurred and be continuing, Financial Security shall have
consented thereto in writing.
(b) CREATION OF INDEBTEDNESS; GUARANTEES. The Trust shall not
create, incur, assume or suffer to exist any indebtedness or assume,
guarantee, endorse or otherwise be or become directly or contingently liable
for the obligations of any Person by, among other things, agreeing to
purchase any obligation of another Person, agreeing to advance funds to such
Person or causing or assisting such Person to maintain any amount of capital,
except as contemplated by the Transaction Documents.
(c) SUBSIDIARIES. The Trust shall not form, or cause to be
formed, any Subsidiaries.
(d) NO LIENS. The Trust shall not, except as contemplated by the
Transaction Documents create, incur, assume or suffer to exist any Lien of
any nature upon or with respect to any of its properties or assets, now owned
or hereafter acquired, or sign or file under the Uniform Commercial Code of
any jurisdiction any financing statement that names the Trust as debtor, or
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sign any security agreement authorizing any secured party thereunder to file
such a financing statement.
(e) IMPAIRMENT OF RIGHTS. The Trust shall not take any action, or
fail to take any action, if such action or failure to take action may
interfere with the enforcement of any rights under the Transaction Documents
that are material to the rights, benefits or obligations of the Indenture
Trustee, the Noteholders or Financial Security.
(f) NO MERGERS. The Trust shall not consolidate with or merge
into any Person or transfer all or any material amount of its assets to any
Person (except as contemplated by the Transaction Documents) or liquidate or
dissolve.
(g) ERISA. The Trust shall not contribute or incur any obligation
to contribute to, or incur any liability in respect of, any Plan or
Multiemployer Plan.
(h) OTHER ACTIVITIES. The Trust shall not:
(i) sell, pledge, transfer, exchange or otherwise dispose of any
of its assets except as permitted under the Transaction Documents; or
(ii) engage in any business or activity except as contemplated by
the Transaction Documents and as permitted by its Certificate of Trust.
(i) INSOLVENCY. The Trust shall not commence any case, proceeding
or other action (A) under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for relief entered with respect
to it, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, consolidation or other relief with respect to it or
(B) seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets or make a
general assignment for the benefit of its creditors. The Trust shall not take
any action in furtherance of, or indicating the consent to, approval of, or
acquiescence in any of the acts set forth above. The Trust shall not admit
in writing its inability to pay its debts.
(j) SUCCESSOR PARTIES. The Trust will not remove or replace, or
cause to be removed or replaced, the Servicer, the Indenture Trustee, the
Owner Trustee or the Administrator.
Section 2.04 REPRESENTATIONS AND WARRANTIES OF ARCADIA FINANCIAL
AND THE SELLER. Each of Arcadia Financial and the Seller represent and
warrant as of the date hereof and as of the Closing Date, as follows:
(a) DUE ORGANIZATION AND QUALIFICATION. The Seller is a
corporation duly organized and validly existing and in good standing under
the laws of the State of Delaware, with power and authority to own its
properties and to conduct its business. The Seller is duly qualified to do
business, is in good standing and has obtained all necessary licenses,
permits, charters, registrations and approvals (together, "approvals")
necessary for the conduct of its business as currently conducted and as
described in the Prospectus and the performance of its
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obligations under the Transaction Documents, in each jurisdiction in which
the failure to be so qualified or to obtain such approvals would render the
Receivables in such jurisdiction or any Transaction Document unenforceable in
any respect or would otherwise have a material adverse effect upon the
Transaction.
(b) POWER AND AUTHORITY. The Seller has all necessary corporate
power and authority to conduct its business as currently conducted and as
described in the Prospectus, to execute, deliver and perform its obligations
under this Agreement and each other Transaction Document to which the Seller
is a party and to carry out the terms of each such agreement, and has full
power and authority to sell and assign the Receivables and the Other Trust
Property to the Trust and has duly authorized such sale and assignment to the
Trust by all necessary corporate action.
(c) DUE AUTHORIZATION. The execution, delivery and performance of
this Agreement and each other Transaction Document to which the Seller is a
party has been duly authorized by all necessary corporate action on the part
of the Seller and does not require any additional approvals or consents or
other action by or any notice to or filing with any Person by or on behalf of
the Seller, including, without limitation, any governmental entity or the
Seller's stockholder.
(d) NONCONTRAVENTION. None of the execution and delivery of this
Agreement and each other Transaction Document to which the Seller is a party,
the consummation of the Transaction or the satisfaction of the terms and
conditions of this Agreement and each other Transaction Document to which the
Seller is a party,
(i) conflicts with or results in any breach or violation of any
provision of the charter or bylaws of the Seller or any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or
award currently in effect having applicability to the Seller or any of its
properties, including regulations issued by an administrative agency or
other governmental authority having supervisory powers over the Seller,
(ii) constitutes a default by the Seller under or a breach of any
provision of any loan agreement, mortgage, indenture or other agreement or
instrument to which the Seller is a party or by which it or any of its
properties is or may be bound or affected, or
(iii) results in or requires the creation of any Lien upon or in
respect of any of the Seller's assets except as otherwise expressly
contemplated by the Transaction Documents.
(e) PENDING LITIGATION OR OTHER PROCEEDING. There is no action,
proceeding or investigation pending, or, to the Seller's or Arcadia
Financial's best knowledge, threatened, before any court, regulatory body,
administrative agency, arbitrator or governmental agency or instrumentality
having jurisdiction over the Seller or its properties: (A) asserting the
invalidity of this Agreement or any other Transaction Document to which the
Seller is a party, (B) seeking to prevent the issuance of the Notes or the
consummation of the Transaction, (C) seeking any determination or ruling that
might materially and adversely affect the validity or enforceability of
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this Agreement or any other Transaction Document to which the Seller is a
party, (D) which might result in a Material Adverse Change with respect to
the Seller or (E) which might adversely affect the federal or state tax
attributes of the Notes or the Trust.
(f) VALID AND BINDING OBLIGATIONS. Each of the Transaction
Documents to which the Seller is a party, when executed and delivered by the
Seller, and assuming due authorization, execution and delivery by the other
parties thereto, will constitute the legal, valid and binding obligation of
the Seller enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general equitable principles. The Notes, when executed, authenticated and
delivered in accordance with the Indenture, will be entitled to the benefits
of the Indenture and will constitute legal, valid and binding obligations of
the Trust, enforceable in accordance with their terms.
(g) NO CONSENTS. No consent, license, approval or authorization
from, or registration, filing or declaration with, any regulatory body,
administrative agency, or other governmental instrumentality, nor any
consent, approval, waiver or notification of any creditor, lessor or other
non-governmental person, is required in connection with the execution,
delivery and performance by the Seller of this Agreement or of any other
Transaction Document to which the Seller is a party, except (in each case)
such as have been obtained and are in full force and effect.
(h) COMPLIANCE WITH LAW, ETC. No practice, procedure or policy
employed or proposed to be employed by the Seller in the conduct of its
business violates any law, regulation, judgment, agreement, order or decree
applicable to the Seller which, if enforced, would result in a Material
Adverse Change with respect to the Seller.
(i) GOOD TITLE; VALID TRANSFER; ABSENCE OF LIENS; SECURITY
INTEREST. Immediately prior to the sale of the Initial Receivables and
related Other Trust Property to the Trust pursuant to the Sale and Servicing
Agreement, the Seller was the owner of, and had good and marketable title to,
such property free and clear of all Liens and Restrictions on
Transferability, and had full right, corporate power and lawful authority to
assign, transfer and pledge the Initial Receivables and the related Other
Trust Property. The Sale and Servicing Agreement constitutes a valid sale,
transfer and assignment of the Other Trust Property to the Trust enforceable
against creditors of and purchasers of the Seller. In the event that, in
contravention of the intention of the parties, the transfer of the Other
Trust Property by the Seller to the Trust is characterized as other than a
sale, such transfer shall be characterized as a secured financing, and the
Trust shall have a valid and perfected first priority security interest in
the Other Trust Property free and clear of all Liens and Restrictions on
Transferability.
(j) ACCURACY OF INFORMATION. Neither the Transaction Documents
nor any documents, agreements, instruments, schedules, certificates,
statements, cash flow schedules, number runs or other writings or data
(collectively, the "Documents") furnished to Financial Security by the Seller
or Arcadia Financial with respect to either of them, their Subsidiaries, the
Receivables or the Transaction contain any statement of a material fact which
was untrue or misleading in any material respect when made (except insofar as
any Document was corrected or
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superseded by a subsequent Document and Financial Security has not
detrimentally relied on the original Document). There is no fact known to the
Seller or Arcadia Financial which has a material possibility of causing a
Material Adverse Change with respect to the Seller or Arcadia Financial, or
which has a material possibility of impairing the value or marketability of
the Receivables, taken as a whole, or decreasing the probability that amounts
due in respect of the Receivables will be collected as due. Since the
furnishing of the Transaction Documents, there has been no change or any
development or event involving a prospective change known to the Seller or
Arcadia Financial which would render any representation or warranty or other
statement made by either of them in any of the Transaction Documents untrue
or misleading in a material respect.
(k) COMPLIANCE WITH INVESTMENT COMPANY ACT. The Seller is not
required to be registered as an "investment company" under the Investment
Company Act.
(l) INCORPORATION OF CERTAIN REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Seller set forth in the Transaction
Documents are (in each case) true and correct as if set forth herein.
(m) SPECIAL PURPOSE ENTITY.
(i) The capital of the Seller is adequate for the business and
undertakings of the Seller.
(ii) Other than with respect to the ownership by Arcadia
Financial of the stock of the Seller and as provided in the Previous Series
Transaction Documents, the Purchase Agreement, the Sale and Servicing
Agreement, and the Spread Account Agreement, the Seller is not engaged in
any business transactions with Arcadia Financial or any Affiliate of
Arcadia Financial.
(iii) At least one director of the Seller shall be a person who is
not, and will not be, a director, officer, employee or holder of any equity
securities of Arcadia Financial or any of its Affiliates or Subsidiaries.
(iv) The Seller's funds and assets are not, and will not be,
commingled with the funds of any other Person, except as provided in the
Transaction Documents.
(v) The by-laws of the Seller require it to maintain (A) correct
and complete minute books and records of account, and (B) minutes of the
meetings and other proceedings of its shareholders and board of directors.
(n) SOLVENCY; FRAUDULENT CONVEYANCE. The Seller is solvent and
will not be rendered insolvent by the Transaction and, after giving effect to
such Transaction, the Seller will not be left with an unreasonably small
amount of capital with which to engage in its business. The Seller does not
intend to incur, or believe that it has incurred, debts beyond its ability to
pay such debts as they mature. The Seller does not contemplate the
commencement of insolvency, bankruptcy, liquidation or consolidation
proceedings or the appointment of a receiver, liquidator, conservator,
trustee or similar official in respect of the Seller or any of its assets.
The amount of
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consideration being received by the Seller upon the sale of the Initial
Receivables and related Other Trust Property and contemplated to be received
upon the Sale of the Subsequent Receivables and related Other Trust Property
constitutes reasonably equivalent value and fair consideration for interest
in such Receivables and such Other Trust Property. The Seller is not
transferring the Other Trust Property to the Trust, as provided in the
Transaction Documents, with any intent to hinder, delay or defraud any of the
Seller's creditors.
(o) REGISTRATION STATEMENT; PROSPECTUS. The Seller has filed with
the Securities and Exchange Commission (the "Commission") a registration
statement on Form S-3 (No. 333-18021), including a preliminary prospectus and
prospectus supplement for the registration of the Notes under the Securities
Act, has filed such amendments thereto, and such amended preliminary
prospectuses and prospectus supplements as may have been required to the date
hereof, and will file such additional amendments thereto and such amended
prospectuses and prospectus supplements as may hereafter be required. Such
registration statement (as amended, if applicable) and the prospectus,
together with the prospectus supplement relating to the Notes, constituting a
part thereof (including in each case all documents, if any, incorporated by
reference therein and the information, if any, deemed to be part thereof
pursuant to the rules and regulations of the Commission under the Securities
Act (the "Rules and Regulations"), as from time to time amended or
supplemented pursuant to the Securities Act or otherwise) are hereinafter
referred to as the "Registration Statement" and the "Prospectus,"
respectively, except that if any revised prospectus or prospectus supplement
shall be provided by the Seller for use in connection with the offering of
the Notes which differs from the Prospectus filed with the Commission
pursuant to Rule 424 of the Rules and Regulations (whether or not such
revised prospectus is required to be filed by the Seller pursuant to Rule 424
of the Rules and Regulations), the term "Prospectus" shall refer to such
revised prospectus and prospectus supplement from and after the time it is
first provided to the Underwriters for such use. The Registration Statement
at the time they became effective complied, and at each time that the
Prospectus is provided to the Underwriters for use in connection with the
offering or sale of any Note will comply, in all material respects with the
requirements of the Securities Act and the Rules and Regulations. The
Registration Statement and the Prospectus at the time the Registration
Statement became effective did not and on the date hereof does not, contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and the Prospectus at the time it was first provided to the
Underwriters for use in connection with the offering of the Notes did not,
and on the date hereof does not, contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein in light of the circumstances under which they were made not
misleading, except that the representations and warranties in this
subparagraph shall not apply to statements in or omissions from the
Registration Statement or the Prospectus or any preliminary prospectus made
in reliance upon information furnished to the Seller in writing by Financial
Security expressly for use therein or the financial statements (including the
related notes thereto) of Financial Security.
(p) ERISA. The Seller is in compliance with ERISA and has not
incurred and does not reasonably expect to incur any liabilities to the PBGC
under ERISA in connection with any Plan or Multiemployer Plan or to
contribute now or in the future in respect of any Plan or Multiemployer Plan.
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(q) PLEDGE OF SHARES. The shares of stock of the Seller which
have been pledged pursuant to the Stock Pledge Agreement constitute all of
the issued and outstanding shares of the Seller.
(r) PERFECTION OF LIENS AND SECURITY INTEREST. On the Closing
Date, the Lien and security interest in favor of the Indenture Collateral
Agent with respect to Indenture Property will be perfected by the filing of
financing statements on Form UCC-1 in each jurisdiction where such recording
or filing is necessary for the perfection thereof, the delivery of the
Receivable Files for the Receivables to the Custodian, and the establishment
of the Collection Account, the Subcollection Account, the Lockbox Account,
the Pre-Funding Account, the Reserve Account and the Note Distribution
Account in accordance with the provisions of the Transaction Documents, and
no other filings in any jurisdiction or any other actions (except as
expressly provided herein) are necessary to perfect the Collateral Agent's
Lien on and security interest in the Collateral as against any third parties.
(s) SECURITY INTEREST IN FUNDS AND INVESTMENTS. Assuming the
retention of funds in the Accounts and the acquisition of Eligible
Investments in accordance with the Transaction Documents, such funds and
Eligible Investments will be subject to a valid and perfected, first priority
security interest in favor of the Collateral Agent on behalf of the Indenture
Trustee (on behalf of the Noteholders) and Financial Security.
Section 2.05 AFFIRMATIVE COVENANTS OF ARCADIA FINANCIAL AND THE
SELLER. Each of Arcadia Financial and the Seller hereby agree that during
the Term of the Agreement, unless Financial Security shall otherwise
expressly consent in writing:
(a) COMPLIANCE WITH AGREEMENTS AND APPLICABLE LAWS. The Seller
will comply with all terms and conditions of this Agreement and each other
Transaction Document to which it is a party and with all material
requirements of any law, rule or regulation applicable to it. The Seller
will not cause or permit to become effective any amendment to or modification
of any of the Transaction Documents to which it is a party unless (i) (so
long as no Insurer Default shall have occurred and be continuing) Financial
Security shall have previously approved in writing the form of such amendment
or modification or (ii) if an Insurer Default shall have occurred and be
continuing, such amendment would not adversely affect the interests of
Financial Security. The Seller shall not take any action or fail to take any
action that would interfere with the enforcement of any rights under this
Agreement or the other Transaction Documents.
(b) CORPORATE EXISTENCE. The Seller shall maintain its corporate
existence and shall at all times continue to be duly organized under the laws
of Delaware and duly qualified and duly authorized (as described in Sections
2.04(a), (b) and (c) hereof) and shall conduct its business in accordance
with the terms of its corporate charter and bylaws.
(c) FINANCIAL STATEMENTS; ACCOUNTANTS' REPORTS; OTHER INFORMATION.
The Seller shall keep or cause to be kept in reasonable detail books and
records of account of the Seller's assets and business, and shall clearly
reflect therein the transfer of the Receivables and the Other Trust Property
to the Trust and the sale of the Receivables as a sale to the Trust of the
Seller's interest in the Receivables and the Other Trust Property. The
Seller shall furnish to Financial
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Security, simultaneously with the delivery of such documents to the Trustee
or the Noteholders, as the case may be, copies of all reports, certificates,
statements, financial statements or notices furnished to the Trustee or the
Noteholders, as the case may be, pursuant to the Transaction Documents. The
Seller shall furnish to Financial Security as soon as available, and in any
event within 90 days after the close of each fiscal year of the Seller, the
unaudited balance sheet of the Seller as of the end of such fiscal year and
the unaudited statements of income, changes in shareholders' equity and cash
flows of the Seller for such fiscal year, all in reasonable detail and
stating in comparative form the respective figures for the preceding fiscal
year, prepared in accordance with generally accepted accounting principles,
consistently applied.
(d) COMPLIANCE CERTIFICATE. The Seller shall deliver to Financial
Security, within 90 days after the close of each fiscal year of the Seller, a
certificate signed by an Authorized Officer of the Seller stating that:
(i) a review of the Seller's performance under the Transaction
Documents during such period has been made under such officer's
supervision; and
(ii) to the best of such individual's knowledge following
reasonable inquiry, no Default or Event of Default has occurred, or if a
Default or Event of Default has occurred, specifying the nature thereof
and, if the Seller has or had a right to cure pursuant to Section 5.01,
stating in reasonable detail the steps, if any, taken or being taken by the
Seller to cure such Default or Event of Default or to otherwise comply with
the terms of the Transaction Document to which such Default or Event of
Default relates.
(iii) the financial reports submitted in accordance with Section
2.05(c) hereof, are complete and correct in all material respects and
present fairly the financial condition and results of operations of the
Seller as of the dates and for the periods indicated, in accordance with
generally accepted accounting principles consistently applied.
(e) ACCESS TO RECORDS; DISCUSSIONS WITH OFFICERS AND ACCOUNTANTS.
The Seller shall, upon the request of Financial Security, permit Financial
Security or its authorized agents (i) to inspect the books and records of
the Seller as they may relate to the Notes, the Receivables and the Other
Trust Property, the obligations of the Seller under the Transaction
Documents, the Seller's business and the Transaction and (ii) to discuss the
affairs, finances and accounts of the Seller with any of its officers,
directors and representatives, including its Independent Accountants. Such
inspections and discussions shall be conducted during normal business hours
and shall not unreasonably disrupt the business of the Seller. The books and
records of the Seller will be maintained at the address of the Seller
designated herein for receipt of notices, unless the Seller shall otherwise
advise the parties hereto in writing.
(f) NOTICE OF MATERIAL EVENTS. The Seller shall promptly inform
Financial Security in writing of the occurrence of any of the following:
(i) the submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation against the
Seller involving potential damages
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or penalties in an uninsured amount in excess of $5,000 in any one
instance or $25,000 in the aggregate;
(ii) any change in the location of Seller's principal office or
any change in the location of the Seller's books and records;
(iii) the occurrence of any Default or Event of Default;
(iv) the commencement or threat of any rule making or
disciplinary proceedings or any proceedings instituted by or against the
Seller in any federal, state or local court or before any governmental body
or agency, or before any arbitration board, or the promulgation of any
proceeding or any proposed or final rule which, if adversely determined,
would result in a Material Adverse Change with respect to the Seller or the
Trust;
(v) the commencement of any proceedings by or against the Seller
under any applicable bankruptcy, reorganization, liquidation,
rehabilitation, insolvency or other similar law now or hereafter in effect
or of any proceeding in which a receiver, liquidator, conservator, trustee
or similar official shall have been, or may be, appointed or requested for
the Seller or any of its assets;
(vi) the receipt of notice that (A) the Seller is being placed
under regulatory supervision, (B) any license, permit, charter,
registration or approval necessary for the conduct of the Seller's business
is to be, or may be, suspended or revoked, or (C) the Seller is to cease
and desist any practice, procedure or policy, employed by the Seller in the
conduct of its business, and such cessation may result in a Material
Adverse Change with respect to the Seller or the Trust; or
(vii) any other event, circumstance or condition that has
resulted, or has a material possibility of resulting, in a Material Adverse
Change in respect of the Seller, or the Trust.
(g) FURTHER ASSURANCES. The Seller will file all necessary
financing statements, assignments or other instruments, and any amendments or
continuation statements relating thereto, necessary to be kept and filed in
such manner and in such places as may be required by law to preserve and
protect fully the Lien and security interest in, and all rights of the Trust
with respect to Other Trust Property, under the Sale and Servicing Agreement.
In addition, the Seller shall, upon the request of Financial Security (so
long as no Insurer Default has occurred and is continuing), from time to
time, execute, acknowledge and deliver and, if necessary, file such further
instruments and take such further action as may be reasonably necessary to
effectuate the intention, performance and provisions of the Transaction
Documents to which the Seller is a party or to protect the interest of the
Trust in the Receivables under the Sale and Servicing Agreement. The Seller
agrees to cooperate with the Rating Agencies in connection with any review of
the Transaction which may be undertaken by the Rating Agencies after the date
hereof.
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(h) MAINTENANCE OF LICENSES. The Seller shall maintain all
licenses, permits, charters and registrations which are material to the
performance by the Seller of its obligations under this Agreement and each
other Transaction Document to which the Seller is a party or by which the
Seller is bound.
(i) DISCLOSURE DOCUMENT. Each Prospectus delivered with respect
to the Notes shall clearly disclose that the Note Policy is not covered by
the property/casualty insurance security fund specified in Article 76 of the
New York Insurance Law. In addition, each Prospectus delivered with respect
to the Notes which includes financial statements of Financial Security
prepared in accordance with generally accepted accounting principles (other
than a Prospectus that only incorporates such financial statements by
reference) shall include the following statement immediately preceding such
financial statements:
The New York State Insurance Department recognizes only
statutory accounting practices for determining and reporting
the financial condition and results of operations of an
insurance company, for determining its solvency under the
New York Insurance Law, and for determining whether its
financial condition warrants the payment of a dividend to
its stockholders. No consideration is given by the New York
State Insurance Department to financial statements prepared
in accordance with generally accepted accounting principles
in making such determinations.
(j) SPECIAL PURPOSE ENTITY.
(i) The Seller shall conduct its business solely in its own name
through its duly authorized officers or agents so as not to mislead others
as to the identity of the entity with which those others are concerned, and
particularly will use its best efforts to avoid the appearance of
conducting business on behalf of Arcadia Financial or any other Affiliate
thereof or that the assets of the Seller are available to pay the creditors
of Arcadia Financial or any Affiliate thereof. Without limiting the
generality of the foregoing, all oral and written communications,
including, without limitation, letters, invoices, purchase orders,
contracts, statements and loan applications, will be made solely in the
name of the Seller.
(ii) The Seller shall maintain corporate records and books of
account separate from those of Arcadia Financial and the other Affiliates
thereof.
(iii) The Seller shall obtain proper authorization from its board
of directors of all corporate action requiring such authorization, meetings
of the board of directors of the Seller shall be held not less frequently
than three times per annum and copies of the minutes of each such board
meeting shall be delivered to Financial Security within two weeks of such
meeting.
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(iv) The Seller shall obtain proper authorization from its
shareholders of all corporate action requiring shareholder approval,
meetings of the shareholders of the Seller shall be held not less
frequently than one time per annum and copies of each such authorization
and the minutes of each such shareholder meeting shall be delivered to
Financial Security within two weeks of such authorization or meeting, as
the case may be.
(v) Although the organizational expenses of the Seller have been
paid by Arcadia Financial, operating expenses and liabilities of the Seller
shall be paid from its own funds.
(vi) The annual financial statements of the Seller shall disclose
the effects of the Seller's transactions in accordance with generally
accepted accounting principles and shall disclose that the assets of the
Seller are not available to pay creditors of Arcadia Financial or any other
Affiliate thereof.
(vii) The resolutions, agreements and other instruments of the
Seller underlying the transactions described in this Agreement and in the
other Transaction Documents shall be continuously maintained by the Seller
as official records of the Seller separately identified and held apart from
the records of Arcadia Financial and each other Affiliate thereof.
(viii) The Seller shall maintain an arm's-length relationship with
Arcadia Financial and the other Affiliates thereof and will not hold itself
out as being liable for the debts of Arcadia Financial or any Affiliate
thereof.
(ix) The Seller shall keep its assets and its liabilities wholly
separate from those of all other entities, including, but not limited to
Arcadia Financial and the other Affiliates thereof except, in each case, as
contemplated by the Transaction Documents.
(k) CLOSING DOCUMENTS. The Seller shall provide or cause to be
provided to Financial Security an executed original copy of each document
executed in connection with the Transaction within 10 days after the Closing
Date, except that the Seller shall cause a copy of the Trust Agreement, the
Sale and Servicing Agreement, the Series 1998-A Supplement, the Indenture,
the Administration Agreement and each Transaction Document to which Financial
Security is a party to be provided to Financial Security on the Closing Date.
(l) SUBSEQUENT RECEIVABLES; GOOD TITLE; VALID TRANSFER; ABSENCE OF
LIENS; SECURITY INTEREST. Immediately prior to the sale to the Trust
pursuant to a Subsequent Transfer Agreement, the Seller will be the owner of,
and shall have good and marketable title to, the Subsequent Receivables
transferred thereby and the related Other Trust Property free and clear of
all Liens and Restrictions on Transferability, and shall have full right,
corporate power and lawful authority to assign, transfer and pledge such
property.
(m) INCORPORATION OF COVENANTS. The Seller agrees to comply with
each of the Seller's covenants set forth in the Transaction Documents and
hereby incorporates such covenants by reference as if each were set forth
herein.
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Section 2.06 NEGATIVE COVENANTS OF ARCADIA FINANCIAL AND THE
SELLER. Each of arcadia financial and the seller hereby agrees that during
the term of this agreement, unless financial security shall otherwise give
its prior express written consent:
(a) WAIVER; AMENDMENTS, ETC. The Seller shall not waive, modify,
amend, supplement or consent to any waiver, modification, amendment of or
supplement to, any of the provisions of any of the Transaction Documents or
Previous Series Transaction Documents or of its certificate of incorporation
or by-laws (i) unless, if no Insurer Default shall have occurred and be
continuing, Financial Security shall have consented thereto in writing or
(ii) if an Insurer Default shall have occurred and be continuing, which would
adversely affect the interests of Financial Security.
(b) CREATION OF INDEBTEDNESS; GUARANTEES. The Seller shall not
create, incur, assume or suffer to exist any indebtedness or assume,
guarantee, endorse or otherwise be or become directly or contingently liable
for the obligations of any Person by, among other things, agreeing to
purchase any obligation of another Person, agreeing to advance funds to such
Person or causing or assisting such Person to maintain any amount of capital,
except as contemplated by the Transaction Documents or as contemplated by the
documents relating to a Series of Notes.
(c) SUBSIDIARIES. The Seller shall not form, or cause to be
formed, any Subsidiaries.
(d) NO LIENS. The Seller shall not, except as contemplated by the
Transaction Documents or as contemplated by the documents relating to a
Series of Notes, create, incur, assume or suffer to exist any Lien of any
nature upon or with respect to any of its properties or assets, now owned or
hereafter acquired, or sign or file under the Uniform Commercial Code of any
jurisdiction any financing statement that names the Seller as debtor, or sign
any security agreement authorizing any secured party thereunder to file such
a financing statement.
(e) ISSUANCE OF STOCK. The Seller shall not issue any shares of
capital stock or rights, warrants or options in respect of its capital stock
or securities convertible into or exchangeable for its capital stock, other
than the shares of common stock which have been pledged to Financial Security
under the Seller Stock Pledge Agreement.
(f) IMPAIRMENT OF RIGHTS. The Seller shall not take any action,
or fail to take any action, if such action or failure to take action may
interfere with the enforcement of any rights under the Transaction Documents
that are material to the rights, benefits or obligations of the Trust, the
Indenture Trustee, the Noteholders or Financial Security.
(g) NO MERGERS. The Seller shall not consolidate with or merge
into any Person or transfer all or any material amount of its assets to any
Person (except as contemplated by the Transaction Documents or the documents
relating to a Series of Notes).
(h) ERISA. The Seller shall not contribute or incur any
obligation to contribute to, or incur any liability in respect of, any Plan
or Multiemployer Plan.
(i) OTHER ACTIVITIES. The Seller shall not:
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(i) sell, pledge, transfer, exchange or otherwise dispose of any
of its assets except as permitted under the Transaction Documents or the
documents relating to a Series of Notes; or
(ii) engage in any business or activity except as contemplated by
the Transaction Documents or as contemplated by the documents relating to a
Series of Notes and as permitted by its certificate of incorporation.
(j) INSOLVENCY. The Seller shall not commence any case,
proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, consolidation or other
relief with respect to it or the Trust or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for the
Trust or for all or any substantial part of its assets or the Collateral
related to any or all Series, or make a general assignment for the benefit of
its creditors. The Seller shall not take any action in furtherance of, or
indicating the consent to, approval of, or acquiescence in any of the acts
set forth above. The Seller shall not admit in writing its inability to pay
its debts.
(k) DIVIDENDS. The Seller shall not declare or make payment of
(i) any dividend or other distribution on any shares of its capital stock, or
(ii) any payment on account of the purchase, redemption, retirement or
acquisition of any option, warrant or other right to acquire shares of its
capital stock, unless (in each case) at the time of such declaration or
payment (and after giving effect thereto) no amount payable by the Seller
under any Transaction Document with respect to any Series is then due and
owing but unpaid.
Section 2.07 REPRESENTATIONS AND WARRANTIES OF ARCADIA FINANCIAL.
Arcadia Financial represents and warrants, as of the date hereof and as of
the Closing Date, as follows:
(a) DUE ORGANIZATION AND QUALIFICATION. Arcadia Financial and
each of its Subsidiaries is a corporation, duly organized, validly existing
and in good standing under the laws of the State of its respective
incorporation with power and authority to own its properties and conduct its
business. Arcadia Financial and each of its Subsidiaries is duly qualified
to do business and is in good standing in each jurisdiction in which the
failure to be so qualified would render any of the Receivables unenforceable
in any respect or would otherwise have a material adverse effect upon the
Transaction. Arcadia Financial and each of its Subsidiaries has obtained all
licenses, permits, charters, registrations and approvals necessary for the
conduct of its business as currently conducted and as described in the
Prospectus and for the performance of its obligations under the Transaction
Documents.
(b) POWER AND AUTHORITY. Arcadia Financial has all necessary
corporate power and authority to conduct its business as currently conducted
and as described in the Prospectus, to execute, deliver and perform its
obligations under this Agreement and each other Transaction Document to which
it is a party and to carry out the terms of each such agreement.
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(c) DUE AUTHORIZATION. The execution, delivery and performance of
this Agreement and each other Transaction Document to which Arcadia Financial
is a party has been duly authorized by all necessary corporate action and
does not require any additional approvals or consents or other action by or
any notice to or filing with any Person, including, without limitation, any
governmental entity or Arcadia Financial's stockholders.
(d) NONCONTRAVENTION. Neither the execution and delivery of this
Agreement and each other Transaction Document to which Arcadia Financial is a
party, the consummation of the Transaction, nor the satisfaction of the terms
and conditions of this Agreement and each other Transaction Document to which
Arcadia Financial is a party,
(i) conflicts with or results in any breach or violation of any
provision of the corporate charter or bylaws of Arcadia Financial or any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award currently in effect having applicability to Arcadia
Financial or any of its properties, including regulations issued by an
administrative agency or other governmental authority having supervisory
powers over Arcadia Financial,
(ii) constitutes a default by Arcadia Financial under or a breach
of any provision of any loan agreement, mortgage, indenture or other
agreement or instrument to which Arcadia Financial or any of its
Subsidiaries is a party or by which it or any of its or their properties is
or may be bound or affected, or
(iii) results in or requires the creation of any Lien upon or in
respect of any of Arcadia Financial's assets, except as otherwise expressly
contemplated by the Transaction Documents.
(e) PENDING LITIGATION OR OTHER PROCEEDING. There is no action,
proceeding or investigation pending, or, to Arcadia Financial's best
knowledge, threatened, before any court, regulatory body, administrative
agency, or other governmental instrumentality having jurisdiction over
Arcadia Financial or its properties: (A) asserting the invalidity of this
Agreement or any other Transaction Document to which Arcadia Financial is a
party, (B) seeking to prevent the issuance of the Notes, or the consummation
of the Transaction, (C) seeking any determination or ruling that might
materially and adversely affect the validity or enforceability of, this
Agreement or any other Transaction Document to which Arcadia Financial is a
party, (D) which might result in a Material Adverse Change with respect to
Arcadia Financial or (E) which might adversely affect the federal or state
tax attributes of the Notes or the Trust.
(f) VALID AND BINDING OBLIGATIONS. The Purchase Agreement
constitutes a valid sale, transfer, and assignment of the Receivables and
Other Trust Property to the Seller, enforceable against creditors of and
purchasers from Arcadia Financial. Each of the other Transaction Documents
to which Arcadia Financial is a party when executed and delivered by Arcadia
Financial, and assuming the due authorization, execution and delivery by the
other parties thereto, will constitute the legal, valid and binding
obligation of Arcadia Financial enforceable in accordance with its respective
terms, except as such enforceability may be limited
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by bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equitable principles.
(g) NO CONSENTS. No consent, license, approval or authorization
from, or registration, filing or declaration with, any regulatory body,
administrative agency, or other governmental instrumentality, nor any
consent, approval, waiver or notification of any creditor, lessor or other
non-governmental person, is required in connection with the execution,
delivery and performance by Arcadia Financial of this Agreement or of any
other Transaction Document to which Arcadia Financial is a party, except (in
each case) such as have been obtained and are in full force and effect.
(h) FINANCIAL STATEMENTS. The Financial Statements of Arcadia
Financial, copies of which have been furnished to Financial Security, (i)
are, as of the dates and for the periods referred to therein, complete and
correct in all material respects, (ii) present fairly the financial
condition and results of operations of Arcadia Financial as of the dates and
for the periods indicated and (iii) have been prepared in accordance with
generally accepted accounting principles consistently applied, except as
noted therein (subject as to interim statements to normal year-end
adjustments and the absence of notes). Since the date of the most recent
Financial Statements, there has been no material adverse change in such
financial condition or results of operations. Except as disclosed in the
Financial Statements, Arcadia Financial is not subject to any contingent
liabilities or commitments that, individually or in the aggregate, have a
reasonable likelihood of causing a Material Adverse Change in respect of
Arcadia Financial.
(i) COMPLIANCE WITH LAW, ETC. No practice, procedure or policy
employee or proposed to be employed by Arcadia Financial in the conduct of
its business violates any law, regulation, judgment, agreement, order or
decree applicable to Arcadia Financial which, if enforced, would result in a
Material Adverse Change with respect to Arcadia Financial.
(j) TAXES. Arcadia Financial has, and each of its Subsidiaries
have, filed all federal and state tax returns and paid all taxes to the
extent that such taxes have become due. Any taxes, fees and other
governmental charges payable by Arcadia Financial in connection with the
Transaction, the execution and delivery of the Transaction Documents and the
issuance of the Notes have been paid or shall have been paid at or prior to
the Closing Date.
(k) ERISA. Arcadia Financial is in compliance with ERISA and has
not incurred and does not reasonably expect to incur any liabilities to the
PBGC under ERISA in connection with any Plan or Multiemployer Plan or to
contribute now or in the future in respect of any Plan or Multiemployer Plan
except in accordance with the provisions of Section 2.9(e) hereof.
(l) INCORPORATION OF CERTAIN REPRESENTATIONS AND WARRANTIES.
Arcadia Financial represents and warrants to Financial Security that the
representations and warranties of Arcadia Financial set forth in the
Transaction Documents are (in each case) true and correct as if set forth
herein.
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Section 2.08 AFFIRMATIVE COVENANTS OF ARCADIA FINANCIAL. Arcadia
Financial hereby agrees that during the Term of the Agreement, unless
Financial Security shall otherwise expressly consent in writing:
(a) COMPLIANCE WITH AGREEMENTS AND APPLICABLE LAWS. Arcadia
Financial will comply with all terms and conditions of this Agreement and
each other Transaction Document to which it is a party and all material
requirements of any law, rule or regulation applicable to it. Arcadia
Financial will not cause or permit to become effective any amendment to or
modification of any Transaction Document to which it is a party (i) unless,
so long as no Insurer Default shall have occurred and be continuing,
Financial Security shall have previously approved in writing the form of such
amendment or modification or (ii) if an Insurer Default shall have occurred
and be continuing, such amendment would not adversely affect the interests of
Financial Security. Arcadia Financial shall not take any action or fail to
take any action that would interfere with the enforcement of any rights under
this Agreement or the other Transaction Documents.
(b) CORPORATE EXISTENCE. Arcadia Financial shall maintain its
corporate existence and shall at all times continue to be duly organized
under the laws of Minnesota and duly qualified and duly authorized (as
described in Sections 2.07(a), (b) and (c) hereof) and shall conduct its
business in accordance with the terms of its corporate charter and bylaws.
(c) FINANCIAL STATEMENTS; ACCOUNTANTS' REPORTS; OTHER INFORMATION.
Arcadia Financial shall keep or cause to be kept in reasonable detail books
and records of account of Arcadia Financial's assets and business. Arcadia
Financial, so long as it shall be the Servicer, shall furnish to Financial
Security, simultaneously with the delivery of such documents to the Owner
Trustee, Indenture Trustee or the Noteholders, as the case may be, copies of
all reports, certificates, statements or notices furnished to the Owner
Trustee, Indenture Trustee or the Noteholders, as the case may be, pursuant
to the Transaction Documents. Arcadia Financial shall also furnish or cause
to be furnished to Financial Security:
(i) ANNUAL FINANCIAL STATEMENTS. As soon as available, and in
any event within 90 days after the close of each fiscal year of Arcadia
Financial, the audited balance sheets of Arcadia Financial and its
subsidiaries as of the end of such fiscal year and the audited consolidated
statements of income, changes in shareholders' equity and cash flows of
Arcadia Financial for such fiscal year, all in reasonable detail and
stating in comparative form the respective figures for the corresponding
date and period in the preceding fiscal year, prepared in accordance with
generally accepted accounting principles, consistently applied, and
accompanied by the certificate of Arcadia Financial's independent
accountants (which, so long as no Insurer Default shall have occurred and
be continuing, shall be acceptable to Financial Security) and by the
certificate specified in Section 2.08(d) hereof.
(ii) QUARTERLY FINANCIAL STATEMENTS. As soon as available, and
in any event within 45 days after the close of each of the first three
quarters of each fiscal year of Arcadia Financial, the unaudited
consolidated balance sheets of Arcadia Financial as of the end of such
quarter and the unaudited consolidated statements of income, changes in
shareholders' equity and cash flows of Arcadia Financial for the portion of
the fiscal year
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then ended, all in reasonable detail and stating in comparative form the
respective figures for the corresponding date and period in the preceding
fiscal year, prepared in accordance with generally accepted accounting
principles consistently applied (subject to normal year-end adjustments),
and accompanied by the certificate specified in Section 2.08(d) hereof.
(iii) ACCOUNTANTS' REPORTS. Promptly upon receipt thereof, copies
of any reports submitted to Arcadia Financial by its independent
accountants in connection with any examination of the financial statements
of Arcadia Financial.
(iv) CERTAIN INFORMATION. Promptly after the filing or sending
thereof, copies of all proxy statements, financial statements, reports and
registration statements which Arcadia Financial files, or delivers to, the
IRS, the Commission, or any other federal government agency, authority or
body which supervises the issuance of securities by Arcadia Financial or
any national securities exchange.
(d) COMPLIANCE CERTIFICATE. Arcadia Financial shall deliver to
Financial Security within 90 days after the close of each fiscal year of
Arcadia Financial, a certificate signed by an Authorized Officer of Arcadia
Financial stating that:
(i) a review of Arcadia Financial's performance under the
Transaction Documents during such period has been made under such officer's
supervision;
(ii) to the best of such individual's knowledge following
reasonable inquiry, no Default or Event of Default has occurred, or if a
Default or Event of Default has occurred, specifying the nature thereof
and, if Arcadia Financial has or had a right to cure pursuant to Section
5.01 hereof, stating in reasonable detail the steps, if any, taken or being
taken by Arcadia Financial to cure such Default or Event of Default or to
otherwise comply with the terms of the Transaction Document to which such
Default or Event of Default relates; and
(iii) the financial statements submitted in accordance with
Section 2.08(c) hereof, as applicable, are complete and correct in all
material respects and present fairly the financial condition and results of
operations of Arcadia Financial as of the dates and for the periods
indicated, in accordance with generally accepted accounting principles
consistently applied (subject as to interim statements to normal year-end
adjustments and the absence of notes).
(e) ACCESS TO RECORDS; DISCUSSIONS WITH OFFICERS AND ACCOUNTANTS.
Arcadia Financial shall, upon the request of Financial Security, permit
Financial Security or its authorized agents (i) to inspect the books and
records of Arcadia Financial as they may relate to the Notes, the
Receivables, the obligations of Arcadia Financial as Servicer under the
Transaction Documents, its business and the Transaction and (ii) to discuss
the affairs, finances and accounts of Arcadia Financial with any of its
officers, directors and representatives, including its Independent
Accountants. Such inspections and discussions shall be conducted during
normal business hours and shall not unreasonably disrupt the business of
Arcadia Financial. The books
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and records of Arcadia Financial will be maintained at the address of Arcadia
Financial designated herein for receipt of notices, unless Arcadia Financial
shall otherwise advise the parties hereto in writing.
(f) NOTICE OF MATERIAL EVENTS. Arcadia Financial shall promptly
inform Financial Security in writing of the occurrence of any of the
following:
(i) the submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation against
Arcadia Financial involving potential damages or penalties in an uninsured
amount in excess of $10,000 in any one instance or $25,000 in the
aggregate;
(ii) any change in the location of Arcadia Financial's principal
office or any change in the location of the Arcadia Financial's books and
records;
(iii) the occurrence of any Default or Event of Default;
(iv) the commencement or threat of any rule making or
disciplinary proceedings or any proceedings instituted by or against
Arcadia Financial in any federal, state or local court or before any
governmental body or agency, or before any arbitration board, or the
promulgation of any proceeding or any proposed or final rule which, if
adversely determined, would result in a Material Adverse Change with
respect to Arcadia Financial;
(v) the commencement of any proceedings by or against Arcadia
Financial under any applicable bankruptcy, reorganization, liquidation,
rehabilitation, insolvency or other similar law now or hereafter in effect
or of any proceeding in which a receiver, liquidator, conservator, trustee
or similar official shall have been, or may be, appointed or requested for
Arcadia Financial or any of its assets;
(vi) the receipt of notice that (A) Arcadia Financial is being
placed under regulatory supervision, (B) any license, permit, charter,
registration or approval necessary for the conduct of Arcadia Financial's
business is to be, or may be, suspended or revoked, or (C) Arcadia
Financial is to cease and desist any practice, procedure or policy employed
by Arcadia Financial in the conduct of its business, and such cessation may
result in a Material Adverse Change with respect to Arcadia Financial; or
(vii) any other event, circumstance or condition that has
resulted, or has a material possibility of resulting, in a Material Adverse
Change in respect of Arcadia Financial.
(g) MAINTENANCE OF LICENSES. Arcadia Financial shall maintain all
licenses, permits, charters and registrations which are material to the
performance by Arcadia Financial of its obligations under this Agreement and
each other Transaction Document to which Arcadia Financial is a party or by
which Arcadia Financial is bound.
(h) ERISA. Arcadia Financial shall give Financial Security prompt
notice of each of the following events (but in no event more than 30 days
after the occurrence of the event): (i)
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an Accumulated Funding Deficiency, (ii) the failure to make a required
contribution to a Plan or Multiemployer Plan, (iii) a Reportable Event, (iv)
any action by a Commonly Controlled Entity to terminate any Plan or withdraw
from any Multiemployer Plan, (v) any action by the PBGC to terminate or
appoint a trustee to administer a Plan, (vi) the reorganization or
insolvency of any Multiemployer Plan and (vii) an aggregate Underfunding for
all Underfunded Plans in excess of $100,000. In addition, Arcadia Financial
shall promptly (but in no case more than 30 days following issuance or
receipt by the Commonly Controlled Entity) provide to Financial Security a
copy of all correspondence between a Commonly Controlled Entity and the PBGC,
IRS, Department of Labor or the administrators of a Multiemployer Plan
relating to any of the events described in the preceding sentence or the
underfunded status, termination or possible termination of a Plan or a
Multiemployer Plan.
(i) THIRD-PARTY BENEFICIARY. Arcadia Financial agrees that
Financial Security shall have all rights of a third-party beneficiary in
respect of the Sale and Servicing Agreement, it being understood that the
remedies of Financial Security with respect to the representations and
warranties set forth in Section 2.4(b) thereof and the covenants set forth in
Section 3.6(a) thereof shall be limited to the remedies set forth in the Sale
and Servicing Agreement.
(j) INCORPORATION OF COVENANTS. Arcadia Financial agrees to
comply with each of Arcadia Financial's covenants set forth in the
Transaction Documents and hereby incorporates such covenants by reference as
if each were set forth herein.
Section 2.09 NEGATIVE COVENANTS OF ARCADIA FINANCIAL. Arcadia
Financial hereby agrees that during the Term of this Agreement, unless
Financial Security shall otherwise give its express written consent:
(a) RESTRICTIONS ON LIENS. Arcadia Financial shall not create,
incur or suffer to exist, or agree to create, incur or suffer to exist, or
consent to cause or permit in the future (upon the happening of a contingency
or otherwise) the creation, incurrence or existence of any Lien or
Restriction on Transferability on the Receivables and the Other Trust
Property except for the Liens in favor of the Seller, the Trust and the
Indenture Collateral Agent for the benefit of the Indenture Trustee and
Financial Security contemplated by the Transaction Documents and the
Restrictions on Transferability imposed by the Purchase Agreement and the
Sale and Servicing Agreement.
(b) IMPAIRMENT OF RIGHTS. Arcadia Financial shall not take any
action, or fail to take any action, if such action or failure to take action
may interfere with the enforcement of any rights under the Transaction
Documents that are material to the rights, benefits or obligations of the
Seller, the Trust, the Indenture Trustee, the Noteholders or Financial
Security.
(c) LIMITATION ON MERGERS. Arcadia Financial shall not
consolidate with or merge with or into any Person or transfer all or any
material part of its assets to any Person (except as contemplated by the
Transaction Documents) or liquidate or dissolve, provided that Arcadia
Financial may consolidate with, merge with or into, or transfer all or a
material part of its assets to, another corporation if (i) the acquiror of
its assets, or the corporation surviving such merger or consolidation, shall
be organized and existing under the laws of any state and shall be
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qualified to transact business in each jurisdiction in which failure to
qualify would render any Transaction Document unenforceable or would result
in a Material Adverse Change in respect of Arcadia Financial or the Trust
Property; (ii) after giving effect to such consolidation, merger or transfer
of assets, no Default or Event of Default shall have occurred or be
continuing; (iii) such acquiring or surviving entity can lawfully perform
the obligations of Arcadia Financial under the Transaction Documents and
shall expressly assume in writing all of the obligations of Arcadia
Financial, including, without limitation, its obligations under the
Transaction Documents; and (iv) such acquiring or surviving entity and the
consolidated group of which it is a part shall each have a net worth
immediately subsequent to such consolidation, merger or transfer of assets at
least equal to the net worth of Arcadia Financial immediately prior to such
consolidation, merger or transfer of assets; and Arcadia Financial shall give
Financial Security written notice of any such consolidation, merger or
transfer of assets on the earlier of: (A) the date upon which any publicly
available filing or release is made with respect to such action or (B) 10
Business Days prior to the date of consummation of such action. Arcadia
Financial shall furnish to Financial Security all information requested by it
that is reasonably necessary to determine compliance with this paragraph.
(d) WAIVER; AMENDMENTS, ETC. Arcadia Financial shall not waive,
modify, amend, supplement or consent to any waiver, modification, amendment
of or supplement to, any of the provisions of any of the Transaction
Documents without the prior written consent of Financial Security (i)
unless, so long as no Insurer Default shall have occurred and be continuing,
Financial Security shall have consented thereto in writing or (ii) if an
Insurer Default shall have occurred and be continuing, which would adversely
affect the interests of Financial Security.
(e) ERISA. Arcadia Financial shall not contribute or incur any
obligation to contribute to, or incur any liability in respect of, any Plan
or Multiemployer Plan, except that Arcadia Financial may make such a
contribution or incur such a liability provided that neither Arcadia
Financial nor any Commonly Controlled Entity will:
(i) terminate any Plan so as to incur any material liability to
the PBGC;
(ii) knowingly participate in any "prohibited transaction" (as
defined in ERISA) involving any Plan or Multiemployer Plan or any trust
created thereunder which would subject any of them to a material tax or
penalty on prohibited transactions imposed under Section 4975 of the Code
or ERISA;
(iii) fail to pay to any Plan or Multiemployer Plan any
contribution which it is obligated to pay under the terms of such Plan or
Multiemployer Plan, if such failure would cause such Plan to have any
material Accumulated Funding Deficiency, whether or not waived; or
(iv) allow or suffer to exist any occurrence of a Reportable
Event, or any other event or condition, which presents a material risk of
termination by the PBGC of any Plan or Multiemployer Plan, to the extent
that the occurrence or nonoccurrence of such
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Reportable Event or other event or condition is within the control of it
or any Commonly Controlled Entity.
(f) INSOLVENCY. Arcadia Financial shall not commence any case,
proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, consolidation or other
relief with respect to the Seller or (B) seeking appointment of a receiver,
trustee, custodian or other similar official for the Seller. Arcadia
Financial shall not take any action in furtherance of, or indicating the
consent to, approval of, or acquiescence in any of the acts set forth above.
ARTICLE III.
THE NOTE POLICY; REIMBURSEMENT; INDEMNIFICATION
Section 3.01 CONDITIONS PRECEDENT TO ISSUANCE OF THE NOTE POLICY.
Financial Security agrees to issue the Note Policy subject to satisfaction of
the conditions set forth below.
(a) The obligation of Financial Security to issue the Note Policy
is subject to the following having occurred or being true (as the case may
be): (i) Financial Security shall have received evidence satisfactory to it
that the Seller shall have assigned, conveyed and transferred, or caused to
be assigned, conveyed and transferred, the Initial Receivables to the Trust,
(ii) the Seller shall have created a valid security interest in, and Lien
on, the Receivables in favor of the Trust, (iii) the Trust shall have
created a valid security interest in, and Lien on, the Indenture Property in
favor of the Indenture Collateral Agent on behalf of the Indenture Trustee
(on behalf of the Noteholders) and Financial Security, (iv) the initial
Premium shall have been paid in accordance with Section 3.02 hereof, (v) the
representations and warranties of the Trust, the Seller and of Arcadia
Financial and the Servicer set forth or incorporated by reference in this
Agreement shall be true and correct on and as of the Closing Date, and (vi)
each Transaction Document shall be in full force and effect and no Default
thereunder shall have occurred and be continuing.
(b) The obligation of Financial Security to issue the Note Policy
is further subject to the condition precedent that Financial Security shall
have received on the Closing Date, or, in its sole and absolute discretion,
received the opportunity to review prior to and on the Closing Date, the
following, each dated the Closing Date and in full force and effect on such
date, except as otherwise provided herein, in form and substance satisfactory
to Financial Security and its counsel:
(i) a certificate of an Authorized Officer of each of the Seller
and Arcadia Financial stating that nothing has come to the attention of
such entity to indicate that the Registration Statement or the Prospectus,
on the date the Registration Statement became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus on any date on which it was
forwarded to the Underwriter for use in connection with the offering of the
Notes contained, or on the
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Closing Date contains, any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading;
(ii) copies, certified to be true copies by an Authorized Officer
of the Owner Trustee, of (i) the resolutions of the board of directors of
the Owner Trustee authorizing the execution, delivery and performance by
the Owner Trustee of this Agreement and each other Transaction Document to
which the Owner Trustee is a party and all transactions and documents
contemplated hereby and thereby, and of all other documents evidencing any
other necessary action of the Owner Trustee (which certification shall
state that such resolutions have not been modified, are in full force and
effect and constitute the only resolutions adopted by the Owner Trustee's
board of directors or any committee thereof with respect thereto and (ii)
the Certificate of Trust, certified by the Secretary of State or other
appropriate official of the State of Delaware;
(iii) copies, certified to be true copies by an Authorized Officer
of the Seller, of (i) the resolutions of the board of directors of the
Seller authorizing the execution, delivery and performance of this
Agreement and each other Transaction Document to which the Seller is a
party and all transactions and documents contemplated hereby and thereby,
and of all other documents evidencing any other necessary action of the
Seller (which certification shall state that such resolutions have not been
modified, are in full force and effect and constitute the only resolutions
adopted by the Seller's board of directors or any committee thereof with
respect thereto), (ii) the corporate charter of the Seller and (iii) the
by-laws, as amended, of the Seller;
(iv) copies, certified to be true copies by an Authorized Officer
of Arcadia Financial, of (i) the resolutions of the board of directors of
Arcadia Financial authorizing the execution, delivery and performance of
this Agreement and each other Transaction Document to which Arcadia
Financial is a party and all other transactions and documents contemplated
hereby and thereby, and of all documents evidencing any other necessary
action of Arcadia Financial (which certification shall state that such
resolutions have not been modified, are in full force and effect and
constitute the only resolutions adopted by Arcadia Financial's board of
directors or any committee thereof with respect thereto), (ii) the
corporate charter of Arcadia Financial and (iii) the by-laws, as amended,
of Arcadia Financial;
(v) a certificate of an Authorized Officer of the Owner Trustee
stating that (i) all consents, licenses and approvals necessary for the
Owner Trustee to execute, deliver and perform this Agreement, the other
Transaction Documents to which the Owner Trustee is a party and all other
documents and instruments on the part of the Owner Trustee to be delivered
pursuant hereto or thereto have been obtained, and (ii) all such consents,
licenses and approvals are in full force and effect, the Owner Trustee has
not received any notice of any proceeding for the revocation of any such
license, charter, permit or approval, and, to the Owner Trustee's
knowledge, there is no threatened action or proceeding or any basis
therefor;
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(vi) a certificate of an Authorized Officer of the Seller stating
that (i) all consents, licenses and approvals necessary for the Seller to
execute, deliver and perform this Agreement, the other Transaction
Documents to which the Seller is a party and all other documents and
instruments on the part of the Seller to be delivered pursuant hereto or
thereto have been obtained, and (ii) all such consents, licenses and
approvals are in full force and effect, the Seller has not received any
notice of any proceeding for the revocation of any such license, charter,
permit or approval, and, to the Seller's knowledge, there is no threatened
action or proceeding or any basis therefor;
(vii) a certificate of an Authorized Officer of Arcadia Financial
stating that (i) all consents, licenses and approvals necessary for
Arcadia Financial to execute, deliver and perform this Agreement, the other
Transaction Documents to which Arcadia Financial is a party and all other
documents and instruments on the part of Arcadia Financial to be delivered
pursuant hereto or thereto have been obtained, and (ii) all such consents,
licenses and approvals are in full force and effect, Arcadia Financial has
not received any notice of any proceeding for the revocation of any such
license, charter, permit or approval, and, to Arcadia Financial's
knowledge, there is no threatened action or proceeding or any basis
therefor;
(viii) a certificate of an Authorized Officer of the Owner Trustee
certifying (i) the names and true signatures of the officers of the Owner
Trustee executing and delivering this Agreement, the other Transaction
Documents to which the Owner Trustee is a party and the other documents to
be executed and delivered by the Owner Trustee hereunder and thereunder,
(ii) that approval by the Owner Trustee's equity holders of the execution
and delivery of this Agreement, the other Transaction Documents and all
other such documents to be executed and delivered, by the Owner Trustee
hereunder, has been obtained or is not required, and (iii) that no action
for the dissolution of the Owner Trustee has been adopted or contemplated
and that no such proceedings have been commenced or are contemplated;
(ix) a certificate of an Authorized Officer of the Seller
certifying (i) the names and true signatures of the officers of the Seller
executing and delivering this Agreement, the other Transaction Documents to
which the Seller is a party and the other documents to be executed and
delivered by the Seller hereunder and thereunder, (ii) that approval by
the Seller's stockholder of the execution and delivery of this Agreement,
the other Transaction Documents and all other such documents to be executed
and delivered, by the Seller hereunder, has been obtained or is not
required, and (iii) that no resolution for the dissolution of the Seller
has been adopted or contemplated and that no such proceedings have been
commenced or are contemplated;
(x) a certificate of an Authorized Officer of Arcadia Financial
certifying (i) the names and true signatures of the officers of Arcadia
Financial executing and delivering this Agreement, the other Transaction
Documents to which Arcadia Financial is a party and the other documents to
be executed and delivered by Arcadia Financial hereunder and thereunder,
(ii) that approval by Arcadia Financial's stockholders of the execution
and delivery of this Agreement, the other Transaction Documents and all
other such
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documents to be executed and delivered, by Arcadia Financial hereunder,
has been obtained or is not required, and (iii) that no resolution for
the dissolution of Arcadia Financial has been adopted or contemplated and
that no such proceedings have been commenced or are contemplated;
(xi) a certificate of an Authorized Officer of the Trust to the
effect that (x) the representations and warranties of the Trust set forth
or incorporated by reference in this Agreement are true and correct on and
as of the Closing Date and (y) confirming that the conditions precedent set
forth herein with respect to the Trust are satisfied;
(xii) a certificate of an Authorized Officer of the Seller to the
effect that (x) the representations and warranties of the Seller set forth
or incorporated by reference in this Agreement are true and correct on and
as of the Closing Date and (y) confirming that the conditions precedent set
forth herein with respect to the Seller are satisfied;
(xiii) a certificate of an Authorized Officer of Arcadia Financial
to the effect that (x) the representations and warranties of Arcadia
Financial set forth or incorporated by reference in this Agreement are true
and correct on and as of the Closing Date, and (y) confirming that the
conditions precedent set forth herein with respect to Arcadia Financial are
satisfied;
(xiv) favorable opinions of counsel and special Texas counsel to
the Seller and Arcadia Financial in form and substance satisfactory to
Financial Security and its counsel;
(xv) a favorable opinion of counsel to each of the Trust, the
Owner Trustee, the Indenture Trustee and the Collateral Agent and the
Indenture Collateral Agent, in form and substance satisfactory to Financial
Security and its counsel;
(xvi) evidence that amounts due and payable Financial Security
under Section 3.02 of this Agreement have been paid or that acceptable
provisions therefor have been made;
(xvii) a fully executed copy of each of the Transaction Documents;
(xviii) evidence that all actions necessary or, in the opinion of
Financial Security, desirable to perfect and protect the interests
transferred by the Sale and Servicing Agreement, the liens and security
interests created with respect to the Spread Account, the Liens and
security interest created in favor of the Indenture Collateral Agent with
respect to the Indenture Property pursuant to the Indenture, including,
without limitation, the filing of any financing statements required by
Financial Security or its counsel, have been taken;
(xix) a certificate or opinion of Independent Accountants
addressed to Financial Security in form and substance satisfactory to
Financial Security;
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(xx) evidence that the Seller shall have deposited, or caused to
have been deposited, the deposits required under the Sale and Servicing
Agreement and the Spread Account Agreement, and any other deposits required
to be made on the Closing Date under the Transaction Documents to which the
Seller is a party; and
(xxi) such other documents, instruments, approvals (and, if
requested by Financial Security, certified duplicates of executed copies
thereof) or opinions as Financial Security may reasonably request.
(c) ISSUANCE OF RATINGS. Financial Security shall have received
confirmation that the risk secured by the Note Policy constitutes an
investment grade risk by Standard and Poor's Corporation ("S&P") and an
insurable risk by Moody's Investors Service, Inc. ("Moody's") and that the
Class A-1 Notes, when issued, will be rated "A-1+" by S&P and "P-1" by
Moody's, and that the Class A-2 Notes, the Class A-3 Notes, the Class A-4
Notes, and the Class A-5 Notes, when issued, will be rated "AAA" by S&P and
"Aaa" by Moody's.
(d) DELIVERY OF DOCUMENTS. Financial Security shall have received
evidence satisfactory to it that delivery has been made to the Trust or to a
Custodian of the Receivable Files required to be so delivered pursuant to
Section 2.2 of the Sale and Servicing Agreement.
(e) NO DEFAULT. No Default or Event of Default shall have
occurred and be continuing.
(f) NO LITIGATION, ETC. No suit, action or other proceeding,
investigation, or injunction or final judgment relating thereto, shall be
pending or threatened before any court or governmental agency in which it is
sought to restrain or prohibit or to obtain damages or other relief in
connection with any of the Transaction Documents or the consummation of the
Transaction.
(g) LEGALITY. No statute, rule, regulation or order shall have
been enacted, entered or deemed applicable by any government or governmental
or administrative agency or court which would make the transactions
contemplated by any of the Transaction Documents illegal or otherwise prevent
the consummation thereof.
(h) SATISFACTION OF CONDITIONS OF UNDERWRITING AGREEMENT. All
conditions in the Underwriting Agreement to the Underwriters' obligation to
purchase the Notes (other than the issuance of the Note Policy) shall have
been concurrently satisfied.
Section 3.02 PAYMENT OF FEES AND PREMIUM.
(a) LEGAL FEES. On the Closing Date, Arcadia Financial shall pay
or cause to be paid legal fees and disbursements incurred by Financial
Security in connection with the issuance of the Note Policy up to an amount
not to exceed $20,000.00, plus disbursements.
(b) RATING AGENCY FEES. The initial fees of S&P and Moody's with
respect to the Notes and the Transaction shall be paid by Arcadia Financial
in full on the Closing Date. All periodic and subsequent fees of S&P or
Moody's with respect to, and directly allocable to, the
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Notes shall be for the account of, shall be billed to, and shall be paid by
Arcadia Financial. The fees for any other rating agency shall be paid by the
party requesting such other agency's rating, unless such other agency is a
substitute for S&P or Moody's in the event that S&P or Moody's is no longer
rating the Notes, in which case the cost for such agency shall be paid by
Arcadia Financial.
(c) AUDITORS' FEES. In the event that Financial Security's
auditors are required to provide information or any consent in connection
with the Registration Statement fees therefor shall be paid by Arcadia
Financial. Any additional fees incurred by Financial Security after the
Closing Date in respect of any additional consents shall be paid by Arcadia
Financial on demand.
(d) PREMIUM. In consideration of the issuance by Financial
Security of the Note Policy, Arcadia Financial shall pay Financial Security
the Premium and Premium Supplement, if any, as and when due in accordance
with the terms of the Premium Letter. The Premium and Premium Supplement, if
any, paid hereunder or under the Sale and Servicing Agreement shall be
nonrefundable without regard to whether Financial Security makes any payment
under the Note Policy or any other circumstances relating to the Notes or
provision being made for payment of the Notes prior to maturity. Although
the Premium is fully earned by Financial Security as of the Closing Date, the
Premium shall be payable in periodic installments as provided in the Premium
Letter. Anything herein or in any of the Transaction Documents
notwithstanding, upon the occurrence of an Event of Default, the entire
outstanding balance of further installments of the Premium and Premium
Supplement shall be immediately due and payable. All payments of Premium and
Premium Supplement, if any, shall be made by wire transfer to an account
designated from time to time by Financial Security by written notice to the
Seller and Arcadia Financial.
Section 3.03 REIMBURSEMENT AND ADDITIONAL PAYMENT OBLIGATION.
Each of Arcadia Financial and the Trust agrees to pay to Financial Security
as follows:
(a) a sum equal to the total of all amounts paid by Financial
Security under the Note Policy;
(b) any and all charges, fees, costs and expenses which Financial
Security may reasonably pay or incur, including, but not limited to,
attorneys' and accountants' fees and expenses, in connection with (i) any
accounts established to facilitate payments under the Note Policy to the
extent Financial Security has not been immediately reimbursed on the date
that any amount is paid by Financial Security under the Note Policy, (ii)
the administration, enforcement, defense or preservation of any rights in
respect of any of the Transaction Documents, including defending, monitoring
or participating in any litigation, proceeding (including any insolvency or
bankruptcy proceeding in respect of any Transaction participant or any
Affiliate thereof), restructuring or engaging in any protective measures or
monitoring activities relating to any of the Transaction Documents, any party
to any of the Transaction Documents or the Transaction, (iii) the
foreclosure against, sale or other disposition of any collateral securing any
obligations under any of the Transaction Documents or otherwise in the
discretion of Financial Security, or pursuit of any other remedies under any
of the Transaction Documents, to the extent such costs and expenses are not
recovered from such foreclosure, sale or other disposition, (iv) any
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amendment, waiver or other action with respect to, or related to, any
Transaction Document whether or not executed or completed, (v) preparation
of bound volumes of the Transaction Documents, (vi) any review or
investigation made by Financial Security in those circumstances where its
approval or consent is sought under any of the Transaction Documents, (vii)
any federal, state or local tax (other than taxes payable in respect of the
gross income of Financial Security) or other governmental charge imposed in
connection with the issuance of the Note Policy, and (viii) Financial
Security reserves the right to charge a reasonable fee as a condition to
executing any amendment, waiver or consent proposed in respect of any of the
Transaction Documents (for the purpose of this paragraph (b), costs and
expenses shall include a reasonable allocation of compensation and overhead
attributable to time of employees of Financial Security spent in connection
with the actions described in the foregoing clauses (ii) and (iii));
(c) interest on any and all amounts described in this Section 3.03
from the date payable to or paid by Financial Security until payment thereof
in full, and interest on any and all amounts described in Section 3.02, in
each case payable to Financial Security at the Late Payment Rate per annum;
and
(d) any payments made by Financial Security on behalf of, or
advanced to, the Seller, Arcadia Financial, the Indenture Trustee, the Owner
Trustee or the Trust including, without limitation, any amounts payable by
Arcadia Financial in its capacity as Servicer or by the Trust, in respect of
the Notes and any other amounts owed pursuant to any Transaction Documents;
and any payments made by Financial Security as, or in lieu of, any servicing,
administration, management, trustee, custodial, collateral agency or
administrative fees payable, in the sole discretion of Financial Security to
third parties in connection with the Transaction.
All such amounts are to be immediately due and payable without
demand. Financial Security shall notify Arcadia Financial of amounts due
hereunder.
Section 3.04 CERTAIN OBLIGATIONS NOT RECOURSE TO ARCADIA
FINANCIAL; RECOURSE TO TRUST PROPERTY.
(a) Notwithstanding any provision of Section 3.03 to the contrary,
the payment obligations provided in Section 3.03(a), b(iii) and (d) (to the
extent of advances to the Trust or to the Indenture Trustee in respect of
payments on the Notes), in each case, to the extent that such payment
obligations do not arise from any failure or default in the performance by
Arcadia Financial or the Seller of any of its obligations under the
Transaction Documents, and any interest on the foregoing in accordance with
Section 3.03(c), shall not be recourse to Arcadia Financial, but shall be
payable in the manner and in accordance with priorities provided in the Sale
and Servicing Agreement.
(b) Financial Security covenants and agrees that it shall not be
entitled to any payment from the Trust Property with respect to amounts owed
under this Agreement other than as set forth in Section 4.6 and Section 9.1
of the Sale and Servicing Agreement and Section 5.06 of the Indenture.
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Section 3.05 INDEMNIFICATION.
(a) INDEMNIFICATION BY ARCADIA FINANCIAL. In addition to any and
all rights of reimbursement, indemnification, subrogation and any other
rights pursuant hereto or under law or in equity, Arcadia Financial agrees to
pay, and to protect, indemnify and save harmless, Financial Security and its
officers, directors, shareholders, employees, agents and each Person, if any,
who controls Financial Security within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act from and against any and
all claims, losses, liabilities (including penalties), actions, suits,
judgments, demands, damages, costs or expenses (including, without
limitation, fees and expenses of attorneys, consultants and auditors and
reasonable costs of investigations) of any nature arising out of or relating
to the Transaction by reason of:
(i) any statement, omission or action (other than of or by
Financial Security) in connection with the offering, issuance, sale or
delivery of the Notes;
(ii) the negligence, bad faith, willful misconduct, misfeasance
malfeasance or theft committed by any director, officer, employee or agent
of the Trust the Seller or Arcadia Financial in connection with the
Transaction;
(iii) the violation by the Trust, the Seller or Arcadia Financial
of an, federal, state or foreign law, rule or regulation, or any judgment,
order or decree applicable to it;
(iv) the breach by the Trust, the Seller or Arcadia Financial of
any representation, warranty or covenant under any of the Transaction
Documents or the occurrence, in respect of the Trust, the Seller or Arcadia
Financial, under any of the Transaction Documents of any event of default
or any event which, with the giving of notice or the lapse of time or both,
would constitute any event of default; or
(v) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus or
in any amendment or supplement thereto or any omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as such
claims arise out of or are based upon any untrue statement or omission
(A) included in the Registration Statement or the Prospectus and furnished
by Financial Security in writing expressly for use therein (all such
information so furnished being referred to herein as "Financial Security
Information"), it being understood that the Financial Security Information
is limited to the information included under the caption "Financial
Security Assurance Inc.," and the financial statements of Financial
Security included in the Registration Statements or the Prospectus or
(B) included in the information set forth under the caption "Underwriting"
in the Prospectus.
(b) CONDUCT OF ACTIONS OR PROCEEDINGS. If any action or
proceeding (including any governmental investigation) shall be brought or
asserted against Financial Security, any officer, director, shareholder,
employee or agent of Financial Security or any Person controlling Financial
Security (individually, an "Indemnified Party" and, collectively, the
"Indemnified Parties") in respect of which indemnity may be sought from
Arcadia Financial hereunder,
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Financial Security shall promptly notify Arcadia Financial in writing, and
Arcadia Financial shall assume the defense thereof, including the employment
of counsel satisfactory to Financial Security and the payment of all
expenses. The Indemnified Party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof at the
expense of the Indemnified Party; PROVIDED, HOWEVER, that the fees and
expenses of such separate counsel shall be at the expense of Arcadia
Financial if (i) Arcadia Financial has agreed to pay such fees and expenses,
(ii) Arcadia Financial shall have failed to assume the defense of such
action or proceeding and employ counsel satisfactory to Financial Security in
any such action or proceeding or (iii) the named parties to any such action
or proceeding (including any impleaded parties) include both the Indemnified
Party and the Trust, the Seller or Arcadia Financial, and the Indemnified
Party shall have been advised by counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Trust, the Seller or Arcadia Financial (in which case, if
the Indemnified Party notifies Arcadia Financial in writing that it elects to
employ separate counsel at the expense of Arcadia Financial, Arcadia
Financial shall not have the right to assume the defense of such action or
proceeding on behalf of such Indemnified Party, it being understood, however,
that Arcadia Financial shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses
of more than one separate form of attorneys at any time for the Indemnified
Parties, which firm shall be designated in writing by Financial Security).
Arcadia Financial shall not be liable for any settlement of any such action
or proceeding effected without its written consent to the extent that any
such settlement shall be prejudicial to it, but, if settled with its written
consent, or if there be a final judgment for the plaintiff in any such action
or proceeding with respect to which Arcadia Financial shall have received
notice in accordance with this subsection (c) Arcadia Financial agrees to
indemnify and hold the Indemnified Parties harmless from and against any loss
or liability by reason of such settlement or judgment.
(c) CONTRIBUTION. To provide for just and equitable contribution
if the indemnification provided by Arcadia Financial is determined to be
unavailable for any Indemnified Party (other than due to application of this
Section), Arcadia Financial shall contribute to the losses incurred by the
Indemnified Party on the basis of the relative fault of Arcadia Financial, on
the one hand, and the Indemnified Party, on the other hand.
Section 3.06 PAYMENT PROCEDURE. In the event of the incurrence
by Financial Security of any cost or expense or any payment by Financial
Security for which it is entitled to be reimbursed or indemnified as provided
above Arcadia Financial agrees to accept the voucher or other evidence of
payment as prima facie evidence of the propriety thereof and the liability
therefor to Financial Security. All payments to be made to Financial
Security under this Agreement shall be made to Financial Security in lawful
currency of the United States of America in immediately available funds to
the account number provided in the Premium Letter before 1:00 p.m. (New York,
New York time) on the date when due or as Financial Security shall otherwise
direct by written notice to Arcadia Financial. In the event that the date of
any payment to Financial Security or the expiration of any time period
hereunder occurs on a day which is not a Business Day, then such payment or
expiration of time period shall be made or occur on the next succeeding
Business Day with the same force and effect as if such payment was made or
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time period expired on the scheduled date of payment or expiration date.
Payments to be made to Financial Security under this Agreement shall bear
interest at the Late Payment Rate from the date when due to the date paid.
Section 3.07 SUBROGATION. Subject only to the priority of
payment provisions of the Sale and Servicing Agreement, each of the Trust,
the Indenture Trustee, the Seller and Arcadia Financial acknowledges that, to
the extent of any payment made by Financial Security pursuant to the Note
Policy, Financial Security is to be fully subrogated to the extent of such
payment and any additional interest due on any late payment, to the rights of
the Noteholders to any moneys paid or payable in respect of the Notes under
the Transaction Documents or otherwise. Each of the Trust, the Indenture
Trustee, the Seller and Arcadia Financial agrees to such subrogation and,
further, agrees to execute such instruments and to take such actions as, in
the sole judgment of Financial Security, are necessary to evidence such
subrogation and to perfect the rights of Financial Security to receive any
such moneys paid or payable in respect of the Notes under the Transaction
Documents or otherwise.
ARTICLE IV.
FURTHER AGREEMENTS; MISCELLANEOUS
Section 4.01 EFFECTIVE DATE: TERM OF AGREEMENT. This Agreement
shall take effect on the Closing Date and shall remain in effect until the
later of (a) such time as Financial Security is no longer subject to a claim
under the Note Policy and the Note Policy shall have been surrendered to
Financial Security for cancellation and (b) all amounts payable to Financial
Security and the Noteholders under the Transaction Documents and under the
Notes have been paid in full; PROVIDED, HOWEVER, that the provisions of
Sections 3.02, 3.03, 3.04, 3.05, 3.06 and 4.03 hereof shall survive any
termination of this Agreement.
Section 4.02 FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS. To
the extent permitted by law, each of the Trust, the Seller and Arcadia
Financial agree that it will, from time to time, execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, such
supplements hereto and such further instruments as Financial Security may
request and as may be required in Financial Security's judgment to effectuate
the intention of or facilitate the performance of this Agreement.
Section 4.03 OBLIGATIONS ABSOLUTE.
(a) The obligations of the Trust, the Seller and Arcadia Financial
hereunder shall be absolute and unconditional, and shall be paid or performed
strictly in accordance with this Agreement under all circumstances
irrespective of:
(i) any lack of validity or enforceability of, or any amendment
or other modifications of, or waiver with respect to any of the Transaction
Documents, the Notes or the Note Policy; PROVIDED, that Financial Security
shall not have consented to any such amendment, modification or waiver;
44
<PAGE>
(ii) any exchange or release of any other obligations hereunder;
(iii) the existence of any claim, setoff, defense, reduction,
abatement or other right which the Trust, the Seller or Arcadia Financial
may have at any time against Financial Security or any other Person;
(iv) any document presented in connection with the Note Policy
proving to be forged, fraudulent, invalid or insufficient in any respect or
any statement therein being untrue or inaccurate in any respect;
(v) any payment by Financial Security under the Note Policy
against presentation of a certificate or other document which does not
strictly comply with terms of the Note Policy;
(vi) any failure of the Seller or the Trust to receive the
proceeds from the Sale of the Notes;
(vii) any breach by the Trust, the Seller or Arcadia Financial of
any representation, warranty or covenant contained in any of the
Transaction Documents; or
(viii) any other circumstances, other than payment in full, which
might otherwise constitute a defense available to, or discharge of, the
Trust, the Seller or Arcadia Financial in respect of any Transaction
Document.
(b) The Trust, the Seller and Arcadia Financial and any and all
others who are now or may become liable for all or part of the obligations of
any of them under this Agreement agree to be bound by this Agreement and (i)
to the extent permitted by law, waive and renounce any and all redemption and
exemption rights and the benefit of all valuation and appraisement privileges
against the indebtedness and obligations evidenced by any Transaction
Document or by any extension or renewal thereof; (ii) waive presentment and
demand for payment, notices of nonpayment and of dishonor, protest of
dishonor and notice of protest; (iii) waive all notices in connection with
the delivery and acceptance hereof and all other notices in connection with
the performance, default or enforcement of any payment hereunder except as
required by the Transaction Documents other than this Agreement; (iv) waive
all rights of abatement, diminution, postponement or deduction, or to any
defense other than payment, or to any right of setoff or recoupment arising
out of any breach under any of the Transaction Documents, by any party
thereto or any beneficiary thereof, or out of any obligation at any time
owing to the Trust, the Seller or Arcadia Financial; (v) agree that its
liabilities hereunder shall, except as otherwise expressly provided in this
Section 4.03, be unconditional and without regard to any setoff, counterclaim
or the liability of any other Person for the payment hereof; (vi) agree that
any consent, waiver or forbearance hereunder with respect to an event shall
operate only for such event and not for any subsequent event; (vii) consent
to any and all extensions of time that may be granted by Financial Security
with respect to any payment hereunder or other provisions hereof and to the
release of any security at any time given for any payment hereunder, or any
part thereof, with or without substitution, and to the release of any Person
or entity liable for any such payment; and (viii) consent to the addition of
any and all other makers, endorsers, guarantors
45
<PAGE>
and other obligors for any payment hereunder, and to the acceptance of any
and all other security for any payment hereunder, and agree that the addition
of any such obligors or security shall not affect the liability of the
parties hereto for any payment hereunder.
(c) Nothing herein shall be construed as prohibiting the Trust,
Seller or Arcadia Financial from pursuing any rights or remedies it may have
against any other Person in a separate legal proceeding.
Section 4.04 ASSIGNMENTS; REINSURANCE; THIRD-PARTY RIGHTS.
(a) This Agreement shall be a continuing obligation of the parties
hereto and shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Neither the
Trust, the Seller nor Arcadia Financial may assign its rights under this
Agreement, or delegate any of its duties hereunder, without the prior written
consent of Financial Security. Any assignment made in violation of this
Agreement shall be null and void.
(b) Financial Security shall have the right to give participations
in its rights under this Agreement and to enter into contracts of reinsurance
with respect to the Note Policy upon such terms and conditions as Financial
Security may in its discretion determine; PROVIDED, HOWEVER, that no such
participation or reinsurance agreement or arrangement shall relieve Financial
Security of any of its obligations hereunder or under the Note Policy.
(c) In addition, Financial Security shall be entitled to assign or
pledge to any bank or other lender providing liquidity or credit with respect
to the Transaction or the obligations of Financial Security in connection
therewith any rights of Financial Security under the Transaction Documents or
with respect to any real or personal property or other interests pledged to
Financial Security, or in which Financial Security has a security interest,
in connection with the Transaction.
(d) Except as provided herein with respect to participants and
reinsurers, nothing in this Agreement shall confer any right, remedy or
claim, express or implied, upon any Person, including, particularly, any
Noteholder (except to the extent provided herein and without limitation of
their rights to receive payments with respect to the Trust Property,
including without limitation payments under the Note Policy), other than
Financial Security, against the Trust, the Seller, Arcadia Financial or the
Servicer, and all the terms, covenants, conditions, promises and agreements
contained herein shall be for the sole and exclusive benefit of the parties
hereto and their successors and permitted assigns. Neither the Trustee, the
Owner Trustee nor any Noteholder shall have any right to payment from any
premiums paid or payable hereunder or from any other amounts paid by the
Seller or Arcadia Financial pursuant to Section 3.02, 3.03 or 3.04 hereof
(without limitation to the rights of the Noteholders to receive payments with
respect to the Trust Property, as provided in the Indenture and the Trust
Agreement).
Section 4.05 LIABILITY OF FINANCIAL SECURITY. Neither Financial
Security nor any of its officers, directors or employees shall be liable or
responsible for: (a) the use which may be made of the Note Policy by the
Owner Trustee or the Indenture Trustee or for any acts or omissions of the
Owner Trustee or the Indenture Trustee in connection therewith; or (b) the
46
<PAGE>
validity, sufficiency, accuracy or genuineness of documents delivered to
Financial Security (or its Fiscal Agent) in connection with any claim under
the Note Policy, or of any signatures thereon, even if such documents or
signatures should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged (unless Financial Security shall have
actual knowledge thereof). In furtherance and not in limitation of the
foregoing, Financial Security (or its Fiscal Agent) may accept documents that
appear on their face to be in order, without responsibility for further
investigation.
ARTICLE V.
EVENTS OF DEFAULT; REMEDIES
Section 5.01 EVENTS OF DEFAULT. The occurrence of any of the
following events shall constitute an Event of Default hereunder:
(a) any demand for payment shall be made under the Note Policy;
(b) any representation or warranty made by the Trust, the Seller,
Arcadia Financial or the Servicer under any of the Related Documents, or in
any certificate or report furnished under any of the Related Documents, shall
prove to be untrue or incorrect in any material respect;
(c) (i) the Trust, the Seller, Arcadia Financial or the Servicer
shall fail to pay, when due, any amount payable by the Seller, Arcadia
Financial or the Servicer under any of the Related Documents (other than
payments of principal and interest on the Notes); (ii) the Trust, the
Seller, Arcadia Financial or the Servicer shall have asserted that any of the
Transaction Documents to which it is a party is not valid and binding on the
parties thereto; or (iii) any court, governmental authority or agency having
jurisdiction over any of the parties to any of the Transaction Documents or
property thereof shall find or rule that any material provision of any of the
Transaction Documents is not valid and binding on the parties thereto;
(d) the Trust, the Seller, Arcadia Financial or the Servicer shall
fail to perform or observe any other covenant or agreement contained in any
of the Related Documents (except for the obligations described under clause
(b) or (c) above) and such failure shall continue for a period of 30 days
after written notice given to the Trust, the Seller, Arcadia Financial or the
Servicer (as applicable); PROVIDED that, if such failure shall be of a nature
that it cannot be cured within 30 days, such failure shall not constitute an
Event of Default hereunder if within such 30 day period such party shall have
given notice to Financial Security of corrective action it proposes to take,
which corrective action is agreed in writing by Financial Security to be
satisfactory and such party shall thereafter pursue such corrective action
diligently until such default is cured;
(e) there shall have occurred an "Event of Default" as specified
in Section 6.01(i) or 6.01(ii) of the Senior Note Indenture or the unpaid
principal amount of, premium, if any, and accrued and unpaid interest on the
Securities (as defined in the Senior Note Indenture) shall have,
47
<PAGE>
upon the declaration of the holders of the Securities, as specified in
Section 6.02 of the Senior Note Indenture, become immediately due and payable;
(f) the Trust shall adopt a voluntary plan of liquidation or shall
fail to pay its debts generally as they come due, or shall admit in writing
its inability to pay its debts generally, or shall make a general assignment
for the benefit of creditors, or shall institute any proceeding seeking to
adjudicate the Trust insolvent or seeking a liquidation, or shall take
advantage of any insolvency act, or shall commence a case or other proceeding
naming the Trust as debtor under the United States Bankruptcy Code or similar
law, domestic or foreign, or a case or other proceeding shall be commenced
against the Trust under the United States Bankruptcy Code or similar law,
domestic or foreign, or any proceeding shall be instituted against the Trust
seeking liquidation of its assets and the Trust shall fail to take
appropriate action resulting in the withdrawal or dismissal of such
proceeding within 30 days or there shall be appointed or the Trust consent
to, or acquiesce in, the appointment of a receiver, liquidator, conservator,
trustee or similar official in respect of the Trust or the whole or any
substantial part of its properties or assets, or the Trust shall take any
corporate action in furtherance of any of the foregoing or the Trust
terminates pursuant to Section 9.1 of the Trust Agreement;
(g) the Trust becomes taxable as an association (or publicly
traded partnership) taxable as a corporation for federal or state income tax
purposes;
(h) on any Distribution Date, the sum of Available Funds with
respect to such Distribution Date and the amounts available in the Series
1998-A Spread Account (prior to any deposits into such Spread Account from
Spread Accounts related to any other Series) and the amount that may be
withdrawn from the Reserve Account pursuant to Section 5.1 of the Sale and
Servicing Agreement is less than the sum of the amounts payable on such
Distribution Date pursuant to clauses (i) through (viii) of Section 4.6 of
the Sale and Servicing Agreement;
(i) any default in the observance or performance of any covenant
or agreement of the Trust made in the Indenture (other than a default in the
payment of the interest or principal on any Note when due) or any
representation or warranty of the Trust made in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith proving to have been incorrect in any material respect as of the
time when the same shall have been made, and such default shall continue or
not be cured, or the circumstance or condition in respect of which such
misrepresentation or warranty was incorrect shall not have been eliminated or
otherwise cured, for a period of 30 days after there shall have been given,
by registered or certified mail, to the Trust and the Indenture Trustee by
Financial Security, a written notice specifying such default or incorrect
representation or warranty and requiring it to be remedied;
(j) the Average Delinquency Ratio with respect to any
Determination Date shall have been equal to or greater than 8.81%;
(k) with respect to any Determination Date, the Cumulative Default
Rate shall be equal to or greater than the percentage set forth in Column A
of Schedule I attached hereto corresponding to such Determination Date;
48
<PAGE>
(l) with respect to any Determination Date, the Cumulative Net
Loss Rate shall be equal to or greater than the percentage set forth in
Column B of Schedule I attached hereto corresponding to such Determination
Date;
(m) the occurrence of an Event of Servicing Termination under the
Sale and Servicing Agreement; or
(n) the occurrence of an "Event of Default" under and as defined
in any Insurance and Indemnity Agreement among Financial Security, Arcadia
Financial, the Seller and any other parties thereto, which "Event of Default"
is not defined as a "Portfolio Performance Event of Default" in such
Insurance and Indemnity Agreement.
Section 5.02 REMEDIES; WAIVERS.
(a) Upon the occurrence of an Event of Default, Financial Security
may exercise any one or more of the rights and remedies set forth below:
(i) declare the Premium Supplement to be immediately due and
payable, and the same shall thereupon be immediately due and payable,
whether or not Financial Security shall have declared an "Event of Default"
or shall have exercised, or be entitled to exercise, any other rights or
remedies hereunder;
(ii) exercise any rights and remedies available under the
Transaction Documents in its own capacity or in its capacity as the Person
entitled to exercise the rights of Controlling Party under the Transaction
Documents; or
(iii) take whatever action at law or in equity as may appear
necessary or desirable in its judgment to enforce performance of any
obligation of the Trust, the Seller or Arcadia Financial under the
Transaction Documents; PROVIDED, HOWEVER, that Financial Security shall not
be entitled hereunder to file any petition with respect to the Trust or the
Trust Property under any bankruptcy or insolvency law.
(b) Unless otherwise expressly provided, no remedy herein
conferred upon or reserved is intended to be exclusive of any other available
remedy, but each remedy shall be cumulative and shall be in addition to other
remedies given under the Transaction Documents or existing at law or in
equity. No delay or failure to exercise any right or power accruing under
any Transaction Document upon the occurrence of any Event of Default or
otherwise shall impair any such right or power or shall be construed to be a
waiver thereof, but any such right and power may be exercised from time to
time and as often as may be deemed expedient. In order to entitle Financial
Security to exercise any remedy reserved to Financial Security in this
Article, it shall not be necessary to give any notice.
(c) If any proceeding has been commenced to enforce any right or
remedy under this Agreement, and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to Financial
Security, then and in every such case the parties hereto shall, subject to
any determination in such proceeding, be restored to their respective former
49
<PAGE>
positions hereunder, and, thereafter, all rights and remedies of Financial
Security shall continue as though no such proceeding had been instituted.
(d) Financial Security shall have the right, to be exercised in
its complete discretion, to waive any covenant, Default or Event of Default
by a writing setting forth the terms, conditions and extent of such waiver
signed by Financial Security and delivered to the Seller and Arcadia
Financial. Any such waiver may only be effected in writing duly executed by
Financial Security, and no other course of conduct shall constitute a waiver
of any provision hereof. Unless such writing expressly provides to the
contrary, any waiver so granted shall extend only to the specific event or
occurrence so waived and not to any other similar event or occurrence which
occurs subsequent to the date of such waiver.
ARTICLE VI.
MISCELLANEOUS
Section 6.01 AMENDMENTS, ETC.. This Agreement may be amended,
modified or terminated only by written instrument or written instruments
signed by the parties hereto. No act or course of dealing shall be deemed to
constitute an amendment, modification or termination hereof.
Section 6.02 NOTICES. All demands, notices and other
communications to be given hereunder shall be in writing (except as otherwise
specifically provided herein) and shall be mailed by registered mail or
overnight carrier, personally delivered or telecopied (with confirmation by
registered mail) to the recipient as follows:
(a) To Financial Security:
Financial Security Assurance Inc.
350 Park Avenue
New York, New York 10022
Attention: Surveillance Department
Confirmation: (212) 826-0100
Telecopy Nos.: (212) 339-3518
(212) 339-3529
(in each case in which notice or other communication to
Financial Security refers to an Event of Default, a
claim on the Note Policy or with respect to which
failure on the part of Financial Security to respond
shall be deemed to constitute consent or acceptance,
then a copy of such notice or other communication should
also be sent to the attention of each of the General
Counsel and the Head--Financial Guaranty Group and shall
be marked to indicate "URGENT MATERIAL ENCLOSED").
50
<PAGE>
(b) To the Seller:
Arcadia Receivables Finance Corp.
7825 Washington Avenue South, Suite 410
Minneapolis, Minnesota 55439-2435
Telephone: (612) 942-9888
Telecopier: (612) 942-6730
(c) To Arcadia Financial:
Arcadia Financial Ltd.
7825 Washington Avenue South
Minneapolis, Minnesota 55439-2435
Telephone: (612) 942-9880
Telecopier: (612) 942-6730
(d) To the Trust:
Arcadia Automobile Receivables Trust, 1998-A
c/o Wilmington Trust Company,
as Owner Trustee
Rodney Square North, 1100 North Market Street
Wilmington, Delaware 19890
Attention: Corporate Trust Administration
Telephone: (302) 651-1000
Telecopier: (302) 651-8882
with a copy to:
Wilmington Trust Company, as Owner Trustee
Rodney Square North, 1100 North Market Street
Wilmington, Delaware 19890
A party may specify an additional or different address or addresses
by writing mailed or delivered to the other party as aforesaid. All such
notices and other communications shall be effective upon receipt.
Section 6.03 SEVERABILITY. In the event that any provision of
this Agreement shall be held invalid or unenforceable by any court of
competent jurisdiction, the parties hereto agree that such holding shall not
invalidate or render unenforceable any other provision hereof. The parties
hereto further agree that the holding by any court of competent jurisdiction
that any remedy pursued by any party hereto is unavailable or unenforceable
shall not affect in any way the ability of such party to pursue any other
remedy available to it.
Section 6.04 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
51
<PAGE>
Section 6.05 CONSENT TO JURISDICTION.
(a) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES
THERETO HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND ANY COURT IN THE
STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK, AND ANY
APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION, SUIT OR PROCEEDING BROUGHT
AGAINST IT AND TO OR IN CONNECTION WITH ANY OF THE TRANSACTION DOCUMENTS OR
THE TRANSACTION OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND THE
PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ALL CLAIMS
IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD OR DETERMINED IN
SUCH NEW YORK STATE COURT OR IN SUCH FEDERAL COURT. THE PARTIES HERETO AGREE
THAT A FINAL JUDGMENT IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT
OR IN ANY OTHER MANNER PROVIDED BY LAW. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, THE PARTIES HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT BY WAY OF
MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY
CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS,
THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT
THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THE RELATED
DOCUMENTS OR THE SUBJECT MATTER THEREOF MAY NOT BE LITIGATED IN OR BY SUCH
COURTS.
(b) To the extent permitted by applicable law, the parties hereto
shall not seek and hereby waive the right to any review of the judgment of
any such court by any court of any other nation or jurisdiction which may be
called upon to grant an enforcement of such judgment.
(c) Arcadia Financial and the Seller hereby irrevocably appoints
and designates CT Corporation System, whose address is 1633 Broadway, New
York, New York 10019, as its true and lawful attorney and duly authorized
agent for acceptance of service of legal process. The Seller and Arcadia
Financial agrees that service of such process upon such Person shall
constitute personal service of such process upon it.
(d) Nothing contained in the Agreement shall limit or affect
Financial Security's right to serve process in any other manner permitted by
law or to start legal proceedings relating to any of the Transaction
Documents against the Seller or Arcadia Financial or its property in the
courts of any jurisdiction.
Section 6.06 CONSENT OF FINANCIAL SECURITY. In the event that
Financial Security's consent is required under any of the Transaction
Documents, the determination whether to grant or withhold such consent shall
be made by Financial Security in its sole discretion without any implied duty
towards any other Person, except as otherwise expressly provided therein.
52
<PAGE>
Section 6.07 COUNTERPARTS. This Agreement may be executed in
counterparts by the parties hereto, and all such counterparts shall
constitute one and the same instrument.
Section 6.08 HEADINGS. The headings of articles and sections and
the table of contents contained in this Agreement are provided for
convenience only. They form no part of this Agreement and shall not affect
its construction or interpretation. Unless otherwise indicated, all
references to articles and sections in this Agreement refer to the
corresponding articles and sections of this Agreement.
Section 6.09 TRIAL BY JURY WAIVED. EACH PARTY HERETO HEREBY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION
WITH ANY OF THE TRANSACTION DOCUMENTS OR THE TRANSACTION. EACH PARTY HERETO
(A) CERTIFIES THAI NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT IT WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
HAS BEEN INDUCED TO ENTER INTO THE TRANSACTION DOCUMENTS TO WHICH IT IS A PARTY
BY, AMONG OTHER THINGS, THIS WAIVER.
Section 6.10 LIMITED LIABILITY. No recourse under any
Transaction Document shall be had against, and no personal liability shall
attach to, any officer, employee, director, affiliate or shareholder of any
party hereto, as such, by the enforcement of any assessment or by any legal
or equitable proceeding, by virtue of any statute or otherwise in respect of
any of the Transaction Documents, the Notes or the Note Policy, it being
expressly agreed and understood that each Transaction Document is solely a
corporate obligation of each party hereto, and that any and all personal
liability, either at common law or in equity, or by statute or constitution,
of every such officer, employee, director, affiliate or shareholder for
breaches by any party hereto of any obligations under any Transaction
Document is hereby expressly waived as a condition of and in consideration
for the execution and delivery of this Agreement.
Section 6.11 LIMITED LIABILITY OF WILMINGTON TRUST COMPANY. It
is expressly understood and agreed by the parties hereto that (a) this
Agreement is executed and delivered by Wilmington Trust Company, not
individually or personally but solely as Owner Trustee on behalf of the
Trust, (b) each of the representations, undertakings and agreements herein
made on the part of the Trust is made and intended not as personal
representations, undertakings and agreements by Wilmington Trust Company, but
are made and intended for the purpose of binding only the Trust Estate, (c)
nothing herein contained shall be construed as creating any liability on
Wilmington Trust Company, individually or personally, to perform any covenant
of the Trust either expressed or implied contained herein, all such
liability, if any, being expressly waived by the parties hereto and by any
person claiming by, through or under such parties and (d) under no
circumstances shall Wilmington Trust Company be personally liable for the
payment of any indebtedness or expenses of the Trust or be liable for the
breach or failure of any obligation, representation, warranty or covenant
made or undertaken by the Trust under this Agreement.
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<PAGE>
Section 6.12 ENTIRE AGREEMENT. This Agreement and the Note
Policy set forth the entire agreement between the parties with respect to the
subject matter thereof, and this Agreement supersedes and replaces any
agreement or understanding that may have existed between the parties prior to
the date hereof in respect of such subject matter.
54
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Insurance and Indemnity Agreement, all as of the day and year
first above written.
FINANCIAL SECURITY ASSURANCE INC.
By: /s/ Russell B. Brewer II
------------------------------------
Authorized Officer
ARCADIA AUTOMOBILE RECEIVABLES
TRUST, 1998-A
By: Wilmington Trust Company, as Owner
Trustee under the Trust Agreement
By: /s/ Emmett R. Harmon
------------------------------------
Vice President
ARCADIA FINANCIAL LTD.
By: /s/ John A Witham
------------------------------------
John A. Witham
Executive Vice President and
Chief Financial Officer
ARCADIA RECEIVABLES FINANCE CORP.
By: /s/ John A. Witham
------------------------------------
John A. Witham
Senior Vice President and
Chief Financial Officer
55
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Determination Date* Cumulative Default Rate Cumulative Net Loss Rate
(month) (Column) (Column B)
<S> <C> <C>
0 to 3 2.66% 1.11%
3 to 6 5.32% 2.22%
6 to 9 7.71% 3.21%
9 to 12 9.84% 4.10%
12 to 15 12.68% 5.28%
15 to 18 15.25% 6.35%
18 to 21 17.50% 7.29%
21 to 24 19.45% 8.11%
24 to 27 20.47% 8.53%
27 to 30 21.29% 8.87%
30 to 33 22.01% 9.17%
33 to 36 22.63% 9.43%
36 to 39 22.93% 9.55%
39 to 42 23.16% 9.65%
42 to 45 23.36% 9.73%
45 to 48 23.52% 9.80%
48 to 51 23.65% 9.86%
51 to 54 23.76% 9.90%
54 to 57 23.84% 9.94%
57 to 60 23.91% 9.96%
60 to 63 23.95% 9.98%
63 to 66 23.98% 9.99%
66 to 69 23.99% 10.00%
69 and higher 24.00% 10.00%
</TABLE>
________________________
* Such Determination Date occurring after the designated calendar months
succeeding the Series 1998-A Closing Date appearing first in the column
below, and prior to or during the designated calendar months succeeding the
Series 1998-A Distribution Date appearing second in the column below.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,387
<SECURITIES> 0
<RECEIVABLES> 814,724
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 28,181
<DEPRECIATION> 11,024
<TOTAL-ASSETS> 869,625
<CURRENT-LIABILITIES> 0
<BONDS> 420,721
0
0
<COMMON> 390
<OTHER-SE> 352,740
<TOTAL-LIABILITY-AND-EQUITY> 869,625
<SALES> 0
<TOTAL-REVENUES> 65,389
<CGS> 0
<TOTAL-COSTS> 45,834
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,785
<INCOME-PRETAX> 6,770
<INCOME-TAX> 2,573
<INCOME-CONTINUING> 4,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,197
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
<PAGE>
CAUTIONARY STATEMENT
ARCADIA FINANCIAL LTD. (THE "COMPANY"), OR PERSONS ACTING ON BEHALF OF THE
COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING STATEMENTS ON
BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S SECURITIES, FROM TIME TO
TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING STATEMENTS" AS DEFINED
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "ACT"). THIS
CAUTIONARY STATEMENT, WHEN USED IN CONJUNCTION WITH AN IDENTIFIED
FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE "SAFE
HARBOR" PROVISIONS OF THE ACT AND IS INTENDED TO BE A READILY AVAILABLE WRITTEN
DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE RESULTS TO DIFFER MATERIALLY
FROM SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS ARE IN ADDITION TO ANY OTHER
CAUTIONARY STATEMENTS, WRITTEN OR ORAL, WHICH MAY BE MADE OR REFERRED TO IN
CONNECTION WITH ANY SUCH FORWARD-LOOKING STATEMENT.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON
THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
LIQUIDITY AND ACCESS TO CAPITAL RESOURCES
NEGATIVE OPERATING CASH FLOWS. The Company's business requires
substantial cash to support the payment of dealer participations, the funding
of spread accounts in connection with securitizations, the purchase of loans
pending securitization, the financing of repossessed inventory and other cash
requirements, in addition to debt service. To the extent that increases in
the volume of loan purchases and securitizations provide income, a
substantial portion of such income is received by the Company in cash over
the life of the loans. The Company has operated on a negative operating cash
flow basis and expects to continue to do in the near future. The Company has
historically funded these negative operating cash flows principally through
borrowings from financial institutions, sales of equity securities and sales
of senior and subordinated notes. The Company expects that it will require
additional capital in the future to fund continued negative cash flows,
although there can be no assurance that the Company will have access to the
capital markets in the future or that financing will be available to satisfy
the Company's operating and debt service requirements or to fund its future
growth. Factors which could affect the Company's access to the capital
markets, or the costs of such capital, include changes in interest rates,
general economic conditions, the perception in the capital markets of the
Company's business, results of operations, leverage, financial condition and
business prospects, and the performance of the Company's securitization
trusts. In addition, covenants with respect to the Company's debt securities
and credit facilities may significantly restrict the Company's ability to
incur additional indebtedness and to issue new classes of preferred stock.
POTENTIAL INABILITY TO REFINANCE EXISTING INDEBTEDNESS. The Company's
ability to repay its outstanding indebtedness at maturity may depend on its
ability to refinance such indebtedness, which could be adversely affected if the
Company does not have access to the capital markets for the sale of additional
debt or equity through public offerings or private placements on terms
reasonably satisfactory to the Company. See "Negative Operating Cash Flows"
above.
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DEPENDENCE ON WAREHOUSE FINANCING. The Company depends on warehouse
facilities with financial institutions or institutional lenders to finance
its purchase of loans on a short-term basis pending securitization. At March
31, 1998, the Company had $875.0 million of warehouse facilities through
various financial institutions and institutional lenders, of which $821.1
million was available. These facilities expire from July 1998 through October
1999, subject to renewal or extension at the lenders' option. There can be no
assurance that such financing will continue to be available on terms
reasonably satisfactory to the Company. The inability of the Company to
arrange additional warehouse facilities or to extend or replace existing
facilities when they expire would have a material adverse effect on the
Company's business, financial condition and results of operations and on the
Company's outstanding securities.
DEPENDENCE ON SECURITIZATION. The Company has relied upon its ability to
aggregate and sell loans as asset-backed securities in the secondary market
to generate cash proceeds for repayment of warehouse facilities and to
purchase new loans from dealers. Since inception, the Company has securitized
approximately $9.3 billion of automobile loans. At March 31, 1998,
approximately $5.0 billion of these loans were outstanding. Accordingly,
adverse changes in the Company's asset-backed securities program or in the
asset-backed securities market for automobile receivables generally could
materially adversely affect the Company's ability to purchase and resell
loans on a timely basis and upon terms reasonably satisfactory to the
Company. The Company endeavors to effect public securitizations of its loans
on at least a quarterly basis. However, market and other considerations,
including the conformity of loans to insurance company and rating agency
requirements, could affect the timing of such transactions. Any delay in the
sale of loans beyond a quarter-end would eliminate the related gain on sale
in the given quarter and adversely affect the Company's reported earnings for
such quarter. All of the Company's securitizations since March 1993 and one
of the Company's warehouse facilities have utilized credit enhancement in the
form of financial guaranty insurance policies issued by FSA to achieve
"AAA/Aaa" ratings with respect to the asset-backed securities. The Company
believes that financial guaranty insurance policies reduce the costs of the
securitizations and such warehouse facility relative to alternative forms of
credit enhancements available to the Company. FSA is not required to insure
Company-sponsored securitizations and there can be no assurance that it will
continue to do so or that future Company-sponsored securitizations will be
similarly rated.
LOAN PERFORMANCE RISKS
POTENTIAL NEGATIVE EFFECTS ON FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY. The Company's business, financial condition, results of operations
and liquidity depend, to a material extent, on the performance of loans
purchased and sold by the Company. When such loans are sold in securitizations,
the Company recognizes gain on sale. Finance income receivable, the Company's
principal asset, has been calculated using assumptions concerning future
default, prepayment and net loss rates on securitized loans that are consistent
with the Company's historical experience and market conditions and present value
discount rates that the Company believes would be requested by an unrelated
purchaser of an identical stream of estimated cash flows. Management believes
that the Company's estimates of excess cash flow were reasonable at the time
each gain on sale of loans was recorded. However, the actual rates of default
and/or prepayment and/or net loss on such loans may exceed those estimated for
purposes of calculating the Company's finance income receivable and consequently
may adversely affect anticipated future excess cash flow. The Company
periodically reviews its default, prepayment and net loss assumptions in
relation to current performance of the loans and market conditions, and, if
necessary, writes down the balance of finance income receivable. The Company
made a significant adjustment to its finance income receivable at March 31, 1997
after completing such a review, primarily relating to the recovery rates on
repossessed vehicles and the Company's disposition strategy. The Company's
business, financial condition, results of operations and liquidity could be
materially adversely affected by such adjustments in the future. No
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assurance can be given that loan losses and prepayments will not exceed the
Company's estimates or that finance income receivable could be sold at its
stated value on the balance sheet, if at all.
POSSIBLE RESTRICTIONS ON CASH FLOW FROM SECURITIZATIONS. The Company's
future liquidity and financial condition, and its ability to finance the
growth of its business and to repay or refinance its indebtedness, will
depend to a material extent on distributions of excess cash flow from
securitization trusts. The Company's agreements with FSA provide that the
Company must maintain in a spread account for each insured securitization
trust specified levels of excess cash during the life of the trust. These
spread accounts are initially funded out of initial deposits or cash flows
from the related trust. Thereafter, during each month, excess cash flow due
to Arcadia Receivables Finance Corp. ("ARFC") from all insured securitization
trusts is first used to replenish any spread account deficiencies and is then
distributed to the Company. The timing and amount of distributions of excess
cash from securitization trusts varies based on a number of factors,
including but not limited to, loan delinquencies, defaults and net losses,
the rate of turnover of repossession inventory and recovery rates, the ages
of loans in the portfolio, prepayment experience and required spread account
levels. A deterioration of the Company's loan delinquencies, cumulative
defaults or net losses, a build-up in repossession inventory, the continuing
increase in the proportion of repossession inventory sold in the wholesale
auction markets, or an increase in loans entering the seasoning period, could
reduce excess cash available to the Company. At March 31, 1998, the Company
had an aggregate of $261.3 million of restricted cash in spread accounts.
There can be no assurance that in the future the Company will not experience
an interruption of excess cash flow from ARFC, which could adversely affect
the Company's ability to pay its obligations.
Each insured securitization trust has certain portfolio performance tests
relating to levels of delinquency, defaults and net losses on the loans in
such trust based in part on the relative percentage of Premier and Classic
loans. Portfolio performance tests require that the loan portfolio of each
insured securitization trust (i) have an average delinquency ratio not equal
to or in excess of a specified percentage, (ii) have a cumulative default
rate not equal to or in excess of specified percentages which vary based on
the aging of the loan portfolio, and (iii) have a cumulative net loss rate
not equal to or in excess of specified percentages which vary based on the
aging of the loan portfolio. If any of these tests are exceeded (a
"violation"), the amount required to be retained in the spread account
related to such securitization trust will be increased to an amount generally
equal to the greater of 10% of the outstanding balance of loans or 1% of the
original balance of loans held by the securitization trust. As a consequence,
a violation generally will decrease excess cash flow available from such
securitization trust until loan portfolio performance has returned to the
required limits for a specified period, generally three to five months,
unless waived by FSA. FSA and the Company have an arrangement under which, if
any insured securitization trust exceeds the specified portfolio performance
tests, ARFC may, in lieu of retaining the excess cash from that
securitization trust in the related spread account, pledge an equivalent
amount of cash, which has the effect of preventing the violation of the
portfolio performance test. Although certain trusts, primarily those that
contained loans originated in 1995, have exceeded portfolio performance tests
and are still in excess of such tests, this arrangement with FSA has
prevented a violation, although it has reduced the amount of cash that would
otherwise have been available to the Company for use if the Company had
sought and received a waiver of such violation from FSA. A deterioration of
the Company's delinquencies, cumulative defaults or net losses would result
in one or more additional existing securitization trusts exceeding one or
more of these tests in the absence of changes to the trigger levels. There
can be no assurance that, in such event, waivers will be available from FSA
permitting payments to ARFC.
Upon the occurrence of certain events with respect to any series of
asset-backed securities insured by FSA, including the failure to meet loan
portfolio performance tests of the nature described above but at significantly
higher levels, or upon a breach of the collateral coverage requirements of the
FSA-insured warehouse facility (an "Insurance Agreement Event of Default"), the
Company will be in default under its insurance agreement with FSA. Upon an
Insurance Agreement Event of Default, unless waived by FSA,
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FSA may suspend distributions of cash flow from the related securitization
trust and all other FSA-insured trusts (including the FSA-insured warehouse
facility) until the asset-backed securities have been redeemed, capture
excess cash flow from performing trusts, increase its premiums and replace
the Company as servicer with respect to all FSA-insured trusts. There can be
no assurance that a further deterioration of the Company's loan
delinquencies, gross charge-offs and net losses would not result in an
Insurance Agreement Event of Default, which could adversely affect the
Company's ability to satisfy its obligations. Certain of the Company's
securitization trusts have exceeded such insurance agreement thresholds and
continue to exceed such thresholds and the Company has obtained waivers from
FSA to permit distributions of cash to ARFC. There can be no assurance that
in the future, if such thresholds are exceeded, waivers will be available.
In addition, the spread account for each securitization is
cross-collateralized to the spread accounts established in connection with
the Company's other securitization trusts (including the FSA-insured
warehouse facility) such that excess cash flow from a performing
securitization trust may be used to support negative cash flow from, or to
replenish a deficient spread account in connection with, a nonperforming
securitization trust, thereby further restricting excess cash flow available
to ARFC. If excess cash flow from all insured securitization trusts is not
sufficient to replenish all such spread accounts, no cash flow would be
available to the Company from ARFC for that month. Excess cash flow has been
interrupted in the past, and there can be no assurance that in the future the
Company will not experience an interruption of excess cash flow from ARFC
which could adversely affect the Company's ability to pay its obligations.
FSA also has a collateral security interest in the stock of ARFC. If FSA were
to foreclose on such security interest following an event of default under an
insurance agreement with respect to a securitization trust (including the
FSA-insured warehouse facility), FSA could preclude payment of dividends by
ARFC to the Company, thereby eliminating the Company's right to receive
distributions of excess cash flow from all the FSA-insured securitization
trusts. The Company's right to service the loans sold in securitizations
insured by FSA is also generally subject to the discretion of FSA.
Accordingly, there can be no assurance that the Company will continue as
servicer for such loans and receive related servicing fees.
Any increase in limitations on cash flow available to the Company from
ARFC (including any increase in the amount of cash pledged under the
arrangement with FSA), inability to obtain any necessary waivers from FSA or
termination of servicing arrangements could materially adversely affect the
Company's cash flow and liquidity, and, ultimately, its business, financial
condition and results of operations and its outstanding securities.
IMPACT OF PORTFOLIO GROWTH AND PRODUCT MIX. Historically, the
statistical incidence of delinquencies and defaults in connection with
automobile loans tends to vary over the age of the loan. For example,
statistically, loans that are between six and fourteen months old have had a
higher likelihood of being delinquent or defaulting than loans with similar
credit characteristics that are three months old. Accordingly, to the extent
that the Company's historical portfolio growth has resulted in a servicing
portfolio containing disproportionately more loans originated within the
prior six months, the current and historical delinquency and default rates of
loans in the servicing portfolio may understate future delinquency and
default rates.
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In addition, to the extent the Company offers new loan products which
involve different underwriting policies, the delinquency and default rates of
the Company's servicing portfolio may change. The Company has instituted a
tiered pricing system and has periodically increased the amount of loans
purchased under its Classic program, which involves borrowers who do not meet
all of the underwriting standards in the Company's Premier program and are
charged rates of interest higher than those under the Company's Premier
program. The Company increased its purchase of loans under the Classic
program from 17% of the principal amount of loans purchased in 1995 to 36% in
1996, 55% in 1997 and 71% in the first three months of 1998. As a result of
the increases in Classic loans as a proportion of the Company's portfolio,
there has been an increase in the rates of, and reserves for, delinquencies,
repossessions and losses historically reported by the Company. The expansion
of the Classic loan program and seasoning of the Company's existing servicing
portfolio will likely continue to cause the Company's loan performance
statistics to show higher delinquencies, gross charge-offs and net losses
when compared with historical performance even if such loan performance
statistics are consistent with the Company's reserves for loan losses.
To estimate future delinquency, repossession and loss experience on
its loans, the Company uses a combination of factors, including actual loan
performance experience for that loan program, and industry experience on
loans with similar credit characteristics. However, there can be no assurance
that its loans will perform under varying economic conditions in the manner
estimated by the Company. Any increase in delinquency, repossession and loss
rates related to its loans above the rates estimated by the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations, as well as its liquidity. In addition, certain of
the Company's loan products which produce higher delinquency, repossession
and loss rates than expected may continue to have an impact on the Company's
overall loan performance, even after being discontinued or modified, until
the loans generated mature beyond the six- to fourteen-month period. In 1996,
the Company discontinued a Classic loan product directed at first-time
credits and modified a Classic program for financing the sale of its
repossessed inventory in retail markets, each of which had experienced higher
than expected delinquency, repossession and loss rates, but the loans
generated under this program have continued to impact the performance of those
securitization pools containing them.
EXTENSIONS AND AMENDMENTS. Like others in the industry, the Company
gives certain obligors extensions or amendments to loan terms in certain
circumstances, including when the Company believes such obligors will thereby
be more likely to repay their loans, and losses on such loans can be reduced.
Loans that have been extended or amended generally present substantially
higher default risks than loans that have neither of these characteristics.
Primarily as a result of the expansion of the Classic program (which involves
higher credit risks than the Premier program), the portion of the Company's
servicing portfolio which exhibits one or both of these characteristics has
increased. Extensions and amendments (in the aggregate) averaged
approximately 3.3% of the servicing portfolio per month in 1997, 2.7% per
month in 1996 and 1.9% per month in 1995, and with seasonal peaks occurring
during the Christmas holiday season. Extensions and amendments (in the
aggregate) averaged approximately 3.3% per month for the first three months
of 1998, compared to 3.8% per month for the first three months of 1997. The
Company believes that one reason for the increase in extensions and
amendments as a percentage of the servicing portfolio during 1997 and the
first three months of 1998 is the slower rate of growth in the size of the
Company's portfolio, which results in a higher percentage of loans of the age
that are more likely to be extended or amended. Any continued slowing of
growth could contribute to a further increase in such statistics. The Company
considers these characteristics when establishing its loss reserves. In
certain circumstances, loans that have been extended or amended have the
effect of removing the related loan from delinquent status.
POTENTIAL NEGATIVE IMPACT OF COVENANTS UNDER FINANCING AGREEMENTS.
Increases in loan delinquency and loss rates with respect to any
securitization trust may result in the trust's portfolio exceeding the
various pool performance levels established by FSA, thereby restricting or
cutting off cash distributions from the securitization trust spread accounts
to ARFC (and thus to the Company). See "Cash Flow from Securitizations"
above. In addition, such
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increases may cause the Company to exceed certain pool performance tests
established in other agreements governing its indebtedness. If at the end of
any month the Portfolio Loss Ratio (as defined) exceeds 3.5% (which is
calculated excluding the effect of the Company's March 1997 special charge),
the Company's Delinquency Rates (as defined) exceed 3.5%, the Warehousing
Loss Ratio (as defined) exceeds 1.0%, or the Average Net Excess Spread (as
defined) is not less than 4.0%, an event of default will occur under one of
the Company's outstanding warehouse facilities. The delinquency level is
calculated as a percentage of outstanding principal balance of all automobile
loans owned or securitized by the Company as to which a payment is more than
thirty days past due. Upon the occurrence of an event of default under such
warehouse facility, the lending banks under such facility would have no
further obligation to extend additional credit. Furthermore, any such event
of default or acceleration may trigger cross-defaults under other outstanding
indebtedness of the Company and may result in the acceleration of amounts due
thereunder. The increase in Classic loans, among other things, has increased
the risk that the Company may trigger its Portfolio Loss Ratio covenants in
the future.
RESALE AND FINANCING OF REPOSSESSIONS In addition to wholesale
distribution channels, the Company has regularly disposed of repossessed
vehicles through retail markets, primarily retail used car consignment lots.
During the first three months of 1998, approximately 29% of repossessed
vehicles sold were liquidated through retail markets, compared with 60% in
the first months of 1997 and 46% in all of 1997. This strategy delays the
Company's excess cash flow during the period repossessions are held in
inventory pending resale, which is typically a longer period of time than for
wholesale auctions. However, since the Company believes that this approach
has produced higher ultimate recoveries, continued reduction in the
percentage of repossession inventory disposed of through retail channels
could decrease recovery rates and increase net losses. In addition, the
Company's repossession inventory has generally increased as a percentage of
its servicing portfolio due to the increase in the rate of loan defaults and
changes in the number and type of dealers used for retail repossession sales.
At March 31, 1998, the Company had $51.5 million of repossessed inventory,
compared to $55.3 million at December 31 1997, $64.9 million at December 31,
1996, and $17.7 million at December 31, 1995.
With the significant increase in the number of repossessions, the Company
has increased purchases of loans that finance resales of repossessions to new
buyers. Delinquency, gross charge-off and net loss rates associated with
loans on repossessed automobiles have historically been substantially in
excess of the same statistics associated with the Company's remaining
servicing portfolio. There can be no assurance that management's recent
efforts to improve the Company's retail repossession finance program will be
successful.
As of March 31, 1997, the Company took an after-tax charge of $60.8
million due primarily to a reduction in the estimated recovery rates on then
current repossessed inventory and anticipated future inventory arising from
then existing securitization transactions. There can be no assurance that a
change in the proportions of vehicles sold through retail and wholesale
channels, any further softening of used car markets or other factors will not
cause the Company's recovery rate to decline further, which could require
additional adjustments to repossession inventory or estimated recovery rates
used to calculate finance income, together with related accounting charges.
POTENTIAL NEGATIVE IMPACT OF INCREASE IN PERSONAL BANKRUPTCIES. Recent
media reports have suggested an increase in the number of personal bankruptcy
filings and during most of 1997 the Company
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experienced a slight increase in the proportion of its servicing portfolio
representing loans to borrowers who have filed for bankruptcy protection. A
continuation or increase in such trend could contribute to greater default
and net loss rates than the Company has historically experienced.
ECONOMIC CONDITIONS
MARKET CONDITIONS. Periods of economic slowdown or recession, whether
general, regional or industry-related, may increase the risk of default on
automobile loans and may have an adverse effect on the Company's business,
financial condition and results of operations. Such periods also may be
accompanied by decreased consumer demand for automobiles, resulting in
reduced demand for automobile loans and declining values of automobiles
securing outstanding loans, thereby weakening collateral coverage and
increasing the possibility of losses in the event of default. The increased
proportion of loans generated under the Company's Classic program has
increased the Company's sensitivity to changes in economic conditions. In
addition, recent reports of increases in consumer bankruptcy filings and
default rates on consumer credit during a period of economic growth indicate
that the impact of consumer behavior on default rates is not limited to
periods of economic slowdown or recession.
Moreover, significant increases in the inventory of used automobiles
during recessionary economies may depress the prices at which repossessed
automobiles may be sold or delay the timing of such sales. A continuation of
the recent softening of the used car market as the result of factors
including the recent start-up of superstore competition or forecasted levels
of used lease vehicles that will be available in the market could have a
similar effect on prices for and timing of sales of repossession inventory.
There can be no assurance that the used automobile markets will be adequate
for the sale of the Company's repossessed automobiles and any material
deterioration of such markets could increase the Company's loan losses or
reduce recoveries from the sale of repossession inventory. In addition, the
Company channels a portion of its repossession inventory through retail
resale markets instead of wholesale markets, including the financing of such
retail sales through its Classic program, which had the effect of reducing
the Company's loan losses while increasing repossession inventory and
delaying cash flow recovered from inventory turnover. There can be no
assurance that the Company will continue to use such retail resale channels,
that it will be able to realize such benefits to loan losses in the future or
that its inventories will not reach levels at which they cannot readily be
liquidated through such channels. Any such event might have an adverse effect
on loan loss levels, and on the Company's financial condition, results of
operations and liquidity.
INTEREST RATES. The Company's profitability may be directly affected by
the level of and fluctuations in interest rates, which affect the Company's
gross interest rate spread. The Company monitors the interest rate
environment and employs pr`efunding or other hedging strategies designed to
mitigate the impact of changes in interest rates on its gross interest rate
spread. However, there can be no assurance that the profitability of the
Company would not be adversely affected during any period of changes in
interest rates.
LABOR MARKET CONDITIONS. The Company's ability to manage portfolio
delinquency, default and loss rates is dependent on its ability to attract
and retain qualified servicing and collection personnel. In recent months,
low unemployment rates driven by economic growth and the continued expansion
of the consumer credit markets have contributed to an increase in employee
turnover rate, especially among the Company's collection personnel. Continued
high turnover relative to historical levels, or an inability to attract and
retain replacement personnel, could have an adverse effect on the Company's
portfolio delinquency, default and net loss rates and, ultimately, its
financial condition, results of operations and liquidity.
LITIGATION
On March 4, 1997 a shareholder commenced an action against the Company
and certain named directors and officers of the Company entitled Taran v.
Olympic Financial Ltd. et al. in the United States District Court for the
District of Minnesota. Four similar lawsuits, three of them in the United
States District Court for the District of Minnesota (Frank Dibella, on behalf
of himself and all others similarly
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situated vs. Olympic Financial Ltd. et al., Michael Diemer vs. Olympic
Financial Ltd. et al. and Howard Pisnoy vs. Olympic Financial Ltd. et al.)
and one in the United States District Court for the Eastern District of New
York (North River Trading, LLC, and Allan Farkas, and All Others Similarly
Situated vs. Olympic Financial Ltd. et al.) were filed after that time. These
suits have been consolidated in one suit, In re Olympic Financial Ltd.
Securities Litigation, in the United States District Court for the District
of Minnesota. Plaintiffs in the consolidated action allege that during the
period from July 20, 1995 through March 3, 1997 the defendants, in violation
of federal securities laws, engaged in a scheme that had the effect of
artificially inflating, maintaining and otherwise manipulating the value of
the Company's Common Stock by, among other things, making baseless, false and
misleading statements about the current state and future prospects of the
Company, particularly with respect to the Classic program and the refinancing
of repossessed automobiles. Plaintiffs allege that this scheme included
making false and misleading statements and/or concealing material adverse
facts. The consolidated action is in the preliminary stages and the parties
have not begun discovery. The Company has reviewed the complaint in the
consolidated action and believes that the consolidated action is without
merit and intends to defend it vigorously. There can, however, be no
assurance that the Company will prevail in such defense or that any order,
judgment, settlement or decree arising out of this litigation will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
Another case which was filed November 8, 1996, Powell et al. v. Arcadia
Financial Ltd. et al., involves a complaint by 200 borrowers who purchased
vehicles from a dealer which sold certain of the Company's repossessed vehicles
on a consignment basis. The plaintiffs in this case allege that the Company is
either directly or vicariously liable for damages incurred as a result of the
consignment dealer's alleged wrongful actions. The Company is seeking to
resolve the matter through the mediation process. There can, however, be no
assurance that the Company will prevail in such defense or that any order,
judgement, settlement or decree arising out of this litigation will not have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.
The nature of the Company's business is such that it is routinely a
party or subject to other items of pending or threatened litigation,
including litigation involving actions against borrowers to collect amounts
on loans or to repossess vehicles and litigation challenging the terms of
loans purchased by the Company. Although the ultimate outcome of certain of
these matters cannot be predicted, management of the Company believes, based
upon information currently available and the advice of counsel, that the
resolution of those various matters currently pending will not result in any
material adverse effect on the Company's financial condition, results of
operations or liquidity.
MANAGEMENT OF GROWTH
The historical growth of the Company's servicing portfolio and the
greater proportion of Classic loans contained in that portfolio have resulted
in increased demands on the Company's personnel and systems. The Company's
ability to support, manage and control growth is dependent upon, among other
things, its ability to hire, train, supervise and manage its larger
workforce. Furthermore, the Company's ability to manage portfolio delinquency
and loss rates is dependent upon the maintenance of efficient collection and
repossession procedures and adequate staffing therefor. There can be no
assurance that the Company will have trained personnel and systems adequate
to support its key initiatives. Since 1996 the Company has opened four
regional collection centers and taken a number of initiatives to improve its
servicing and collection performance. There can be no assurance that these
efforts will be successful.
COMPETITION
The business of financing automobiles is highly competitive. Existing and
potential competitors include well-established financial institutions, such
as banks, other automobile finance companies, small loan companies, thrifts,
leasing companies and captive finance companies owned by automobile
manufacturers, such as General Motors Acceptance Corporation, Chrysler Credit
Corp. and Ford Motor Credit Company. Many of these competitors have greater
financial, technical and marketing resources than the Company and from time
to time offer special buyer incentives in the form of below-market interest
rates on certain classes of vehicles. Many of such competitors also have
longstanding relationships with automobile dealers and some of such major
competitors provide other forms of financing to automobile dealers, including
dealer floor plan financing and leasing, which are not provided by the
Company. There can be no assurance that the Company will be able to compete
successfully with such competitors.
REGULATION
The Company's business is subject to numerous federal and state consumer
protection laws and regulations, which, among other things: (i) require the
Company to obtain and maintain certain licenses and qualifications; (ii)
limit the interest rates, fees and other charges the Company is allowed to
charge; (iii) limit or prescribe certain other terms of the Company's
automobile loan contracts; (iv) require specific disclosures; and (v) define
the Company's rights to repossess and sell collateral. The Company believes
it is in substantial compliance with all such laws and regulations, and that
such laws and regulations have had no material effect on the Company's
ability to operate its business. Changes in existing laws or regulations, or
in the interpretation thereof, or the promulgation of any additional laws or
regulations, could have a material adverse effect on the Company's business,
financial condition and results of operations and upon its outstanding
securities.
UNDESIGNATED SHARES; ANTI-TAKEOVER CONSIDERATIONS
The authorized and unissued stock of the Company, other than shares reserved
for issuance pursuant to options and warrants, consists of undesignated shares.
The Board of Directors, without any action by the Company's shareholders, is
authorized to designate and issue the undesignated shares in such classes or
series as it deems appropriate and to establish the rights, preferences and
privileges of such shares, including dividend, liquidation and voting rights.
The Company has adopted a shareholder rights plan to deter a hostile takeover.
Further, certain provisions of the Minnesota Business Corporation Act may
operate to discourage a negotiated acquisition or unsolicited takeover of the
Company. Each or any of the foregoing could have the effect of entrenching the
Company's directors, impeding or deterring an unsolicited tender offer or
takeover proposal regarding the Company and thereby depriving the then current
shareholders of the ability to sell their shares at a premium over the market
price, or otherwise adversely affecting the voting power, dividend, liquidation
and other rights of holders of Common Stock.
8
