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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-45611
PROSPECTUS
FINGERHUT MASTER TRUST
$337,500,000 6.23% ASSET BACKED SECURITIES, SERIES 1998-2, CLASS A
$51,136,000 6.51% ASSET BACKED SECURITIES, SERIES 1998-2, CLASS B
FINGERHUT RECEIVABLES, INC.
Transferor
FINGERHUT NATIONAL BANK
Servicer
Each of the 6.23% Asset Backed Securities, Series 1998-2, Class A (the "Class A
Securities"), and each of the 6.51% Asset Backed Securities, Series 1998-2,
Class B (the "Class B Securities," and, together with the Class A Securities,
the "Offered Securities"), will represent an undivided interest in the Fingerhut
Master Trust (the "Trust") created pursuant to a Pooling and Servicing Agreement
among Fingerhut Receivables, Inc., as transferor (the "Transferor"), Fingerhut
National Bank, as servicer (the "Servicer"), and The Bank of New York
(Delaware), as trustee (the "Trustee"). The Class B Securities will be
subordinated to the Class A Securities as described in "Description of the
Offered Securities--Subordination of the Class B Securities," "--Redirected
Principal Collections," "--Application of Collections" and "--Series
Charge-Offs." The property of the Trust includes Receivables generated from time
to time in the ordinary course of business by Fingerhut National Bank and
Fingerhut Corporation, all monies due or to become due in payment of such
Receivables and the benefit of funds on deposit in the Excess Funding Account
(as defined herein) and certain other accounts described herein.
(COVER CONTINUED ON NEXT PAGE)
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH IN "RISK FACTORS" BEGINNING ON PAGE 26 HEREIN.
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THE OFFERED SECURITIES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR RECOURSE OBLIGATIONS OF THE TRANSFEROR, FINGERHUT
NATIONAL BANK, FINGERHUT COMPANIES, INC., FINGERHUT CORPORATION OR ANY AFFILIATE
THEREOF. AN OFFERED SECURITY IS NOT A DEPOSIT AND NEITHER THE OFFERED SECURITIES
NOR THE UNDERLYING ACCOUNTS OR RECEIVABLES ARE INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING THE
PUBLIC(1) DISCOUNT TRANSFEROR(1)(2)
PER CLASS A SECURITY 99.971529% 0.300% 99.671529%
PER CLASS B SECURITY 99.984495% 0.325% 99.659495%
TOTAL $388,531,981 $1,178,692 $387,353,289
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(1) Plus accrued interest, if any, from April 28, 1998.
(2) Before deduction of expenses estimated to be $665,000.
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The Offered Securities are offered by the Underwriters, subject to prior sale,
when, as and if issued to and accepted by the Underwriters, subject to approval
of certain legal matters by counsel for the Underwriters. The Underwriters
reserve the right to reject orders in whole or in part. It is expected that the
Offered Securities will be delivered in book-entry form on or about April 28,
1998 through the facilities of The Depository Trust Company, Cedel Bank, societe
anonyme and the Euroclear System, against payment therefor in immediately
available funds.
Underwriters of the Class A Securities
CHASE SECURITIES INC.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS SECURITIES
Underwriter of the Class B Securities
CHASE SECURITIES INC.
The date of this Prospectus is April 21, 1998
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(CONTINUED FROM PREVIOUS PAGE)
Concurrently with the issuance of the Offered Securities, the Trust will
issue the Floating Rate Asset Backed Collateralized Trust Obligations, Series
1998-2 (the "Collateralized Trust Obligations"), which may be privately placed,
and the Asset Backed Securities, Series 1998-2, Class D (the "Class D
Securities," and, together with the Collateralized Trust Obligations and the
Offered Securities, the "Securities" or the "Series 1998-2 Securities"), which
will initially be retained by the Transferor. The Securities constitute "Series
1998-2". The Collateralized Trust Obligations will be subordinated to the
Offered Securities and the Class D Securities will be subordinated to the
Collateralized Trust Obligations and the Offered Securities as described in
"Description of the Offered Securities--Subordination of Class B Securities,"
"--Redirected Principal Collections," "--Application of Collections" and
"--Series Charge-Offs." The Transferor will own the remaining undivided interest
in the Trust not represented by the Securities, any Participations or any other
investor securities issued by the Trust, which retained interest will be
represented by the Exchangeable Transferor Security (as defined herein). The
Transferor from time to time may offer other series of securities that evidence
interests in certain assets of the Trust by exchanging a portion of its interest
in the Trust therefor. Only the Offered Securities are being offered hereby.
Interest will accrue on the Class A Securities at the rate of 6.23% per
annum (the "Class A Interest Rate"). Interest will accrue on the Class B
Securities at the rate of 6.51% per annum (the "Class B Interest Rate").
Interest with respect to the Securities will be distributed on June 15, 1998 and
on the 15th day of each month thereafter (or, if such 15th day is not a business
day, the next succeeding business day) (each, a "Distribution Date"). Principal
on the Class A Securities is scheduled to be distributed on each Distribution
Date commencing on the Distribution Date in September 2002 but may be paid
earlier under certain limited circumstances described herein. Principal on the
Class B Securities is scheduled to be distributed on each Distribution Date
commencing on the Distribution Date in December 2003 but may be paid earlier
under certain limited circumstances described herein.
Application has been made to list the Offered Securities on the Luxembourg
Stock Exchange.
There currently is no secondary market for the Offered Securities. The
Underwriters expect, but are not obligated, to make a market in the Offered
Securities, and there is no assurance that any such market will develop or
continue.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE OFFERED
SECURITIES, INCLUDING OVER-ALLOTMENT TRANSACTIONS, STABILIZING TRANSACTIONS,
SYNDICATE COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Securities (as defined herein) are issued,
monthly and annual reports, containing information concerning the Trust and
prepared by the Servicer, will be sent on behalf of the Trust to Cede & Co., as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Securities, pursuant to the Pooling and Servicing Agreement (as defined
herein). See "Description of the Offered Securities--Book-Entry Registration,"
"--Reports to Securityholders" and "--Evidence as to Compliance." Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. Neither Fingerhut National Bank nor any
successor servicer intends to send any of its financial reports to
Securityholders or to the owners of beneficial interests in the Offered
Securities ("Security Owners"). The Servicer will file with the Securities and
Exchange Commission (the "Commission") such periodic reports with respect to the
Trust as are required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder for
so long as the Offered Securities are outstanding.
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AVAILABLE INFORMATION
The Transferor, as originator of the Trust, has filed a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
with the Commission on behalf of the Trust with respect to the Securities
offered pursuant to this Prospectus. For further information, reference is made
to the Registration Statement and amendments thereof and exhibits thereto, which
are available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
7 World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and amendments thereof and exhibits thereto may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a website at "http://www.sec.gov" that contains information regarding
registrants that file electronically with the Commission. Periodic reports with
respect to the Trust that have been filed under the Exchange Act and the rules
and regulations of the Commission thereunder and other information filed by the
Servicer can be inspected and copied at the public reference facilities
maintained by the Commission referred to above.
OTHER INFORMATION
Upon receipt of a request by an investor who has received an electronic
Prospectus from an Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus,
the Transferor or such Underwriter will promptly deliver, or cause to be
delivered, without charge, a paper copy of the Prospectus.
The distribution of this Prospectus and the offering of the Offered
Securities in certain jurisdictions may be restricted by law. Persons into whose
possession this Prospectus comes are required by the Underwriters to inform
themselves about and to observe any such restrictions.
The Transferor has taken all reasonable care to ensure that the information
contained in this Prospectus is true and accurate in all material respects and
that there are no material facts the omission of which would make misleading any
statement herein, whether fact or opinion. The Transferor accepts responsibility
accordingly.
As used in this Prospectus, all references to "dollars" and "$" refer to
United States dollars.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed herein under the captions "Fingerhut
Corporation's and Fingerhut National Bank's Businesses," "The Receivables" and
"Maturity Considerations" may constitute forward-looking statements within the
meaning of Section 27A of the Securities Act. Such forward-looking statements
may involve uncertainties and other factors that may cause the actual results
and performance of the Trust and the Receivables to be materially different from
future results or performance expressed or implied by such statements. Among
others, factors that could adversely affect actual results and performance
include economic conditions, declines in sales of merchandise and financial
services products by Fingerhut Corporation, the ability of Fingerhut National
Bank to change payment terms and collection policies, and potential changes in
consumers' attitudes toward financing purchases with debt. See "Risk Factors."
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN CAPITALIZED
TERMS USED HEREIN ARE DEFINED IN THE "GLOSSARY OF TERMS" OR ELSEWHERE IN THIS
PROSPECTUS. UNLESS THE CONTEXT REQUIRES OTHERWISE, CERTAIN CAPITALIZED TERMS,
WHEN USED IN THIS PROSPECTUS, RELATE ONLY TO THE SECURITIES AND NOT TO OTHER
SECURITIES ISSUED BY THE TRUST WHICH MAY BE OUTSTANDING FROM TIME TO TIME.
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Offered Securities.............. $337,500,000 aggregate principal amount of Class A
Securities and $51,136,000 aggregate principal amount of
Class B Securities are being offered hereby.
The Offered Securities will be available for purchase in
minimum denominations of $1,000 and in integral
multiples of $1,000 in excess thereof. The Offered
Securities will be issued in certificated registered
form. See "Description of the Offered
Securities--General."
The Offered Securities represent the right to receive
certain payments from the Trust only and do not
represent interests in or recourse obligations of
Fingerhut National Bank ("FNB"), Fingerhut Companies,
Inc. ("FCI"), the Transferor, Fingerhut Corporation
("Fingerhut"), or any affiliate thereof.
The Class B Securities will be subordinated to fund
certain payments with respect to the Class A Securities
as described herein. See "Description of the Offered
Securities-- Subordination of the Class B Securities."
Other Securities................ $61,364,000 aggregate principal amount of Collateralized
Trust Obligations, which may be privately placed, and
$61,364,000 aggregate principal amount of Class D
Securities, which will initially be retained by the
Transferor, are being issued concurrently. The Trust has
previously issued three other Series (the "Previously
Issued Series"), only one of which will remain
outstanding after the issuance of the Securities, which
will rank PARI PASSU with the Securities. Concurrently
with Series 1998-2, the Trust will issue Series 1998-1
Securities comprised of $337,500,000 aggregate principal
amount of 6.07% Asset Backed Securities, Series 1998-1,
Class A, $51,136,000 aggregate principal amount of 6.29%
Asset Backed Securities, Series 1998-1, Class B,
$61,364,000 aggregate principal amount of Floating Rate
Asset Backed Collateralized Trust Obligations, Series
1998-1, and $61,364,000 aggregate principal amount of
Asset Backed Securities, Series 1998-1, Class D
(collectively, the "Series 1998-1 Securities"). The
Series 1998-1 Securities, Class A and Class B, will be
offered publicly concurrently herewith by means of a
separate prospectus. The Series 1998-1 Securities,
Collateralized Trust Obligations, may be privately
placed and the Series 1998-1 Securities, Class D, will
initially be retained by the Transferor. The Series
1998-1 Securities will rank PARI PASSU with the Series
1998-2 Securities. See "Annex I: Other Series" for a
summary of the terms of these other Series which will be
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outstanding on the Closing Date. See also "Description
of the Offered Securities--Other Series." The Transferor
from time to time may create other Series that evidence
interests in assets of the Trust (other than any
Enhancement for, or Collections allocated initially to,
any other Series), by exchanging a portion of the
Exchangeable Transferor Security and satisfying certain
conditions described herein. In addition, on or about
the Closing Date the Trust will issue to FNB a
Participation. See "Description of the Offered
Securities--Exchanges" and "-- Participations." Only the
Offered Securities are being offered hereby.
Transferor...................... Fingerhut Receivables, Inc. is the Transferor. The
principal executive offices of the Transferor are located
at 4400 Baker Road, Suite F480, Minnetonka, MN 55343,
telephone number (612) 936-5035. See "The Transferor and
Related Parties-- Fingerhut Receivables, Inc."
Servicer........................ FNB is the Servicer. The principal executive offices of
the Servicer are located at 3904 West Technology Circle,
Suite 102, Sioux Falls, South Dakota 57106, telephone
number (605) 362-2380. A substitute Servicer may be
appointed in certain circumstances. FNB has delegated a
substantial portion of its servicing duties to Fingerhut
pursuant to a subservicing agreement. See "The
Receivables--Servicing," "The Transferor and Related
Parties-- Fingerhut National Bank" and "Description of
the Offered Securities--Certain Matters Regarding the
Transferor and the Servicer."
Trustee......................... The Bank of New York (Delaware) is the Trustee. Under
certain circumstances specified herein, the Transferor and
the holders of the Securities will have the right to
remove the Trustee. See "Description of the Offered
Securities--The Trustee."
Trust........................... Fingerhut Master Trust was formed in June 1994 pursuant to
the Pooling and Servicing Agreement, which has been
supplemented by the Supplements thereto relating to the
Previously Issued Series and will be supplemented by the
Series 1998-2 Supplement relating to the Securities, the
Supplement relating to the Series 1998-1 Securities, the
Participation Supplement relating to the Participation
to be issued to FNB on the Closing Date and the
Supplements relating to any other Series that may be
issued in the future and the Participation Supplements
relating to any Participations that may be issued in the
future. See "The Trust."
As more fully described below and elsewhere herein, the
Trust's assets include the Receivables and the proceeds
thereof. Collections on the Receivables are deposited
into the Collection Account maintained in the name of
the Trust.
Trust Assets.................... The Trust assets include (i) all Receivables generated by
FNB or one of its affiliates from time to time satisfying
certain criteria described herein (see "Description of
the Offered Securities--
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Eligible Receivables"), (ii) all monies and investments
due or to become due with respect thereto (including,
without limitation, the right to any Finance Charge
Receivables), (iii) all proceeds of such Receivables,
(iv) all right, title, and interest of the Transferor
in, to, and under the Purchase Agreements and the Bank
Purchase Agreement with respect to Receivables arising
under Eligible Accounts, (v) the benefit of funds on
deposit in certain bank accounts maintained for the
benefit of securityholders of each Series, including the
Excess Funding Account, (vi) the benefit of funds on
deposit in the Revolving Receivables Reserve Account and
certain other bank accounts maintained for the benefit
of the Securityholders, (vii) recoveries (net of
collection expenses) on Receivables which were
previously charged off as uncollectible ("Recoveries")
and (viii) all proceeds of the foregoing. The Offered
Securities will not have the benefit of any Enhancement
other than the subordination of the Class B Securities,
the Collateralized Trust Obligations and the Class D
Securities for the benefit of each more senior Class of
Securities as described herein. See "Description of the
Offered Securities--Subordination of the Class B
Certificates."
On and after the Initial Closing Date and prior to January
12, 1997, all Receivables that were transferred to the
Trust by the Transferor were closed-end installment sale
contracts originated by Fingerhut in connection with the
sale of merchandise, financial service products or
services. Such Receivables were sold by Fingerhut to the
Transferor pursuant to the Fingerhut Purchase Agreement.
Since January 12, 1997, FNB has been originating all
receivables in connection with the sale of merchandise,
financial service products and services by Fingerhut.
These receivables, in the form of closed-end loans and
revolving credit card loans extended by FNB under credit
card accounts, have been sold on an ongoing basis by FNB
to FCI pursuant to the Bank Purchase Agreement and, in
the case of closed-end loans that are Eligible
Receivables, have been sold by FCI to the Transferor
pursuant to the FCI Purchase Agreement. Pursuant to the
Pooling and Servicing Agreement, the Transferor
automatically transfers to the Trust all of its right,
title, and interest in and to the Receivables purchased
by it pursuant to the Purchase Agreements, subject to
certain restrictions on the automatic addition of new
Obligors set forth herein. See "Risk Factors--Transfer
of the Receivables; Insolvency Risk Considerations" for
a discussion of certain legal considerations relating to
such transfer. On March 18, 1998, the FCI Purchase
Agreement and the Pooling and Servicing Agreement were
amended to provide for the sale on an ongoing basis by
FCI to the Transferor, and by the Transferor to the
Trust, respectively, of the revolving credit card loans
originated by FNB that are Eligible Receivables.
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Receivables..................... The Receivables consist of Closed End Receivables and
Revolving Receivables. Receivables will not be Eligible
Receivables and, therefore, will not be transferred to
the Transferor and the Trust unless the Obligor thereof
is a Back End Customer. Subject to certain restrictions
on the addition of new Obligors set forth herein, all
Receivables originated by FNB that are Eligible
Receivables are purchased by the Transferor and
thereafter automatically transferred to the Trust. The
Transferor may elect at any time to suspend the
automatic inclusion of receivables in accounts that
would otherwise constitute Additional Accounts. See
"Description of the Offered Securities--Addition of
Trust Assets." The amount of Receivables fluctuates from
day to day as new Receivables are generated and as
existing Receivables are collected, written off as
uncollectible, or otherwise adjusted.
The Receivables consist of Principal Receivables and
Finance Charge Receivables. "Finance Charge Receivables"
include (i) with respect to consumer revolving credit
card accounts, amounts billed from time to time to
Obligors in respect of Periodic Finance Charges,
overlimit fees, late charges, returned check fees,
annual account fees or service charges, transaction
charges and similar fees and charges (except for fees
associated with ancillary products and services sold to
Obligors) plus (ii) with respect to all Receivables,
Recoveries, any other fees, other than prepaid insurance
premiums, billed to Obligors, plus (iii) investment
earnings on amounts credited to the Excess Funding
Account, plus (iv) Discount Receivables. Discount
Receivables are portions of the principal balance of
Receivables which are recharacterized as Finance Charge
Receivables based on a Discount Factor. The Discount
Factor for Revolving Receivables generated in connection
with sales by Fingerhut will initially be 9% and for
Closed End Receivables generated in connection with
sales by Fingerhut will initially be 25%. "Principal
Receivables" are amounts payable by Obligors with
respect to the Receivables other than such amounts that
are Finance Charge Receivables or Default Amounts. See
"Description of the Offered Securities--Finance Charge
Collections; Principal Collections."
Subject to the satisfaction of the Rating Agency
Condition, Receivables originated by FNB or an affiliate
of FNB other than in connection with the sale of
merchandise or services by Fingerhut may be transferred
to the Trust. These Receivables may be originated using
criteria different from those applied, and may have
different terms or characteristics than the Receivables
originated, by FNB in connection with the sale of
merchandise or services by Fingerhut. See "Description
of the Offered Securities--Addition of Trust Assets."
Subject to the satisfaction of the Rating Agency
Condition, the Transferor may, but will not be obligated
to, designate from time to time certain Accounts (the
"Removed Accounts"), all
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Receivables in which shall be subject to removal from
the Trust in an aggregate amount not greater than the
lesser of (i) the excess of the Transferor Interest over
the Minimum Transferor Interest and (ii) the excess of
Aggregate Principal Receivables over the Minimum
Aggregate Principal Receivables as of the last day of
the related Monthly Period; PROVIDED, HOWEVER, that
there will be no more than one such removal with respect
to any Monthly Period. See "Description of the Offered
Securities-- Removal of Accounts."
Collections..................... The Servicer is obligated to deposit all collections of
Receivables, other than the portion of Collections
allocable to Participations, in the Collection Account.
Collections on the Receivables will be applied as
collections of Principal Receivables or collections of
Finance Charge Receivables in accordance with the
definitions thereof. See "Description of the Offered
Securities--Finance Charge Collections; Principal
Collections." Finance Charge Collections and Principal
Collections are applied on each business day to the
Transferor Interest, the holders of any Participation
and the respective interests of the securityholders of
each Series issued and outstanding from time to time in
accordance with the Pooling and Servicing Agreement and
applicable Supplements. In general, in accordance with
the provisions of the Pooling and Servicing Agreement
and the applicable Supplements, (i) Finance Charge
Collections and certain other amounts are applied on
each business day to fund interest on the securities of
any Series then outstanding, to pay certain fees and
expenses, to cover Series default amounts, to reimburse
Series charge-offs and to make required payments to the
Transferor, and (ii) Principal Collections and certain
other amounts are applied on each business day to fund
principal on the securities of any Series then
outstanding, except that during any revolving period
applicable to a Series, Principal Collections otherwise
applied for the benefit of the securityholders of such
Series which are not redirected to cover amounts payable
from Finance Charge Collections in the event of a
shortfall thereof are paid to the holder of the
Exchangeable Transferor Security or paid to the
securityholders of any other Series then outstanding.
See "Description of the Offered Securities--Application
of Collections--Payment of Fees, Interest and Other
Items."
Allocation of Trust Assets...... The right to receive payments from the Trust's assets will
be allocated among the Class A Securityholders' Interest,
the Class B Securityholders' Interest, the CTO
Securityholders' Interest, the Class D Securityholders'
Interest, the interest of the securityholders of the
Previously Issued Series that remain outstanding and any
other Series (including the interest of the
securityholders of the Series 1998-1 Securities) issued
pursuant to the Pooling and Servicing Agreement and
applicable Supplements, the interest of the holders of
any Participations and the Transferor Interest. The
interest of the securityholders of any class of any
Series in the assets of the Trust will be limited to
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the securityholders' interest for such class and Series,
and such securityholders will not have any recourse
against any assets of the Trust other than those
allocated to such securityholders' interest pursuant to
the Pooling and Servicing Agreement and any applicable
Supplement. The Transferor Interest represents the right
to receive payments from the assets of the Trust not
allocated to the securityholders' interest of any Series
issued pursuant to the Pooling and Servicing Agreement
and applicable Supplements or the interest of the holder
of any Participation. The principal amount of the
Transferor Interest will fluctuate as the amount of
Receivables in the Trust, the invested amount of each
Series (including any Series consisting of variable
funding securities), the amount of any Participation and
the amounts on deposit in the Excess Funding Account
change from time to time. See "Description of the
Offered Securities--General,"
"--Other Series," and "--Excess Funding Account."
The Class A Securities will represent the right to receive
payments of interest on the aggregate outstanding
principal amount of the Class A Securities at the Class
A Interest Rate and the payment of principal to the
extent of the Class A Invested Amount (which may be less
than the aggregate outstanding principal amount of the
Class A Securities, in certain circumstances, if the
Series Default Amount exceeds funds allocable thereto
and the Class B Invested Amount, the CTO Invested Amount
and the Class D Invested Amount are reduced to zero).
See "Description of the Offered
Securities--Subordination of the Class B Securities,"
"--Allocation Percentages" and "--Series Charge-Offs."
The Class B Securities will represent the right to receive
payments of interest on the aggregate outstanding
principal amount of the Class B Securities at the Class
B Interest Rate and the payment of principal to the
extent of the Class B Invested Amount (which may be less
than the aggregate outstanding principal amount of the
Class B Securities, in certain circumstances, if the
Series Default Amount exceeds funds allocable thereto
and the CTO Invested Amount and the Class D Invested
Amount are reduced to zero). See "Description of the
Offered Securities-- Subordination of the Class B
Securities," "--Allocation Percentages" and "--Series
Charge-Offs."
The Collateralized Trust Obligations will represent the
right to receive payments of interest on the aggregate
outstanding principal amount of the Collateralized Trust
Obligations at the CTO Interest Rate and the payment of
principal to the extent of the CTO Invested Amount
(which may be less than the aggregate unpaid principal
amount of the Collateralized Trust Obligations, in
certain circumstances, if the Series Default Amount
exceeds funds allocable thereto and the Class D Invested
Amount is reduced to zero). See "Description of the
Offered Securities--Allocation Percentages" and
"--Series
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Charge-Offs." The Collateralized Trust Obligations are
not being offered hereby.
The Class D Securities will represent the right to receive
payments of principal to the extent of the Class D
Invested Amount and, to the extent the Transferor
assigns an interest rate (the "Class D Interest Rate")
to all or a portion of the Class D Securities, payments
of interest at such rate on the Class D Securities or
such portion thereof. The Class D Securities are not
being offered hereby.
The aggregate amount of Receivables in the Trust as of
March 27, 1998 was $1,686,837,273, comprised of
$417,752,162 of Finance Charge Receivables and
$1,269,085,111 of Principal Receivables. As of March 27,
1998, the Principal Receivables consisted of
$242,849,680 of closed-end installment sale contracts
originated by Fingerhut, $977,585,148 of closed-end
credit card loans originated by FNB and $48,650,283 of
revolving credit card loans originated by FNB. The
"Initial Invested Amount" will be equal to the sum of
(i) an amount equal to the initial principal amount of
the Class A Securities; (ii) an amount equal to the
initial principal amount of the Class B Securities;
(iii) an amount equal to the initial principal amount of
the Collateralized Trust Obligations; and (iv) an amount
equal to the initial principal amount of the Class D
Securities. The aggregate principal amount of the
Securities, except as otherwise provided herein, will
remain fixed at the Initial Invested Amount during the
period beginning on the Closing Date and ending with the
date on which the first principal payment is made with
respect to the Securities during the Amortization
Period. No payment of principal with respect to the
Class B Securities may be made until the final principal
payment of the Class A Invested Amount with respect to
the Class A Securities has been made. No payment of
principal with respect to the Collateralized Trust
Obligations may be made until the final principal
payment of the Class A Invested Amount with respect to
the Class A Securities and the final principal payment
of the Class B Invested Amount with respect to the Class
B Securities have been made. During the Controlled
Amortization Period, the Class D Invested Amount may be
reduced and the amount of the Transferor Interest
correspondingly increased concurrently with payments of
principal for the benefit of the Offered Securities and
the Collateralized Trust Obligations to an amount equal
to the Stated Class D Amount. See "Description of the
Offered Securities--Principal Payments."
The Series 1998-2 Securityholders' Interest will include
the right to receive (but only to the extent needed to
make required payments under the Pooling and Servicing
Agreement) varying percentages of Finance Charge
Collections and Principal Collections during each
Monthly Period. Finance Charge Collections prior to the
occurrence of a Pay Out Event, the
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Default Amount at all times, and Principal Collections
during the Revolving Period will be applied on each
business day for the benefit of the Series 1998-2
Securityholders' Interest based on the Floating
Percentage. On and after the date on which a Pay Out
Event is deemed to occur, Finance Charge Collections
will be applied on each business day for the benefit of
the Series 1998-2 Securityholders' Interest based on the
Fixed/Floating Percentage. During the Revolving Period,
all Principal Collections that would otherwise be
applied for the benefit of the Securityholders will be
applied on each business day and paid to the holder of
the Exchangeable Transferor Security (except for Shared
Principal Collections used to make payments to other
Series). During the Amortization Period, until the Class
B Principal Payment Commencement Date, Principal
Collections will be applied on each business day for the
benefit of the Class A Securityholders' Interest based
on the Fixed/Floating Percentage. On and after the Class
B Principal Payment Commencement Date, Principal
Collections will be applied on each business day for the
benefit of the Class B Securityholders' Interest based
on the Fixed/Floating Percentage. On and after the CTO
Principal Payment Commencement Date, Principal
Collections will be applied on each business day for the
benefit of the CTO Securityholders' Interest based on
the Fixed/Floating Percentage. See "Description of the
Offered Securities-- Allocation Percentages."
Exchanges....................... The Pooling and Servicing Agreement provides that the
Trustee may issue two types of securities, (i) investor
securities in one or more Series, each of which may have
multiple classes of securities of which one or more such
classes may be transferable and (ii) the Exchangeable
Transferor Security. In addition, the Trust may issue
Participations representing participation interests in
the assets of the Trust, as described below. The
Exchangeable Transferor Security will evidence the
Transferor Interest, will initially be held by the
Transferor, and will be transferable only as provided in
the Pooling and Servicing Agreement, including through
the issuance of a Supplemental Security. See
"Description of the Offered Securities-- Exchanges." The
Pooling and Servicing Agreement also provides that,
pursuant to any one or more Supplements, the Transferor
may tender the Exchangeable Transferor Security or, if
provided in the relevant Supplement, securities
comprising any Series and the Exchangeable Transferor
Security, to the Trustee in exchange for securities
comprising one or more new Series and a reissued
Exchangeable Transferor Security. However, at all times,
the interest in the Principal Receivables in the Trust
and amounts on deposit in the Excess Funding Account
represented by the Transferor Interest must equal or
exceed the Minimum Transferor Interest. Under the
Pooling and Servicing Agreement, the Transferor may
define, with respect to any new Series, the Principal
Terms of such Series. See "Description of the Offered
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Securities--Exchanges." The Transferor may offer any
Series for sale in transactions either registered under
the Securities Act or exempt from registration
thereunder, directly, through one or more underwriters
or placement agents, in fixed-price offerings, or in
negotiated transactions or otherwise. The Transferor
currently intends to offer, from time to time,
additional Series issued by the Trust.
Under the Pooling and Servicing Agreement, an Exchange of
the Exchangeable Transferor Security for securities
comprising one or more Series and a reissued
Exchangeable Transferor Security may occur only upon
delivery to the Trustee of the following: (i) a
Supplement specifying the Principal Terms of each Series
to be issued in connection therewith, (ii) the
applicable enhancement, if any, (iii) the agreement, if
any, pursuant to which the enhancement provider agrees
to provide the enhancement, if any, (iv) a Tax Opinion,
(v) an opinion of counsel to the effect that the
securities of such Series will be characterized as
indebtedness or as a partnership interest for Applicable
Tax State income tax purposes under existing law or that
the issuance of such Series will not materially
adversely affect the Applicable Tax State income tax
characterization of any outstanding Series or the
taxability of the Trust under Applicable Tax State
income tax laws, (vi) written confirmation from each
Rating Agency that the Exchange will not result in the
Rating Agency reducing or withdrawing its original
rating on any then outstanding Series rated by it, (vii)
an officer's certificate of the Transferor stating that,
after giving effect to such Exchange, the Transferor
Interest would be at least equal to the Minimum
Transferor Interest, and (viii) the existing
Exchangeable Transferor Security and, if applicable, the
existing securities representing the Series to be
exchanged. See "Description of the Offered Securities--
Exchanges."
Participations.................. The Pooling and Servicing Agreement provides that the
Transferor may direct the Trustee to issue on behalf of
the Trust one or more participation interests in the
assets of the Trust or in any portion thereof (each
interest, a "Participation"), the terms of which shall
be defined in a supplement to the Pooling and Servicing
Agreement (a "Participation Supplement"), which shall
include, among other things, a conveyance to the holder
of the Participation of all right, title and interest of
the Trust in a specified percentage of the Receivables.
The Trustee shall deliver the Participation to or upon
the order of the Transferor upon the satisfaction of the
Rating Agency Condition and certain other conditions
described herein under "Description of the Offered
Securities--Participations."
Interest........................ Each Class A Security represents the right to receive
interest accruing from the Closing Date at the rate equal
to 6.23% per annum (such rate, the "Class A Interest
Rate"). Each Class B Security represents the right to
receive interest accruing from the
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Closing Date at the rate equal to 6.51% per annum (such
rate, the "Class B Interest Rate" and together with the
Class A Interest Rate sometimes referred to as an
"Interest Rate" and collectively as the "Interest
Rates"). Interest on the Offered Securities will be
payable on June 15, 1998, and on each Distribution Date
thereafter, in an amount equal to (i) with respect to
the Class A Securities, one-twelfth of the product of
(a) the Class A Interest Rate and (b) the outstanding
aggregate principal amount of the Class A Securities as
of the close of business on the first day of such
Interest Accrual Period (or in the case of the first
Distribution Date, the initial principal amount of the
Class A Securities) and (ii) with respect to the Class B
Securities, one-twelfth of the product of (a) the Class
B Interest Rate and (b) the Class B Invested Amount as
of the close of business on the first day of such
Interest Accrual Period (or in the case of the first
Distribution Date, the initial principal amount of the
Class B Securities). Interest for the first Distribution
Date will include accrued interest at the applicable
Interest Rate from the Closing Date through June 14,
1998. Interest on the Offered Securities will be
calculated on the basis of a 360-day year of twelve
30-day months.
On the Closing Date, the Transferor will make a deposit to
the Interest Funding Account in an amount equal to
$2,000,000.
Interest payments on the Class A Securities on each
Distribution Date will be funded from Available Series
1998-2 Finance Charge Collections with respect to the
preceding Monthly Period (or, with respect to the first
Distribution Date, such Collections from and including
the Closing Date to and including May 29, 1998), and
from certain other funds allocated as set forth in the
Pooling and Servicing Agreement to the Class A
Securities, and deposited on each business day during
such Monthly Period in the Interest Funding Account. See
"Description of the Offered Securities--Interest
Payments" and "--Application of Collections--Payment of
Fees, Interest and Other Items."
Subject to the prior payment of interest on the Class A
Securities, interest payments on the Class B Securities
on each Distribution Date will be funded from the
portion of Available Series 1998-2 Finance Charge
Collections with respect to the preceding Monthly Period
(or, with respect to the first Distribution Date, such
collections from and including the Closing Date to and
including May 29, 1998), and from certain other funds
allocated as set forth in the Pooling and Servicing
Agreement to the Class B Securities, and deposited on
each business day during such Monthly Period in the
Interest Funding Account. See "Description of the
Offered Securities--Interest Payments" and
"--Application of Collections--Payment of Fees, Interest
and Other Items."
Revolving Period................ The "Revolving Period" with respect to the Securities
means the period from and including the Closing Date to,
but excluding, the
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earlier of (a) the commencement of the Controlled
Amortization Period and (b) the commencement of the
Early Amortization Period. The Controlled Amortization
Period with respect to the Securities is scheduled to
begin at the close of business on the last day of the
July 2002 Monthly Period. During the Revolving Period,
Principal Collections otherwise allocable to the
Securityholders (other than any Shared Principal
Collections paid to the holders of securities of other
Series and any Redirected Principal Collections) will,
subject to certain limitations, be paid from the Trust
to the holder of the Exchangeable Transferor Security.
See "Description of the Offered Securities--Pay Out
Events" for a discussion of the events which might lead
to the termination of the Revolving Period for the
Securities prior to the end of the July 2002 Monthly
Period.
Principal Payment; Controlled
Amortization.................. Unless a Pay Out Event shall have occurred with respect to
the Securities, during the period commencing with the
August 2002 Monthly Period and ending with the October
2003 Monthly Period, on each business day during such
period, an amount equal to the lesser of (i) Available
Series 1998-2 Principal Collections, and (ii) the Class
A Controlled Amortization Amount for such Monthly Period
plus any Class A Deficit Controlled Amortization Amount
arising from prior Monthly Periods, will be deposited in
the Principal Account. On any business day when the
amount on deposit in the Principal Account equals or
exceeds the Class A Controlled Distribution Amount for
the related Distribution Date, the balance of all such
funds remaining on deposit in the Collection Account
will be treated as Shared Principal Collections and may
be used to make payments on other Series or classes of
such Series that may be accumulating principal or
amortizing or paid to the holder of the Exchangeable
Transferor Security. The funds on deposit in the
Principal Account will be available to be paid to the
Class A Securityholders on the September 2002
Distribution Date and on each Distribution Date
thereafter until the Class A Invested Amount is paid in
full. If the funds available for distribution to the
Class A Securityholders on the November 2003
Distribution Date (the "Class A Expected Final Payment
Date") are insufficient to pay the Class A Invested
Amount in full, all such funds will be distributed to
the Class A Securityholders at such time on a pro rata
basis. Thereafter, until the Class A Invested Amount has
been paid in full or the Termination Date has occurred,
principal and interest payments will be made to Class A
Securityholders monthly on each Distribution Date. No
payment of principal to the Class B Securityholders will
be made until the Class A Invested Amount has been paid
in full. See "Description of the Offered
Securities--Principal Payments."
On each business day on and after the first business day
of the Monthly Period preceding the Class B Principal
Payment
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Commencement Date, an amount equal to the lesser of (i)
Available Series 1998-2 Principal Collections, and (ii)
the Class B Controlled Amortization Amount for such
Monthly Period plus any Class B Deficit Controlled
Amortization Amount arising from prior Monthly Periods,
will be deposited in the Principal Account. On any
business day when the amount on deposit in the Principal
Account equals or exceeds the Class B Controlled
Distribution Amount for the related Distribution Date,
the balance of all such funds remaining on deposit in
the Collection Account will be treated as Shared
Principal Collections and may be used to make payments
on other Series or classes of such Series which may be
accumulating principal or amortizing or paid to the
holder of the Exchangeable Transferor Security. The
funds on deposit in the Principal Account will be
available to be paid to the Class B Securityholders on
the Class B Principal Payment Commencement Date and on
each Distribution Date thereafter until the Class B
Invested Amount is paid in full. If the funds available
for distribution to the Class B Securityholders on the
February 2004 Distribution Date (the "Class B Expected
Final Payment Date") are insufficient to pay the Class B
Invested Amount in full, all such funds will be
distributed to the Class B Securityholders at such time
on a pro rata basis. Thereafter, until the Class B
Invested Amount has been paid in full or the Termination
Date has occurred, principal and interest payments will
be made to Class B Securityholders monthly on each
Distribution Date. No payment of principal to the CTO
Securityholders will be made until the Class B Invested
Amount has been paid in full. See "Description of the
Offered Securities--Principal Payments."
Other Series offered by the Trust may or may not have
amortization periods like the Amortization Periods for
the Securities, and any such periods may have different
lengths and begin on different dates than the
Amortization Period described herein. Thus, certain
Series may be in their revolving periods while others
are in their amortization periods. In addition, other
Series may allocate Principal Receivables based upon
different investor percentages. See "Description of the
Offered Securities--Exchanges" for a discussion of the
potential terms of other Series. See "Annex I: Other
Series" for a description of the terms of the Other
Series that will remain outstanding upon the issuance of
the Securities.
Early Amortization Period....... During the Early Amortization Period, Principal
Collections allocable to the respective Securityholders'
Interest and certain other amounts (including Shared
Principal Collections from any other Series, and amounts
deposited in the Excess Funding Account) will no longer
be reinvested in the Trust or otherwise used to maintain
the Securityholders' Interest of such Series, but
instead will be distributed as principal payments
monthly on each Distribution Date beginning with the
first Distribution Date following the Monthly Period in
which a Pay Out Event occurs or
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is deemed to have occurred to the Class A
Securityholders in respect of the Class A Invested
Amount and, following the payment in full of the Class A
Invested Amount, to the Class B Securityholders in
respect of the Class B Invested Amount and, following
the payment in full of the Class B Invested Amount, to
the CTO Securityholders in respect of the CTO Invested
Amount and, following the payment in full of the CTO
Invested Amount, to the Class D Securityholders until
the Class D Invested Amount is paid in full. See
"Description of the Offered Securities--Pay Out Events."
Shared Principal Collections.... To the extent that Principal Collections and other amounts
that are initially applied for the benefit of the
Securityholders' Interest are not needed to make
payments to the Securityholders or required to be
deposited in the Principal Account, they may be applied
to cover principal payments due to or for the benefit of
securityholders of another Series, including principal
payments which the Transferor elects to make with
respect to any Variable Funding Securities. Any such
application will not result in a reduction in the
Securityholders' Interest. In addition, Principal
Collections and certain other amounts initially applied
for the benefit of other Series, to the extent such
collections are not needed to make payments to the
securityholders of such other Series, and certain
amounts that any Participation Supplements specify are
to be treated as "Shared Principal Collections" may be
applied to cover principal payments due to or for the
benefit of the holders of the Securities. See
"Description of the Offered Securities--Principal
Payments" and "--Application of Collections."
Excess Funding Account.......... At any time at which the Transferor Interest is less than
the Minimum Transferor Interest, funds (to the extent
available therefor as described herein) otherwise
payable to the Transferor will be deposited in the
Excess Funding Account on each business day until the
Transferor Interest is at least equal to the Minimum
Transferor Interest. Funds on deposit in the Excess
Funding Account may, at the option of the Transferor, be
withdrawn and paid to the Transferor to the extent that
on any day the Transferor Interest exceeds the Minimum
Transferor Interest.
The portion of any funds on deposit in the Excess Funding
Account at the beginning of the Amortization Period that
are allocable to Series 1998-2 will be deposited in the
Principal Account and applied as Class A Principal for
the next succeeding Distribution Date. In addition, no
funds allocated to investor securities of any Series
will be deposited in the Excess Funding Account during
any amortization period or early amortization period
with respect to such Series until the principal account
for such Series for such Distribution Date has been
fully funded or the investor securities of such Series
have been paid in full. See "Description of the Offered
Securities--Excess Funding Account."
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Distribution of Available Series 1998-2
Finance Charge Collections............ Available Series 1998-2 Finance Charge
Collections will be applied on each
business day in a Monthly Period in
the following order of priority:
(i) an amount equal to the amount of
Class A Monthly Interest and any
overdue Class A Monthly Interest not
previously deposited in the Interest
Funding Account for such Monthly
Period and interest on any overdue
interest amounts will be deposited
in the Interest Funding Account;
(ii) an amount equal to the amount of
Class B Monthly Interest and any
overdue Class B Monthly Interest
not previously deposited in the
Interest Funding Account for such
Monthly Period and interest on any
overdue interest amounts will be
deposited in the Interest Funding
Account;
(iii) an amount equal to the amount of
CTO Monthly Interest and any overdue
CTO Monthly Interest not
previously deposited in the
Interest Funding Account for such
Monthly Period and interest on any
overdue interest amounts will be
deposited in the Interest Funding
Account;
(iv) an amount equal to the Monthly
Servicing Fee plus any Monthly
Servicing Fee that was due but not
paid on any prior business day will
be paid to the Servicer;
(v) an amount equal to the Series
Default Amount on such business day
and, to the extent not previously
paid, the Series Default Amount for
each prior business day in such
Monthly Period will be (a) during
the Revolving Period, treated as
Shared Principal Collections and (b)
during the Amortization Period,
treated as Available Series 1998-2
Principal Collections for the
benefit of the Securities;
(vi) an amount equal to the Series
1998-2 Percentage of any Adjustment
Payment which the Transferor is
required but failed to make
pursuant to the Pooling and
Servicing Agreement will be (a)
during the Revolving Period,
treated as Shared Principal
Collections and (b) during the
Amortization Period, treated as
Available Series 1998-2 Principal
Collections for the benefit of the
Securities;
(vii) an amount equal to unreimbursed
Class A Charge-Offs will be (a) during
the Revolving Period, treated as
Shared Principal Collections or
(b) during the Amortization
Period, treated as Available
Series 1998-2 Principal
Collections for the benefit of the
Securities;
(viii) an amount equal to the accrued
and unpaid interest on the outstanding
aggregate principal amount of the
Class B Securities not previously
deposited in the Interest Funding
Account for such Monthly Period
will be deposited in the Interest
Funding Account;
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(ix) an amount equal to the accrued and
unpaid interest on the outstanding
aggregate principal amount of the
Collateralized Trust Obligations
not previously deposited in the
Interest Funding Account for such
Monthly Period will be deposited in
the Interest Funding Account;
(x) an amount equal to unreimbursed
Class B Charge-Offs will be (a) during
the Revolving Period, treated as
Shared Principal Collections and (b)
during the Amortization Period,
treated as Available Series 1998-2
Principal Collections for the
benefit of the Securities;
(xi) an amount equal to unreimbursed CTO
Charge-Offs will be (a) during the
Revolving Period, treated as Shared
Principal Collections and (b)
during the Amortization Period,
treated as Available Series 1998-2
Principal Collections for the
benefit of the Securities;
(xii) an amount equal to unreimbursed
Class D Charge-Offs will be (a) during
the Revolving Period, treated as
Shared Principal Collections and
(b) during the Amortization
Period, treated as Available
Series 1998-2 Principal
Collections for the benefit of the
Securities;
(xiii) an amount equal to the accrued
and unpaid interest on the outstanding
aggregate principal amount of the
Class D Securities not previously
deposited in the Interest Funding
Account for such Monthly Period
plus any additional interest (to
the extent permitted by
applicable law) at the Class D
Interest Rate on interest that
was payable during a prior
Monthly Period but was not
deposited in the Interest Funding
Account or paid to the Class D
Securityholders will be deposited
in the Interest Funding Account;
(xiv) an amount equal to the excess, if
any, of the Specified Revolving
Receivables Reserve Amount over
the amount then on deposit in the
Revolving Receivables Reserve
Account will be deposited in the
Revolving Receivables Reserve
Account;
(xv) at the option of the Transferor, on
and after the Defeasance Reserve
Account Funding Date, but prior to
the date on which a Defeasance
occurs, an amount equal to the
excess, if any, of the Required
Defeasance Reserve Account Amount
over the Available Defeasance
Reserve Account Amount will be
deposited in the Defeasance Reserve
Account;
(xvi) an amount equal to any amount
required to be deposited in a reserve
account established for the
benefit of the Collateralized
Trust Obligations will be
deposited in such reserve account;
(xvii) an amount designated by the
Transferor in writing will be
deposited in the Payment Reserve
Account; and
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(xviii) the remainder will be treated as
Excess Finance Charge Collections. See
"Description of the Offered
Securities-- Application of
Collections."
Coverage of Interest Shortfalls from
Transferor Finance Charge
Collections........................... If any amounts are on deposit in the
Excess Funding Account on any business
day, the Servicer will determine the
amount (the "Negative Carry Amount"),
if any, equal to the excess of (x) the
product of (a) the Base Rate and (b)
the product of (i) the amounts on
deposit in the Excess Funding Account
and (ii) the number of days elapsed
since the previous business day
divided by 360 over (y) the aggregate
amount of all earnings since the
previous business day available from
the Cash Equivalents in which funds on
deposit in the Excess Funding Account
are invested. The Servicer will apply
an amount equal to the lesser of (i)
the Series 1998-2 Percentage of the
Finance Charge Collections allocable
to the Exchangeable Transferor
Security ("Transferor Finance Charge
Collections") on such business day and
(ii) the Negative Carry Amount for
such business day in the manner
specified for application of Available
Series 1998-2 Finance Charge
Collections.
Revolving Receivables Reserve Account... The "Revolving Receivables Reserve
Account" will be funded from Available
Series 1998-2 Finance Charge
Collections as described in clause
(xiv) of "Distribution of Available
Series 1998-2 Finance Charge
Collections" up to an amount generally
equal to the product of (x) the
Floating Percentage and (y) 1% of the
aggregate amount of Principal
Receivables which are Revolving
Receivables; provided, however, that
such percentage may be reduced at the
option of the Transferor at any time
if the Rating Agency Condition shall
have been satisfied. Funds on deposit
in the Revolving Receivables Reserve
Account will be withdrawn by the
Servicer on each Transfer Date to the
extent of any shortfalls in amounts to
be paid or deposited as of the end of
the day on the last business day of
the preceding Monthly Period and will
be applied as Available Series 1998-2
Finance Charge Collections as if such
amounts were available on the last
business day of the preceding Monthly
Period.
Sharing of Excess Finance Charge
Collections........................... Finance Charge Collections on any
business day in excess of the amounts
necessary to make required payments on
such business day will be applied to
cover any shortfalls with respect to
amounts payable from Finance Charge
Collections allocable to any other
Series then outstanding, pro rata
based upon the amount of the
shortfall, if any, with respect to
such other Series. Any Excess Finance
Charge Collections remaining after
covering shortfalls with respect to
all outstanding Series will be paid to
the Transferor.
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Series Default Amount; Series
Charge-Offs........................... A portion of all Receivables in
Defaulted Accounts will be allocated to
the Securityholders on each business
day in an amount equal to the product
of the Floating Percentage and the
Default Amount on such business day
(the "Series Default Amount"). If on
any Determination Date the aggregate
Series Default Amount and the Series
1998-2 Percentage of unpaid Adjustment
Payments, if any, for the preceding
Monthly Period exceeds the aggregate
amount of Available Series 1998-2
Finance Charge Collections applied to
the payment thereof as described in
clauses (v) and (vi) of "Distribution
of Available Series 1998-2 Finance
Charge Collections," and the amount of
(x) Transferor Finance Charge
Collections and (y) Excess Finance
Charge Collections, in each case to
the extent applied to the payment
thereof as described in "Coverage of
Interest Shortfalls from Transferor
Finance Charge Collections," and
"Sharing of Excess Finance Charge
Collections," respectively, and any
Redirected Principal Collections
applied with respect thereto, then the
Class D Invested Amount will be
reduced to the extent of such excess
(but not in an amount greater than the
sum of the remaining aggregate Series
Default Amount and the remaining
Series 1998-2 Percentage of unpaid
Adjustment Payments for such Monthly
Period).
The Class D Invested Amount will
thereafter be increased (but not in
excess of the unpaid principal amount
of the Class D Securities) on any
business day by the amount of
Available Series 1998-2 Finance Charge
Collections applied for such purpose
as described in clause (xii) of
"Distribution of Available Series
1998-2 Finance Charge Collections." If
the Class D Invested Amount is reduced
to zero, the CTO Invested Amount will
be reduced by an amount equal to the
amount by which such excess would have
caused the Class D Invested Amount to
be reduced below zero (but not in
excess of the sum of the remaining
aggregate Series Default Amount and
the remaining Series 1998-2 Percentage
of unpaid Adjustment Payments for such
Monthly Period).
The CTO Invested Amount will thereafter
be increased (but not in excess of the
unpaid principal amount of the
Collateralized Trust Obligations) on
any business day by the amount of
Available Series 1998-2 Finance Charge
Collections applied for that purpose
as described in clause (xi) of
"Distribution of Available Series
1998-2 Finance Charge Collections." If
the CTO Invested Amount is reduced to
zero, the Class B Invested Amount will
be reduced by an amount equal to the
amount by which such excess would have
caused the CTO Invested Amount to be
reduced below zero (but not in excess
of the sum of the remaining aggregate
Series Default Amount and the
remaining Series 1998-2 Percentage of
unpaid Adjustment Payments for such
Monthly Period). If and for so long as
the CTO Invested Amount is reduced to
zero, the Class B Securityholders will
bear directly
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the credit and other risks associated
with their undivided interest in the
Trust.
The Class B Invested Amount will
thereafter be increased (but not in
excess of the unpaid principal amount
of the Class B Securities) on any
business day by the amount of
Available Series 1998-2 Finance Charge
Collections applied for that purpose
as described in clause (x) of
"Distribution of Available Series
1998-2 Finance Charge Collections." If
the Class B Invested Amount is reduced
to zero, the Class A Invested Amount
will be reduced by an amount equal to
the amount by which such excess would
have caused the Class B Invested
Amount to be reduced below zero (but
not in excess of the sum of the
remaining aggregate Series Default
Amount and the remaining Series 1998-2
Percentage of unpaid Adjustment
Payments for such Monthly Period). If
and for so long as the Class B
Invested Amount is reduced to zero,
the Class A Securityholders will bear
directly the credit and other risks
associated with their undivided
interest in the Trust.
The Class A Invested Amount will
thereafter be increased (but not in
excess of the unpaid principal amount
of the Class A Securities) on any
business day by the amount of
Available Series 1998-2 Finance Charge
Collections applied for that purpose
as described in clause (vii) of
"Distribution of Available Series
1998-2 Finance Charge Collections."
See "Description of the Offered
Securities--Series Charge-Offs."
Paired Series........................... Subject to satisfaction of the Rating
Agency Condition, the Securities may be
paired with one or more other Series
or a portion of one or more other
series issued by the Trust (each, a
"Paired Series") at or after the
Amortization Period Commencement Date
but prior to the occurrence of a Pay
Out Event. If a Paired Series is
issued with respect to Series 1998-2,
following the issuance of such Paired
Series, as the Invested Amount is
reduced, the invested amount of the
Paired Series would increase by an
amount that otherwise would have
increased the Transferor Interest.
Upon payment in full of Series 1998-2,
the increase in the invested amount of
the Paired Series will be equal to the
amount of the Invested Amount paid to
Securityholders of Series 1998-2 since
the issuance of such Paired Series. If
a Pay Out Event occurs with respect to
any such Paired Series prior to the
payment in full of the Securities, the
final payment of principal to the
Securityholders may be delayed. See
"Description of the Offered
Securities--Paired Series."
Subordination of the Class B Securities,
the Collateralized Trust Obligations
and the Class D Securities............ The Class B Securities will be
subordinated as described herein to the
extent necessary to fund payments of
principal and interest on the Class A
Securities. The Collateralized Trust
Obligations will be subordinated as
described herein to the extent
necessary
</TABLE>
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to fund payments of principal and
interest on the Class A Securities and
the Class B Securities. The Class D
Securities will be subordinated as
described herein to the extent
necessary to fund payments of
principal and interest on the Class A
Securities, the Class B Securities and
the Collateralized Trust Obligations.
See "Description of the Offered
Securities-- Subordination of the
Class B Securities," "--Redirection of
Cash Flows" and "--Redirected
Principal Collections." If on any
business day there is a positive Class
A Required Amount, Class B Required
Amount or CTO Required Amount, certain
Principal Collections for such
business day will be used to fund
first the Class A Required Amount,
second the Class B Required Amount and
third the CTO Required Amount and the
Invested Amounts of the Class D
Securities, the Collateralized Trust
Obligations or the Class B Securities
may be reduced on the related
Distribution Date as more fully
described herein in "Description of
the Offered Securities--Redirected
Principal Collections." To the extent
the Class B Invested Amount, the CTO
Invested Amount or the Class D
Invested Amount is reduced, the
percentage of Finance Charge
Collections applied for the benefit of
the Series 1998-2 Securityholders, in
subsequent Monthly Periods will be
reduced. Moreover, to the extent the
amount of such reduction in the Class
B Invested Amount, the CTO Invested
Amount, or the Class D Invested Amount
is not reimbursed, the amount of
principal distributable to the Class B
Securityholders, the CTO
Securityholders, or the Class D
Securityholders, as applicable, from
the Collection Account will be
reduced. Principal payments with
respect to the Class B Securities will
not be made until the final payment of
the Class A Invested Amount has been
made to the Class A Securityholders.
Principal payments with respect to the
Collateralized Trust Obligations will
not be made until the final payment of
the Class A Invested Amount has been
made to the Class A Securityholders
and the final payment of the Class B
Invested Amount has been made to the
Class B Securityholders. During the
Controlled Amortization Period, the
Class D Invested Amount may be reduced
and the amount of the Transferor
Interest correspondingly increased
concurrently with payments of
principal to the Class A
Securityholders, the Clasrityholders
and the CTO Securityholders to an
amount equal to the Stated Class D
Amount. During the Early Amortization
Period, principal payments with
respect to the Class D Securities will
not be made and, except as a result of
Class D Charge-Offs or Redirected
Principal Collections, the Class D
Invested Amount will not be reduced to
an amount equal to the Stated Class D
Amount until the final payment of the
Class A Invested Amount has been made
to the Class A Securityholders, the
final payment of the Class B Invested
Amount has been made to the Class B
Securityholders and the final payment
of the CTO Invested Amount has been
made to the CTO Securityholders. See
"Description of the Offered
Securities--Subordination of
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the Class B Securities,"
"--Redirection of Cash Flows" and
"--Redirected Principal Collections."
Defeasance.............................. On the date during the Amortization
Period that (v) an amount has been
deposited (i) in the Defeasance
Funding Account equal to the sum of
the outstanding aggregate principal
amount of the Class A Securities, the
Class B Securities and the
Collateralized Trust Obligations,
which amount shall be invested in Cash
Equivalents and (ii) in the Defeasance
Reserve Account equal to or greater
than the excess of the sum of the
Class A Monthly Interest, the Class B
Monthly Interest and the estimated CTO
Monthly Interest over the estimated
amount of investment earnings on
amounts in the Defeasance Funding
Account, as estimated by the
Transferor, for each of the Monthly
Periods during the period from the
date of such deposit to the Defeasance
Funding Account through the CTO
Expected Final Payment Date, (w) the
Transferor shall have delivered to the
Trustee an opinion of counsel to the
effect that such deposit and
termination of obligations will not
result in the Trust being required to
register as an "investment company"
within the meaning of the Investment
Company Act and an opinion of counsel
to the effect that following such
deposit none of the Trust, the
Defeasance Reserve Account or the
Defeasance Funding Account will be
deemed to be an association (or
publicly traded partnership) taxable
as a corporation; (x) the Transferor
shall have delivered to the Trustee a
certificate of an officer of the
Transferor stating that the Transferor
reasonably believes that such deposit
and termination of its obligations
will not constitute a Pay Out Event or
an event that, with the giving of
notice or the lapse of time, would
cause a Pay Out Event to occur; (y)
the Rating Agency Condition has been
satisfied and (z) the Transferor has
satisfied certain other conditions,
the Securities will no longer be
entitled to the security interest of
the Trust in the Receivables and other
Trust assets (except those set forth
above), and the percentages applicable
to the rights of the Securityholders
to Principal Collections, Finance
Charge Collections and Default Amounts
shall be reduced to zero. Upon the
satisfaction of the foregoing
conditions, the Class D Invested
Amount shall be reduced to zero. See
"Description of the Offered
Securities--Defeasance."
Optional Repurchase..................... The Class A Securities, the Class B
Securities and the Collateralized Trust
Obligations will be subject to
optional repurchase by the Transferor
on any Distribution Date if on such
Distribution Date the sum of the Class
A Invested Amount, the Class B
Invested Amount and the CTO Invested
Amount would be reduced to an amount
less than or equal to 10 percent of
the sum of the initial Class A
Invested Amount, the initial Class B
Invested Amount and the initial CTO
Invested Amount, if certain conditions
set forth in the Pooling and Servicing
Agreement are met. The repurchase
price will be equal to the sum of the
Class A Invested Amount, the Class B
Invested
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23
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<S> <C>
Amount and the CTO Invested Amount
that would be remaining on such date
after giving effect to any payments on
such date plus accrued interest which
would otherwise remain unpaid on the
Class A Securities, the Class B
Securities and the Collateralized
Trust Obligations through the day
preceding the Distribution Date on
which the repurchase occurs. See
"Description of the Offered
Securities--Final Payment of
Principal; Termination."
Tax Status.............................. In the opinion of Special Tax Counsel,
the Class A Securities and the Class B
Securities will be characterized as
debt for federal income tax purposes.
Under the Pooling and Servicing
Agreement, the Transferor, the
Servicer, the Class A Securityholders
and the Class B Securityholders, agree
to treat the Class A Securities and
the Class B Securities as debt for
federal, state, and other tax
purposes. See "Certain Federal Income
Tax Consequences" for additional
information concerning the application
of federal income tax laws.
ERISA Considerations.................... Under a regulation issued by the U.S.
Department of Labor (the "Plan Assets
Regulation"), the Trust's assets would
not be deemed "plan assets" of an
employee benefit plan holding an
interest in the Class A Securities or
Class B Securities if such Class of
Securities qualify as
"publicly-offered securities" within
the meaning of the Plan Assets
Regulation. To qualify as
"publicly-offered securities" within
the meaning of the Plan Assets
Regulation, certain conditions must be
met, including that interests in such
Class of Securities be held by at
least 100 persons independent of the
Transferor and each other upon
completion of the public offering
being made hereby. The Class A
Underwriters expect, although no
assurance can be given, that the Class
A Securities will be held by at least
100 such persons, and the Transferor
anticipates that the other conditions
of the "publicly-offered security"
exception contained in the Plan Assets
Regulation will be met with respect to
the Class A Securities. No monitoring
or other measures will be taken to
ensure that any such conditions will
be met with respect to the Class A
Securities. If the Trust's assets were
deemed to be "plan assets" of such a
plan, there is uncertainty whether
existing exemptions from the
"prohibited transaction" rules of the
Employee Retirement Income Security
Act of 1974, as amended ("ERISA"),
would apply to all transactions
involving the Trust's assets. See
"Employee Benefit Plan
Considerations."
The Class B Underwriter does not expect
that the Class B Securities will be
held by 100 or more independent
investors and, therefore, do not
expect that the Class B Securities
will qualify as "publicly-offered
securities" under the Plan Assets
Regulation. Accordingly, the Class B
Securities may not be acquired by
employee benefit plan investors
subject to Title I of ERISA or Section
4975 of the Internal Revenue Code of
1986, as amended (the "Code") or any
substantially similar federal, state
or local
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law, including, but not limited to, as
applicable, an insurance company
general account. Each Security Owner
of a Class B Security, by its
acceptance thereof, will be deemed to
have represented and warranted that it
is not an employee benefit plan
investor subject to Title I of ERISA
of Section 4975 of the Code or any
substantially similar federal, state
or local law. See "Employee Benefit
Plan Considerations."
Offered Security Ratings................ It is a condition to the issuance of the
Class A Securities that they be rated
"AAA" or its equivalent by at least
one nationally recognized rating
agency.
It is a condition to the issuance of the
Class B Securities that they be rated
at least "A" or its equivalent by at
least one nationally recognized rating
agency.
Listing................................. Application has been made to list the
Offered Securities on the Luxembourg
Stock Exchange.
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RISK FACTORS
LIMITED LIQUIDITY
There is currently no market for the Offered Securities. Each Underwriter
expects to make a market in each Class of the Offered Securities purchased by it
from the Transferor, but is not obligated to do so. There is no assurance that a
secondary market will develop or, if it does develop, that it will provide
Security Owners with liquidity of investment or that it will continue until the
Offered Securities are paid in full.
LIMITED HISTORY FOR ORIGINATION OF REVOLVING LOANS
FNB began originating revolving credit card loans in November 1996 and began
originating closed-end loans in January 1997 and thus has limited underwriting
experience. While Fingerhut originated closed-end installment sale contracts for
more than 25 years, Fingerhut has not originated a significant amount of
revolving credit card loans. As a result, FNB and its affiliates have very
limited experience with respect to revolving credit card loans. However, the
underwriting criteria being utilized by FNB in originating these Receivables are
derived from the underwriting criteria utilized by Fingerhut prior to January
1997 in originating closed-end installment sale contracts. There can be no
assurances that the performance of the revolving credit card loans originated by
FNB will be comparable to the historical performance of the closed-end
installment sale contracts originated by Fingerhut and FNB. See "Fingerhut
Corporation's and Fingerhut National Bank's Businesses--Credit Management."
NON-RECOURSE TO TRANSFEROR, FCI, FNB, FINGERHUT OR AFFILIATES THEREOF
No Securityholder will have recourse for distributions on its Securities to
any assets of any of the Transferor (other than the Exchangeable Transferor
Security, to the extent described herein), FCI, FNB, Fingerhut or any affiliates
thereof. Consequently, Securityholders must rely solely upon payments on the
Receivables for distributions of principal of and interest on the Securities.
Furthermore, under the Pooling and Servicing Agreement, the Securityholders have
an interest in the Receivables and Collections only to the extent of the
Securityholders' Interest and, to the limited extent described herein, the
Transferor Interest. Should the Offered Securities not be paid in full on a
timely basis, Securityholders may not look to any assets of any of the
Transferor (other than the Exchangeable Transferor Security, to the extent
described herein), FCI, FNB, Fingerhut or any affiliates thereof to satisfy
their claims.
TRANSFERS OF THE RECEIVABLES; INSOLVENCY RISK CONSIDERATIONS
Under the Bank Purchase Agreement, FNB has represented and warranted to FCI,
and, under the applicable Purchase Agreement, FCI and Fingerhut have represented
and warranted to the Transferor, that the transfer of Receivables to FCI or the
Transferor, is a valid sale and assignment. In addition, FNB, FCI, Fingerhut and
the Transferor have agreed that if, notwithstanding their intent, the respective
sales of Receivables to FCI and the Transferor, are not treated as sales, the
Bank Purchase Agreement or the Purchase Agreement, as applicable, will be deemed
to create a security interest in the Receivables. In a receivership or
conservatorship of FNB or in a bankruptcy proceeding involving FCI or Fingerhut,
if the conveyance of the Receivables is not treated as a sale, but is deemed to
create a security interest in the Receivables, FCI's, or the Transferor's
interest in the Receivables may be subject to tax or other governmental liens
relating to FNB, FCI or Fingerhut, as applicable, arising before the subject
Receivables came into existence and to certain administrative expenses of the
receivership, conservatorship or bankruptcy proceeding. FNB, FCI and Fingerhut
have taken or will take certain actions required to perfect the interest of FCI
or the Transferor, as applicable, in the Receivables. If a bankruptcy trustee
for FCI or Fingerhut, FCI or Fingerhut as debtor-in-possession, or a creditor of
FCI or Fingerhut were to take the view that FCI or Fingerhut and the Transferor
should be substantively consolidated or that the transfer of the Receivables
from FCI to the Transferor, or from Fingerhut to the Transferor, respectively,
should be
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recharacterized as a pledge of such Receivables, then delays in payments on the
Offered Securities or (should the bankruptcy court rule in favor of any such
trustee, debtor-in-possession or creditor) reductions in such payments on such
Securities could result.
In addition, a conservator or receiver would have the power under the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
to repudiate contracts of, and to request a stay of up to 90 days of any
judicial action or proceeding involving, FNB. However, notwithstanding the
insolvency of, or the appointment of a receiver or conservator for, FNB, subject
to certain qualifications, a valid perfected security interest of FCI in the
Receivables should be enforceable (to the extent of FCI's "actual direct
compensatory damages" (as described below)) and payments to FCI with respect to
the Receivables (up to the amount of such damages) should not be subject to an
automatic stay of payment or to recovery by such a conservator or receiver. If,
however, the conservator or receiver were to assert that the security interest
was unperfected or unenforceable, or were to require FCI to establish its right
to those payments by submitting to and completing the administrative claims
procedure established under FIRREA, or the conservator or receiver were to
request a stay of proceedings with respect to FNB as provided under FIRREA,
delays in payments to the Trust and on the Securities and possible reductions in
the amount of those payments could occur. In the event of a repudiation of
obligations by a conservator or receiver, FIRREA provides that a claim for the
repudiated obligation is limited to "actual direct compensatory damages"
determined as of the date of the appointment of the conservator or receiver
(which in most cases are expected to include the outstanding principal on the
Securities plus interest accrued thereon to the date of payment). The FDIC has
not adopted a formal policy statement on payment of principal and interest on
collateralized borrowings of banks that are repudiated. On April 10, 1990, the
Resolution Trust Corporation ("RTC"), formerly a sister agency of the FDIC,
adopted a statement of policy (the "RTC Policy Statement") with respect to the
payment of interest on collateralized borrowings. The RTC Policy Statement
states that interest on such borrowings will be payable at the contract rate up
to the date of the redemption or payment by the conservator, receiver, or the
trustee of an amount equal to the principal owed plus the contract rate of
interest up to the date of such payment or redemption, plus any expenses of
liquidation if provided for in the contract, to the extent secured by the
collateral. In one case involving the repudiation by the RTC of certain secured
zero-coupon bonds issued by a savings association, a United States federal
district court held that "actual direct compensatory damages" in the case of a
marketable security meant the value of the repudiated bonds as of the date of
repudiation. If that court's view were applied to determine FCI's "actual direct
compensatory damages" in the event a conservator or receiver of FNB repudiated
the Bank Purchase Agreement, the amount paid to Securityholders could, depending
upon circumstances existing on the date of the repudiation, be less than the
principal of the Securities and the interest accrued thereon to the date of
payment. See "Certain Legal Aspects of the Receivables-- Certain Matters
Relating to Bankruptcy or Receivership."
Although the Pooling and Servicing Agreement provides that the Transferor
will transfer all of its right, title, and interest in and to the Receivables to
the Trust, a court could treat such transactions as an assignment of collateral
as security for the benefit of holders of securities issued by the Trust. It is
possible that the risk of such treatment may be increased by the retention by
the Transferor of the Exchangeable Transferor Security, the Class D Securities,
each class of the Previously Issued Series, a class of the Series 1998-1
Securities and any other class of Securities that may be issued and retained by
the Transferor. The Transferor represents and warrants in the Pooling and
Servicing Agreement that the transfer of the Receivables to the Trust is either
a valid transfer and assignment of the Receivables to the Trust or the grant to
the Trust of a security interest in the Receivables. The Transferor has taken
and will take certain actions required to perfect the Trust's interest in the
Receivables and warrants that if the transfer to the Trust is deemed to be a
grant to the Trust of a security interest in the Receivables, the Trustee will
have a first priority perfected security interest therein, subject only to
Permitted Liens. If the transfer of the Receivables to the Trust is deemed to
create a security interest therein under the UCC, a tax or governmental lien on
property of the Transferor arising before the Receivables came into existence
may have priority over the Trust's interest in such Receivables. In the event of
the insolvency of the Transferor,
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certain administrative expenses may also have priority over the Trust's interest
in such Receivables. See "Certain Legal Aspects of the Receivables--Transfer of
Receivables."
To the extent that the Transferor is deemed to have granted a security
interest in the Receivables to the Trust and such security interest was validly
perfected before any insolvency of the Transferor and was not granted or taken
in contemplation of insolvency or with the intent to hinder, delay, or defraud
the Transferor or its creditors, such security interest should not be subject to
avoidance in the event of insolvency or receivership of the Transferor, and
payments to the Trust with respect to the Receivables should not be subject to
recovery by a bankruptcy trustee or receiver of the Transferor. If, however, a
bankruptcy trustee or receiver were to assert a contrary position, delays in
payments on the Offered Securities and possible reductions in the amount of
those payments could occur.
In OCTAGON GAS SYSTEMS, INC. V. RIMMER, 995 F.2d 948 (10th Cir. 1993), CERT.
DENIED, 114 S. Ct. 554 (1993), the United States Court of Appeals for the 10th
Circuit suggested that even where a transfer of accounts from a seller to a
buyer constitutes a "true sale," the accounts would nevertheless constitute
property of the seller's estate in a bankruptcy of the seller. If Fingerhut, FCI
or the Transferor were to become subject to a bankruptcy proceeding or if FNB
were to become subject to a receivership and a court were to follow the 10th
Circuit's reasoning, Securityholders might experience delays in payment or
possibly losses in their investment in the Securities. Counsel to the Transferor
has advised the Transferor that the facts of OCTAGON are distinguishable from
those in the sale transactions between FNB and FCI, FCI and the Transferor,
Fingerhut and the Transferor and the Transferor and the Trust and the reasoning
of the 10th Circuit appears to be inconsistent with established precedent and
the UCC. See "Certain Legal Aspects of the Receivables--Certain Matters Relating
to Bankruptcy or Receivership."
If a receiver or conservator were appointed for the Servicer, and no
Servicer Default other than such bankruptcy or receivership or insolvency of the
Servicer exists, the bankruptcy trustee or receiver may have the power to
prevent either the Trustee or the majority of the securityholders of all Series
from effecting a transfer of servicing to a successor Servicer. If a bankruptcy
trustee were appointed for the Transferor, causing a Pay Out Event with respect
to all Series then outstanding, new Principal Receivables would not be
transferred to the Trust pursuant to the Pooling and Servicing Agreement and the
Trustee would sell the portion of the Receivables allocable in accordance with
the Pooling and Servicing Agreement to each Series (unless holders of more than
50% of the principal amount of each class of each Series, excluding any class or
portion thereof held by the Transferor, and the holders of any Supplemental
Securities or any other interest in the Exchangeable Transferor Securities other
than the Transferor instruct otherwise), thereby causing early termination of
the Trust and a loss to the Securityholders if the net proceeds allocable to the
Securityholders from such sale, if any, were insufficient to pay the
Securityholders in full. The net proceeds of any such sale of the portion of the
Receivables allocated in accordance with the Pooling and Servicing Agreement to
Series 1998-2 will first be used to pay amounts due to the Class A
Securityholders, will thereafter be used to pay amounts due to the Class B
Securityholders, will thereafter be used to pay amounts due to the CTO
Securityholders, and will thereafter be used to pay amounts due to the Class D
Securityholders. If the only Pay Out Event to occur is either the insolvency of
the Transferor or the appointment of a bankruptcy trustee for the Transferor,
the bankruptcy trustee may have the power to continue to require the Transferor
to transfer new Receivables to the Trust and to prevent the early sale,
liquidation, or disposition of the Receivables and the commencement of the Early
Amortization Period. In addition, a bankruptcy trustee for the Transferor may
have the power to cause early payment of the Securities. In the event of an
early payment of principal on the Securities, Securityholders may realize a
lower yield on their reinvestment of such early payment and may be required to
incur costs associated with reinvesting such funds. See "Certain Legal Aspects
of the Receivables--Certain Matters Relating to Bankruptcy or Receivership."
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CONSUMER AND DEBTOR PROTECTION LAWS
The Accounts and the Receivables are subject to numerous federal and state
consumer protection laws that impose requirements related to offering and
extending credit. Any failure by the Servicer to comply with such legal
requirements also could adversely affect the Servicer's ability to collect the
full amount of the Receivables. The United States Congress and the states may
enact laws and amendments to existing laws to further regulate consumer credit
or to reduce finance charges or other fees or charges applicable to credit card
and other consumer revolving loan accounts. Such laws, as well as any new laws
or rulings which may be adopted, may adversely affect the Servicer's ability to
collect on the Receivables or maintain previous levels of collections.
Receivables originated by Fingerhut were generated under the Minnesota
"time-price" doctrine. Under this doctrine, the difference between the time
price and cash price for the goods sold is not treated as interest subject to
regulation under Minnesota's usury laws. In certain states, these Receivables
are subject to regulations that limit maximum finance charges and require
refunding of finance charges to customers under certain circumstances. Fingerhut
believes that the time payment pricing and credit practices applicable to these
Receivables are in compliance with applicable state requirements. On August 14,
1997, Fingerhut was served with a summons and class action complaint commenced
in Minnesota District Court, Fourth Judicial District, on behalf of named
plaintiffs in ten states. The alleged class consists of "Fingerhut customers
whose contracts are declared by Fingerhut to be governed by Minnesota law." The
complaint alleges violations of the usury law, deceptive trade practices and
consumer fraud based on Fingerhut's use of the "time price" doctrine in its
credit sales. Fingerhut has filed a motion for summary judgment. There can be no
assurance that the outcome of such lawsuit will not be adverse to Fingerhut. The
plaintiffs' claims are substantially identical to the claims asserted in an
earlier case brought against Fingerhut in the same court. The court granted
summary judgment in favor of Fingerhut in that case in March 1997. The
plaintiffs in the earlier case did not appeal the summary judgment, and their
counsel has refiled their claims on behalf of new members of the purported
plaintiff class.
Any change of law, including any changes to the "time-price" doctrine with
retroactive application, negatively affecting the Receivables or FNB's credit
practices could adversely affect the Servicer's ability to collect the full
amount of the Receivables.
Although the Transferor will make certain representations and warranties
relating to the validity and enforceability of the Receivables, the Trustee will
not make any examination of the Receivables or the records relating thereto for
the purpose of establishing the presence or absence of defects or compliance
with such representations and warranties, or for any other purpose. In the event
of a breach of certain representations and warranties, the Transferor may be
obligated to accept the reassignment and transfer of the entire Trust portfolio.
See "Description of the Offered Securities--Representations and Warranties" and
"Certain Legal Aspects of the Receivables--Consumer Protection Laws."
Application of federal and state bankruptcy and debtor relief laws to the
obligations represented by the Receivables could adversely affect the interests
of the Securityholders in the Receivables. See "Description of the Offered
Securities--Defaulted Receivables; Dilution."
PAYMENTS AND MATURITY
The Receivables may be paid at any time and there is no assurance that there
will be additional Receivables created or that any particular pattern of
repayments will occur. A significant decline in the amount of Receivables
generated could result in the occurrence of a Pay Out Event and the commencement
of the Early Amortization Period if, as a result, the Transferor Interest were
reduced below the Minimum Transferor Interest or amounts in the Excess Funding
Account result in significant Negative Carry Amounts. See "Maturity
Considerations" and "Description of the Offered Securities--Pay Out Events" for
a discussion of other Pay Out Events. If a Pay Out Event occurs, the Early
Amortization Period will commence and the average life and maturity of the
Offered Securities may be significantly reduced.
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There can be no assurance in that event that the holders of the Offered
Securities would be able to reinvest any accelerated distributions on account of
such Offered Securities in other suitable investments having a comparable yield.
EFFECT OF SUBORDINATION OF CLASS B SECURITIES; PRINCIPAL PAYMENTS
The Class B Securities will be subordinated in right of payment of principal
to the payment of principal and interest on the Class A Securities. Payments of
principal in respect of the Class B Securities will not commence until after the
final principal payment with respect to the Class A Securities has been made and
the Class A Invested Amount has been paid in full. Moreover, the Class B
Invested Amount is subject to reduction on any Distribution Date if collections
of Principal Receivables allocable to the Class B Securities are redirected to
cover the Class A Required Amount or if the aggregate Series Default Amount and
unpaid Adjustment Payments, if any, for each business day in the preceding
Monthly Period exceeds the aggregate Available Series 1998-2 Finance Charge
Collections applied to the payment thereof and is not funded from Excess Finance
Charge Collections, Transferor Finance Charge Collections, CTO Redirected
Principal Collections or Class D Redirected Principal Collections and the CTO
Invested Amount and the Class D Invested Amount have been reduced to zero. If
the Class B Invested Amount suffers such a reduction, Finance Charge Collections
applicable to the Series 1998-2 Securityholders' Interest in future Monthly
Periods will be reduced. Moreover, to the extent the amount of such reduction in
the Class B Invested Amount is not reimbursed, the amount of principal
distributable to the Class B Securityholders will be reduced. See "Description
of the Offered Securities--Allocation Percentages," "--Redirected Principal
Collections," "--Series Charge-Offs" and "--Subordination of the Class B
Securities."
EFFECT OF ADDITION OF TRUST ASSETS ON CREDIT QUALITY
The Transferor automatically designates all Receivables that are Eligible
Receivables to be conveyed to the Trust. Such additional Receivables may include
receivables originated using criteria different from those which were applied to
the Receivables existing on the Closing Date related to the Trust or to
previously-designated Receivables, because such accounts were originated at a
different date. Consequently, there can be no assurance that Receivables
designated in the future will be of the same credit quality as
previously-designated Receivables. In addition, subject to the satisfaction of
certain conditions described herein, including satisfaction of the Rating Agency
Condition, such additional Receivables may have been originated in connection
with the sale of merchandise or services by an entity other than Fingerhut and
may consist of receivables that have different terms or characteristics than the
Receivables previously included in the Trust, including lower periodic rate
finance charges and other fees and charges, or different payment rates and
higher loss or delinquency experience, which may have the effect of reducing the
average yield on the portfolio of accounts included in the Trust. See
"Description of the Offered Securities--Addition of Trust Assets."
NEGATIVE CARRY
Any amounts deposited in the Excess Funding Account subsequent to the
Closing Date will result in a reduction of Portfolio Yield to the extent that
the Cash Equivalents in which such amounts are invested earn a rate which is
less than the effective yield from Finance Charge Receivables.
BASIS RISK
Finance Charge Collections with respect to the Receivables include
collections of amounts billed with respect to finance charges and fees and
principal amounts discounted at designated rates. The revolving credit card
loans in the Trust generally will have finance charges set at a variable rate
above a designated prime rate or other designated index. It is anticipated that
the revolving credit card loans will represent an increasing portion of the
assets of the Trust. Closed End Receivables generated in connection with sales
by
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Fingerhut are discounted at a fixed rate of 25% and Revolving Receivables
generated in connection with sales by Fingerhut are discounted at a fixed rate
of 9%. If there is a decline in the designated prime rate or other designated
index applicable to the revolving credit card loans in the Trust or a decline in
the payment rate, the amount of Finance Charge Collections on the Receivables
may be reduced, whereas amounts payable as interest on the Class A Securities
and Class B Securities and other amounts required to be funded out of
collections of Finance Charge Receivables with respect to the Securities would
not be similarly reduced.
DEPENDENCE ON FINGERHUT
All new Receivables currently arise from the extension of credit by FNB in
connection with the sale of merchandise and financial service products by
Fingerhut. The Trust is dependent upon Fingerhut for the retail sales from which
FNB generates Receivables. The direct marketing industry, in general, is highly
competitive. Generally, Fingerhut competes not only with other direct marketers
but with department stores and numerous other types of retail outlets, including
variety stores and discount stores. None of the transaction documents prohibit
Fingerhut from selling all or any portion of its business or assets.
Accordingly, there can be no assurance that Fingerhut will continue to generate
Receivables at the same rate as in prior years.
SOCIAL, TECHNOLOGICAL AND ECONOMIC FACTORS
Changes in purchase and payment patterns by Obligors may result from a
variety of social, technological, and economic factors. Social factors include
potential changes in consumers' attitudes toward financing purchases with debt.
Technological factors include new methods of payment. Economic factors include
the rate of inflation, unemployment levels and relative interest rates. Obligors
generally have billing addresses in all 50 states, the District of Columbia and
other United States territories and possessions. There is no basis, however, to
predict whether, or to what extent, social, technological, or economic factors
will affect future use of credit or repayment patterns.
BOOK-ENTRY REGISTRATION
Each Class of the Offered Securities initially will be represented by one or
more securities registered in the name of Cede & Co., the nominee for DTC, and
will not be registered in the names of the Security Owners or their nominees.
Unless and until Definitive Securities are issued, Security Owners will not be
recognized by the Trustee as Securityholders, as that term is used in the
Pooling and Servicing Agreement. Hence, until such time, Security Owners will
only be able to receive payments from, and exercise the rights of
Securityholders indirectly through DTC and its participating organizations and,
unless a Security Owner requests a copy of any such report from the Trustee,
will receive reports and other information provided for under the Pooling and
Servicing Agreement only if, when and to the extent provided to Security Owners
by DTC and its participating organizations. In addition, the ability of Security
Owners to pledge Securities to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such Securities, may be
limited due to the lack of physical securities for such Securities. See
"Description of the Offered Securities--Book-Entry Registration" and
"--Definitive Securities."
ABILITY OF FNB TO CHANGE PAYMENT TERMS
Pursuant to the Pooling and Servicing Agreement, the Transferor will not be
transferring to the Trust any Accounts but only the Receivables arising in the
Accounts. As owner of the Accounts, FNB will have the right to determine the
annual percentage rates, if any, and the fees which will be applicable from time
to time to the Receivables, to alter the payment terms of the Receivables and to
change various other terms with respect to the Receivables. A decrease in the
annual percentage rates or a reduction in fees would decrease the effective
yield on the Receivables and could result in the occurrence of a Pay Out Event
with respect to the Securities. An alteration of payment terms may result in
fewer payments on
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Receivables being made in any month. Under the Bank Purchase Agreement, FNB
agrees that, except as it deems such action necessary to maintain its credit
card business on a competitive basis or as required by law, it will not reduce
the annual percentage rates of the Periodic Finance Charges assessed on the
Receivables or other fees charged on the Accounts if, as a result of any such
reduction, a pay out event (or other early termination event) would occur under
the Pooling and Servicing Agreement or any Supplement. Subject to compliance
with applicable law and the preceding restriction, FNB may change the terms and
provisions of the Contracts establishing the Accounts or the Credit and
Collection Policy if (i) it is FNB's reasonable belief that such change would
not materially impair the collectibility of any Receivable or cause a Pay Out
Event (or other early termination event) to occur under the Pooling and
Servicing Agreement or any Supplement either immediately or with the passage of
time and (ii) such change (A) if FNB owns a comparable segment of receivables,
is made applicable to the comparable segment of the receivables owned by FNB
which have characteristics the same as, or substantially similar to, the
Receivables that are the subject of such change and (B) if FNB does not own a
comparable segment of receivables, will not be made with the intent to
materially benefit FNB over the purchaser of the Receivables or to materially
adversely affect such purchaser, except as otherwise restricted by an
endorsement, sponsorship or other agreement between FNB and an unrelated third
party or by the terms of the Contracts.
The Servicer will have the right to generate new Receivables with payment
terms which are generally longer than the current payment terms on the
Receivables. Such a lengthening of the payment period could result in a
reduction of the monthly payment rate and consequently a reduction in the
Portfolio Yield unless the Discount Factor is increased accordingly, with
respect thereto for any Monthly Period.
CONTROL
Subject to certain exceptions, the investor securityholders of each Series
may take certain actions, or direct certain actions to be taken, under the
Pooling and Servicing Agreement or the related Supplement. In determining
whether the required percentage of Securityholders have given their approval or
consent, except as otherwise specified, the Class A Securityholders, the Class B
Securityholders and the CTO Securityholders will be treated as a single Series.
Accordingly, while the Class A Securities are outstanding, the Class A
Securityholders will have the power to determine whether any such action is
taken without regard to the position or interests of the Class B Securityholders
or the CTO Securityholders relating to such action. However, under certain
circumstances the consent or approval of a specified percentage of the aggregate
invested amount of all Series outstanding or of the invested amount of each
class of each Series may be required to direct certain actions, including
requiring the appointment of a successor Servicer following a Servicer Default,
amending the Pooling and Servicing Agreement in certain circumstances and
directing a repurchase of all outstanding Series upon the breach of certain
representations and warranties by the Transferor.
MASTER TRUST CONSIDERATIONS
In addition to the Securities, the Trust, as a master trust, has issued the
Previously Issued Series, will issue the Series 1998-1 Securities and a
Participation on the Closing Date and is expected to issue additional Series
from time to time. See "Annex I: Other Series." While the terms of any
Participation or the Principal Terms of any Series will be specified in a
Participation Supplement or a Supplement, as applicable, the provisions of such
Participation Supplement or a Supplement and, therefore, the terms of any
Participation or additional Series, will not be subject to the prior review or
consent of holders of the securities of any previously issued Series. Such
Principal Terms may include methods for determining applicable investor
percentages and allocating collections, provisions creating security or
Enhancements, different classes of securities (including subordinated classes of
securities), provisions subordinating the new Series to another Series (if the
Supplement relating to such Series so permits) or another Series to such Series
(if the Supplement for such other Series so permits), and any other amendment or
supplement
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to the Pooling and Servicing Agreement which is made applicable only to such
Series. See "Description of the Offered Securities--Exchanges" and
"--Participations." In addition, the provisions of any Supplement may give the
holders of the securities issued pursuant thereto consent, approval, or other
rights that could result in such holders having the power to cause the
Transferor, the Servicer, or the Trustee to take or refrain from taking certain
actions, including, without limitation, actions with respect to the exercise of
certain rights and remedies under the Pooling and Servicing Agreement, without
regard to the position or
interest of the securityholders of any other Series. Similar rights may also be
given to the provider of any Enhancement for any Series. It is a condition
precedent to the issuance of any Participation or any additional Series that
each Rating Agency that has rated any outstanding Series deliver written
confirmation to the Trustee that such issuance will not result in such Rating
Agency reducing or withdrawing its rating on any outstanding Series. There can
be no assurance, however, that the Principal Terms of any other Series,
including any Series issued from time to time hereafter, or of any Participation
might not have an adverse impact on the timing and amount of payments received
by a Securityholder or the value of Securities even if there is no change in the
rating of any outstanding Series. See "Description of the Offered
Securities--Exchanges" and "--Participations."
SECURITY RATING
It is a condition to the issuance of the Class A Securities that they be
rated "AAA" or its equivalent by at least one nationally recognized rating
agency. It is a condition to the issuance of the Class B Securities that they be
rated "A" or its equivalent by at least one nationally recognized rating agency.
The ratings assigned to the Offered Securities by a Rating Agency will reflect
such Rating Agency's assessment of the likelihood that Securityholders of such
Class will receive the payments of interest and principal required to be made
under the Pooling and Servicing Agreement and the applicable Supplement, in the
case of principal on or prior to the Termination Date, and in the case of
interest, as required under the Pooling and Servicing Agreement. The ratings
will be based primarily on an assessment of the Receivables in the Trust
(including the eligibility criteria for the transfer of Receivables to the
Trust), of the amounts held in any trust account for the benefit of the Offered
Securities (including in the Excess Funding Account, if any) and the
subordination of the Class B Securities, Collateralized Trust Obligations and
the Class D Securities for the benefit of the Class A Securities and the
subordination of the Collateralized Trust Obligations and the Class D Securities
for the benefit of the Class B Securities. However, any such rating will not
address the possibility of the occurrence of a Pay Out Event with respect to the
Offered Securities, the possibility of the imposition of United States
withholding tax with respect to non-U.S. Securityholders or the likelihood that
the principal of, or interest on, the Offered Securities will be paid by the
Class A Expected Final Payment Date or the Class B Expected Final Payment Date,
as applicable. It is a condition to the issuance of the Collateralized Trust
Obligations that they be rated "BBB" or its equivalent by at least one
nationally recognized rating agency. The Class D Securities will not be rated.
The ratings are not a recommendation to purchase, hold, or sell the Class A
Securities or the Class B Securities, inasmuch as such ratings do not comment as
to the market price or suitability for a particular investor. There can be no
assurance that the ratings will remain in effect for any given period of time or
that any rating will not be lowered or withdrawn by any Rating Agency if in its
judgment circumstances so warrant.
The Transferor will request a rating of the Offered Securities by at least
one nationally recognized Rating Agency. There can be no assurance as to whether
any rating agency not requested to rate the Offered Securities will nonetheless
issue a rating with respect to any Class of the Offered Securities, and, if so,
what such rating would be. A rating assigned to any Class of the Offered
Securities by a rating agency that has not been requested by the Transferor to
do so may be lower than the ratings assigned by the Rating Agencies pursuant to
the Transferor's request.
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DEFEASANCE
The Securities are subject to Defeasance in certain circumstances. It is not
clear under the existing authorities whether Defeasance would, for federal
income tax purposes, result in a deemed taxable sale or exchange of the
Securities in exchange for the amounts deposited in the Defeasance Funding
Account and the Defeasance Reserve Account as a result of the Defeasance.
However, if such a sale or exchange were deemed to occur, because of the short
time period until the Class A Expected Final Payment Date or Class B Expected
Final Payment Date, as applicable, the amount required to be deposited and the
nature of the assets in which such amount may be invested, such a result would
not be expected to have a material adverse effect on Securityholders for federal
income tax purposes, notwithstanding that, if such a sale or exchange were
deemed to occur, each Securityholder would thereafter be deemed to own its pro
rata share of the assets in which such amount is invested, and would be required
to report its taxable income on such basis.
EFFECT OF DISCOUNT FACTOR
Pursuant to the Pooling and Servicing Agreement, the Transferor has elected
to discount the Receivables by initially designating 25% of the amount of Closed
End Receivables generated in connection with sales by Fingerhut and 9% of the
amount of Revolving Receivables generated in connection with sales by Fingerhut
that otherwise would be treated as Principal Receivables to be treated as
Finance Charge Receivables. The Transferor may, without notice or consent of the
Securityholders, from time to time, increase, reduce or eliminate such
percentages. In addition, the Discount Factor may be different for other types
of Receivables. An increase in the percentage of Principal Receivables to be
treated as Finance Charge Receivables will increase the percentage of
collections on the Receivables that are treated as collections of Finance Charge
Receivables, which will increase the Portfolio Yield to a level higher than it
would be in the absence of such designation. As a result, such designation would
decrease the likelihood of the occurrence of a Pay Out Event based upon a
reduction of the average Portfolio Yield for any three-month period to a rate
below the average Base Rate for such period. However, such designation would
also reduce the aggregate amount of Principal Receivables, which could increase
the likelihood of the occurrence of a Pay Out Event if the Aggregate Principal
Receivables fall below the Minimum Aggregate Principal Receivables. A reduction
in the Discount Factor could reduce the Portfolio Yield and may increase the
possibility of a Pay Out Event arising, if the average Portfolio Yield for any
three-month period is less than the Base Rate for such period. The ability of
the Transferor to adjust the Discount Factor to change the amount of Receivables
that otherwise would be treated as Principal Receivables to be treated as
Finance Charge Receivables is limited in certain circumstances. The Transferor
may, following written notice to the Rating Agencies, increase the Discount
Factor by up to two percentage points over the amounts set forth herein or other
amounts approved by the Rating Agencies. In addition, the Transferor may make
other adjustments to the Discount Factor if such change would not cause a pay
out event to occur with respect to any Series and the Rating Agency Condition
shall have been satisfied with respect to such change.
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THE TRUST
The Trust was formed, in accordance with the laws of the State of Delaware,
pursuant to the Pooling and Servicing Agreement. The Trust was formed for the
transactions described herein and similar transactions, as contemplated by the
Pooling and Servicing Agreement, and prior to formation had no assets or
obligations. The Trust has not engaged, and will not engage, in any business
activity, other than as described herein, but rather will only acquire and hold
the Receivables (and related assets), issue (or cause to be issued) the
Securities, the Exchangeable Transferor Security, and securities representing
other Series, and any Participation and engage in related activities (including,
with respect to any Series, entering into any Enhancement and Enhancement
agreement relating thereto) and make payments thereon. As a consequence, the
Trust is not expected to have any need for additional capital resources.
FINGERHUT CORPORATION'S AND FINGERHUT NATIONAL BANK'S BUSINESSES
Fingerhut Corporation ("Fingerhut"), one of the largest catalog marketers in
the United States, sells general merchandise and financial service products to
moderate income consumers. The median age of Fingerhut's customers is slightly
higher than the national average and families are a significant portion of its
customer base. FNB offers extended payment terms on all purchases and Fingerhut
makes substantially all of its sales on FNB's proprietary credit. Fingerhut has
used its extensive database and proprietary database segmentation software,
along with credit programs, to establish a strong position in this market.
Fingerhut's existing customers account for approximately 84% of Fingerhut's net
sales.
CREDIT PROGRAMS
Substantially all of Fingerhut's sales are made using proprietary credit
card loans made by FNB. Historically, Fingerhut financed its customers'
purchases through fixed-term fixed payment installment sales contracts. FNB
began testing private label revolving credit card programs for Fingerhut
customers in late 1996 and in January 1997, FNB began extending private label
credit for all credit purchases from Fingerhut. Although closed-end credit card
loans presently are the predominant form of credit extended to Fingerhut
customers, FNB is increasing its use of revolving credit for both existing
Fingerhut customers and prospective customers. In addition, FNB offers Fingerhut
customers the opportunity to refinance existing closed-end installment sale
contracts originated by Fingerhut and closed-end credit card loans originated by
FNB with new revolving credit card loans. In those cases where the refinanced
closed-end installment sale contracts originated by Fingerhut or closed-end
credit card loans originated by FNB include finance charges, the new revolving
credit card loan has a 0% finance charge and the related Receivable is treated
as a Closed End Receivable for purposes of calculating Discount Receivables. FNB
expects that eventually revolving credit card loans will be the only type of
credit it offers to Fingerhut customers. Although the billing mechanism used for
consumer revolving credit card accounts and the associated fees and charges will
differ from those used in closed-end credit card loans, Fingerhut's marketing
strategies, as well as FNB's credit risk underwriting and collections
strategies, will remain largely the same.
FNB generally does not require its customers to provide traditional credit
information in order to approve purchases on credit. Instead of using
traditional credit applications, FNB uses highly automated proprietary
techniques for evaluating the creditworthiness of new and existing customers and
for selecting those customers who will receive various categories of mailings.
The goal of the evaluation is not to achieve the lowest possible credit losses
but to balance credit losses and return rates with customer response, thereby
optimizing overall profitability. Consequently, FNB's planned credit losses
typically are higher than the private label credit card programs of other direct
mail and retail companies. Once a consumer places an order, FNB employs
proprietary techniques to determine the appropriate credit action. Customer
payments are continuously monitored to identify credit problems as early as
possible. See "--Credit Management" below.
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At the present time, only Receivables arising in accounts originated by FNB
generated in connection with the sale of merchandise, financial service products
or services from Fingerhut are included in the Trust. In the future, Receivables
generated by FNB or one of its affiliates in accounts originated other than in
connection with sales by Fingerhut may be included in the Trust, subject to
satisfaction of the Rating Agency Condition. See "Description of the Offered
Securities--Addition of Trust Assets."
FINGERHUT DATABASE
Fingerhut's target customers include people who have limited information at
the credit bureaus. To be successful in this niche, Fingerhut and FNB have
developed an extensive database (the "Fingerhut Database") and sophisticated
credit scoring models for determining the creditworthiness of Fingerhut's target
customers. Fingerhut believes its development and use of information-based
marketing concepts, the Fingerhut Database and proprietary data base
segmentation software afford it a competitive advantage within its market niche.
The Fingerhut Database contains information on over 30 million people,
approximately 8 million of whom have purchased products from Fingerhut within
the past 24 months, and contains up to 3,500 potential data items in a customer
record. These data items include names, addresses, behavioral characteristics,
general demographic information and information provided by the customer. FNB
uses this information, along with proprietary credit scoring models, to produce
proprietary credit scores for Fingerhut customers. The Fingerhut Database also
includes a "suppress" file, which contains information on more than 8 million
individuals about whom it has information relating to fraud and similar
indicators of unacceptably high risk. The Fingerhut Database is continually
updated as new information is obtained. Fingerhut uses the Fingerhut Database
for marketing and FNB uses the Fingerhut Database for extending credit.
PRODUCTS
Fingerhut offers a broad mix of brand name and private label consumer
products, including electronics, housewares, home textiles, apparel, furniture,
home accessories, jewelry, sporting goods and toys, tools, automotive, lawn and
garden, and financial service products. In 1997, Fingerhut offered approximately
17,000 different products. Fingerhut's sales mix by product category for 1997 is
shown in the following table:
FINGERHUT CORPORATION 1997 PRODUCT MIX
<TABLE>
<CAPTION>
PERCENT OF
GROSS RETAIL SALES
---------------------
<S> <C>
Electronics................................................................ 22%
Home Textiles.............................................................. 19
Housewares................................................................. 17
Furniture/Home Accessories................................................. 10
Jewelry.................................................................... 8
Leisure.................................................................... 8
Apparel.................................................................... 7
Tools/Automotive/Lawn & Garden............................................. 6
Other...................................................................... 3
---
Total...................................................................... 100%
---
---
</TABLE>
Fingerhut selects merchandise to be offered to its customers by evaluating
historical product and category demand and analyzing emerging merchandise trends
in conjunction with proprietary marketing information. Fingerhut is constantly
developing unique brand name and private label product groupings, such as
coordinated kitchen ensembles, coordinated bed and bath ensembles and tool sets,
targeted to
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appeal to its customers and to add value and/or style to its merchandise.
Historically, Fingerhut has offered its customers financial service products,
including credit and property insurance and extended service agreements.
Fingerhut and FNB expect to offer additional products and services, such as
credit card registration, membership clubs and fee-based services, to Fingerhut
customers with consumer revolving credit card accounts.
Fingerhut's general merchandise catalogs feature a wide array of products;
they are updated and published throughout the year, including a holiday big book
of approximately 500 pages. Specialty catalogs mailed to targeted portions of
Fingerhut's customer list include outdoor living, jewelry, electronics,
domestics/housewares, gifts, juvenile, home fitness, home improvement and
Spanish-language catalogs.
MARKETING
Marketing activities are divided into three primary programs: new customer
acquisition, a transitional program and existing customer programs. During 1997,
Fingerhut mailed approximately 472 million catalogs and other promotions to
existing and prospective customers.
Fingerhut's new customer acquisition program is designed to identify and
attract new customers on a cost-effective basis. The primary sources of new
customers are rented lists, catalog requests, customer referrals and other
direct marketing solicitations. Fingerhut mails catalogs and other multi-product
offerings to prospective customers and adds them to the Fingerhut Database as
responses are received. At the present time, solicitations to prospective new
customers generally have lower retail prices and a limited number of product
offerings. These programs are intended to target new customers who will become
long-term Fingerhut customers. New customers account for approximately 16% of
Fingerhut's net sales. The decisions on which prospective customers to solicit,
which products to offer and which media to use are based upon the projected
long-term profitability and internal rates of financial return of the program.
Fingerhut continuously tests various media, products, offerings and incentives
and analyzes the results in order to maximize the effectiveness of its customer
acquisition efforts.
After first-time buyers commence payments on their initial purchases, they
are placed into a transitional program. The time a person remains in a
transitional program and the number and type of products he or she is offered
depends on the buyer's purchasing and payment practices. A customer is placed on
Fingerhut's promotable customer list after demonstrating his or her
creditworthiness.
Fingerhut reaches its existing customers through extensive promotional
mailing efforts, primarily catalogs, and through telemarketing. In 1997,
Fingerhut mailed 139 different catalogs and other promotions to its established
customers. These mailings include general merchandise catalogs, specialty
catalogs, small and large multi-product mailers and single product promotions.
Fingerhut believes the key factors in maximizing the profitability of its
existing customer list are developing long-term repeat buyers and balancing
customer response with appropriate credit losses and merchandise return rates
for each segment of its customer list. Fingerhut promotes customer satisfaction
and loyalty by extending credit through its affiliate FNB, by using a number of
marketing devices (including targeted promotions, deferred payments, 30-day home
trials, a "satisfaction pledge" policy, free gifts, merchandise giveaways,
sweepstakes and personalized mailings) and by offering attractive brand name and
private label merchandise.
CREDIT MANAGEMENT
Although the mechanics differ, the credit management processes used by FNB
for closed-end and revolving credit are similar. In each case, FNB uses a two
step process of first establishing a credit score before mailing catalogs that
offer closed-end credit or before establishing credit lines for consumer
revolving credit card accounts and then reviewing credit risk before authorizing
individual closed-end credit card loans or individual transactions on consumer
revolving credit card accounts.
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CLOSED-END CREDIT. Potential new customers are solicited after undergoing
credit risk evaluation and scoring. When a prospect makes an order, FNB reviews
his or her credit risk a second time using order scoring models. The orders of
customers deemed too risky (due to deteriorating credit, order size, etc.) are
credit canceled. If FNB approves the loan, Fingerhut records the sale and ships
the merchandise. Closed-end credit card loans that relate to a customer's
initial purchase are not included in the Trust until the customer becomes a Back
End Customer. Subsequent purchases are allowed only after a customer has made at
least one payment on his or her first closed-end credit card loan and is not
delinquent on any closed-end credit card loan.
Solicitations to existing customers are based on the customers' credit score
at the time of mailing. These credit scores are based on the customers' internal
behavioral data as well as external credit bureau information. Each order placed
by a customer is reviewed systematically and credit is approved or declined
based on the total balance of all closed-end credit card loans, delinquency
status and other behavioral scoring data. A customer's ability to increase his
or her purchasing level is based on his or her ability to maintain closed-end
credit card loans in good standing over a period of time and a favorable overall
risk assessment. By reviewing a customer at the time of mailing and again at
time of response, the credit models allow FNB to maintain control over the
credit granting process.
REVOLVING CREDIT. The credit granting process is similar for consumer
revolving credit card accounts. Prospective customers are solicited after credit
risk evaluation and scoring. Each qualified applicant is issued an introductory
line of credit based on his or her credit profile. The amount of this initial
line generally will be consistent with the current limits on new customer
closed-end loans, but new customers may be given higher credit lines based on
the credit scoring models. After a new customer's first order, Fingerhut will
suspend subsequent solicitations only if the customer has no "open-to-buy"
(unused credit line) or does not meet specified credit criteria. FNB plans to
use credit bureau information when available for extending credit to prospective
customers. At the present time, FNB is only offering revolving credit to
prospective customers on a test basis. For an existing customer, an FNB consumer
revolving credit card account is established with a credit line based on the
individual's demonstrated creditworthiness with Fingerhut or FNB and on credit
bureau information. FNB authorizes each transaction on a consumer revolving
credit card account based on the customer's "open to buy" amount, delinquency
status and other behavioral scoring data. Orders from customers with a
delinquent balance (1+ days) will not be approved.
Although customers with consumer revolving credit card accounts have a
credit line with an "open to buy" amount, Fingerhut and FNB maintain control by
reviewing individual transactions and also by using mail select models that
determine which customers receive mailings. Thus, if a customer's credit risk
deteriorates, Fingerhut can limit his or her ability to purchase by suspending
mailings to that customer or mailing lower price point catalogs.
FNB's credit line assignments for existing customers are based on historical
credit performance data and are expected to be lower than most private label
revolving portfolios. Credit line assignments for new customers are based on a
proprietary bureau score, other bureau score, and other characteristics derived
from the Fingerhut Database. Decisions to increase credit lines are made based
on the customer's demonstrated ability to keep his or her account in good
standing over a period of time. From time to time, either at the customer's
request or at FNB's option, a customer's credit line may be reviewed for a
potential increase or decrease. Two events currently trigger an automatic credit
line adjustment review: the next scheduled review date or an account becoming 30
or more days delinquent. Scheduled review dates for new and existing customers
are within three months and 12 months, respectively. In the future, FNB
anticipates a change in credit bureau score of more than 10 points (credit
bureau scores are reviewed every 6 months) will also trigger an automatic
review. Adjustment criteria considered in line adjustments (up or down) includes
number of payments made, amount of payments made, credit bureau score and time
as a revolving credit customer. Credit line increases requested by customers are
evaluated as received. Currently, delinquency is the only factor used in
determining credit line decreases but FNB may add additional factors in the
future.
38
<PAGE>
All new orders are subject to FNB's existing internal fraud screens. Future
plans include use of a third party account management software which will allow
FNB to maximize operational functions in the areas of line management,
authorizations, overlimit treatment and collections.
FNB's credit management processes will evolve as it accumulates more data on
the performance of its consumer revolving credit card accounts.
YEAR 2000 COMPLIANCE
FNB and Fingerhut are heavily dependent upon complex computer systems for
all phases of their operations. Fingerhut supplies FNB with information systems
and acts as a subservicer of the Receivables. Since many of FNB's and
Fingerhut's currently installed computer systems and software products use only
the last two digits to identify a year in the date field (e.g., "98" for
"1998"), some software may fail to operate properly in the year 2000 if the
computer systems or software are not reprogrammed or replaced to comply with
such "Year 2000" requirements. Problems may also arise earlier than January 1,
2000 as dates in the next millennium are entered into non-Year 2000 compliant
programs.
In early 1996, Fingerhut started an aggressive conversion effort to identify
and correct the Year 2000 programming issues in a timely manner. By mid-1996,
the most critical mainframe processing system was converted to be Year 2000
compliant and Fingerhut initiated a large project to address all remaining
systems. This project consists of many sub-projects that will span the remainder
of 1998 and the first quarter of 1999. This project will use a combination of
internal and external resources. In late 1997, Fingerhut created a Year 2000
Project Office to oversee the project, address all related business issues and
facilitate communication with significant suppliers and service providers.
Fingerhut believes that many of its suppliers and customers also have Year
2000 programming issues which could affect Fingerhut. Fingerhut is working with
its significant suppliers and service providers to assure that failures in those
organizations will have minimal impact on Fingerhut. There can be no assurance
that Fingerhut's suppliers or service providers have, or will have, management
information systems that are Year 2000 compliant. Therefore, Fingerhut is
developing contingency plans with respect to its significant suppliers and
service providers.
Each of FNB and Fingerhut believes that it has allocated adequate resources
to achieve Year 2000 compliance in a timely manner; however, there can be no
assurance to that effect.
39
<PAGE>
THE RECEIVABLES
TYPES OF RECEIVABLES
On the Closing Date, the Receivables in the Trust will include existing
closed-end installment sale contracts originated by Fingerhut (no new closed-end
installment sale contracts are being originated) as well as existing receivables
related to closed-end credit card loans and revolving credit card loans
originated by FNB. On the Closing Date, only Receivables arising in accounts
originated in connection with the sale of merchandise, financial service
products or services from Fingerhut customers will be included in the Trust. In
the future, Receivables generated by FNB or one of its affiliates and arising in
accounts originated other than in connection with sales by Fingerhut may be
included in the Trust, subject to satisfaction of the Rating Agency Condition.
Customers typically order products after being promoted by Fingerhut by
completing a home trial order form that is pre-printed by Fingerhut or by
telephone. A small percentage of orders are generated by customers writing an
order on their own stationery. As described in more detail above, after
receiving an order for merchandise from a customer, and before shipping the
ordered merchandise to the consumer, FNB performs an evaluation of the
creditworthiness of the potential customer making the order. If FNB determines
that the customer is an acceptable credit risk, Fingerhut then sends the ordered
merchandise to the customer for a thirty day trial period. The Receivables arise
upon shipment of the ordered merchandise.
CLOSED-END CREDIT. At the end of the thirty day trial period a customer who
has closed-end credit has three options: (1) the customer can return the
merchandise to Fingerhut; (2) the customer may elect to pay a cash price for the
merchandise; or (3) the customer may elect to pay for the merchandise over a
defined period of time under the terms of the closed-end credit card loan. The
Receivables balance relating to closed-end credit card loans is based on the
full installment loan amount. Therefore, to the extent that an Obligor exercises
options (1) or (2) above, a portion of the related Receivable will be adjusted
to reflect the reduction in the amount owing.
An invoice and an explanation of the customer's options are included with
the merchandise when it is initially sent to the customer for the thirty day
trial period. For closed-end installment sale contracts originated by Fingerhut
the material explained that the customer had two options for remitting payment.
The customer could elect to pay the lower cash price by paying such amount in
full before the first payment due date, or the customer could elect to pay the
higher "time price" in installments. The cash price, the installment price, and
the time price differential were displayed in the material. As required by the
federal Truth-in-Lending Act and Regulation Z, 12 C.F.R. Part 226 (1989), the
differential between the cash price and the time price was referred to as the
finance charge and was disclosed as both a dollar amount and as an annual
percentage rate. For closed-end credit card loans originated by FNB, the
material explains that the buyer has two options for remitting payment. The
customer can elect either to pay the cash price by paying such amount in full
before the first payment due date, or to pay the installment credit card loan
price (which includes the cash price plus an interest charge) over a specified
period of time. As required by the federal Truth-in-Lending Act and Regulation
Z, 12 C.F.R. Part 226 (1989), the difference between the cash price and the
installment credit card loan price is referred to as the finance charge and is
disclosed as both a dollar amount and as an annual percentage rate.
REVOLVING CREDIT. At the end of the thirty day trial period, a customer
with a consumer revolving credit card account may return the product to
Fingerhut or keep it and make payments pursuant to the terms of the account.
These terms include minimum payments with the right to repay all or a portion of
the account balance and may include deferred payment options. Refinanced
closed-end installment sale contracts originated by Fingerhut and refinanced
closed-end credit card loans originated by FNB receive special treatment. In the
case where the refinanced amount includes a finance charge, the portion of the
Obligor's consumer revolving credit card account balance related to that
refinanced amount has a 0% interest rate and such receivables are treated as
Closed End Receivables for purposes of calculating
40
<PAGE>
Discount Receivables. Any payments received in excess of the minimum payment
will be applied first to any refinanced balance with a 0% interest rate.
At the present time, Revolving Receivables are a small portion of the
Receivables in the Trust. In the fourth quarter of 1996, FNB had approximately
1,000 Fingerhut customers with consumer revolving credit card accounts.
Approximately 84,500 Fingerhut customers were converted to revolving credit
during the second and third quarters of 1997 and approximately 14,500 more
Fingerhut customers were converted to revolving credit in the fourth quarter of
1997. FNB currently plans to convert approximately 1,300,000 Back End Customers
to revolving credit in 1998 and another 1,500,000 Back End Customers to
revolving credit in 1999. At the present, all new Fingerhut customers generally
are being granted closed-end credit card loans, but FNB is offering revolving
credit on a test basis to prospective customers. By the end of 1998, FNB expects
to originate all new customer accounts under consumer revolving credit card
accounts.
The following tables summarize the Receivables in consumer revolving credit
card accounts by various criteria as of February 27, 1998. These consumer
revolving credit card accounts include a small amount (less than 1%) of
Receivables in accounts that are not Eligible Accounts because the Obligors are
not Back End Customers. Because the future composition of the consumer revolving
credit card accounts included in the Trust may change over time, these tables
are not necessarily indicative of the composition of the consumer revolving
credit card accounts included in the Trust at any subsequent time. The
Transferor will continuously add Eligible Receivables to the Trust, in
compliance with provisions of the Pooling and Servicing Agreement.
COMPOSITION BY CREDIT LIMIT
REVOLVING ACCOUNTS
AS OF FEBRUARY 27, 1998
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PERCENTAGE OF
NUMBER OF RECEIVABLES TOTAL RECEIVABLES
CREDIT LIMIT RANGE NUMBER OF ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ---------------------------------------- ------------------ ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
$0.00-250.00............................ 10,093 6.23% $ 414,484 1.04%
$250.01-500.00.......................... 29,327 18.09 2,375,728 5.94
$500.01-750.00.......................... 5,366 3.31 1,216,001 3.04
$750.01-1,000.00........................ 56,037 34.57 10,843,744 27.11
$1,000.01-1,500.00...................... 42,718 26.35 10,368,079 25.92
$1,500.01-2,000.00...................... 9,926 6.12 5,419,375 13.55
$2,000.01 and greater................... 8,601 5.31 9,361,185 23.40
Not Available(1)........................ 25 0.02 52 0.00
------- ------ ------------- ------
Total................................. 162,093 100.00% $ 39,998,648 100.00%
------- ------ ------------- ------
------- ------ ------------- ------
</TABLE>
- ------------------------
(1) As of February 27, 1998, there were 25 new accounts whose credit limits had
not yet been posted to the receivables management system.
41
<PAGE>
COMPOSITION BY ACCOUNT BALANCE
REVOLVING ACCOUNTS
AS OF FEBRUARY 27, 1998
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PERCENTAGE OF
NUMBER OF RECEIVABLES TOTAL RECEIVABLES
ACCOUNT BALANCE RANGE NUMBER OF ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------------------------- ------------------ ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Credit Balance......................... 1,808 1.12% $ (46,916) (0.12)%
No Balance............................. 72,892 44.97 0 0.00
$0.01-250.00........................... 41,731 25.75 4,704,230 11.76
$250.01-500.00......................... 18,739 11.56 6,777,598 16.94
$500.01-750.00......................... 10,341 6.38 6,374,158 15.94
$750.01-1,000.00....................... 6,342 3.91 5,474,706 13.69
$1,000.01-2,000.00..................... 8,148 5.03 11,076,605 27.69
$2,000.01 and greater.................. 2,092 1.29 5,638,267 14.10
------- ------ -------------- ------
Total.................................. 162,093 100.00% $ 39,998,648 100.00%
------- ------ -------------- ------
------- ------ -------------- ------
</TABLE>
SERVICING
Fingerhut currently performs a substantial portion of the servicing of both
the closed-end credit card contracts and the consumer revolving credit card
accounts for FNB under a subservicing agreement. Under the terms of the
subservicing agreement, Fingerhut has agreed to perform all of FNB's obligations
as Servicer under the Pooling and Servicing Agreement that FNB requests it to
perform and indemnifies FNB against any liability for its performance. FNB pays
a portion of the servicing fee it receives under the Pooling and Servicing
Agreement to Fingerhut based on the proportion of servicing functions performed
by it and by Fingerhut. FNB is contemplating moving all or a portion of the
servicing functions for its consumer revolving credit card accounts to a third
party servicer.
BILLING AND PAYMENTS
Payments from customers are received and processed at Fingerhut's payment
processing department pursuant to a subservicing agreement between FNB and
Fingerhut.
CLOSED-END CREDIT. Monthly payments on closed-end contracts are made by
customers and processed primarily through the use of coupons contained in
payment booklets delivered with each order shipment. Customers receive a new
coupon book for each individual closed-end loan and, therefore, a customer with
multiple outstanding closed-end loans will have several different coupon books
(with separate payment due dates).
Payment terms to Back End Customers generally range from 4 to 36 monthly
payments with an average payment term of approximately 19 monthly payments. In
addition, a majority of sales are to Back End Customers who receive a deferred
billing option, which extends the due date of the first payment by up to five
months. Many Back End Customers pay their contracts in full before the end of
the scheduled payment term.
REVOLVING CREDIT. Customers who have consumer revolving credit card
accounts receive a monthly billing statement in addition to the invoice shipped
with the customer's order. Under consumer revolving credit card accounts, all
orders are combined into a single monthly billing statement with one due date.
Obligors receive a monthly billing statement for any month during which there is
a balance or activity on the account. The monthly billing statement contains the
following information: new balance, previous balance, payments made, periodic
interest rate, annual percentage rate, purchases (deferred and non-deferred),
minimum payment, cycle date and payment due date (25 days from cycle date),
returns and
42
<PAGE>
allowances. In addition, each billing statement may include a message of up to
120 characters that can be specific to the account (such as delinquency, credit
line increase or decrease, promotional offer, etc.). Consumer revolving credit
card accounts are in one of six monthly billing cycles and payment due dates are
set 25 days from the cycle date. A customer who pays the outstanding balance in
full prior to the due date (grace period) is exempt from finance charges for
that billing cycle. Those customers who pay less than the outstanding balance
are assessed interest on the average daily balance of the previous billing
cycle. The minimum payment for revolving credit customers is set at the greater
of 5% of the outstanding balance (excluding deferred balances) or $7.00.
Interest rates are variable, set at a margin above a designated prime rate. At
the current prime rate most of the accounts have an APR set at 24.9%. FNB is
testing other rates, which currently range from 18.9% to 31.9%, based on the
credit risk profile of the customer. FNB charges a late payment fee of up to
$10.00 and a $10.00 fee for insufficient funds or returned checks.
COLLECTION PROCEDURES
Receivables are monitored on a daily, weekly, and monthly basis, through a
series of automated reports, to identify credit problems as early as possible.
FNB has a flexible policy of working with certain delinquent customers to, among
other things, adjust payment schedules, which it believes reduces default rates,
and improves customer loyalty. In no case does FNB or Fingerhut repossess
merchandise.
CLOSED-END CREDIT. All of a customer's closed-end loans are considered
delinquent if the total payments received from such customer are less than the
total payments due on all such loans at any point in time. Closed-end loan
collections are managed under a process called the "Dynamic Dunning System."
Each customer is assigned to a specific dun series based on a "risk score"
calculated by FNB's credit area. FNB currently has over 200 different dun
series. Each series is made up of letters and/or phone calls, varying in
content, approximately twelve to eighteen days apart. Delinquent customers are
generally contacted with in the first ten days of delinquency and four times
within the first 60 days. The actual timing and number of contacts, as well as
type of contacts (letter or phone) are dependent upon the dollar balance, risk
score, whether the customer has a telephone, and other account characteristics
and can vary depending on payment arrangements made with the customer. For
closed-end loans, delinquency and collection strategies are based on all of an
Obligor's closed-end loans rather than on an individual loan basis.
REVOLVING CREDIT. A consumer revolving credit card account is considered
delinquent if the minimum payment on the account is not received by the payment
due date listed in the monthly statement. Consumer revolving credit card account
collections are managed through the VisionPlus, Credit Management System. One of
the modules making up the VisionPlus system is the Collection, Tracking and
Analysis system. Currently, FNB uses approximately 20 separate dun series for
delinquent revolving credit customers. Accounts are classified by balance, level
of delinquency and other account characteristics. Each series is made up of
letters and/or phone calls, varying in content, approximately twelve to eighteen
days apart. Delinquent customers are generally contacted beginning at six days
of delinquency and four events occur within the first 60 days. The actual timing
and number of contacts, as well as type of contacts (letter or phone) are
dependent upon the dollar balance, whether the customer has a telephone, and
other account characteristics, and can vary depending on payment arrangements
made with the customer.
In addition to the dunning strategy, the monthly billing statement provides
an additional delinquency reminder. While a consumer revolving credit card
account is delinquent, all monthly statements on that account will contain a
message informing the customer that he or she is past due. The actual message
delivered will depend on account history and status at the time the statement is
printed. Any late fees incurred as a result of delinquency will also be
highlighted on the monthly billing statement.
43
<PAGE>
LOSS AND DELINQUENCY HISTORY
CLOSED-END CREDIT. All closed-end loans of a particular customer may be
charged off as "uncollectible" when collection efforts fail to provide a
recovery of the balance due or when account aging has reached certain time
limits and no payment has been received within the prior 30 days. To be
considered for charge-off, all the customer's closed-end loans must be at least
30 days delinquent and there must be no orders pending. Accounts are charged-off
when the following circumstances occur: no later than 210 days since the last
payment; upon notification of an Obligor bankruptcy; when at least two pieces of
undeliverable mail have been returned and no request for credit authorization is
outstanding; and upon notification of death of the Obligor. FNB may change its
charge-off policy and collection practices at any time in accordance with its
business judgment, applicable law and certain restrictions in the Bank Purchase
Agreement. See "Description of the Purchase Agreements--Certain Covenants."
REVOLVING CREDIT. Consumer revolving credit card accounts are generally
charged off when the account is 210 days delinquent or upon notification of
Obligor bankruptcy. In certain situations, if an account is 210 days delinquent
and a payment or a promise to pay has been made (as part of a revised payment
arrangement) within the last 30 days, the account may remain active. Charge-offs
can also occur upon notice of the death of the Obligor. Charged-off consumer
revolving credit card accounts currently are being referred to outside
collection agencies on a fee basis. As the pool of consumer revolving credit
card accounts grow, FNB will use Fingerhut's in house collection group and
outside agencies.
The following table sets forth the historical net charge-offs for
Receivables (both Closed End Receivables and Revolving Receivables) originated
by Fingerhut and FNB from Back End Customers for the given periods, but does not
include Receivables relating to (i) the initial orders of Back End Customers,
which became eligible for inclusion in the Trust as of March 18, 1998 and (ii)
purchases by Back End Customers from Fingerhut's prospective new customer
marketing materials. The amount of such Receivables is not material and the
Transferor does not believe that the performance of such Receivables would be
materially different than the historical data set forth in the following table.
There can be no assurance, however, that the loss experience for the Receivables
in the future will be similar to the historical experience set forth below, in
part because for the historical periods shown, the Receivables were comprised
substantially of closed-end installment sale contracts originated by Fingerhut
and closed-end credit card loans originated by FNB and the Receivables are
expected to become entirely revolving credit card loans originated by FNB over
the next several years.
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS ENDED FISCAL YEAR ENDED
-------------------------- ----------------------------------------------------------
FEBRUARY 27, FEBRUARY 28, DECEMBER 26, DECEMBER 27, DECEMBER 29, DECEMBER 30,
1998 1997 1997 1996 1995 1994
------------ ------------ ------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Average Receivables
outstanding(1)................ $ 1,756,422 $ 1,865,448 $ 1,674,219 $ 1,695,578 $ 1,544,955 $ 1,305,942
Net charge-offs(2).............. $ 47,173 $ 57,651 $ 296,923 $ 268,387 $ 219,689 $ 175,480
Net charge-offs as a percentage
of average Receivables
outstanding................... 16.1%(3) 18.5%(3) 17.7% 15.8% 14.2% 13.4%
</TABLE>
- ------------------------
(1) Average Receivables outstanding is the arithmetic average of Receivables
outstanding at the beginning of each fiscal month during the period shown.
(2) Net charge-offs reflect charge-offs relating to merchandise purchases less
recoveries.
(3) Annualized percentage.
44
<PAGE>
The following table sets forth the delinquency experience with respect to
Receivables for which no payment had been received within 30 days of the most
recent due dates for each such Receivable for each of the periods shown for
Receivables originated by Fingerhut and FNB from Back End Customers, but does
not include Receivables relating to (i) the initial orders of Back End
Customers, which became eligible for inclusion in the Trust as of March 18, 1998
and (ii) purchases by Back End Customers from Fingerhut's prospective new
customer marketing materials. The amount of such Receivables is not material and
the Transferor does not believe that the performance of such Receivables would
be materially different than the historical data set forth in the following
table. In addition, the table does not include Receivables which are less than
30 days delinquent. There can be no assurance, however, that the delinquency
experience for the Receivables in the future will be similar to the historical
experience set forth below, in part because for the historical periods shown,
the Receivables were comprised substantially of closed-end installment sales
contracts originated by Fingerhut and closed-end credit card loans originated by
FNB and the Receivables are expected to become entirely revolving credit card
loans originated by FNB over the next several years.
DELINQUENCY EXPERIENCE(3)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS ENDED FISCAL YEAR ENDED
------------------------------------------------------ ------------------------------------------------------
FEBRUARY 27, 1998 FEBRUARY 28, 1997 DECEMBER 26,1997 DECEMBER 27, 1996
-------------------------- -------------------------- -------------------------- --------------------------
AMOUNT(1) PERCENTAGE(2) AMOUNT(1) PERCENTAGE(2) AMOUNT(1) PERCENTAGE(2) AMOUNT(1) PERCENTAGE(2)
----------- ------------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days past
due........... $ 97,467 5.83% $ 112,089 6.01% $ 99,464 5.97% $ 116,251 6.85%
60-89 days past
due........... $ 53,741 3.22% $ 64,473 3.46% $ 62,140 3.73% $ 68,181 4.01%
90 days or more
past due...... $ 230,249 13.78% $ 241,024 12.92% $ 231,606 13.91% $ 226,785 13.35%
<CAPTION>
DECEMBER 29, 1995 DECEMBER 30, 1994
-------------------------- --------------------------
AMOUNT(1) PERCENTAGE(2) AMOUNT(1) PERCENTAGE(2)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
30-59 days past
due........... $ 111,148 7.10% $ 94,279 7.08%
60-89 days past
due........... $ 63,190 4.04% $ 51,337 3.86%
90 days or more
past due...... $ 184,450 11.78% $ 141,942 10.67%
</TABLE>
- ------------------------
(1) The Receivable delinquent amount by category is the arithmetic average of
the delinquencies at each fiscal month end during the period shown.
(2) The delinquency percentages for the periods shown are the quotients obtained
by dividing (i) the arithmetic average of the Receivable delinquent amount
by category at each fiscal month end during the period by (ii) the average
of the Receivables outstanding at each fiscal month end during the period.
(3) If a customer has one Account that is delinquent, all Accounts of such
customer are considered delinquent.
DILUTION EXPERIENCE
A factor used to evaluate a portfolio of receivables is Dilution. "Dilution"
occurs if a Receivable is adjusted because of a rebate, billing error, return,
exchange, allowance (including adjustments because of the selection of a cash
price payment option) or certain other non-cash items, or if a Receivable is
cancelled due to goods that have been refused by the Obligor. The table below
sets forth dilution experience for Receivables originated by Fingerhut and FNB
from Back End Customers, but does not include Receivables with respect to (i)
the initial orders of the Back End Customers, which became eligible for
inclusion in the Trust as of March 18, 1998 and (ii) purchases by Back End
Customers from Fingerhut's prospective new customer marketing materials. The
amount of such Receivables is not material and the Transferor does not believe
that the performance of such Receivables would be materially different than the
historical data set forth in the following tables. The middle fiscal month of
each fiscal quarter is a five week fiscal month. There can be no assurance that
the actual dilution experience in the future will be similar to the historical
experience set forth in this table, in part because for the historical periods
shown, the Receivables were comprised substantially of closed-end installment
sales contracts originated by Fingerhut and closed-end credit card loans
originated by FNB and the Receivables are expected to become entirely revolving
credit card loans originated by FNB over the next several years.
45
<PAGE>
DILUTION EXPERIENCE
<TABLE>
<CAPTION>
MONTHLY
DILUTION
MONTHLY PERIOD PERCENTAGE(1)
- ---------------------------------------------------------------------------------------------------- ---------------
<S> <C>
1994
January............................................................................................. 2.6%
February............................................................................................ 2.8
March............................................................................................... 2.2
April............................................................................................... 2.2
May................................................................................................. 2.4
June................................................................................................ 2.1
July................................................................................................ 1.9
August.............................................................................................. 2.7
September........................................................................................... 2.2
October............................................................................................. 2.1
November............................................................................................ 3.1
December............................................................................................ 2.6
1995
January............................................................................................. 2.3%
February............................................................................................ 2.6
March............................................................................................... 1.9
April............................................................................................... 1.9
May................................................................................................. 2.3
June................................................................................................ 1.9
July................................................................................................ 1.7
August.............................................................................................. 2.3
September........................................................................................... 1.9
October............................................................................................. 2.1
November............................................................................................ 2.8
December............................................................................................ 2.3
1996
January............................................................................................. 2.1%
February............................................................................................ 2.3
March............................................................................................... 1.8
April............................................................................................... 1.8
May................................................................................................. 2.0
June................................................................................................ 1.5
July................................................................................................ 1.4
August.............................................................................................. 1.9
September........................................................................................... 1.5
October............................................................................................. 1.7
November............................................................................................ 2.4
December............................................................................................ 1.9
1997
January............................................................................................. 2.0%
February............................................................................................ 1.8
March............................................................................................... 1.3
April............................................................................................... 1.6
May................................................................................................. 2.0
June................................................................................................ 1.4
July................................................................................................ 1.5
August.............................................................................................. 1.7
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
MONTHLY
DILUTION
MONTHLY PERIOD PERCENTAGE(1)
- ---------------------------------------------------------------------------------------------------- ---------------
<S> <C>
September........................................................................................... 1.5%
October............................................................................................. 1.7
November............................................................................................ 2.1
December............................................................................................ 1.7
1998
January............................................................................................. 1.6%
February............................................................................................ 2.0
</TABLE>
- ------------------------
(1) Monthly Dilution Percentage is calculated by dividing the total amount of
Receivable dilution activity for a given fiscal month by the outstanding
Receivables at the beginning of such fiscal month.
GEOGRAPHIC DISTRIBUTION
The table below sets forth the geographic distribution of the Accounts as of
February 27, 1998, but does not include Receivables relating to (i) the initial
orders of the Back End Customers, which became eligible for inclusion in the
Trust as of March 18, 1998 and (ii) purchases by Back End Customers from
Fingerhut's prospective new customer marketing materials. The amount of such
Receivables is not material and the Transferor does not believe that the
geographic distribution of Receivables in such Accounts would be materially
different than as set forth in the following table. Because the future
composition of the Receivables may change over time, this table is not
indicative of the geographic distribution of the Receivables at any subsequent
time.
GEOGRAPHIC DISTRIBUTION
AS OF FEBRUARY 27, 1998
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF OUTSTANDING
NUMBER OF RECEIVABLES BY
STATE ACCOUNTS DOLLAR AMOUNT
- --------------------------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Alabama.......................................................................... 2.36% 2.27%
Alaska........................................................................... 0.18 0.17
Arizona.......................................................................... 1.86 1.91
Arkansas......................................................................... 1.41 1.37
California....................................................................... 8.14 8.05
Colorado......................................................................... 1.53 1.62
Connecticut...................................................................... 1.00 1.02
Delaware......................................................................... 0.31 0.30
District of Columbia............................................................. 0.35 0.33
Florida.......................................................................... 4.95 4.98
Georgia.......................................................................... 3.06 3.09
Hawaii........................................................................... 0.22 0.19
Idaho............................................................................ 0.48 0.49
Illinois......................................................................... 3.37 3.43
Indiana.......................................................................... 2.51 2.54
Iowa............................................................................. 0.85 0.83
Kansas........................................................................... 1.06 1.08
Kentucky......................................................................... 2.25 2.18
Louisiana........................................................................ 2.13 2.11
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF OUTSTANDING
NUMBER OF RECEIVABLES BY
STATE ACCOUNTS DOLLAR AMOUNT
- --------------------------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Maine............................................................................ 0.58% 0.57%
Maryland......................................................................... 2.22 2.18
Massachusetts.................................................................... 1.75 1.69
Michigan......................................................................... 3.61 3.70
Minnesota........................................................................ 1.03 1.06
Mississippi...................................................................... 1.52 1.48
Missouri......................................................................... 2.33 2.34
Montana.......................................................................... 0.33 0.33
Nebraska......................................................................... 0.53 0.53
Nevada........................................................................... 0.86 0.92
New Hampshire.................................................................... 0.37 0.38
New Jersey....................................................................... 3.03 3.10
New Mexico....................................................................... 0.90 0.90
New York......................................................................... 6.63 6.83
North Carolina................................................................... 3.45 3.34
North Dakota..................................................................... 0.21 0.20
Ohio............................................................................. 4.06 4.10
Oklahoma......................................................................... 1.55 1.54
Oregon........................................................................... 1.08 1.07
Pennsylvania..................................................................... 4.35 4.30
Rhode Island..................................................................... 0.34 0.32
South Carolina................................................................... 1.41 1.39
South Dakota..................................................................... 0.23 0.23
Tennessee........................................................................ 2.31 2.32
Texas............................................................................ 7.58 7.71
Utah............................................................................. 0.63 0.62
Vermont.......................................................................... 0.26 0.27
Virginia......................................................................... 2.93 2.83
Washington....................................................................... 2.07 2.12
West Virginia.................................................................... 1.34 1.27
Wisconsin........................................................................ 1.58 1.58
Wyoming.......................................................................... 0.24 0.27
U.S. Territories and Other....................................................... 0.68 0.53
----- -----
Total............................................................................ 100.0% 100.0%
----- -----
----- -----
</TABLE>
48
<PAGE>
THE TRANSFEROR AND RELATED PARTIES
FINGERHUT RECEIVABLES, INC.
Fingerhut Receivables, Inc. was incorporated under the laws of the State of
Delaware on April 14, 1994. At the present time, all of its outstanding capital
stock is owned by FCI. In connection with the Spin Off described below, FCI
expects to contribute all the capital stock of the Transferor to another direct,
wholly owned subsidiary of FCI. The Transferor was organized for the limited
purposes of purchasing, holding, owning and selling receivables and any
activities incidental to and necessary or convenient for the accomplishment of
such purposes, and has no material assets other than such receivables. Neither
FCI, as stockholder of the Transferor, nor the Transferor's board of directors,
intend to change the Transferor's business purpose. The Transferor's executive
offices are located at 4400 Baker Road, Suite F480, Minnetonka, Minnesota 55343;
the Transferor's telephone number is (612) 936-5035.
FINGERHUT CORPORATION
FCI's principal subsidiary, Fingerhut, has been in the direct mail marketing
business for 50 years and sells general merchandise and financial service
products to moderate income consumers using catalogs and other direct marketing
solicitations. Fingerhut's merchandise includes a broad mix of quality brand
name and private label products. In 1997, Fingerhut generated over $1.4 billion
in net sales. Fingerhut's executive offices are located at 4400 Baker Road,
Minnetonka, Minnesota 55343; Fingerhut's telephone number is (612) 932-3100.
FINGERHUT COMPANIES, INC.
FCI is a database marketing company that sells a broad range of products and
services directly to consumers via catalogs, television and other media. It had
1997 net revenues of approximately $1.8 billion. FCI is the successor to the
business of several related companies, the first of which was a partnership
formed in 1948. FCI was incorporated in 1978 in connection with the acquisition
of Fingerhut by a predecessor of Travelers Group Inc. in 1979 and became a
publicly held company in May 1990. FCI announced, in October 1997, that its
Board of Directors had authorized it to file an application with the IRS for a
tax-free distribution to FCI shareholders of all of FCI's ownership in Metris
Companies Inc. (the "Spin Off"). The proposed Spin Off, anticipated in 1998, is
subject to the final approval of FCI's Board of Directors and approval of the
IRS, and is subject to market conditions. There are no assurances that the Spin
Off will be consummated.
FINGERHUT NATIONAL BANK
FNB, a wholly owned subsidiary of FCI, is a special-purpose credit card
bank, established under Section 2(c)(2)(F) of the Bank Holding Company Act of
1956, as amended by the Competitive Equality Banking Act of 1987, as amended.
FNB was chartered as a national banking association on November 11, 1996. FNB's
principal executive offices are located at 3904 West Technology Circle, Suite
102, Sioux Falls, South Dakota 57106; FNB's telephone number is (605) 362-2380.
MATURITY CONSIDERATIONS
The Class A Invested Amount is payable to the Class A Securityholders, to
the extent funds are available therefor in the Principal Account, on each
Distribution Date beginning with the September 2002 Distribution Date, or
earlier in the event of a Pay Out Event that results in the commencement of the
Early Amortization Period. The Class A Securityholders will receive payments of
principal on each Distribution Date during the Controlled Amortization Period
until the Class A Invested Amount has been paid in full or the Termination Date
has occurred. It is anticipated that the final payment of principal with respect
to the Class A Securities will be made on the November 2003 Distribution Date
(the "Class A Expected Final Payment Date"). The Pooling and Servicing Agreement
provides that the Class B Securityholders will not begin to receive payments of
principal until the Class A Invested Amount has been paid in full. The Class B
Securityholders will receive payments of principal on the Class B Principal
Payment Commencement Date and each Distribution Date thereafter until the Class
B Invested Amount is paid in full or the Termination Date has occurred. It is
anticipated that the final payment of principal
49
<PAGE>
with respect to the Class B Securities will be made on the February 2004
Distribution Date (the "Class B Expected Final Payment Date"). The Pooling and
Servicing Agreement provides that the CTO Securityholders will not begin to
receive payments of principal until the Class A Invested Amount and the Class B
Invested Amount have been paid in full.
During the Controlled Amortization Period an amount equal to the lesser of
(i) Available Series 1998-2 Principal Collections and (ii) the "Class A
Controlled Distribution Amount" which is equal to the sum of the Class A
Controlled Amortization Amount and any existing Class A Deficit Controlled
Amortization Amount will be deposited in the Principal Account during each
Monthly Period. The term "Class A Deficit Controlled Amortization Amount" means
zero on the initial Distribution Date with respect to the Controlled
Amortization Period and, on any subsequent Distribution Date, means the excess,
if any, of the amount determined on the preceding Distribution Date under clause
(ii) above over the amount determined under clause (i) above with respect to the
related Monthly Period. During the Controlled Amortization Period following the
deposit in the Principal Account of an amount sufficient to pay the Class A
Invested Amount in full, an amount equal to the lesser of (i) Available Series
1998-2 Principal Collections and (ii) the "Class B Controlled Distribution
Amount" which is equal to the sum of the Class B Controlled Amortization Amount
and any existing Class B Deficit Controlled Amortization Amount will be
deposited in the Principal Account during each Monthly Period. The term "Class B
Deficit Controlled Amortization Amount" means zero on the Class B Principal
Payment Commencement Date and, on any subsequent Distribution Date, means the
excess, if any, of the amount determined under clause (ii) above over the amount
determined under clause (i) above with respect to the related Monthly Period.
Although it is anticipated that principal payments will be made to Class A
Securityholders in an amount equal to the Class A Controlled Amortization Amount
on each Distribution Date beginning on the September 2002 Distribution Date and
ending on the November 2003 Distribution Date and to the Class B Securityholders
in an amount equal to the Class B Controlled Amortization Amount beginning on
the December 2003 Distribution Date and ending on the February 2004 Distribution
Date, no assurance can be given in that regard.
Should a Pay Out Event occur and the Early Amortization Period commence, the
Class A Securityholders will be entitled to receive monthly payments of
principal in an amount equal to the lesser of the Available Series 1998-2
Principal Collections and the Class A Invested Amount, until the Class A
Invested Amount is paid in full or until the Termination Date. Thereafter, on
and after the Class B Principal Payment Commencement Date, the Class B
Securityholders will be entitled to receive monthly payments of principal in an
amount equal to the lesser of the Available Series 1998-2 Principal Collections
and the Class B Invested Amount, until the Class B Invested Amount is paid in
full or until the Termination Date. Thereafter, on and after the CTO Principal
Payment Commencement Date, the CTO Securityholders will be entitled to receive
monthly payments of principal, until the CTO Invested Amount is paid in full or
until the Termination Date. A "Pay Out Event" occurs, either automatically or
after specified notice, upon (a) the failure of the Transferor to make certain
payments or transfers of funds for the benefit of the Securityholders or to
observe or perform in any material respect certain other covenants within the
time periods stated in the Pooling and Servicing Agreement, (b) material
breaches of certain representations, warranties, or covenants of the Transferor
which remain uncured after grace periods specified in the Pooling and Servicing
Agreement, (c) certain bankruptcy or insolvency events relating to the
Transferor, Fingerhut, FCI or FNB, (d) the occurrence of a Servicer Default that
would have a material adverse effect on the Securityholders, (e) (x) the
Transferor Interest being less than the Minimum Transferor Interest, (y) the
total amount of Principal Receivables and the amount on deposit in the Excess
Funding Account being less than the Minimum Aggregate Principal Receivables or
(z) the Retained Percentage being equal to or less than 2 percent, in each case
as of any Determination Date, and not exceeding the required amount on or prior
to the tenth business day following such Determination Date, (f) the Trust
becoming subject to regulation as an "investment company" within the meaning of
the Investment Company Act or (g) a reduction in the average of the Portfolio
Yields for any three consecutive Monthly Periods to a rate which
50
<PAGE>
is less than the weighted average of the Base Rates for such three consecutive
Monthly Periods. See "Description of the Offered Securities--Pay Out Events."
The "Base Rate" means, with respect to any Monthly Period, the sum of (i)
the weighted average of the Class A Interest Rate, the Class B Interest Rate,
the CTO Interest Rate and, if an interest rate is assigned to any portion of the
Class D Securities, the Class D Interest Rate as of the last day of such Monthly
Period (weighted based on the Class A Invested Amount, the Class B Invested
Amount, the CTO Invested Amount and, if an interest rate is assigned to any
portion of the Class D Securities, such portion of the Class D Invested Amount,
respectively, as of the beginning of the day on the first day of such Monthly
Period) plus (ii) the product of 2.00 percent per annum and the percentage
equivalent of a fraction the numerator of which is the Adjusted Invested Amount
and the denominator of which is the Invested Amount, each as of the beginning of
the day on the first day of such Monthly Period. The term "Portfolio Yield"
means, with respect to any Monthly Period, the annualized percentage equivalent
of a fraction, the numerator of which is the sum of (i) the aggregate amount of
Available Series 1998-2 Finance Charge Collections for each business day during
such Monthly Period (not including (x) the amounts withdrawn from the Payment
Reserve Account, (y) Adjustment Payments made by the Transferor with respect to
Adjustment Payments required to be made but not made in prior Monthly Periods,
if any, and (z) the amount of any Finance Charge Collections received with
respect to the final payment of any Closed End Receivable that is refinanced
with a receivable arising under a consumer revolving credit card account) and
(ii) amounts withdrawn from the Defeasance Reserve Account with respect to such
Monthly Period calculated on a cash basis after subtracting the aggregate Series
Default Amount for such Monthly Period and the Series 1998-2 Percentage of any
Adjustment Payments which the Transferor is required but fails to make pursuant
to the Pooling and Servicing Agreement for each business day during such Monthly
Period, and the denominator of which is the average daily Invested Amount during
such Monthly Period; PROVIDED, HOWEVER, that Excess Finance Charge Collections
applied for the benefit of the Securityholders may be added to the numerator if
the Transferor shall have provided ten Business Days prior written notice of
such action to each Rating Agency and the Transferor, the Servicer and the
Trustee shall have received notifications in writing that such action will not
result in Standard & Poor's reducing or withdrawing its then existing rating of
the Investor Securities of any outstanding Series or class with respect to which
it is a Rating Agency. See "Description of the Offered Securities--Pay Out
Events."
The following table sets forth for the Receivables originated by Fingerhut
and FNB from Back End Customers, but not including Receivables relating to (i)
the initial orders of the Back End Customers, which became eligible for
inclusion in the Trust as of March 18, 1998 and (ii) purchases by Back End
Customers from Fingerhut's prospective new customer marketing materials, the
highest and lowest monthly payment rates during any month in the period shown
and the average monthly payment rates for such Receivables for all months during
the periods shown, in each case calculated by dividing the total collections
during a given fiscal month by total opening monthly balances of such
Receivables during the periods shown and expressing such amounts as a
percentage. The middle fiscal month of each fiscal quarter is, and each of
February 1997 and February 1998 was, a five week fiscal month. Payment rates
shown in the table are based on amounts which are or would be deemed payments of
Principal Receivables with respect to such Receivables, but do not include
payments resulting from refinancing existing Receivables that are closed-end
installment sales contracts or closed-end credit card loans with Receivables
under consumer revolving credit card accounts.
MONTHLY PAYMENT RATES
<TABLE>
<CAPTION>
TWO MONTHS ENDED FISCAL YEAR ENDED
-------------------------------- -----------------------------------------------------------
FEBRUARY 27, FEBRUARY 28, DECEMBER 26, DECEMBER 27, DECEMBER 29,
1998 1997 1997 1996 1995
--------------- --------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C>
Lowest Month.................... 5.9% 6.0% 5.7% 5.5% 5.6%
Highest Month................... 8.5% 8.2% 8.2% 8.2% 9.1%
Monthly Average................. 7.2% 7.0% 7.1% 7.1% 7.6%
<CAPTION>
DECEMBER 30,
1994
---------------
<S> <C>
Lowest Month.................... 6.0%
Highest Month................... 10.3%
Monthly Average................. 8.1%
</TABLE>
51
<PAGE>
The amount of collections of Receivables may vary from month to month due to
seasonal variations, general economic conditions, economic and financial
conditions affecting the payment habits of individual customers, the length of
the fiscal month and other factors. There can be no assurance that Principal
Collections with respect to the Trust, and thus the rate at which the
Securityholders could expect to receive payments of principal on their
Securities during the Amortization Period, will be similar to the historical
experience set forth above, in part because for the historical periods shown,
the Receivables were comprised substantially of closed-end installment sales
contracts originated by Fingerhut and closed-end credit card loans originated by
FNB and the Receivables are expected to become entirely revolving credit card
loans originated by FNB over the next several years. If a Pay Out Event occurs,
the average life and maturity of the Offered Securities could be significantly
reduced.
USE OF PROCEEDS
The Transferor will apply the net proceeds received from the sale of the
Offered Securities, to repay principal of classes of the Series 1997-1 Variable
Funding Trust Certificates (a substantial portion of which are held by certain
of the Underwriters or their affiliates) and the Series 1994-2 Variable Funding
Trust Certificates, to pay the purchase price of Receivables and to make a
deposit to the Interest Funding Account for the payment of interest on the first
Distribution Date. See "Annex I: Other Series."
DESCRIPTION OF THE OFFERED SECURITIES
The Offered Securities will be issued pursuant to the Pooling and Servicing
Agreement and the Series 1998-2 Supplement. The Pooling and Servicing Agreement,
the Series 1998-2 Supplement and the Offered Securities will be governed by, and
construed in accordance with, the laws of the State of Delaware. Pursuant to the
Pooling and Servicing Agreement, the Transferor and the Trustee have executed
the Supplements with respect to the Previously Issued Series and may execute
additional Supplements in order to issue additional Series (including the Series
1998-1 Securities) and Participation Supplements in order to issue
Participations (including the Participation to be issued to FNB on or about the
Closing Date).
GENERAL
The Offered Securities will represent the right to receive payments from
certain assets of the Trust, including the right to the investor percentage of
all Obligor payments on the Receivables in the Trust. Each Class A Security and
Class B Security represents the right to receive payments of interest at the
Class A Interest Rate or the Class B Interest Rate, as the case may be, funded
from Available Series 1998-2 Finance Charge Collections and the right to receive
payments of principal after the beginning of the Amortization Period, with
respect to the Class A Securities, and on and after the Class B Principal
Payment Commencement Date, with respect to the Class B Securities, in each case
funded from Principal Collections applied for the benefit of the Series 1998-2
Securityholders' Interest.
The Transferor owns the Exchangeable Transferor Security and will initially
own the Class D Securities. The Exchangeable Transferor Security will represent
an undivided interest in the Trust, including the right to the Transferor
Percentage of all Obligor payments on the Receivables in the Trust equal to 100%
minus the sum of the applicable investor percentages (which shall not exceed
100%) for all Series of securities then outstanding and the Participation
Percentages for all Participations then outstanding. See "--Certain Matters
Regarding the Transferor and the Servicer."
During the Revolving Period, the Invested Amount will remain constant except
under certain limited circumstances. See "--Defaulted Receivables; Dilution."
The amount of Principal Receivables in the Trust, however, will vary each day as
new Principal Receivables are transferred to the Trust and others are paid or
charged off. The amount of the Transferor Interest (or the amount in the Excess
Funding Account) will fluctuate each day, therefore, to reflect the changes in
the amount of the Principal Receivables in the Trust unless and to the extent
that the Other Series or another Series absorbs such change. During the
Amortization Period, the Adjusted Invested Amount will decline as Principal
Collections are held for distribution or distributed to the Securityholders. As
a result, unless and to the extent that the Variable Funding absorb such
increase, the Transferor Interest will generally increase each month during the
52
<PAGE>
Amortization Period to reflect the reductions in the Invested Amount and will
also change to reflect the variations in the amount of the Principal Receivables
in the Trust. The Transferor Interest may be reduced as the result of an
Exchange or the issuance of a Participation. See "--Exchanges" and
"--Participations."
Each Class of Offered Securities initially will be represented by securities
registered in the name of the nominee of DTC (together with any successor
depository selected by the Transferor, the "Depository"), except as set forth
below. Beneficial interests in each Class of Offered Securities will be
available for purchase in minimum denominations of $1,000 and integral multiples
of $1,000 in excess thereof in book-entry form only. The Transferor has been
informed by DTC that DTC's nominee will be Cede & Co. Accordingly, Cede & Co. is
expected to be the holder of record of the Offered Securities. Unless and until
Definitive Securities are issued under the limited circumstances described
herein, no Security Owner acquiring an interest in any Class of Offered
Securities will be entitled to receive a security representing such Security
Owner's interest in such Securities. Until such time, all references herein to
actions by Securityholders of any Class of Offered Securities will refer to
actions taken by the Depository upon instructions from its participating
organizations ("Participants") and all references herein to distributions,
notices, reports, and statements to Securityholders of any Class of Offered
Securities will refer to distributions, notices, reports, and statements to the
Depository or its nominee, as the registered holder of the Offered Securities of
such Class, for distribution to Security Owners of such Class in accordance with
the Depository's procedures. See "--Book-Entry Registration" and "--Definitive
Securities."
BOOK-ENTRY REGISTRATION
With respect to each Class of Offered Securities in book-entry form,
Securityholders may hold their Securities through DTC (in the United States) or
Cedel or Euroclear (in Europe), which in turn hold through DTC, if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
Cede & Co., as nominee for DTC, will hold the global securities. Cedel and
Euroclear will hold omnibus positions on behalf of the Cedel Participants and
the Euroclear Participants, respectively, through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositaries
(collectively, the "Depositaries") which in turn will hold such positions in
customers' securities accounts in the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities for its Participants ("DTC Participants") and facilitates the
clearance and settlement among Participants of securities transactions, such as
transfers and pledges, in deposited securities through electronic book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities. Participants include securities brokers and dealers,
banks, trust companies, clearing corporations, and certain other organizations.
Indirect access to the DTC system is also available to others such as securities
brokers and dealers, banks, and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC in the United States, on the one hand, and directly or indirectly
through Cedel Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time).
53
<PAGE>
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to its Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Cedel Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits or securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant Cedel
Participant or Euroclear Participant on such business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a Cedel
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC.
Purchases of Securities under the DTC system must be made by or through
Participants, which will receive a credit for the Securities on DTC's records.
The ownership interest of each actual Security Owner is in turn to be recorded
on the Participants' and Indirect Participants' records. Security Owners will
not receive written confirmation from DTC of their purchase, but Security Owners
are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the
Participant or Indirect Participant through which the Security Owner entered
into the transaction. Transfers of ownership interests in the Securities are to
be accomplished by entries made on the books of Participants acting on behalf of
Security Owners. Security Owners will not receive securities representing their
ownership interest in Securities, except in the event that use of the book-entry
system for the Securities is discontinued.
To facilitate subsequent transfers, all Securities deposited by Participants
with DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of
Securities with DTC and their registration in the name of Cede & Co. effects no
change in beneficial ownership. DTC will have no knowledge of the actual
Security Owners of the Securities; DTC's records will reflect only the identity
of the Participants to whose accounts such Securities are credited, which may or
may not be the Security Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Security Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to Securities.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede & Co.'s consenting or voting
rights to those Participants to whose accounts the Securities are credited on
the record date (identified in a listing attached thereto). Principal and
interest payments on the Securities will be made to DTC. DTC's practice is to
credit Participants' accounts on the Distribution Date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payment on the Distribution Date. Payments by Participants
to Security Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility of
such Participant and not of DTC, the Trustee or the Transferor, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal and interest to DTC is the responsibility of the Trustee,
disbursement of such payments to Participants shall be the responsibility of
DTC, and disbursement of such payments to the Security Owners shall be the
responsibility of Participants and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Securities at any time by giving reasonable notice to the
Transferor or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Securities are
required to be printed
54
<PAGE>
and delivered. The Transferor may decide to discontinue use of the system of
book-entry transfers through DTC (or a successor securities depository). In that
event, Definitive Securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Transferor believes to be reliable, but
the Transferor takes no responsibility for the accuracy thereof.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the clearance
and settlement of securities transactions between Cedel Participants through
electronic book-entry changes in accounts of Cedel Participants, thereby
eliminating the need for physical movement of securities. Transactions may be
settled by Cedel in any of 36 currencies, including United States dollars. Cedel
provides to its Cedel Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel interfaces with domestic
markets in several countries. As a professional depository, Cedel is subject to
regulations by the Luxembourg Monetary Institute. Cedel Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the underwriters of the
Securities. Indirect access to Cedel is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Cedel Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of securities and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 34 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. The Euroclear System is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear system on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the underwriters of
any Series of Securities. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission. Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific securities
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with Persons holding through Euroclear Participants.
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Distributions with respect to Securities held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Cedel or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Securityholder under the related Pooling and
Servicing Agreement on behalf of a Cedel Participant or a Euroclear Participant
only in accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Securities among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
DEFINITIVE SECURITIES
The Offered Securities of each Class will be issued in fully registered,
certificated form to the Security Owners of such Class or their nominees
("Definitive Securities"), rather than to the Depository or its nominee, only if
(i) the Transferor advises the Trustee in writing that the Depository is no
longer willing or able to discharge properly its responsibilities as Depository
with respect to the Securities of such Class, and the Trustee or the Transferor
is unable to locate a qualified successor, (ii) the Transferor, at its option,
advises the Trustee in writing that it elects to terminate the book-entry system
through the Depository, or (iii) after the occurrence of a Servicer Default,
Security Owners representing not less than 50 percent of the Invested Amount of
such Class advise the Trustee and the Depository through Participants in writing
that the continuation of a book-entry system through the Depository is no longer
in the best interest of the Security Owners of such Class.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee is required to notify all Security Owners
through the Depository of the availability through the Depository of Definitive
Securities. Upon surrender by the Depository of the definitive security
representing the Securities of the affected Class and instructions for
registration, the Trustee will issue and make available to all holders entitled
thereto through the Corporate Trust Office or the office of any other transfer
agent (including any transfer agent located in Luxembourg) the Securities of
such Class as Definitive Securities, and thereafter the Trustee will recognize
the holders of such Definitive Securities as Securityholders under the Pooling
and Servicing Agreement.
Distribution of principal and interest on the Offered Securities will be
made by the Trustee directly to Securityholders in accordance with the
procedures set forth herein and in the Pooling and Servicing Agreement. Interest
payments and any principal payments on each Distribution Date will be made to
Securityholders in whose names the Definitive Securities were registered at the
close of business on the related Record Date. Distributions will be made by
check mailed to the address of such Securityholder as it appears on the register
maintained by the Trustee. The final payment on any Offered Security, however,
will be made only upon presentation and surrender of such Certificate at the
Corporate Trust Office or at the office of any other transfer agent (including
any transfer agent located in Luxembourg) as specified in the notice of final
distribution to Securityholders. The Trustee will provide such notice to
registered Securityholders mailed not later than the fifth day of the month of
such final distributions. Following the listing of the Offered Securities on the
Luxembourg Stock Exchange, such notice will be published in a daily newspaper in
Luxembourg, which is expected to be the LUXEMBURGER WORT.
Definitive Securities will be transferable and exchangeable at the offices
of the transfer agent and registrar, which initially will be the Trustee and the
Paying Agent in Luxembourg (each in such capacity, the "Transfer Agent and
Registrar"). With respect to any transfer of Definitive Securities in part, the
new Definitive Securities registered in the names specified by the transferee
and the original transferor will be available at the office of any Transfer
Agent and Registrar (including any Transfer Agent and Registrar located in
Luxembourg). No service charge will be imposed for any registration of transfer
or exchange, but the Transfer Agent and Registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith. The Transfer Agent and Registrar will not be
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required to register the transfer or exchange of Definitive Securities for the
period from the Record Date preceding the due date for any payment to the
Distribution Date with respect to such Definitive Securities.
STATUS OF THE SECURITIES
Upon issuance, the Securities will rank PARI PASSU with all other
outstanding series. Payments on the Class B Securities are subordinated to the
Class A Securities as described herein.
INTEREST PAYMENTS
Interest will accrue on the outstanding principal amount of each Class of
the Securities at the applicable Interest Rate from the Closing Date. Interest
will be distributed on June 15, 1998, and on each Distribution Date thereafter
to Securityholders, to the extent of Available Series 1998-2 Finance Charge
Collections. Interest payments on the Class A Securities and the Class B
Securities on any Distribution Date will be calculated on the outstanding
principal amount of the Class A Securities or the outstanding principal amount
of the Class B Securities, as applicable, as of the close of business on the
first day of such Interest Accrual Period, except that interest for the first
Distribution Date will be calculated on the initial principal amount of the
Class A Securities or the initial principal amount of the Class B Securities
from the Closing Date. Interest on the Offered Securities will be calculated on
the basis of a 360-day year of twelve 30-day months.
PRINCIPAL PAYMENTS
During the Revolving Period (which begins on the Closing Date and ends on
the day before the Amortization Period begins), no principal payments will be
made to Securityholders. During the Amortization Period, principal will be paid
to the Principal Account on each business day and such amounts will be
distributed, first to the Class A Securityholders until the Class A Invested
Amount is paid in full, then to the Class B Securityholders until the Class B
Invested Amount is paid in full, then to the CTO Securityholders until the CTO
Invested Amount is paid in full, and finally to the Class D Securityholders
until the Class D Invested Amount is paid in full. The amount of principal
distributed with respect to the Class A Securities on each Distribution Date
during the Controlled Amortization Period shall not exceed the Class A
Controlled Distribution Amount. The amount of principal distributed with respect
to the Class B Securities during the Controlled Amortization Period on and after
the Class B Principal Payment Commencement Date shall not exceed the Class B
Controlled Distribution Amount. See "--Pay Out Events" for a discussion of
events which might lead to the commencement of the Amortization Period prior to
the first day of the August 2002 Monthly Period. See "--Application of
Collections" for a discussion of the method by which Principal Collections are
applied during the Amortization Period.
Available Series 1998-2 Principal Collections for any Monthly Period will
first be used to cover, with respect to any Monthly Period during the
Amortization Period, required deposits into the Principal Account for the
benefit of the Class A Securityholders. On and after the Class B Principal
Payment Commencement Date, Available Series 1998-2 Principal Collections for
each related Monthly Period will first be used to cover required deposits into
the Principal Account for the benefit of the Class B Securityholders. On and
after the CTO Principal Payment Commencement Date, Available Series 1998-2
Principal Collections for each related Monthly Period will first be used to
cover required deposits into the Principal Account for the benefit of the CTO
Securityholders. "Available Series 1998-2 Principal Collections" means, with
respect to any Monthly Period or portion thereof commencing on the Amortization
Period Commencement Date, an amount equal to the sum of (i) an amount equal to
the Fixed/Floating Percentage on each business day during such period of all
Principal Collections (less the amount of Redirected Principal Collections)
received during such period, (ii) any amount on deposit in the Excess Funding
Account allocated to the Securities with respect to such period, (iii) an amount
equal to the sum of the aggregate Series Default Amount and the Series 1998-2
Percentage of any unpaid Adjustment Payments paid from Available Series 1998-2
Finance Charge Collections, Transferor Finance Charge Collections, Excess
Finance Charge Collections or Redirected Principal Collections with respect to
such period and any reimbursements from Available Series 1998-2 Finance Charge
Collections, Transferor Finance Charge Collections, Excess Finance Charge
Collections or Redirected Principal Collections of unreimbursed Series
Charge-Offs and (iv) the aggregate Shared Principal Collections applied to the
Securities during such period.
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The Servicer will determine the amount of Principal Collections for any
business day applied to the Offered Securities and remaining after covering
required deposits or payments of principal to the Securityholders and any
similar amount remaining with respect to securities of any other Series plus
amounts specified in any Participation Supplement to be treated as Shared
Principal Collections (collectively, "Shared Principal Collections"). The
Servicer will allocate the Shared Principal Collections to cover, (x) with
respect to Series 1998-2, (i) during the Controlled Amortization Period on or
prior to the CTO Principal Payment Commencement Date, the excess of the Class A
Controlled Distribution Amount or the Class B Controlled Distribution Amount, as
applicable, over the aggregate amount applied with respect thereto for such
business day and for each prior business day in such Monthly Period, and (ii) at
all other times, the Invested Amount of the Class then receiving principal
payments, if any, after the application of Principal Collections on such
business day or (y) with respect to any other Series, the amounts specified as
such in the Supplement for such other Series ("Principal Shortfalls"). Shared
Principal Collections will not be used to cover series charge-offs for any
Series. If Principal Shortfalls exceed Shared Principal Collections on any
business day, Shared Principal Collections will be allocated pro rata among the
applicable Series based on the relative amounts of Principal Shortfalls. To the
extent that Shared Principal Collections exceed Principal Shortfalls, the
balance will, subject to certain limitations, be paid to the holder of the
Exchangeable Transferor Security.
FINANCE CHARGE COLLECTIONS; PRINCIPAL COLLECTIONS
The Servicer is obligated to deposit all Collections on the Receivables,
other than the portion of Collections allocable to Participations, into the
Collection Account maintained in the name of the Trust. Collections are
allocated on each business day between Finance Charge Collections and Principal
Collections. Finance Charge Receivables include (i) with respect to consumer
revolving credit card accounts, amounts billed from time to time to Obligors in
respect of Periodic Finance Charges, overlimit fees, late charges, returned
check fees, annual account fees or service charges, transaction charges and
similar fees and charges (except for fees associated with ancillary products and
services sold to Obligors) plus (ii) with respect to all Receivables,
Recoveries, any other fees (other than prepaid insurance premiums or fees
associated with ancillary products and services sold to Obligors) billed to
Obligors, plus (iii) investment earnings on amounts credited to the Excess
Funding Account, plus (iv) Discount Receivables. Discount Receivables are
portions of the principal balance of Receivables which are recharacterized as
Finance Charge Receivables based on a Discount Factor. Discount Receivables on
any day include the product of the amount of the outstanding balance of the
Receivables on such day (less, with respect to revolving credit card loans, the
Periodic Finance Charges and other fees and charges described in clause (i) of
the definition of Finance Charge Receivables) and the applicable Discount
Factor. The Discount Factor for Revolving Receivables generated in connection
with sales by Fingerhut will initially be 9% and for Closed End Receivables
generated in connection with sales by Fingerhut will initially be 25%. The
Discount Factor for other Receivables will be such other rate or rates (which
may be a fixed percentage or a variable percentage based on a formula) approved
by the Rating Agencies. Following notice to the Rating Agencies, the Transferor
may increase the Discount Factor from time to time in an amount not to exceed
two percentage points from the amounts set forth above or the amounts otherwise
approved by the Rating Agencies if such change will not cause a Pay Out Event to
occur. In addition, the Discount Factor may be adjusted from time to time if
such change will not cause a Pay Out Event to occur and the Rating Agencies have
confirmed that the change will not result in any of the Rating Agencies reducing
or withdrawing its original rating on any then outstanding Series rated by it.
Principal Receivables are amounts payable by Obligors with respect to Eligible
Receivables other than such amounts that are Finance Charge Receivables or
Default Amounts. Finance Charge Collections are Collections received with
respect to Finance Charge Receivables (other than Discount Receivables) and
Discount Receivables Collections. Principal Collections include all amounts
collected which are not Finance Charge Collections (Principal Collections and
Finance Charge Collections are collectively sometimes referred to herein as
"Collections").
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Finance Charge Collections and Principal Collections are allocated on each
business day among the Transferor Interest, the interest of the holders of any
Participations, and the respective interests of the securityholders of each
Series issued and outstanding from time to time in accordance with the Pooling
and Servicing Agreement and applicable Supplements. In general, in accordance
with such allocations and the provisions of the Pooling and Servicing Agreement
and the applicable Supplements, (i) Finance Charge Collections and certain other
amounts are applied on each business day to fund interest on the securities of
any Series then outstanding, to pay certain fees and expenses, to cover default
amounts, to cover any Adjustment Payments the Transferor fails to make, to
reimburse series charge-offs and to make required payments to the Transferor,
and (ii) Principal Collections and certain other amounts are applied on each
business day to fund principal on the securities of any Series then outstanding,
except that during any revolving period applicable to a Series, Principal
Collections otherwise allocable to the securityholders of such Series which are
not redirected to cover amounts payable from Finance Charge Collections in the
event of a shortfall thereof are paid to the holder of the Exchangeable
Transferor Security or paid to the securityholders of any other Series then
outstanding.
SUBORDINATION OF THE CLASS B SECURITIES
The Class B Securities will be subordinated to the extent necessary to fund
certain payments with respect to the Class A Securities. To the extent the Class
B Invested Amount is reduced, the percentage of Finance Charge Collections
applied for the benefit of the Series 1998-2 Securityholders in subsequent
Monthly Periods will be reduced. Moreover, to the extent the amount of such
reduction in the Class B Invested Amount is not reimbursed, the amount of
principal distributable to the Class B Securityholders will be reduced.
The Collateralized Trust Obligations will be subordinated to the extent
necessary to fund certain payments with respect to the Class A Securities and
the Class B Securities. To the extent the CTO Invested Amount is reduced, the
percentage of Finance Charge Collections applied for the benefit of the Series
1998-2 Securityholders in subsequent Monthly Periods will be reduced. Moreover,
to the extent the amount of such reduction in the CTO Invested Amount is not
reimbursed, the amount of principal distributable to the CTO Securityholders
will be reduced.
If, on any Determination Date, the aggregate Series Default Amount and the
Series 1998-2 Percentage of the unpaid Adjustment Payments, if any, for all
business days in the preceding Monthly Period exceeds the sum of (a) the
aggregate amount of Available Series 1998-2 Finance Charge Collections
(including amounts withdrawn from the Revolving Receivables Reserve Account)
applied to the payment thereof as described in clauses (v) and (vi) of
"--Application of Collections--Payment of Fees, Interest and Other Items," (b)
the amount of Transferor Finance Charge Collections and Excess Finance Charge
Collections allocated thereto as described in "--Redirection of Cash Flows," and
(c) the amount of Redirected Principal Collections allocated with respect
thereto as described in "--Redirected Principal Collections," the Class D
Invested Amount will be reduced by the aggregate amount of such excess. Such
reductions of the Class D Invested Amount will thereafter be reimbursed and the
Class D Invested Amount increased on each business day by the amount, if any, of
Available Series 1998-2 Finance Charge Collections and Excess Finance Charge
Collections applied for that purpose.
In the event that any such reduction of the Class D Invested Amount would
cause the Class D Invested Amount to be a negative number, the Class D Invested
Amount will be reduced to zero and the CTO Invested Amount will be reduced by
the amount by which the Class D Invested Amount would have been reduced below
zero, but not by more than the sum of the remaining aggregate Series Default
Amount and the remaining Series 1998-2 Percentage of the unpaid Adjustment
Payments for such Monthly Period. Such reductions of the CTO Invested Amount
will thereafter be reimbursed and the CTO Invested Amount increased on each
business day by the amount, if any, of Available Series 1998-2 Finance Charge
Collections and Excess Finance Charge Collections for such business day applied
for that purpose.
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In the event that any such reduction of the CTO Invested Amount would cause
the CTO Invested Amount to be a negative number, the CTO Invested Amount will be
reduced to zero and the Class B Invested Amount will be reduced by the amount by
which the CTO Invested Amount would have been reduced below zero, but not by
more than the sum of the remaining aggregate Series Default Amount and the
remaining Series 1998-2 Percentage of the unpaid Adjustment Payments for such
Monthly Period. Such reductions of the Class B Invested Amount will thereafter
be reimbursed and the Class B Invested Amount increased on each business day by
the amount, if any, of Available Series 1998-2 Finance Charge Collections and
Excess Finance Charge Collections for such business day applied for that
purpose. If the Class B Invested Amount is reduced to zero, the Class A Invested
Amount will be reduced by the amount by which the Class B Invested Amount would
have been reduced below zero, but not by more than the sum of the remaining
aggregate Series Default Amount and the remaining Series 1998-2 Percentage of
the unpaid Adjustment Payments for such Monthly Period. Such reductions of the
Class A Invested Amount will thereafter be reimbursed and the Class A Invested
Amount increased on each business day by the amount, if any, of Available Series
1998-2 Finance Charge Collections and Excess Finance Charge Collections applied
for that purpose. See "--Redirection of Cash Flows," "--Redirected Principal
Collections" and "--Series Charge-Offs."
TRANSFER AND ASSIGNMENT OF RECEIVABLES
On and after the Initial Closing Date and prior to January 12, 1997, all
Receivables that were transferred to the Trust by the Transferor were closed-end
installment sales contracts originated by Fingerhut (each such installment sale
contract constitutes a separate Account for purposes of the Trust). Such
Receivables were sold by Fingerhut to the Transferor pursuant to the Fingerhut
Purchase Agreement. In January 1997, Fingerhut ceased extending credit to its
customers pursuant to closed-end installment sale contracts and FNB commenced
the origination of closed-end credit card loans to finance purchases of
merchandise and services from Fingerhut (each such loan is a separate Account
for purposes of the Trust). In addition, in November 1996, FNB commenced the
origination of revolving credit card loans to finance purchases of merchandise
and services from Fingerhut. Since January 12, 1997, all closed-end credit card
loans and revolving credit card loans originated by FNB have been sold on an
ongoing basis by FNB to FCI pursuant to the Bank Purchase Agreement and, all
such closed-end credit card loans that are Eligible Receivables, have been
transferred by FCI to the Transferor pursuant to the FCI Purchase Agreement.
Since January 12, 1997, the Transferor has been transferring to the Trust the
closed-end credit card loans originated by FNB that it purchases from FCI. On
March 18, 1998, the FCI Purchase Agreement and the Pooling and Servicing
Agreement were amended to provide for the sale on an ongoing basis by FCI to the
Transferor, and by the Transferor to the Trust, respectively, of the revolving
credit card loans originated by FNB that are Eligible Receivables. The aggregate
amount of Receivables in the Trust as of March 27, 1998 was $1,686,837,273
comprised of $417,752,162 of Finance Charge Receivables and $1,269,085,111 of
Principal Receivables. As of March 27, 1998, the Principal Receivables consisted
of $242,849,680 of closed-end installment sale contracts originated by
Fingerhut, $977,585,148 of closed-end credit card loans originated by FNB and
$48,650,283 of revolving credit card loans originated by FNB. See "Description
of the Purchase Agreements."
Fingerhut filed one or more UCC-1 or UCC-3 financing statements in
accordance with the UCC to perfect the Transferor's interest in the Receivables
sold pursuant to the Fingerhut Purchase Agreement. FNB filed one or more UCC-1
financing statements in accordance with the UCC to perfect the interest of FCI
in the Receivables sold pursuant to the Bank Purchase Agreement and FCI filed
one or more UCC-1 or UCC-3 financing statements in accordance with the UCC to
perfect the interest of the Transferor in the Receivables sold pursuant to the
FCI Purchase Agreement. The Transferor, in turn, filed one or more UCC-1
financing statements in accordance with applicable state law to perfect the
Trust's interest in the Receivables and one or more UCC-3 financing statements
in accordance with the UCC to reflect the Transferor's assignment to the Trust
of revolving credit card loans originated by FNB and to amend certain
definitions in the filing. FCI, Fingerhut, FNB and the Transferor will file any
additional amendments or
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continuation statements to the UCCs that may be required to be filed from time
to time. See "Certain Legal Aspects of the Receivables."
FNB for itself and as Servicer has identified in its computer files that the
Receivables are Receivables as defined herein. FNB, as Servicer, retains and
will not deliver to the Trustee any other records or agreements relating to the
Receivables. The records and agreements relating to the Receivables will not be
segregated from those relating to other accounts and receivables of FNB and the
physical documentation relating to Receivables will not be stamped or marked to
reflect the transfer of Receivables to the Trust. The Trustee will have
reasonable access to such records and agreements as required by applicable law
or to enforce the rights of the Securityholders.
EXCHANGES
The Pooling and Servicing Agreement provides for the Trustee to issue two
types of securities: (i) investor securities in one or more Series, each of
which may have one or more classes of securities of which one or more such
classes may be transferable and (ii) the Exchangeable Transferor Security. The
Exchangeable Transferor Security evidences the Transferor Interest, is held by
the Transferor, and will be transferable only as provided in the Pooling and
Servicing Agreement. The Pooling and Servicing Agreement also provides that,
pursuant to any one or more Supplements, the holder of the Exchangeable
Transferor Security may tender the Exchangeable Transferor Security and the
securities evidencing any Series of securities, to the Trustee in exchange for
one or more new Series and a reissued Exchangeable Transferor Security. Under
the Pooling and Servicing Agreement, the holder of the Exchangeable Transferor
Security may define, with respect to any newly issued Series, certain terms
including: (i) its name or designation; (ii) its initial invested amount (or
method for calculating such amount); (iii) its interest rate (or the method of
calculating interest payments or other cash flows to such Series); (iv) the
closing date; (v) the rating agency or agencies, if any, rating such Series;
(vi) the interest payment date or dates and the date or dates from which
interest shall accrue; (vii) the name of the clearing agency, if any; (viii) the
method of allocating Principal Collections for such Series and the method by
which the principal amount of investor securities of such Series will amortize
or accrue and the method for allocating Finance Charge Collections and Default
Amounts; (ix) the names of any accounts to be used by such Series and the terms
governing the operation of any such accounts; (x) the percentage used to
calculate monthly servicing fees for such Series; (xi) the Minimum Transferor
Percentage; (xii) the Enhancement provider, if applicable, and the terms of any
Enhancement with respect to such Series; (xiii) the base rate applicable to such
Series; (xiv) the terms on which the securities of such Series may be
repurchased or remarketed to other investors; (xv) the termination date of such
Series; (xvi) any deposit into any account provided for such Series; (xvii) the
number of classes of such Series and, if more than one class, the rights and
priorities of each such class; (xviii) the fees, if any, to be included in funds
available to securityholders of such Series; (xix) the subordination, if any, of
such new Series with respect to any other Series; (xx) the rights, if any, of
the holder of the Exchangeable Transferor Security that have been transferred to
the holders of such Series pursuant to such Exchange (including any rights to
allocations of Finance Charge Collections and Principal Collections); (xxi) the
Minimum Retained Percentage; (xxiii) whether such Series will be part of a group
or subject to being paired with any other Series; (xxii) whether such Series
will be prefunded; and (xxiv) any other relevant terms, including whether or not
such Series will be pledged as collateral for an issuance of any other
securities, including commercial paper (all such terms, the "Principal Terms" of
such Series). None of the Transferor, the Servicer, the Trustee, or the Trust is
required or intends to obtain the consent of any Securityholder to issue any
additional Series or in connection with the determination of the Principal Terms
thereof. However, as a condition of an Exchange, the holder of the Exchangeable
Transferor Security will deliver to the Trustee written confirmation that the
Exchange will not result in any Rating Agency reducing or withdrawing its rating
of any outstanding Series, including the Offered Securities. The Transferor may
offer any Series to the public or other investors in transactions either
registered under the Securities Act or exempt from registration thereunder,
directly, through one or more underwriters or placement agents, in fixed-price
offerings, in negotiated transactions or otherwise. Any
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such Series may be issued in fully registered or book-entry form in minimum
denominations determined by the Transferor. The Transferor currently intends to
offer, from time to time, additional Series.
The Pooling and Servicing Agreement provides that the holder of the
Exchangeable Transferor Security may perform Exchanges and define the Principal
Terms of each Series, including the period during which amortization of the
principal amount thereof is intended to occur, which period may have a different
length and begin on a different date than such period for any other Series.
Accordingly, one or more Series may be in their amortization periods while other
Series are not. Moreover, any Series may have the benefit of an Enhancement that
is available only to such Series. Under the Pooling and Servicing Agreement, the
Trustee will hold any such form of Enhancement only on behalf of the Series with
respect to which it relates. Likewise, with respect to each such form of
Enhancement, the holder of the Exchangeable Transferor Security may deliver a
different form of Enhancement agreement. Collections allocated to Finance Charge
Receivables not used to pay interest on the securities, the monthly servicing
fee, the series default amount, or series charge-offs with respect to any Series
will be allocated as provided in such Enhancement agreement, if applicable. The
Pooling and Servicing Agreement also provides that the holder of the
Exchangeable Transferor Security may specify different coupon rates and monthly
servicing fees with respect to each Series (or a particular class within such
Series). The holder of the Exchangeable Transferor Security also has the option
under the Pooling and Servicing Agreement to vary between Series the terms upon
which a Series (or a particular class within such Series) may be repurchased by
the Transferor or remarketed to other investors. Additionally, certain Series
may be subordinated to other Series, and classes within a Series may have
different priorities. The Series 1998-2 Supplement does not permit the
subordination of the Securities to any other Series that may be issued by the
Trust (except to the limited extent described herein with respect to Shared
Principal Collections and Excess Finance Charge Collections). There is no limit
to the number of Exchanges that may be performed under the Pooling and Servicing
Agreement. The Trust will terminate only as provided in the Pooling and
Servicing Agreement.
Under the Pooling and Servicing Agreement and pursuant to a Supplement, an
Exchange may occur only upon the satisfaction of certain conditions provided in
the Pooling and Servicing Agreement. Under the Pooling and Servicing Agreement,
the holder of the Exchangeable Transferor Security may perform an Exchange by
notifying the Trustee at least five business days in advance of the date upon
which the Exchange is to occur. Under the Pooling and Servicing Agreement, the
notice will state the designation of any Series to be issued on the date of the
Exchange and, with respect to each such Series: (i) its initial invested amount
(or method for calculating such amount), (ii) its interest rate (or the method
of calculating interest payments or other payments to such Series), and (iii)
the provider of the Enhancement, if any, with respect to such Series. The
Pooling and Servicing Agreement provides that on the date of the Exchange the
Trustee will authenticate any such Series only upon delivery to the Trustee of
the following: (i) a Supplement specifying the Principal Terms of such Series,
(ii) a Tax Opinion and an opinion of counsel to the effect that the securities
of such Series sold to third parties will be characterized as either
indebtedness or as partnership interests under existing law for federal and
Applicable Tax State income tax purposes, or that the issuance of such Series
will not materially adversely affect the Applicable Tax State income tax
characterization of any outstanding Series or the taxability of the Trust under
Applicable Tax State income tax laws, (iii) if required by such Supplement, the
form of Enhancement and an appropriate Enhancement agreement with respect
thereto executed by the Transferor and the provider of the Enhancement, (iv)
written confirmation from each Rating Agency that the Exchange will not result
in such Rating Agency's reducing or withdrawing its rating on any then
outstanding Series rated by it, (v) the existing Exchangeable Transferor
Security or, if applicable, the securities representing the Series to be
exchanged, and (vi) an officer's certificate of the Transferor stating that,
after giving effect to such Exchange, (a) the Transferor Interest would be at
least equal to the Minimum Transferor Interest and (b) the Retained Interest (as
defined in the Pooling and Servicing Agreement) equals or exceeds the Minimum
Retained Interest.
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Under the Pooling and Servicing Agreement, the Transferor may also exchange
the Exchangeable Transferor Security for a newly issued Exchangeable Transferor
Security and a second security (a "Supplemental Security") the terms of which
will be defined in a Supplement upon the satisfaction of certain conditions
provided in the Pooling and Servicing Agreement.
PARTICIPATIONS
The Pooling and Servicing Agreement provides that the Transferor may direct
the Trustee to issue on behalf of the Trust one or more participation interests
in the assets of the Trust or in any portion thereof (each interest, a
"Participation"), the terms of which shall be defined in a supplement to the
Pooling and Servicing Agreement (a "Participation Supplement"), which shall
include, among other things, a conveyance to the holder of the Participation of
all right, title and interest of the Trust in a specified percentage of the
Receivables. The Trustee is expected to issue a one percent Participation to FNB
on or about the Closing Date.
The Trustee shall issue the Participation to or upon the order of the
Transferor upon satisfaction of the following conditions: (a) the Rating Agency
Condition will be satisfied in connection with such issuance, (b) the Transferor
Interest shall not be less than the Minimum Transferor Interest and the Retained
Interest shall not be less than the Minimum Retained Interest, in each case, as
of the date of, and after giving effect to, such issuance, (c) the Transferor
shall have delivered to the Trustee and each Rating Agency a Tax Opinion and an
opinion of counsel, each dated the date of such issuance, to the effect that
such Participation will not adversely affect the Minnesota or Delaware income
tax characterization of any outstanding Series or the taxability of the Trust
under Minnesota or Delaware income tax laws and (d) the Trust and the Trustee
shall have received a representation from each beneficial owner of a
Participation that such beneficial owner is not a trust estate, partnership or
an "S Corporation" (within the meaning of Section 1361(a) of the Code) for
United States federal income tax purposes or if it is such an entity, that after
giving effect to such transfer of a Participation and at all times thereafter,
less than 50% of the aggregate value of such beneficial owner's assets would
consist of Participations. Any Participation may be transferred or exchanged
only upon satisfaction of the conditions described in clauses (a) and (c) above.
Each Participation will entitle its holder to a specified percentage (the
"Participation Percentage") of all Collections of Principal Receivables and
Finance Charge Receivables and any other Trust Assets to the extent specified in
the applicable Participation Supplement. Pursuant to the Pooling and Servicing
Agreement, no Participation may be issued, sold or otherwise transferred on an
"established securities market" within the meaning of Section 7704(b)(1) of the
Code.
OTHER SERIES
The Trust has previously issued the Series 1994-2 Variable Funding
Certificates bearing the rate of interest and having the outstanding principal
amounts set forth in "Annex I: Other Series." In addition, the Trust previously
issued two other Series that will no longer be outstanding upon the issuance of
the Securities. Concurrently with the issuance of the Securities, the Trust will
issue the Series 1998-1 Securities bearing the rate of interest and having the
outstanding principal amounts set forth in "Annex I: Other Series" (the Series
1998-1 Securities, together with the Previously Issued Series, the "Other
Series").
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REPRESENTATIONS AND WARRANTIES
Pursuant to the Pooling and Servicing Agreement, the Transferor represents
and warrants that, among other things, subject to specified exceptions and
limitations (i) the Transferor is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware and has
the corporate power and authority to execute, deliver, and perform its
obligations under the Pooling and Servicing Agreement and the Purchase
Agreement, (ii) the Transferor is duly qualified to do business and in good
standing (or is exempt from such requirement) in any state required in order to
conduct its business and has obtained all necessary licenses and approvals
required under federal and Delaware law, PROVIDED, HOWEVER, that no
representation or warranty is made with respect to any qualifications, licenses
or approvals which the Trustee would have to obtain to do business in any state
in which the Trustee seeks to enforce any Receivable, (iii) the execution and
delivery of the Pooling and Servicing Agreement and the Purchase Agreements, and
the consummation of the transactions provided for therein, have been duly
authorized by the Transferor by all necessary corporate action on its part, (iv)
each of the Pooling and Servicing Agreement and the Purchase Agreements
constitutes a legal, valid, and binding obligation of the Transferor, and (v)
the transfer of Receivables by it to the Trust under the Pooling and Servicing
Agreement constitutes either a valid transfer and assignment to the Trust of all
right, title, and interest of the Transferor in and to the Receivables and the
proceeds thereof and amounts in any of the accounts established for the benefit
of securityholders free and clear of any lien of any Person claiming through or
under the Transferor or any of its affiliates (except for Permitted Liens and
certain rights of the Transferor) or the grant of a first priority security
interest in such Receivables and the proceeds thereof (including amounts in any
of the accounts established for the benefit of securityholders). In the event of
a breach of any of the representations and warranties described in this
paragraph with respect to any Series, either the Trustee or the holders of
securities evidencing undivided interests in the Trust aggregating more than 50
percent of the invested amount of such Series, by written notice to the
Transferor (and to the Trustee and the Servicer if given by the Securityholders
of such Series), may direct the Transferor to accept reassignment of an amount
of Principal Receivables equal to the invested amount to be reassigned (as
described below) within 60 days of such notice. The Transferor will thereupon be
obligated to accept reassignment of such Receivables (which shall include
related Finance Charge Receivables) on a Distribution Date occurring within such
applicable period (such Distribution Date, a "Reassignment Date"). Such
reassignment will not be required to be made, however, if at any time during
such applicable period such representations and warranties shall then be true
and correct in all material respects. The Transferor shall provide written
notice to the Rating Agencies of any such reassignment. The amount to be
deposited by the Transferor for distribution to securityholders in connection
with such reassignment will be equal to the invested amount for all Series of
securities, other than Variable Funding Securities, required to be reassigned,
at the end of the day on the business day preceding the Reassignment Date, less,
in each case, the amount, if any, on deposit in any Series Account on such date
and allocated for payment of principal to such securityholders, plus an amount
equal to all interest accrued but unpaid on such securities at the applicable
interest rate through such business day, less the amount transferred to the
Distribution Account from any Series Account in respect of interest on such
securities. The payment of the reassignment deposit amount and the transfer of
all other amounts deposited on such date and allocated for payment to the
Securityholders, shall be considered payment in full of the investor interest
for all Series of securities required to be repurchased and will be distributed
upon presentation and surrender of the securities for each such Series. If the
Trustee or securityholders give a notice as provided above, the obligation of
the Transferor to make any such deposit will constitute the sole remedy
available to the Trustee and the securityholders with respect to any breach of
the Transferor's representations and warranties.
Pursuant to the Pooling and Servicing Agreement, the Transferor also
represents and warrants that, among other things, subject to specified
exceptions and limitations, (i) the execution and delivery of the Pooling and
Servicing Agreement and the Purchase Agreement, and the performance of the
transactions contemplated thereby, do not contravene the Transferor's charter or
by-laws, violate any material provision of law applicable to it or require any
filing (except for filing under the UCC), registration, consent, or
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approval under any such law except for such filings, registrations, consents, or
approvals as have already been obtained and are in full force and effect, (ii)
except as described in the Pooling and Servicing Agreement, the Transferor and
each prior owner of the Receivables has filed all tax returns required to be
filed and has paid or made adequate provision for the payment of all taxes,
assessments, and other governmental charges due from the Transferor or such
prior owner or is contesting any such tax, assessment or other governmental
charge in good faith through appropriate proceedings, (iii) there are no
proceedings or investigations pending or, to the best knowledge of the
Transferor, threatened against the Transferor, before any Governmental Authority
asserting the invalidity of the Pooling and Servicing Agreement, and the
Purchase Agreement, seeking to prevent the consummation of any of the
transactions contemplated thereby, seeking any determination or ruling that
would materially and adversely affect the performance by the Transferor of its
obligations thereunder, or seeking any determination or ruling that would
materially and adversely affect the validity or enforceability thereof or
seeking to affect adversely the tax attributes of the Trust, (iv) each
Receivable is or will be an account receivable arising out of the performance by
the applicable Originator in accordance with the terms of the Contract giving
rise to such Receivable, (v) the Transferor has no knowledge of any act which
should have led it to expect at the time of the classification of any Receivable
as an Eligible Receivable that such Receivable would not be paid in full when
due, and each Receivable classified as an Eligible Receivable by the Transferor
in any document or report delivered under the Pooling and Servicing Agreement
satisfies the requirements of eligibility contained in the definition of
Eligible Receivable set forth in the Pooling and Servicing Agreement, (vi) the
Transferor is not an "investment company" within the meaning of the Investment
Company Act (or is exempt from all provisions of such Act), (vii) the Transferor
is not insolvent and will not be rendered insolvent upon the transfer of the
Receivables to the Trust and (viii) the Transferor is the legal and beneficial
owner of all right, title and interest in and to each Receivable conveyed to the
Trust by the Transferor pursuant to the Pooling and Servicing Agreement, and
each such Receivable has been or will be transferred to the Trust free and clear
of any lien other than Permitted Liens and in compliance in all material respect
with all requirements of law applicable to the Transferor. If any representation
or warranty made by the Transferor in the Pooling and Servicing Agreement or the
Series 1998-2 Supplement proves to have been incorrect in any material respect
when made, and as a result the interests of the Securityholders are materially
adversely affected, and such representation or warranty continues to be
incorrect for 60 days after notice to the Transferor by the Trustee or to the
Transferor and the Trustee by more than 50 percent of the Invested Amount and
the interests of the Securityholders continue to be materially adversely
affected during such period, then the holders of more than 50 percent of the
Invested Amount may give notice to the Transferor, the Trustee and the Servicer
declaring that a Pay Out Event has occurred, thereby commencing the Early
Amortization Period; provided, however, that a Pay Out Event will not be deemed
to have occurred as aforesaid if the Transferor has accepted a reassignment of
the affected Receivables during such period in accordance with the Pooling and
Servicing Agreement. See "--Pay Out Events."
It is not required or anticipated that the Trustee will make any initial or
periodic general examination of the Receivables or any records relating to the
Receivables for the purpose of establishing the presence or absence of defects
or compliance with the Transferor's representations and warranties or for any
other purpose. The Servicer, however, will deliver to the Trustee on or before
March 31 of each year an opinion of counsel with respect to the continued
perfection of the security interest of the Trust in and to the Receivables and
certain other Trust assets.
CERTAIN COVENANTS
Pursuant to the Pooling and Servicing Agreement, the Transferor covenants
that, among other things, subject to specified exceptions and limitations, (i)
it will take no action to cause any Receivable to be evidenced by any
instruments or to be anything other than an account, chattel paper or general
intangible, except in connection with the enforcement or collection of a
Receivable, (ii) except for the conveyances under the Pooling and Servicing
Agreement, it will not sell any Receivable or grant a lien (other than a
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Permitted Lien) on any Receivable, (iii) in the event it receives a collection
on any Receivables, it will deposit such collections to the Collection Account
within two business days, (iv) it will notify the Trustee promptly after
becoming aware of any lien on any Receivable other than Permitted Liens, (v) it
will take all actions necessary and appropriate to enforce its rights and claims
under the Bank Purchase Agreement, the Fingerhut Purchase Agreement and the FCI
Purchase Agreement with respect to Receivables arising under Eligible Accounts,
(vi) it will promptly provide the Trustee any notices, reports or certificates
given or delivered under the Fingerhut Purchase Agreement and the FCI Purchase
Agreement and (vii) except as permitted by the Pooling and Servicing Agreement,
it will maintain its separate corporate existence and it will not commingle its
assets with those of FNB or FCI or any affiliate thereof.
ELIGIBLE ACCOUNTS
As of the date the Receivables of such Account are first designated for
inclusion in the Trust, each Account which is in existence and owned by an
Originator that satisfies each of the following criteria will be an Eligible
Account (each, an "Eligible Account"): (a) it is payable in Dollars; (b) the
related Obligor has provided, as its billing address, an address located in the
United States or its territories or possessions or a United States military
address; (c) it has not been identified by the applicable Originator or any of
its affiliates in its computer files as stolen or lost; (d) it is not at the
time of transfer to the Trust sold or pledged to any other party and which does
not have Receivables which, at the time of transfer to the Trust, are sold or
pledged to any other party (provided that Receivables which were sold or pledged
prior to the date such Receivables are first designated for inclusion in the
Trust, but were repurchased free of all liens or where all liens were released
prior to the sale hereunder, shall not be disqualified under this clause (d));
(e) the Receivables in which the applicable Originator has not charged off in
its customary and usual manner for charging off Receivables in such Accounts
unless such Account is subsequently reinstated and (f) the related Obligor is a
Back End Customer.
ELIGIBLE RECEIVABLES
Each Receivable that satisfies each of the following criteria will be an
Eligible Receivable (each, an "Eligible Receivable"): (a) each Receivable
designated for inclusion in the Trust on or after the Amendment Closing Date
shall have arisen under an Eligible Account, (b) it constitutes an "account,"
"chattel paper" or a "general intangible" as such terms are defined in Article 9
of the UCC as then in effect in each Relevant UCC State, (c) it is at the time
of its transfer to the Trust the legal, valid and binding obligation of, or is
guaranteed by, a Person who is competent to enter into a contract and incur debt
and is enforceable against such Person in accordance with its terms, (d) it was
created or acquired in compliance, in all material respects, with all
Requirements of Law applicable to the Originator and pursuant to a Contract that
complies, in all material respects, with all Requirements of Law applicable to
the Originator or such Contract (including without limitation, laws, rules and
regulations relating to truth in lending, usury, fair credit billing, fair
credit reporting, equal credit opportunity and fair debt collection practices),
(e) all material consents, licenses, or authorizations of, or registrations
with, any Governmental Authority required to be obtained or given in connection
with the creation of such Receivable or the execution, delivery, creation, and
performance of the related Contract have been duly obtained or given and are in
full force and effect as of the date of the creation of such Receivables and (f)
immediately prior to giving effect to the sale, the Transferor had good and
marketable title free and clear of all liens and security interests arising
under or through the Transferor (other than Permitted Liens).
ADDITION OF TRUST ASSETS
Subject to the following restrictions, all new Receivables purchased by the
Transferor will be automatically transferred to the Trust; PROVIDED, HOWEVER
that receivables arising pursuant to a consumer revolving credit card account or
a closed-end installment credit card loan originated by FNB or one of its
affiliates other than in connection with sales of merchandise or services by
Fingerhut will not be eligible for
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transfer to the Trust until the Rating Agency Condition has been satisfied with
respect thereto. Future Receivables may be originated using different criteria,
and may have different terms or characteristics, than the Receivables originated
by FNB in connection with the sale of merchandise or services by Fingerhut.
All Receivables will be automatically transferred to the Trust upon purchase
by the Transferor so long as the number of new Obligors (which shall include any
Obligors who, prior to the relevant measuring period did not have a relationship
with Fingerhut, FNB or any affiliate thereof) since the first day of the
eleventh preceding Monthly Period that are Back End Customers minus the number
of new Obligors that are Back End Customers who have previously been approved by
the Rating Agencies since the first day of such eleventh preceding Monthly
Period shall not exceed 20% of the number of Back End Customers at the close of
business on the last day of such eleventh preceding Monthly Period. In addition,
the Transferor may elect at any time to suspend the automatic inclusion of
receivables in new accounts which would otherwise be Additional Accounts as of
any business day (the "Automatic Addition Suspension Date"), or terminate any
such inclusion as of any business day (an "Automatic Addition Termination Date")
until a date (the "Restart Date") to be identified in writing by the Transferor
to the Trustee, the Servicer and each Rating Agency at least 10 days prior to
such Restart Date. If the Transferor has elected to terminate or suspend the
inclusion of receivables in new accounts which would otherwise be Additional
Accounts and (i) on any Determination Date, the Transferor Interest is less than
the Minimum Transferor Interest, the Transferor is required to designate
additional consumer revolving credit card accounts or closed-end installment
loans ("Supplemental Accounts") to be included as Accounts in a sufficient
number such that the Transferor Interest as a percentage of the Aggregate
Principal Receivables for such Monthly Period after giving effect to such
addition is at least equal to the Minimum Transferor Interest, or (ii) on any
Determination Date, the Aggregate Principal Receivables is less than the Minimum
Aggregate Principal Receivables, the Transferor will be obligated to designate
Supplemental Accounts to be included as Accounts and transfer the outstanding
receivables therein in a sufficient number such that the Aggregate Principal
Receivables will be equal to or greater than the Minimum Aggregate Principal
Receivables. Receivables in such Supplemental Accounts are required to be
transferred to the Trust on or before the tenth business day following such
Determination Date. In addition, the Transferor may, but will not be obligated
to, designate from time to time Supplemental Accounts of the Transferor to be
included as Accounts.
Any such transfer of Receivables from Supplemental Accounts will be subject
to the following conditions: (i) on or before the fifth business day prior to
the date of any such addition (each, an "Addition Date") with respect to
required additions and on or before the tenth business day prior to the Addition
Date with respect to optional additions (as applicable, the "Notice Date"), the
Transferor is obligated to give the Trustee, each Rating Agency and the Servicer
written notice that such Supplemental Accounts will be included, which notice
shall specify the approximate aggregate amount of the Receivables to be
transferred; (ii) on or before the applicable Addition Date, the Transferor will
have delivered to the Trustee a written assignment (the "Assignment") and the
Transferor will have indicated in its computer files that the Receivables in the
Supplemental Accounts have been transferred to the Trust and, within five
business days thereafter, the Transferor will have delivered to the Trustee or
the bailee of the Trustee a computer file or microfiche list containing a true
and complete list of all Supplemental Accounts, identified by account number and
the Principal Receivables in such Supplemental Accounts, as of the Addition
Date; (iii) the Transferor will represent and warrant that (x) no selection
procedure that is materially adverse to the interests of the Securityholders or
any holder of a Participation was utilized in selecting the Supplemental
Accounts and (y) as of the applicable Addition Date, the Transferor is not
insolvent and will not be rendered insolvent upon the transfer of the
Receivables in the Supplemental Accounts to the Trust; (iv) the Transferor will
represent and warrant that, as of the Addition Date, the Assignment constitutes
either (x) a valid transfer, assignment, set-over and conveyance to the Trust of
all right, title and interest of the Transferor in and to the Receivables in the
Supplemental Accounts then existing and thereafter created, in each case,
immediately upon the Transferor's acquisition of rights
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therein, and related property or (y) a grant of a security interest (as defined
in the UCC as in effect in the Relevant UCC State) in such property to the
Trust, which grant is enforceable with respect to the then existing Receivables
in the Supplemental Accounts and the proceeds thereof upon the conveyance of
such Receivables to the Trust, and which will be enforceable with respect to
such Receivables thereafter created and the proceeds thereof, upon such
creation, and (z) if the Assignment constitutes the grant of a security interest
to the Trust in such property, upon the filing of a financing statement and in
the case of the Receivables thereafter created in such Supplemental Accounts and
the proceeds thereof, upon such creation, the Trust shall have a first priority
perfected security interest in such property, except for Permitted Liens; (v)
the Transferor will deliver to the Trustee an officer's certificate confirming
the items set forth in clause (ii) above; (vi) the Transferor will deliver to
the Trustee an opinion of counsel with respect to the Trust's security interest
in the Receivables in the Supplemental Accounts (with a copy to the Rating
Agencies); and (vii) the Transferor will have received written notice from each
Rating Agency that the inclusion of such accounts as Supplemental Accounts will
not result in a Ratings Event.
REMOVAL OF ACCOUNTS
On any Determination Date, the Transferor may, but will not be obligated to,
designate certain Accounts (the "Removed Accounts"), all Receivables in which
shall be subject to deletion and removal from the Trust in an aggregate amount
not greater than the lesser of (i) the excess of the Transferor Interest over
the Minimum Transferor Interest and (ii) the excess of Aggregate Principal
Receivables over the Minimum Aggregate Principal Receivables as of the last day
of the related Monthly Period; PROVIDED, HOWEVER, that there will be no more
than one such removal with respect to any Monthly Period. The Transferor will be
permitted to accept reassignment to it of the Receivables from Removed Accounts
only upon satisfaction of the following conditions: (i) on each date specified
by the Transferor for removal of the Removed Accounts (a "Removal Date"), the
Transferor will prepare and the Trustee shall execute and deliver to the
Transferor a written reassignment (the "Reassignment") and the Transferor will
deliver to the Trustee or the bailee of the Trustee a computer file or
microfiche list containing a true and complete schedule identifying all Accounts
the Receivables in which remain in the Trust specifying for each such Account,
as of the Removal Notice Date, its account number and the principal balance of
such Account; (ii) the Transferor will represent and warrant as of each Removal
Notice Date that (a) the list of the Accounts not removed from the Trust, as of
the Removal Notice Date, complies in all material respects with the requirements
of clause (i) above and (b) no selection procedure used by the Transferor that
is materially adverse to the interests of the Investor Securityholders was
utilized in selecting the Removed Accounts; (iii) the Transferor will represent
and warrant that the removal of any Receivables in any Removed Accounts on any
Removal Date will not, in the reasonable belief of the Transferor, cause,
immediately or with the passage of time, a Pay Out Event to occur; (iv) the
Transferor will have delivered at least 20 days' (or such lesser number as any
Rating Agency may agree) prior written notice of such removal to each Rating
Agency that has rated any outstanding Class of any Series and the Trustee shall
have received written confirmation from each such Rating Agency that a Ratings
Event would not occur as a result of such removal; and (v) the Transferor will
have delivered to the Trustee an officer's certificate confirming the
Transferor's compliance with the items set forth in clauses (i) through (iv)
above.
COLLECTION AND OTHER SERVICING PROCEDURES
Pursuant to the Pooling and Servicing Agreement, the Servicer is responsible
for servicing, enforcing, and administering the Receivables and collecting
payments due thereunder in accordance with its usual and customary servicing
procedures and the applicable Credit and Collection Policy. Servicing functions
to be performed with respect to the Receivables include coupon or statement
processing and mailing, collecting and recording payments, investigating payment
delinquencies, and communicating with Obligors. The Servicer may delegate these
servicing functions to a subservicer who agrees to conduct these functions in
accordance with the applicable Credit and Collection Policies; PROVIDED,
HOWEVER, that the delegation of such duties shall not materially adversely
affect the taxability of the Trust under the
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applicable state income tax law of any Applicable Tax State; AND PROVIDED,
FURTHER, that the Servicer shall remain jointly and severally liable with such
subservicer. FNB, as servicer, has designated Fingerhut as a subservicer for a
substantial portion of the servicing of the Receivables. FNB has the ability to
change subservicers from time to time. FNB is contemplating delegating all or a
portion of the servicing functions for consumer revolving credit card accounts
to a third party subservicer. See "The Receivables--Collection Procedures."
Managerial functions to be performed by the Servicer on behalf of the Trust
include maintaining books and records with respect to the foregoing and other
matters pertinent to the Receivables, assisting the Trustee with any inspections
of such books and records by the Trustee pursuant to the Pooling and Servicing
Agreement, preparing and delivering the monthly and annual statements described
in "--Reports to Securityholders," and causing a firm of independent certified
public accountants to prepare and deliver the annual reports described in
"--Evidence as to Compliance."
TRUST ACCOUNTS
The Trustee has established and maintains with a Qualified Institution in
the name of the Trust, for the benefit of the Securityholders, two separate
accounts, each in a segregated trust account, consisting of an "Interest Funding
Account" and a "Principal Account". The Trustee will also establish a
"Distribution Account" for the benefit of the Securityholders which will be a
non-interest bearing segregated demand deposit account established with a
Qualified Institution. The Servicer is required to establish and maintain, in
the name of the Trust, for the benefit of securityholders of all Series, a
"Collection Account," which shall be a deposit account or a segregated trust
account established by and maintained by the Servicer with a Qualified
Institution. A "Qualified Institution" is (i) with respect to a deposit account,
a depository institution or trust company, which may include the Trustee,
organized under the laws of the United States or any one of the states thereof
or the District of Columbia, which at all times has a short-term rating of P-1
by Moody's and of A-1+ by Standard & Poor's or long-term unsecured debt
obligation (other than such obligation the rating of which is based on
collateral or on the credit of a Person other than such institution or trust
company) rating of at least Aa3 by Moody's and of AAA by Standard & Poor's and
deposit insurance provided by the FDIC, or (ii) with respect to a segregated
trust account, the corporate trust department of a depository institution, which
may include the Trustee, which is rated at least Baa3 by Moody's. Funds in the
Principal Account and the Interest Funding Account, will be invested, at the
direction of the Transferor, in (a) negotiable instruments or securities
represented by instruments in bearer or registered form which evidence (i)
obligations of or fully guaranteed by the United States of America; (ii) time
deposits, promissory notes, or certificates of deposit of any depositary
institution or trust company; PROVIDED, HOWEVER, that at the time of the Trust's
investment or contractual commitment to invest therein, the certificates of
deposit or short-term deposits of such depositary institution or trust company
shall have a credit rating from Standard & Poor's of A-1+ and from Moody's of
P-1; (iii) commercial paper having, at the time of the Trust's investment or
contractual commitment to invest therein, a rating from Standard & Poor's of
A-1+ and from Moody's of P-1; (iv) bankers acceptances issued by any depositary
institution or trust company described in clause (a)(ii) above; and (v)
investments in money market funds rated AAA-m or AAA-mg by Standard & Poor's and
Aaa by Moody's or otherwise approved in writing by Moody's and Standard &
Poor's; (b) time deposits and demand deposits in the name of the Trust or the
Trustee in any depositary institution or trust company referred to in clause
(a)(ii) above; (c) securities not represented by an instrument that are
registered in the name of the Trustee or its nominee (which may not be FCI or an
affiliate) upon books maintained for that purpose by or on behalf of the issuer
thereof and identified on books maintained for that purpose by the Trustee as
held for the benefit of the Trust or the Securityholders, and consisting of (x)
shares of an open end diversified investment company which is registered under
the Investment Company Act which (i) invests its assets exclusively in
obligations of or guaranteed by the United States of America or any
instrumentality or agency thereof having in each instance a final maturity date
of less than one year from their date of purchase or other Cash Equivalents,
(ii) seeks to maintain a constant net asset value per share, (iii) has aggregate
net assets of not less than $100,000,000 on the date of purchase of such shares
and (iv) which the Rating Agency designates in writing
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will not result in a withdrawal or downgrading of its then current rating of any
Series rated by it or (y) Eurodollar time deposits of a depository institution
or trust company that are rated A-1+ by Standard & Poor's and P-1 by Moody's;
PROVIDED, HOWEVER, that at the time of the Trust's investment or contractual
commitment to invest therein, the Eurodollar deposits of such depositary
institution or trust company shall have a credit rating from Standard & Poor's
of A-1+ and P-1 by Moody's; (d) a guaranteed investment contract (guaranteed as
to timely payment) which each Rating Agency designates in writing will not
result in a withdrawal or downgrading of its then current rating of any Series
rated by it; (e) repurchase agreements transacted with either (i) an entity
subject to the United States federal bankruptcy code, provided, however, that
(A) the term of the repurchase agreement is consistent with the requirements
with regard to the maturity of Cash Equivalents specified herein or in the
applicable Supplement for the applicable account or is due on demand, (B) the
Trustee or a third party acting solely as agent for the Trustee has possession
of the collateral, (C) the Trustee on behalf of the Trust has a perfected first
priority security interest in the collateral, (D) the market value of the
collateral is maintained at the requisite collateral percentage of the
obligation in accordance with standards of the Rating Agencies, (E) the failure
to maintain the requisite collateral level will obligate the Trustee to
liquidate the collateral as promptly as practicable upon instructions from the
Servicer, (F) the securities subject to the repurchase agreement are either
obligations of, or fully guaranteed as to principal and interest by, the United
States of America or any agency or any instrumentality or agency thereof,
certificates of deposit or bankers acceptances and (G) the securities subject to
the repurchase agreement are free and clear of any third party lien or claim, or
(ii) a financial institution insured by the FDIC, or any broker-dealer with
"retail-customers" that is under the jurisdiction of the Securities Investors
Protection Corporation, provided, however, that (A) the market value of the
collateral is maintained at the requisite collateral percentage of the
obligation in accordance with the standards of the Rating Agencies, (B) the
Trustee or a third party (with a rating from Moody's and Standard & Poor's of
P-1 and A-1+, respectively) acting solely as agent for the Trustee has
possession of the collateral, (C) the collateral is free and clear of third
party liens and, in the case of a broker that is under the jurisdiction of the
Securities Investors Protection Corporation, was not acquired pursuant to a
repurchase or reverse repurchase agreement and (D) the failure to maintain the
requisite collateral percentage will obligate the Trustee to liquidate the
collateral upon instructions from the Servicer; provided, however, that at the
time of the Trust's investment or contractual commitment to invest in any
repurchase agreement the short-term deposits or commercial paper rating of such
entity or institution in subsections (i) and (ii) above shall have a credit
rating of P-1 or A-1+ or their equivalent from each Rating Agency; and (f) any
other investment if each Rating Agency confirms in writing that such investment
will not adversely affect its then current rating of the Investor Securities
(such investments, "Cash Equivalents"). Any earnings (net of losses and
investment expenses) on funds in the Interest Funding Account and the Principal
Account will be Available Series 1998-2 Finance Charge Collections. The Servicer
has the revocable power to withdraw funds from the Collection Account, and to
instruct the Trustee to make withdrawals and payments from the Interest Funding
Account, the Excess Funding Account, the Principal Account and any Series
Account, in each case for the purpose of making deposits and distributions
required under the Pooling and Servicing Agreement, including the deposits and
distributions described in "--Applications of Collections." The agent making
payments to the Securityholders (the "Paying Agent") has the revocable power to
withdraw funds from the Distribution Account for the purpose of making
distributions to Securityholders. The Paying Agent initially will be The Bank of
New York and in certain limited circumstances the Banque Generale du Luxembourg
S.A.
On the Closing Date, the Transferor will make an initial deposit to the
Interest Funding Account in an amount equal to $2,000,000.
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EXCESS FUNDING ACCOUNT
The Trustee has established and will maintain in the name of the Trust, for
the benefit of the securityholders of all Series, an "Excess Funding Account"
which is a segregated account established by and maintained by the Servicer with
a Qualified Institution. At any time during which no Series is in an
amortization period (including any early amortization period), or for a Series
in amortization, the principal account, if any, is fully funded for an
applicable period, and the Transferor Interest does not exceed the Minimum
Transferor Interest, funds (to the extent available therefor as described
herein) otherwise payable to the Transferor will be deposited in the Excess
Funding Account on any business day until the Transferor Interest is at least
equal to the Minimum Transferor Interest. Funds on deposit in the Excess Funding
Account may, at the option of the Transferor, be withdrawn and paid to the
Transferor to the extent that on any day the Transferor Interest exceeds the
Minimum Transferor Interest. Such deposits in and withdrawals from the Excess
Funding Account may be made on a daily basis.
The portion of any funds on deposit in the Excess Funding Account to be
applied for the benefit of the Securities at the beginning of the Amortization
Period will be deposited in the Principal Account as part of Class A Principal
for the next succeeding Distribution Date. In the event that more than one
Series begins its amortization period at the same time, any funds on deposit in
the Excess Funding Account will be applied as if they were Shared Principal
Collections.
Funds on deposit in the Excess Funding Account will be invested by the
Trustee at the direction of the Transferor in Cash Equivalents. On each
Distribution Date, all net investment income earned on amounts in the Excess
Funding Account since the preceding Distribution Date will be withdrawn from the
Excess Funding Account and treated as Finance Charge Collections.
ALLOCATION PERCENTAGES
Pursuant to the Pooling and Servicing Agreement, during each Monthly Period
the Servicer will allocate among the Series 1998-2 Securityholders' Interest,
the interest of the holders of the Other Series then outstanding, the holders of
any Participations then outstanding and the Transferor Interest pursuant to the
Pooling and Servicing Agreement and applicable Supplements all Finance Charge
Collections and all Principal Collections and the Default Amount. Finance Charge
Collections will be allocated prior to the commencement of an Early Amortization
Period and the Default Amount will be allocated at all times, and Principal
Collections will be allocated during the Revolving Period to the Series 1998-2
Securityholders' Interest, based on the percentage equivalent of a fraction, the
numerator of which is the Adjusted Invested Amount as of the beginning of such
business day after giving effect to any deposits to be made to the Principal
Account on such business day and the denominator of which is the greater of (a)
the sum of the aggregate amount of Principal Receivables and the amounts on
deposit in the Excess Funding Account as of the beginning of such business day
after giving effect to any deposits or withdrawals to be made to the Excess
Funding Account on such business day and (b) the sum of the numerators used to
calculate the applicable floating or fixed/floating percentages with respect to
all Participations and all classes of all Series then outstanding (the "Floating
Percentage"). During the Revolving Period, all Principal Collections allocable
to the Securities will be allocated and paid to the Transferor (except for
collections applied as Redirected Principal Collections and Shared Principal
Collections paid to the holders of securities of other Series, if any, and
except for funds deposited in the Excess Funding Account). On any business day
on or after the Amortization Period Commencement Date, Principal Collections
will be allocated to the Series 1998-2 Securityholders' Interest based on the
percentage equivalent of a fraction the numerator of which is the Invested
Amount at the end of the last day of the Revolving Period and the denominator of
which is the greater of (a) the sum of the aggregate amount of Principal
Receivables and the amounts on deposit in the Excess Funding Account as of the
beginning of such business day after giving effect to any deposits or
withdrawals to be made to the Excess Funding Account on such business day and
(b) the sum of the numerators used to calculate the applicable floating or
fixed/floating percentages with respect to Principal Collections for all
Participations and all classes of all Series then outstanding (the
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"Fixed/Floating Percentage"). Finance Charge Collections will be applied on and
after the date on which a Pay Out Event is deemed to occur to the Series 1998-2
Securityholders' Interest based on the Fixed/ Floating Percentage. On and after
the date on which a Defeasance occurs with respect to the Securities, each of
the percentages specified above with respect to the Securities will be zero. See
"--Defeasance."
The term "Transferor Percentage" means (a) when used with respect to (i)
Principal Collections during the Revolving Period and (ii) Finance Charge
Collections and Default Amounts, a percentage equal to 100 percent minus the sum
of the Floating Percentage, the floating percentages for all other Series and
the Participation Percentages with respect to all Participations and (b) when
used with respect to Principal Collections during the Amortization Period, 100
percent minus the sum of the Fixed/Floating Percentage, the allocation
percentages used with respect to Principal Collections for all other Series and
the Participation Percentages with respect to all Participations.
As used herein: (i) the term "Class A Invested Amount" for any date means an
amount equal to (a) the initial principal amount of the Class A Securities,
minus (b) the aggregate amount of principal payments made to Class A
Securityholders through and including such date, and minus (c) the aggregate
amount of Class A Charge-Offs for all prior Distribution Dates plus (d) the
aggregate amount of Available Series 1998-2 Finance Charge Collections,
Transferor Finance Charge Collections, Excess Finance Charge Collections and
Redirected Principal Collections applied on all prior Distribution Dates for the
purpose of reimbursing amounts deducted pursuant to the foregoing clause (c),
PROVIDED, HOWEVER, that the Class A Invested Amount may not be reduced below
zero; (ii) the term "Class A Adjusted Invested Amount" for any date means an
amount not less than zero equal to the then current Class A Invested Amount
minus the amount then on deposit in the Principal Account; (iii) the term "Class
B Invested Amount" for any date means an amount equal to (a) the initial
principal amount of the Class B Securities, minus (b) the aggregate amount of
principal payments made to Class B Securityholders through and including such
date, minus (c) the aggregate amount of Class B Charge-Offs for all prior
Distribution Dates, minus (d) the aggregate amount of Redirected Class B
Principal Collections through and including such business days for which neither
the Class D Invested Amount nor the CTO Invested Amount has been reduced on all
prior Distribution Dates pursuant to the Pooling and Servicing Agreement, plus
(e) the aggregate amount of Available Series 1998-2 Finance Charge Collections,
Transferor Finance Charge Collections, Excess Finance Charge Collections,
Redirected CTO Principal Collections, Redirected Class D Principal Collections
and certain other amounts applied on all prior Distribution Dates for the
purpose of reimbursing amounts deducted pursuant to the foregoing clauses (c)
and (d); PROVIDED, HOWEVER; that the Class B Invested Amount may not be reduced
below zero; (iv) the term "Class B Adjusted Invested Amount" for any date means
an amount not less than zero equal to the Class B Invested Amount minus the
excess, if any, of the amount then on deposit in the Principal Account over the
Class A Invested Amount; (v) the term "CTO Invested Amount" for any date means
an amount equal to (a) the initial principal amount of the Collateralized Trust
Obligations, minus (b) the aggregate amount of principal payments made to CTO
Securityholders through and including such date, minus (c) the aggregate amount
of CTO Charge-Offs for all prior Distribution Dates minus (d) the aggregate
amount of Redirected CTO Principal Collections and Redirected Class B Principal
Collections for which the Class D Invested Amount has not been reduced for all
prior Distribution Dates, plus (e) the aggregate amount of Available Series
1998-2 Finance Charge Collections, Transferor Finance Charge Collections, Excess
Finance Charge Collections, Redirected Class D Principal Collections, and
certain other amounts applied on all prior Distribution Dates for the purpose of
reimbursing amounts deducted pursuant to the foregoing clauses (c) and (d)
PROVIDED, HOWEVER, that the CTO Invested Amount may not be reduced below zero;
(vi) the term "CTO Adjusted Invested Amount" for any date means an amount not
less than zero equal to the CTO Invested Amount minus the excess, if any, of the
amount then on deposit in the Principal Account over the Class A Invested Amount
and the Class B Invested Amount; (vii) the term "Class D Invested Amount" for
any date means an amount equal to (a) the initial principal amount of the Class
D Securities, minus (b) the aggregate amount of principal payments made to Class
D Securityholders through and including such date and minus the amounts by which
the Transferor has elected to reduce the Class D Invested Amount to the extent
it
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exceeds the Stated Class D Amount, minus (c) the aggregate amount of Class D
Charge-Offs for all prior Distribution Dates, minus (d) the aggregate amount of
Redirected Principal Collections through and including such business day, plus
(e) the aggregate amount of Finance Charge Collections, Transferor Finance
Charge Collections, Excess Finance Charge Collections and certain other amounts
applied on all prior Distribution Dates for the purpose of reimbursing amounts
deducted pursuant to the foregoing clauses (c) and (d); PROVIDED, HOWEVER, that
the Class D Invested Amount may not be reduced below zero; (viii) the term
"Stated Class D Amount" means the greater of (a) zero and (b) a number rounded
to the nearest dollar equal to 13.64 percent of the ABC Adjusted Invested
Amount; PROVIDED, HOWEVER, that during any Early Amortization Period the Stated
Class D Amount shall be equal to the Stated Class D Amount immediately preceding
the commencement of the Early Amortization Period; provided, further, that on
any business day after the earlier of (a) the Class A Expected Final Payment
Date if the Class A Invested Amount was not paid in full on the Class A Expected
Final Payment Date or (b) the Class B Expected Final Payment Date if the Class B
Invested Amount was not paid in full on the Class B Expected Final Payment Date,
the Stated Class D Amount shall be equal to the Stated Class D Amount on the
Class A Expected Final Payment Date or the Class B Expected Final Payment Date,
as applicable; provided, further, that there shall be no reduction in the Stated
Class D Amount on any day on which the amount on deposit in the Revolving
Receivables Reserve Account is less than the Specified Revolving Receivables
Reserve Amount or the amount on deposit in the reserve account established for
the benefit of the CTO Securities is less than the specified amount for such
account and; provided, further, that the Stated Class D Amount shall not be less
than $15,340,920 prior to the date on which each of the outstanding principal
balances of the Class A Securities, the Class B Securities and the
Collateralized Trust Obligations have been reduced to zero; and (ix) the term
"Invested Amount" means the sum of the Class A Invested Amount, the Class B
Invested Amount, the CTO Invested Amount and the Class D Invested Amount.
As a result of the Floating Percentage, the portion of the Finance Charge
Collections and the Default Amount applicable with respect to the
Securityholders will change each business day based on the relationship of the
Adjusted Invested Amount to the total amount of Principal Receivables and
amounts on deposit in the Excess Funding Account. The numerator of the
percentage of collections of Principal Receivables allocable to the Series
1998-2 Securityholders, however, will remain fixed during the Amortization
Period. Collections of Principal Receivables allocable to the Class B Securities
are subject to possible redirection for the benefit of the Class A
Securityholders; collections of Principal Receivables allocable to the CTO
Invested Amount are subject to possible redirection for the benefit of the Class
A Securityholders and the Class B Securityholders and collections of Principal
Receivables allocable to the Class D Invested Amount are subject to possible
redirection for the benefit of the Class A Securityholders, the Class B
Securityholders and the CTO Securityholders. See "--Redirected Principal
Collections" below.
REDIRECTION OF CASH FLOWS
If any amounts are on deposit in the Excess Funding Account on any business
day, the Servicer will determine the Negative Carry Amount, if any. The Servicer
will apply an amount equal to the lesser of (i) the Transferor Finance Charge
Collections on such business day, and (ii) the Negative Carry Amount for such
business day in the manner specified for application of Available Series 1998-2
Finance Charge Collections.
On each business day the Servicer will determine the Required Amount, if
any. To the extent of any Required Amount, the Servicer will apply all or a
portion of the Excess Finance Charge Collections of other Series with respect to
such business day allocable to the Securities in an amount equal to the Required
Amount. Excess Finance Charge Collections from other Series allocable to the
Securities for any business day will be equal to the product of (x) Excess
Finance Charge Collections available from all other Series for such business day
and (y) a fraction, the numerator of which is the Required Amount for such
business day (as reduced by amounts applied pursuant to the preceding paragraph)
and the denominator
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of which is the aggregate amount of shortfalls in required amounts or other
amounts to be paid from available Finance Charge Collections for all Series for
such business day.
REDIRECTED PRINCIPAL COLLECTIONS
On each business day, the Servicer will apply or cause the Trustee to apply
an amount, not to exceed the Class D Invested Amount, equal to the lesser of (x)
the product of (a)(i) during the Revolving Period, the Class D Floating
Percentage or (ii) during an Amortization Period, the Class D Fixed/Floating
Percentage and (b) the amount of Principal Collections with respect to such
business day and (y) an amount equal to the sum of (a) the Class A Required
Amount for such business day, (b) the Class B Required Amount for such business
day and (c) the CTO Required Amount for such business day (such amount,
"Redirected Class D Principal Collections"), as if such amount was Available
Series 1998-2 Finance Charge Collections. Any such Principal Collections
allocable to the Securities not applied in the foregoing manner (and therefore
not constituting Redirected Class D Principal Collections) will, on business
days with respect to the Revolving Period, be applied as Shared Principal
Collections and, on business days with respect to an Amortization Period, be
included in Available Series 1998-2 Principal Collections.
On each business day, the Servicer will apply or cause the Trustee to apply
an amount, not to exceed the CTO Invested Amount, equal to the lesser of (x) the
product of (a)(i) during the Revolving Period, the CTO Floating Percentage or
(ii) during an Amortization Period, the CTO Fixed/Floating Percentage and (b)
the amount of Principal Collections with respect to such business day and (y) an
amount equal to the sum of (a) the excess, if any, of the Class A Required
Amount for such business day over the amount of Redirected Class D Principal
Collections applied with respect thereto for such business day and (b) the
excess, if any, of the Class B Required Amount for such business day over the
amount of Redirected Class D Principal Collections applied with respect thereto
for such business day (such amount, "Redirected CTO Principal Collections"), as
if such amount was Available Series 1998-2 Finance Charge Collections. Any such
Principal Collections allocable to the Securities not applied in the foregoing
manner (and therefore not constituting Redirected CTO Principal Collections)
will, on business days with respect to the Revolving Period, be applied as
Shared Principal Collections and, on business days with respect to an
Amortization Period, be included in Available Series 1998-2 Principal
Collections.
On each business day, the Servicer will apply or cause the Trustee to apply
an amount, not to exceed the Class B Invested Amount, equal to the lesser of (x)
the product of (a)(i) during the Revolving Period, the Class B Floating
Percentage or (ii) during an Amortization Period, the Class B Fixed/Floating
Percentage and (b) the amount of Principal Collections with respect to such
business day and (y) an amount equal to the excess, if any, of the Class A
Required Amount for such business day over the sum of the amount of Redirected
Class D Principal Collections and Redirected CTO Principal Collections applied
with respect thereto for such business day (such amount, "Redirected Class B
Principal Collections"), as if such amount was Available Series 1998-2 Finance
Charge Collections. Any such Principal Collections allocable to the Securities
not applied in the foregoing manner (and therefore not constituting Redirected
Class B Principal Collections) will, on business days with respect to the
Revolving Period, be applied as Shared Principal Collections and, on business
days with respect to an Amortization Period, be included in Available Series
1998-2 Principal Collections.
On each Distribution Date the Class D Invested Amount will be reduced by the
aggregate amount of unreimbursed Redirected Principal Collections for the
related Monthly Period. In the event that such reduction would cause the Class D
Invested Amount to be a negative number, the Class D Invested Amount will be
reduced to zero and the CTO Invested Amount will be reduced by the amount by
which the Class D Invested Amount would have been reduced below zero. On each
Distribution Date, in the event that the aggregate amount of unreimbursed
Redirected Principal Collections for the related Monthly Period would cause the
CTO Invested Amount to be a negative number, the CTO Invested Amount will be
reduced to zero and the Class B Invested Amount will be reduced by the amount by
which the CTO
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Invested Amount would have been reduced below zero. In the event that on any
business day the aggregate amount of unreimbursed Redirected Principal
Collections for the then current Monthly Period would cause the Class B Invested
Amount to be a negative number on the related Distribution Date, the amount of
Redirected Class B Principal Collections on such business day will be an amount
not to exceed the amount which would cause the Class B Invested Amount to be
reduced to zero.
APPLICATION OF COLLECTIONS
IN GENERAL. Obligors make payments on the Receivables to the Servicer, who
deposits all such payments, other than collections allocated to the holder of
any Participation, in the Collection Account no later than the second business
day following the date of processing. On the day on which any deposit to the
Collection Account is available, the Servicer will make the deposits and
payments to the accounts and parties as indicated below; PROVIDED, HOWEVER, that
for as long as FNB or any affiliate of FNB remains the Servicer under the
Pooling and Servicing Agreement, then the Servicer may make such deposits and
payments on the business day immediately prior to each Distribution Date (the
"Transfer Date") in an aggregate amount equal to the net amount of such deposits
and payments which would have been made had the conditions of this proviso not
applied if (a)(i) FNB or any affiliate of FNB provides to the Trustee a letter
of credit or other form of Enhancement rated at least A-1 by Standard & Poor's
and P-1 by Moody's and (ii) the Transferor shall not have received a notice from
each Rating Agency that making payments monthly rather than daily would result
in the lowering of such Rating Agency's then-existing rating of any Series of
securities then outstanding or (b) FNB has and maintains a short-term credit
rating of P-1 by Moody's and A-1 by Standard & Poor's.
If clause (a) or clause (b) set forth in the proviso to the immediately
preceding paragraph is satisfied, payments on the Receivables collected by the
Servicer will not be segregated from the assets of the Servicer. Until such
payments on the Receivables collected by the Servicer are deposited into the
Collection Account, such funds may be used by the Servicer for its own benefit,
and the proceeds of any short-term investment of such funds will accrue to the
Servicer. During such times as the Servicer holds funds representing payments on
the Receivables collected by the Servicer and is permitted to use such funds for
its own benefit, the Securityholders are subject to risk of loss, including risk
resulting from the bankruptcy or insolvency of the Servicer. The Servicer pays
no fee to the Trust or any Securityholder for any use by the Servicer of funds
representing Collections on the Receivables.
The Servicer will withdraw the following amounts from the Collection Account
for application on each business day as indicated:
(i) an amount equal to the Transferor Percentage of the aggregate amount
of Principal Collections will be paid to the Transferor;
(ii) an amount equal to the Transferor Percentage of the aggregate
amount of Finance Charge Collections will be paid to the holder of the
Exchangeable Transferor Security to the extent such funds are not allocated
to any Series as set forth in the applicable Supplement;
(iii) an amount equal to the sum of (a) prior to the occurrence of a Pay
Out Event, the Floating Percentage, and on and after the occurrence of a Pay
Out Event, the Fixed/Floating Percentage, of the sum of the aggregate amount
of Finance Charge Collections, (b) certain Transferor Finance Charge
Collections allocable to the Securities and (c) Excess Finance Charge
Collections of other Series
allocable to such Series, will be allocated and paid as described below in
"--Payment of Fees, Interest and Other Items";
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(iv) during the Revolving Period, an amount equal to the Floating
Percentage of Principal Collections (less the amount thereof which may be
applied as Redirected Principal Collections) will be applied as Shared
Principal Collections;
(v) during the Amortization Period, an amount equal to the
Fixed/Floating Percentage of Principal Collections (less the amount thereof
applied as Redirected Principal Collections), any amount on deposit in the
Excess Funding Account allocated to the holders of the Securities, any
amounts to be paid in respect of the Series Default Amount, unpaid
Adjustment Payments, Class A Charge-Offs, Class B Charge-Offs and CTO
Charge-Offs and any amount of Shared Principal Collections allocated to the
Securities on such business day, up to (a) during the Controlled
Amortization Period, the Class A Controlled Distribution Amount or Class B
Controlled Distribution Amount, as applicable, or (b) during the Early
Amortization Period, the Invested Amount, will be deposited in the Principal
Account;
(vi) Shared Principal Collections will be allocated to each outstanding
Series pro rata based on any shortfalls with respect to principal payments
with respect to any Series which is in its amortization period, and then, at
the option of the Transferor, to make payments of principal with respect to
the Variable Funding Securities. The Servicer will pay any remaining Shared
Principal Collections on such business day to the holder of the Exchangeable
Transferor Security; and
(vii) Excess Finance Charge Collections will be allocated as set forth
below in clause (xviii) of "--Payment of Fees, Interest and Other Items."
In addition, on each business day the Servicer will pay to the holder of
each Participation an amount equal to the applicable Participation Percentage of
all Collections received on such day.
Any Shared Principal Collections and other amounts described above as being
payable to the Transferor will not be paid to the Transferor if the Transferor
Interest on any date, after giving effect to the inclusion in the Trust of all
Receivables on or prior to such date and the application of all prior payments
to the Transferor, does not exceed the Minimum Transferor Interest. Any such
amounts otherwise payable to the Transferor, together with any Adjustment
Payments, as described below, will be deposited into and held in the Excess
Funding Account, and on and after the Amortization Period Commencement Date with
respect to any Series, such amounts will be applied as if they were Shared
Principal Collections. See "--Excess Funding Account."
PAYMENT OF FEES, INTEREST AND OTHER ITEMS. On each business day during a
Monthly Period, the Servicer will determine, (a) prior to the date on which a
Pay Out Event is deemed to occur, the Floating Percentage of the Finance Charge
Collections for such business day or, on and after the date on which a Pay Out
Event is deemed to occur, the Fixed/Floating Percentage of the Finance Charge
Collections for such business day, (b) amounts on deposit in the Payment Reserve
Account, if any, if and to the extent the Transferor designates that such
amounts are to be so applied, (c) Reserve Account Investment Proceeds and
investment earnings on amounts on deposit in the Interest Funding Account and
the Principal Account and (d) Defeasance Funding Account Investment Proceeds and
amounts withdrawn from the Defeasance Reserve Account and the Revolving
Receivables Reserve Account (which amounts shall be applied on each Transfer
Date as if such amounts had been available on the last business day of the
preceding Monthly Period) (collectively, the "Available Series 1998-2 Finance
Charge Collections" PROVIDED, that with respect to the Closing Date the amount
of the initial deposit by the Transferor to the Interest Funding Account will
constitute Available Series 1998-2 Finance Charge Collections, and PROVIDED
FURTHER that certain Transferor Finance Charge Collections and Excess Finance
Charge Collections allocable to the Series 1998-2 Securities and Redirected
Principal Collections shall be applied as if such amounts were Available Series
1998-2 Finance Charge Collections) and the Servicer will instruct the Trustee to
apply such amount in the following priority:
(i) an amount equal to the lesser of (A) the Available Series 1998-2
Finance Charge Collections and (B) the excess of (a) the sum of (1) the
Class A Monthly Interest, (2) the amount of any Class A Monthly Interest due
to be deposited but not deposited in the Interest Funding Account in prior
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Monthly Periods, and (3) any additional interest (to the extent permitted by
applicable law) at the Class A Interest Rate with respect to interest
amounts that were due to be deposited but not deposited in prior Monthly
Periods over (b) the amount which has already been deposited in the Interest
Funding Account with respect thereto in the current Monthly Period, will be
deposited in the Interest Funding Account for distribution on the next
succeeding Distribution Date to the Class A Securityholders;
(ii) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) the excess of (a) the sum of
(1) the Class B Monthly Interest, (2) the amount of any Class B Monthly
Interest due to be deposited but not deposited in the Interest Funding
Account in prior Monthly Periods, and (3) any additional interest (to the
extent permitted by applicable law) at the Class B Interest Rate with
respect to Class B Monthly Interest amounts that were due to be deposited
but not deposited in prior Monthly Periods over (b) the amount which has
already been deposited in the Interest Funding Account with respect thereto
in the current Monthly Period, will be deposited in the Interest Funding
Account for distribution on the next succeeding Distribution Date to the
Class B Securityholders;
(iii) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) the excess of (a) the sum of
(1) the CTO Monthly Interest, (2) the amount of any CTO Monthly Interest due
to be deposited but not deposited in the Interest Funding Account in prior
Monthly Periods, and (3) any additional interest (to the extent permitted by
applicable law) at the CTO Interest Rate with respect to CTO Monthly
Interest amounts that were due to be deposited but not deposited in prior
Monthly Periods over (b) the amount which has already been deposited in the
Interest Funding Account with respect thereto in the current Monthly Period,
will be deposited in the Interest Funding Account for distribution on the
next succeeding Distribution Date to the CTO Securityholders;
(iv) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) the portion of the Monthly
Servicing Fee for the current month that has not been previously paid to the
Servicer plus any prior Monthly Servicing Fee that was due but not
previously paid to the Servicer will be distributed to the Servicer;
(v) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) the sum of (1) the aggregate
Series Default Amount for such business day and (2) the unpaid Series
Default Amount for any prior business day during the then-current Monthly
Period, will be (w) during the Revolving Period, treated as Shared Principal
Collections and (x) during the Amortization Period, treated as Available
Series 1998-2 Principal Collections for the benefit of the Securities;
(vi) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) the Series 1998-2 Percentage of
any Adjustment Payment which the Transferor is required but fails to make on
such business day or any prior business day during such Monthly Period
pursuant to the Pooling and Servicing Agreement, less any amounts previously
withdrawn pursuant to this clause (vi) on account of such unpaid Adjustment
Payments, will be (a) during the Revolving Period, treated as Shared
Principal Collections and (b) during the Amortization Period, treated as
Available Series 1998-2 Principal Collections for the benefit of the
Securities;
(vii) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) unreimbursed Class A
Charge-Offs, if any, will be applied to reimburse Class A Charge-Offs and
(w) during the Revolving Period, be treated as Shared Principal Collections
and (x) during the Amortization Period, be treated as Available Series
1998-2 Principal Collections for the benefit of the Securities;
(viii) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) the sum of (1) the amount of
interest which has accrued with respect to the outstanding aggregate
principal amount of the Class B Securities at the Class B Interest Rate but
not
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previously deposited in the Interest Funding Account will be deposited in
the Interest Funding Account and (2) any additional interest (to the extent
permitted by applicable law) at the Class B Interest Rate with respect to
such interest amounts that were due to be deposited but not deposited in the
Interest Funding Account in any previous Monthly Period, will be deposited
in the Interest Funding Account for distribution on the next succeeding
Distribution Date to Class B Securityholders;
(ix) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) the sum of (1) the amount of
interest which has accrued with respect to the outstanding aggregate
principal balance of the Collateralized Trust Obligations at the CTO
Interest Rate but not previously deposited in the Interest Funding Account
will be deposited in the Interest Funding Account, and (2) any additional
interest (to the extent permitted by applicable law) at the CTO Interest
Rate with respect to such interest amounts that were due to be deposited but
not deposited in the Interest Funding Account in any previous Monthly
Period, will be deposited in the Interest Funding Account for distribution
on the next succeeding Distribution Date to CTO Securityholders;
(x) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) unreimbursed Class B
Charge-Offs, if any, will be applied to reimburse Class B Charge-Offs and
(w) during the Revolving Period, be treated as Shared Principal Collections
and (x) during the Amortization Period, be treated as Available Series
1998-2 Principal Collections for the benefit of the Securities;
(xi) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) unreimbursed CTO Charge-Offs,
if any, will be applied to reimburse CTO Charge-Offs and (w) during the
Revolving Period, be treated as Shared Principal Collections and (x) during
the Amortization Period, be treated as Available Series 1998-2 Principal
Collections for the benefit of the Securities;
(xii) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) unreimbursed Class D
Charge-Offs, if any, will be applied to reimburse Class D Charge-Offs and
(w) during the Revolving Period, be treated as Shared Principal Collections
and (x) during the Amortization Period, be treated as Available Series
1998-2 Principal Collections for the benefit of the Securities;
(xiii) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) the sum of (1) the amount of
interest which has accrued with respect to the outstanding aggregate
principal amount of the Class D Securities at the Class D Interest Rate but
not previously been deposited in the Interest Funding Account on any prior
business day or paid to the Class D Securityholders will be deposited in the
Interest Funding Account and (2) any additional interest (to the extent
permitted by applicable law) at the Class D Interest Rate with respect to
such interest amounts that were due but not deposited in the Interest
Funding Account in any previous Monthly Period, will be deposited in the
Interest Funding Account for distribution on the next succeeding
Distribution Date to Class D Securityholders;
(xiv) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) an amount equal to the excess,
if any, of the Specified Revolving Receivables Reserve Amount on such date
over the amount then on deposit in the Revolving Receivables Reserve Account
will be deposited in the Revolving Receivables Reserve Account;
(xv) at the option of the Transferor, on and after the Defeasance Reserve
Account Funding Date, but prior to the date on which a Defeasance occurs, an
amount equal to the lesser of any Available Series 1998-2 Finance Charge
Collections remaining and the excess, if any, of the Required Defeasance
Reserve Account Amount over the Available Defeasance Reserve Account Amount
will be deposited in the Defeasance Reserve Account;
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(xvi) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) any amount required to be
deposited in a reserve account established for the benefit of the
Collateralized Trust Obligations will be deposited in such reserve account;
(xvii) an amount equal to the lesser of (A) any Available Series 1998-2
Finance Charge Collections remaining and (B) an amount designated by the
Transferor in writing will be deposited in the Payment Reserve Account; and
(xviii) any Available Series 1998-2 Finance Charge Collections remaining
after making the above described distributions will be treated as Excess
Finance Charge Collections which will be available to cover shortfalls, if
any, in amounts payable from Finance Charge Collections to securityholders
of other Series, then to pay any unpaid commercially reasonable costs and
expenses of a successor Servicer, if any, then to reserve for (or pay when
due) any taxes and related expenses anticipated by the Servicer to be
payable by the Trust with respect to the related Monthly Period or prior
Monthly Periods. Excess Finance Charge Collections which are not so used
will be paid to the Transferor.
On each Transfer Date all investment income (net of investment losses and
expenses) on funds on deposit in the Defeasance Funding Account, the Defeasance
Reserve Account and the Revolving Receivables Reserve Account will be applied as
if such amounts were Available Series 1998-2 Finance Charge Collections on the
last business day of the preceding Monthly Period.
"Class A Monthly Interest" with respect to any Distribution Date will equal
one-twelfth of the product of (i) the Class A Interest Rate and (ii) the
outstanding principal amount of the Class A Securities at the close of business
on the first day of the related Interest Accrual Period (or in the case of the
initial Distribution Date, an amount equal to the product of (u) the initial
Class A Invested Amount, (v) 47 divided by 360, and (w) the Class A Interest
Rate).
"Class B Monthly Interest" with respect to any Distribution Date will equal
one-twelfth of the product of (i) the Class B Interest Rate and (ii) the Class B
Invested Amount at the close of business on the first day of the related
Interest Accrual Period (or in the case of the initial Distribution Date, an
amount equal to the product of (u) the initial Class B Invested Amount, (v) 47
divided by 360, and (w) the Class B Interest Rate).
"CTO Monthly Interest" with respect to any Distribution Date will equal the
product of (i) the CTO Interest Rate for the related Interest Accrual Period,
(ii) the CTO Invested Amount at the close of business on the first day of the
related Interest Accrual Period and (iii) a fraction the numerator of which is
the actual number of days in the related Interest Accrual Period and the
denominator of which is 360 (or in the case of the initial Distribution Date, an
amount equal to the product of (u) the initial CTO Invested Amount, (v) 48
divided by 360, and (w) the CTO Interest Rate for the initial Interest Accrual
Period).
"Required Amount" means on any business day the amount, if any, by which the
full amount to be paid pursuant to clauses (i)-(xiii) above exceeds the portion
of the Available Series 1998-2 Finance Charge Collections and Transferor Finance
Charge Collections, if any, applied to the payment of the amounts described in
such clauses.
PAYMENT OF PRINCIPAL. On each business day during the Revolving Period, the
Trustee, acting in accordance with instructions from the Servicer, will treat
the amount described in clause (iv) of "--Allocations" as Shared Principal
Collections which will be applied as described in clause (vi) of
"--Allocations." On each Transfer Date during the Amortization Period, the
Trustee, acting in accordance with instructions from the Servicer, will withdraw
the amount on deposit in the Principal Account and, to the extent of Class A
Principal until the Class A Invested Amount is paid in full, deposit such
amounts in the Distribution Account for distribution to the Class A
Securityholders on the next succeeding Distribution Date. The Class A
Securityholders will be entitled to receive principal payments to the extent of
Class A Principal until the Class A Invested Amount is paid in full. Beginning
on the Class B Principal
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Payment Commencement Date, the Class B Securityholders will be entitled to
receive principal payments to the extent of Class B Principal until the Class B
Invested Amount is paid in full only after the Class A Invested Amount has been
paid in full. Beginning on the CTO Principal Payment Commencement Date, the CTO
Securityholders will be entitled to receive principal payments to the extent of
CTO Principal until the CTO Invested Amount is paid in full only after the Class
A Invested Amount and the Class B Invested Amount have been paid in full. Except
with respect to payments or reductions of the Class D Invested Amount during the
Controlled Amortization Period to the extent of the excess of the Class D
Invested Amount over the Stated Class D Amount, the Class D Securityholders will
be entitled to receive principal payments only after the Class A Invested
Amount, the Class B Invested Amount, and the CTO Invested Amount have been paid
in full. If a Defeasance occurs the Trustee shall withdraw amounts from the
Defeasance Funding Account on each Distribution Date and make principal payments
to the Securityholders in the amounts and at the times specified above.
The amount of principal (the "Class A Principal") distributable from the
Distribution Account with respect to the Class A Securities for each
Distribution Date with respect to the Amortization Period will be equal to the
Available Series 1998-2 Principal Collections on deposit in the Principal
Account with respect to the related Monthly Period; provided, however, that with
respect to any Distribution Date during the Controlled Amortization Period,
Class A Principal shall not exceed the lesser of (i) the Class A Controlled
Distribution Amount and (ii) the Class A Invested Amount; provided, further that
with respect to any Distribution Date with respect to the Early Amortization
Period following a Defeasance, Class A Principal will be equal to the lesser of
(i) the balance in the Defeasance Funding Account and (ii) the Class A Invested
Amount; provided, further that with respect to the Termination Date, Class A
Principal will be an amount equal to the Class A Invested Amount.
The amount of principal (the "Class B Principal") distributable from the
Distribution Account with respect to the Class B Securities for each
Distribution Date, beginning on the Class B Principal Payment Commencement Date,
will be equal to the Available Series 1998-2 Principal Collections remaining on
deposit in the Principal Account with respect to the related Monthly Period
after application thereof to Class A Principal, if any; PROVIDED, HOWEVER, that
with respect to any Distribution Date during the Controlled Amortization Period,
Class B Principal will not exceed the lesser of (i) the Class B Controlled
Distribution Amount and (ii) the Class B Invested Amount; provided, further that
with respect to any Distribution Date with respect to the Early Amortization
Period following a Defeasance, Class B Principal will be equal to the lesser of
(i) the balance in the Defeasance Funding Account after application of amounts
on deposit therein to Class A Principal and (ii) the Class B Invested Amount;
provided, further that with respect to the Termination Date, Class B Principal
will be an amount equal to the Class B Invested Amount.
The amount of principal (the "CTO Principal") distributable from the
Distribution Account with respect to the Collateralized Trust Obligations for
each Distribution Date, beginning on or after the CTO Principal Payment
Commencement Date, will be equal to the Available Series 1998-2 Principal
Collections remaining on deposit in the Principal Account with respect to the
related Monthly Period after application thereof to Class A Principal and Class
B Principal, if any; provided that with respect to any Distribution Date with
respect to the Early Amortization Period following a Defeasance, CTO Principal
will be equal to the lesser of (i) the balance in the Defeasance Funding Account
after application of amounts on deposit therein to Class A Principal and Class B
Principal and (ii) the CTO Invested Amount; provided, further with respect to
the Termination Date, CTO Principal will be an amount equal to the CTO Invested
Amount.
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The amount of principal (the "Class D Principal") distributable from the
Distribution Account with respect to the Class D Securities for each
Distribution Date, beginning on the Class D Principal Payment Commencement Date,
or, in the case of distributions of Class D Excess Amounts during the Controlled
Amortization Period, and on each Distribution Date thereafter until the Trust is
terminated or until the Class D Invested Amount is paid in full, will be equal
to the Available Series 1998-2 Principal Collections remaining on deposit in the
Principal Account with respect to the related Monthly Period after application
thereof to Class A Principal, Class B Principal and CTO Principal, if any, and
the Trustee, acting in accordance with instructions from the Servicer, will
withdraw such amounts from the Principal Account and, to the extent of the Class
D Invested Amount, deposit such amounts in the Distribution Account for
distribution to the Class D Securityholders on the next succeeding Distribution
Date. Notwithstanding the foregoing, if so designated in writing by the
Transferor, any such payment of Class D Principal shall not be made to the Class
D Securityholders but such amount shall nonetheless be subtracted from the Class
D Invested Amount and added to the Transferor Interest and Class D Excess
Amounts may be subtracted from the Class D Invested Amount and added to the
Transferor Interest whether or not such amount has been deposited into the
Distribution Account.
COVERAGE OF INTEREST SHORTFALLS
To the extent of any shortfall in the amount of Available Series 1998-2
Finance Charge Collections due to the accumulation of principal in the Excess
Funding Account, the Transferor Finance Charge Collections will be made
available to cover such Negative Carry Amount.
Rights with respect to Finance Charge Collections allocable to any Series in
excess of the amounts necessary to make required payments with respect to such
Series ("Excess Finance Charge Collections") will be applied to cover any
shortfalls with respect to amounts payable from Finance Charge Collections
allocable to any other Series, pro rata based upon the amounts of the
shortfalls, if any, with respect to such other Series. Any Excess Finance Charge
Collections remaining after covering shortfalls with respect to all outstanding
Series during a Monthly Period will be paid to the successor Servicer, if any,
to cover certain costs and expenses and then to the holder of the Exchangeable
Transferor Security.
DEFAULTED RECEIVABLES; DILUTION
Receivables in Defaulted Accounts will be charged off as uncollectible in
accordance with the Servicer's customary and usual policies and the Credit and
Collection Policy. See "The Receivables--Loss and Delinquency History." On each
business day, the Servicer will allocate to the Securityholders a portion of all
Receivables in Defaulted Accounts in an amount (the "Series Default Amount")
equal to the product of (a) the Floating Percentage applicable for such business
day and (b) the aggregate principal amount of Receivables in Defaulted Accounts
identified since the prior reporting date (the "Default Amount").
If on any business day the Servicer adjusts the amount of any Principal
Receivable due to Dilution, then the amount of the Transferor Interest in the
Trust will be reduced, on a net basis, by the amount of the adjustment on such
business day. In the event the Transferor Interest would be reduced below the
Minimum Transferor Interest, the Transferor will be required to pay to the Trust
for deposit in the Excess Funding Account the amount by which the Transferor
Interest would be reduced below the Minimum Transferor Interest (an "Adjustment
Payment"). If the Transferor fails to pay such amount when due, Available Series
1998-2 Finance Charge Collections and certain other amounts may be applied for
such purpose. To the extent that such amounts are not sufficient to cover the
portion of the unpaid Adjustment Payments allocated to Series 1998-2, there will
be a Series Charge-Off as described below.
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SERIES CHARGE-OFFS
If on the second business day preceding each Distribution Date (the
"Determination Date"), the aggregate Series Default Amount and the Series 1998-2
Percentage of unpaid Adjustment Payments, if any, for all business days in the
preceding Monthly Period exceeds the aggregate amount of the Available Series
1998-2 Finance Charge Collections (including amounts withdrawn from the
Revolving Receivables Reserve Account), Transferor Finance Charge Collections,
Excess Finance Charge Collections and
Redirected Collections applied with respect thereto, then the Class D Invested
Amount will be reduced by the aggregate amount of such excess (a "Class D
Charge-Off"). The Class D Invested Amount thereafter will be increased (but not
in excess of the unpaid principal amount of the Class D Securities) on any
business day by any amounts applied for that purpose as described under clause
(xii) of "--Application of Collections--Payment of Fees, Interest and Other
Items."
In the event that any such reduction of the Class D Invested Amount would
cause the Class D Invested Amount to be a negative number, the Class D Invested
Amount will be reduced to zero, and the CTO Invested Amount will be reduced by
the aggregate amount of such excess, but not by more than the sum of the
remaining aggregate Series Default Amount and the remaining unpaid Adjustment
Payments with respect to such Monthly Period (a "CTO Charge-Off"), which will
have the effect of slowing or reducing the return of principal to the CTO
Securityholders. The CTO Invested Amount will thereafter be increased (but not
in excess of the unpaid principal amount of the Collateralized Trust
Obligations) on any business day by any amounts applied for that purpose as
described under clause (xi) of "--Application of Collections--Payment of Fees,
Interest and Other Items."
In the event that any such reduction of the CTO Invested Amount would cause
the CTO Invested Amount to be a negative number, the CTO Invested Amount will be
reduced to zero, and the Class B Invested Amount will be reduced by the
aggregate amount of such excess, but not by more than the sum of the remaining
aggregate Series Default Amount and the remaining unpaid Adjustment Payments
with respect to such Monthly Period (a "Class B Charge-Off"), which will have
the effect of slowing or reducing the return of principal to the Class B
Securityholders. The Class B Invested Amount will thereafter be increased (but
not in excess of the unpaid principal amount of the Class B Securities) on any
business day by any amounts applied for that purpose as described under clause
(x) of "--Application of Collections-- Payment of Fees, Interest and Other
Items."
In the event that any such reduction of the Class B Invested Amount would
cause the Class B Invested Amount to be a negative number, the Class B Invested
Amount will be reduced to zero, and the Class A Invested Amount will be reduced
by the amount by which the Class B Invested Amount would have been reduced below
zero, but not by more than the sum of the remaining aggregate Series Default
Amount and the remaining unpaid Adjustment Payments with respect to such Monthly
Period (a "Class A Charge-Off") which will have the effect of slowing or
reducing the return of principal to the Class A Securityholders. The Class A
Invested Amount will thereafter be increased (but not in excess of the unpaid
principal amount of the Class A Securities) on any business day by any of the
amounts applied for that purpose as described under clause (vii) of
"--Application of Collections--Payment of Fees, Interest and Other Items."
PAIRED SERIES
Subject to the satisfaction of the Rating Agency Condition, prior to the
commencement of the Early Amortization Period the Securities may be paired with
one or more other Series (each, a "Paired Series"). Each Paired Series either
will be pre-funded with an initial deposit to a pre-funding account in an amount
up to the initial principal amount of such Paired Series primarily from the
proceeds of the sale of such Paired Series or will have a variable principal
amount. Any such pre-funding account will be held for the benefit of such Paired
Series and not for the benefit of the Series 1998-2 Securityholders. As amounts
are paid for the benefit of the Class A Securityholders, Class B Securityholders
and CTO Securityholders, either (i) in the case of a pre-funded Paired Series,
an equal amount of funds on deposit in any pre-funding
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account for such pre-funded Paired Series will be released (which funds will be
distributed to the Transferor) or (ii) in the case of a Paired Series having a
variable principal amount, an interest in such variable Paired Series in an
equal or lesser amount may be sold by the Trust (and the proceeds thereof will
be distributed to the Transferor) and, in either case, the invested amount in
the Trust of such Paired Series will increase by up to a corresponding amount.
Upon payment in full of the Securities, assuming that there have been no
unreimbursed charge-offs with respect to any related Paired Series, the
aggregate invested amount of such related Paired Series will have been increased
by an amount up to an aggregate amount equal to the Invested Amount paid to the
Securityholders since the issuance of such Paired Series. The issuance of a
Paired Series will be subject to the conditions described under "--Exchanges."
There can be no assurance, however, that the terms of any Paired Series might
not have an impact on the timing or amount of payments received by a
Securityholder. In particular, the denominator of the Fixed/Floating Percentage
may be increased upon the occurrence of a Pay Out Event with respect to a Paired
Series resulting in a possible reduction of the percentage of Collections of
Principal Receivables and Finance Charge Receivables allocated to the Securities
if such event required reliance by the Securities on clause (b) of the
denominator of the applicable Fixed/Floating Percentage and, in the case of
Principal Collections allowed payment of principal at such time to the Paired
Series. See "--Allocation Percentages."
DEFEASANCE
On the date during the Amortization Period that the following conditions
shall have been satisfied: (i) an amount shall have been deposited (x) in the
Defeasance Funding Account equal to the sum of the outstanding principal amounts
of the Class A Securities, the Class B Securities and the Collateralized Trust
Obligations, which amount shall be invested in Cash Equivalents and (y) in the
Defeasance Reserve Account equal to or greater than the excess of the sum of the
Class A Monthly Interest, the Class B Monthly Interest and the estimated CTO
Monthly Interest over the estimated amount of investment earnings on amounts in
the Defeasance Funding Account, as estimated by the Transferor, for each of the
Interest Accrual Periods during the period from the date of the deposit to the
Defeasance Funding Account through the CTO Expected Final Payment Date (the
"Required Defeasance Reserve Account Amount"); (ii) the Transferor shall have
delivered to the Trustee an opinion of counsel to the effect that such deposit
and termination of obligations will not result in the Trust being required to
register as an "investment company" within the meaning of the Investment Company
Act and an opinion of counsel to the effect that following such deposit none of
the Trust, the Defeasance Reserve Account or the Defeasance Funding Account will
be deemed to be an association (or publicly traded partnership) taxable as a
corporation; (iii) the Transferor shall have delivered to the Trustee a
certificate of an officer of the Transferor stating that the Transferor
reasonably believes that such deposit and termination of its obligations will
not constitute a Pay Out Event or any event that, with the giving of notice or
the lapse of time, would cause a Pay Out Event to occur; and (iv) the Rating
Agency Condition shall have been satisfied; then, the Securities will no longer
be entitled to the security interest of the Trust in the Receivables and, except
those set forth in clause (i) above, other Trust assets ("Defeasance"), the
percentages applicable to the allocation to the Securityholders of Principal
Collections, Finance Charge Collections, unpaid Adjustment Payments and Default
Amounts shall be reduced to zero and the Monthly Servicing Fee will be reduced
to zero; PROVIDED, HOWEVER, that no such Defeasance shall occur for so long as
any Series Charge-Off exists. Upon the satisfaction of the foregoing conditions,
the Class D Invested Amount shall be reduced to zero.
DEFEASANCE FUNDING ACCOUNT
Pursuant to the Series 1998-2 Supplement, the Servicer will establish and
maintain with a Qualified Institution a defeasance funding account as a
segregated trust account held for the benefit of the Securityholders (the
"Defeasance Funding Account"). On the date of Defeasance of the Securities, the
Trustee will transfer to the Defeasance Funding Account proceeds from the
issuance of a new Series in an
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amount equal to the sum of the outstanding principal amounts of the Class A
Securities, the Class B Securities and the Collateralized Trust Obligations.
Funds on deposit in the Defeasance Funding Account will be invested by the
Trustee at the direction of the Servicer in Cash Equivalents maturing no later
than the following Transfer Date. Investment earnings (net of investment losses
and expenses) on funds on deposit in the Defeasance Funding Account (the
"Defeasance Funding Account Investment Proceeds") will be applied on each
Transfer Date following a Defeasance as if such amount were Available Series
1998-2 Finance Charge Collections on the last business day of the preceding
Monthly Period. If, for any Interest Accrual Period, the Defeasance Funding
Account Investment Proceeds for the related Monthly Period are less than the sum
of the Class A Monthly Interest, the Class B Monthly Interest and the CTO
Monthly Interest for such Interest Accrual Period, the amount of such deficiency
will be paid from the Defeasance Reserve Account to the extent of the Available
Defeasance Reserve Account Amount and applied on the applicable Transfer Date as
Available Series 1998-2 Finance Charge Collections as if such amounts were
available on the last business day of the preceding Monthly Period.
The Defeasance Funding Account will be terminated following the earliest to
occur of (a) the termination of the Trust pursuant to the Pooling and Servicing
Agreement, (b) the date on which the ABC Invested Amount is paid in full and (c)
after Defeasance, the earlier of the first Transfer Date with respect to the
Early Amortization Period and the CTO Expected Final Payment Date. Upon the
termination of the Defeasance Funding Account, all amounts remaining on deposit
therein (after the payment in full of the Series 1998-2 Securities) will be
treated as Shared Principal Collections.
DEFEASANCE RESERVE ACCOUNT
Pursuant to the Series 1998-2 Supplement, the Servicer will establish and
maintain with a Qualified Institution a defeasance reserve account as a
segregated trust account held for the benefit of the Securityholders (the
"Defeasance Reserve Account"). The Defeasance Reserve Account is established to
assist with the subsequent distribution of interest on the Class A Securities,
Class B Securities and Collateralized Trust Obligations following Defeasance. At
the option of the Transferor, on each business day from and after the Defeasance
Reserve Account Funding Date, but prior to Defeasance, the Trustee, acting
pursuant to the Servicer's instructions, will apply Available Series 1998-2
Finance Charge Collections allocated to the Securities (to the extent described
above in clause (xv) under "--Application of Collections--Payment of Fees,
Interest and Other Items") to increase the amount on deposit in the Defeasance
Reserve Account (to the extent such amount is less than the Required Defeasance
Reserve Account Amount). The "Defeasance Reserve Account Funding Date" will be
the first day of the Monthly Period prior to the Defeasance, or such earlier
date as the Transferor may determine. On the date of Defeasance, an amount equal
to the excess of the Required Defeasance Reserve Account Amount over the amount
then on deposit in the Defeasance Reserve Account will be deposited in the
Defeasance Reserve Account.
On or before each Transfer Date following Defeasance, a withdrawal will be
made from the Defeasance Reserve Account, and the amount of such withdrawal will
be applied as if such amount were Available Series 1998-2 Finance Charge
Collections on the last business day of the preceding Monthly Period. On each
Transfer Date following Defeasance, the amount available to be withdrawn from
the Defeasance Reserve Account (the "Available Defeasance Reserve Account
Amount") will be equal to the lesser of the amount on deposit in the Defeasance
Reserve Account (before giving effect to any withdrawal from the Defeasance
Reserve Account on such Transfer Date) and the Required Defeasance Reserve
Account Amount for such Transfer Date.
Provided that the Defeasance Reserve Account has not terminated as described
below, all amounts on deposit in the Defeasance Reserve Account on any Transfer
Date (after giving effect to any deposits to, or withdrawals from, the
Defeasance Reserve Account to be made on such Transfer Date) will be invested by
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the Trustee at the direction of the Servicer in Cash Equivalents maturing no
later than the following Transfer Date. The interest and other investment income
(net of investment expenses and losses) earned on such investments will be
retained in the Defeasance Reserve Account (to the extent the amount on deposit
therein is less than the Required Defeasance Reserve Account Amount) or applied
on each Transfer Date as Available Series 1998-2 Finance Charge Collections as
if such amounts were available on the last business day of the preceding Monthly
Period.
The Defeasance Reserve Account will be terminated following the earliest to
occur of (a) the termination of the Trust pursuant to the Pooling and Servicing
Agreement, (b) the date on which the ABC Invested Amount is paid in full, (c)
prior to Defeasance, the occurrence of a Pay Out Event with respect to the
Series 1998-2 Securities and (d) after Defeasance, the earlier of the first
Transfer Date with respect to the Early Amortization Period and the CTO Expected
Final Payment Date. Upon the termination of the Defeasance Reserve Account, all
amounts on deposit therein (after giving effect to any withdrawal from the
Defeasance Reserve Account on such date as described above) will be applied as
if they were Available Series 1998-2 Finance Charge Collections.
REVOLVING RECEIVABLES RESERVE ACCOUNT
Pursuant to the Series 1998-2 Supplement, the Servicer will establish and
maintain or cause to be established and maintained with a Qualified Institution,
which may be the Trustee, in the name of the Trustee, on behalf of the
Securityholders, the "Revolving Receivables Reserve Account," which shall be a
segregated trust account with the corporate trust department of such Qualified
Institution, bearing a designation clearly indicating that the funds deposited
therein are held for the benefit of the Securityholders. The Trustee will
possess all right, title and interest in all funds on deposit from time to time
in the Revolving Receivables Reserve Account and in all proceeds thereof. The
Revolving Receivables Reserve Account will be under the sole dominion and
control of the Trustee for the benefit of the Securityholders. If at any time,
the institution holding the Revolving Receivables Reserve Account ceases to be a
Qualified Institution, the Trustee will within ten (10) business days establish
a new Revolving Receivables Reserve Account meeting the conditions specified
above with a Qualified Institution, and will transfer any cash or any
investments to such new Revolving Receivables Reserve Account. From the date
such new Revolving Receivables Reserve Account is established, it will be the
"Revolving Receivables Reserve Account."
On the Closing Date, the Transferor will make an initial deposit to the
Revolving Receivables Reserve Account in an amount equal to $200,000. In
addition, the Revolving Receivables Reserve Account will be funded from
Available Series 1998-2 Finance Charge Collections up to an amount generally
equal to the product of (x) the Series 1998-2 Percentage and (y) 1% of the
aggregate amount of Principal Receivables which are Revolving Receivables. Funds
on deposit in the Revolving Receivables Reserve Account will be withdrawn by the
Servicer on each Transfer Date to the extent of any shortfalls in amounts to be
paid or deposited as described above under clauses (i) through (xiii) of
"--Application of Collections--Payment of Fees, Interest and Other Items" as of
the end of the day on the last business day of the preceding Monthly Period and
will be applied as Available Series 1998-2 Finance Charge Collections as if such
amounts were available on the last business day of the preceding Monthly Period.
Funds on deposit in the Revolving Receivables Reserve Account will be
invested by the Trustee at the direction of the Servicer in Cash Equivalents
maturing no later than the following Transfer Date. The interest and other
investment income (net of investment expenses and losses) earned on such
investments will be retained in the Revolving Receivables Reserve Account (to
the extent the amount on deposit therein is less than the Specified Revolving
Receivables Reserve Amount) or applied on each Transfer Date as Available Series
1998-2 Finance Charge Collections as if such amounts were available on the last
business day of the preceding Monthly Period.
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The Revolving Receivables Reserve Account will be terminated following the
earlier to occur of (a) the termination of the Trust pursuant to the Pooling and
Servicing Agreement and (b) the date on which the ABC Invested Amount is paid in
full. Upon the termination of the Revolving Receivables Reserve Account, all
amounts on deposit therein (after giving effect to any withdrawal from the
Revolving Receivables Reserve Account on such date as described above) will be
applied as Available Series 1998-2 Finance Charge Collections as if such amounts
were available on the last business day of the preceding Monthly Period.
PAYMENT RESERVE ACCOUNT
Pursuant to the Series 1998-2 Supplement, the Servicer will establish and
maintain or cause to be established and maintained with a Qualified Institution,
which may be the Trustee, in the name of the Trustee, on behalf of the
Securityholders, the "Payment Reserve Account," which will be a segregated trust
account with the corporate trust department of such Qualified Institution,
bearing a designation clearly indicating that the funds deposited therein are
held for the benefit of the Securityholders. The Trustee will possess all right,
title and interest in all funds on deposit from time to time in the Payment
Reserve Account and in all proceeds thereof. The Payment Reserve Account will be
under the sole dominion and control of the Trustee for the benefit of the
Securityholders. If, at any time, the institution holding the Payment Reserve
Account ceases to be a Qualified Institution, the Trustee will within ten (10)
business days establish a new Payment Reserve Account meeting the conditions
specified above with a Qualified Institution, and will transfer any cash or any
investments to such new Payment Reserve Account. From the date such new Payment
Reserve Account is established, it shall be the "Payment Reserve Account."
The Payment Reserve Account will be funded at the discretion of the
Transferor as described above under clause (xvii) of "--Application of
Collections--Payment of Fees, Interest and Other Items." The Transferor, at its
discretion, may on any business day withdraw all or a part of any amounts then
on deposit in the Payment Reserve Account and apply such funds as Available
Series 1998-2 Finance Charge Collections in accordance with the Pooling and
Servicing Agreement.
Funds on deposit in the Payment Reserve Account will be invested by the
Trustee (or, at the direction of the Trustee, by the Servicer on behalf of the
Trustee) at the direction of the Servicer in Cash Equivalents that will mature
so that such funds will be available for withdrawal on or prior to the following
business day. The proceeds of any such investments will be invested in Cash
Equivalents that will mature so that such funds will be available for withdrawal
on or prior to the following business day. The interest and other investment
income (net of investment expenses and losses) earned on such investments will
be applied on each business day as Reserve Account Investment Proceeds.
The Payment Reserve Account will be terminated following the earlier to
occur of (a) the termination of the Trust pursuant to the Pooling and Servicing
Agreement and (b) the date on which the ABC Adjusted Invested Amount is reduced
to zero. Upon the termination of the Payment Reserve Account, all amounts on
deposit therein (after giving effect to any withdrawal from the Payment Reserve
Account on such date as described above) will be applied as Available Series
1998-2 Finance Charge Collections as if such amounts were available to be
applied on the last business day of the preceding Monthly Period.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Class A Securities, the Class B Securities and the Collateralized Trust
Obligations will each be subject to optional repurchase by the Transferor on any
Distribution Date if on such Distribution Date the sum of the Class A Invested
Amount, the Class B Invested Amount and the CTO Invested Amount would be reduced
to an amount less than or equal to 10 percent of the sum of the initial Class A
Invested Amount, the initial Class B Invested Amount and the initial CTO
Invested Amount, if certain conditions set forth in the Pooling and Servicing
Agreement are satisfied. The repurchase price will be equal to (i) the unpaid
Class A Invested Amount plus accrued and unpaid interest on the Class A
Securities, (ii) the unpaid Class B Invested Amount plus accrued and unpaid
interest on the Class B Securities, and (iii) the unpaid CTO Invested Amount
plus accrued and unpaid interest on the Collateralized Trust Obligations, in
each case after giving effect to any payments on such date. In each case,
interest will accrue through the day preceding the Distribution Date on which
the repurchase occurs.
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The Securities will be retired on the day following the Distribution Date on
which the final payment of principal is scheduled to be made to the
Securityholders, whether as a result of optional reassignment to the Transferor
or otherwise. Subject to prior termination as provided above, the Pooling and
Servicing Agreement provides that the final distribution of principal and
interest on the Offered Securities will be made on the February 2007
Distribution Date (the "Termination Date"), except to the extent provided below.
In the event that the Invested Amount is greater than zero, exclusive of any
Class held by the Transferor, on the Termination Date, the Trustee will sell or
cause to be sold (and apply the proceeds first to the Class A Securities until
paid in full, then to the Class B Securities until paid in full, then to the
Collateralized Trust Obligations until paid in full, and finally to the Class D
Securities to the extent necessary to pay such remaining amounts to all
Securityholders pro rata within each Class as final payment of the Securities)
interests in the Receivables or certain Receivables, as specified in the Pooling
and Servicing Agreement and the Series 1998-2 Supplement, in an amount up to
110% of the Invested Amount at the close of business on such date (but not more
than the total amount of Receivables allocable to the Securities in accordance
with the Pooling and Servicing Agreement). If the sale contemplated by the
preceding sentence has not occurred by the Termination Date, the affected
Securityholders shall remain entitled to receive proceeds of such sale when it
occurs. The net proceeds of such sale and any Collections on the Receivables
through the date of sale, up to an amount equal to the Invested Amount plus
accrued interest due on the Securities, will be paid on the Termination Date
first to Class A Securityholders until the Class A Invested Amount is paid in
full, then to the Class B Securityholders until the Class B Invested Amount is
paid in full, then to the CTO Securityholders until the CTO Invested Amount is
paid in full, and then to the Class D Securityholders until the Class D Invested
Amount is paid in full.
Unless the Servicer and the holder of the Exchangeable Transferor Security
instruct the Trustee otherwise, the Trust will terminate on the earlier of (a)
the day after the Distribution Date following the date on which funds shall have
been deposited in the Distribution Account for the payment to
securityholders outstanding sufficient to pay in full the aggregate investor
interest of all Series outstanding plus interest thereon at the applicable
interest rates to the next Distribution Date and (b) a date which shall not be
later than June 29, 2034. Upon the termination of the Trust and the surrender of
the Exchangeable Transferor Security, the Trustee will convey to the holder of
the Exchangeable Transferor Security, subject to the rights of the holder of any
Participation, all right, title, and interest of the Trust in and to the
Receivables and other funds of the Trust (other than funds on deposit in the
Distribution Account and other similar bank accounts of the Trust with respect
to any Series).
PAY OUT EVENTS
As described above, the Revolving Period will continue through the end of
the July 2002 Monthly Period, with respect to the Securities, unless a Pay Out
Event occurs prior to such date. A "Pay Out Event" refers to any of the
following events:
(i) failure on the part of the Transferor (a) to make any payment or
deposit on the date required under the Pooling and Servicing Agreement (or
within the applicable grace period which will not exceed five business
days); (b) to perform in all material respects the Transferor's covenant not
to sell, pledge, assign, or transfer to any Person, or grant any unpermitted
lien on, any Receivable; or (c) to observe or perform in any material
respect any other covenants or agreements of the Transferor set forth in the
Pooling and Servicing Agreement, which failure has a material adverse effect
on the Securityholders and which continues unremedied for a period of 60
days after written notice of such failure, requiring the same to be
remedied, shall have been given to the Transferor by the Trustee, or to the
Transferor and the Trustee by the Securityholders representing more than 50%
of the Invested Amount and continues to materially and adversely affect the
interests of the Securityholders for such period;
(ii) any representation or warranty made by the Transferor in the
Pooling and Servicing Agreement proves to have been incorrect in any
material respect when made, and as a result the
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interests of the Securityholders are materially adversely affected, and such
representation or warranty continues to be incorrect for a period of 60 days
after notice to the Transferor by the Trustee or to the Transferor and the
Trustee by more than 50% of the Invested Amount and the Securityholders'
Interest continues to be materially adversely affected during such period;
PROVIDED, HOWEVER, that a Pay Out Event pursuant to this clause (ii) will
not be deemed to occur thereunder if the Transferor has accepted
reassignment of the related Receivable or all such Receivables, if
applicable, during such period (or such longer period as the Trustee may
specify) in accordance with the provisions thereof;
(iii) certain events of bankruptcy or insolvency relating to the
Transferor, FCI or Fingerhut National Bank;
(iv) any reduction of the average of the Portfolio Yields for any three
consecutive Monthly Periods to a rate which is less than the weighted
average Base Rates for such three consecutive Monthly Periods;
(v) the Trust shall become subject to regulation by the Commission as an
"investment company" within the meaning of the Investment Company Act;
(vi) (a) the Transferor Interest shall be less than the Minimum
Transferor Interest, (b) the total amount of Principal Receivables and the
amount on deposit in the Excess Funding Account shall be less than the
Minimum Aggregate Principal Receivables or (c) the Retained Percentage shall
be equal to or less than 2 percent, in each case as of any Determination
Date and shall not exceed the required amount on or prior to the tenth
business day following such Determination Date;
(vii) any Servicer Default (as defined below) shall occur which would
have a material adverse effect on the Securityholders; or
(viii) certain events of bankruptcy or insolvency involving Fingerhut.
In the case of any event described in clause (i), (ii), or (vii) above, a
Pay Out Event will be deemed to have occurred with respect to the Securities
only if, after any applicable grace period, the Securityholders evidencing
undivided interests aggregating more than 50% of the Invested Amount, by written
notice to the Transferor and the Servicer declare that a Pay Out Event has
occurred with respect to the Securities as of the date of such notice. In the
case of any event described in clause (iii), or (v) above, a Pay Out Event with
respect to all Series then outstanding, and in the case of any event described
in clause (iv), (vi) or (viii), a Pay Out Event with respect only to the
Securities, will be deemed to have occurred without any notice or other action
on the part of the Trustee or the Securityholders or all securityholders, as
appropriate, immediately upon the occurrence of such event. On the date on which
a Pay Out Event is deemed to have occurred, the Early Amortization Period will
commence. In such event, distributions of principal to the Securityholders will
begin on the first Distribution Date following the month in which such Pay Out
Event occurred. If, because of the occurrence of a Pay Out Event, the Early
Amortization Period begins, Securityholders will begin receiving distributions
of principal earlier than they otherwise would have, which may shorten the
average life of the Securities.
In addition to the consequences of a Pay Out Event discussed above, if,
pursuant to certain provisions of federal law, the Transferor voluntarily enters
liquidation or a trustee in bankruptcy is appointed for the Transferor (an
"Insolvency Event"), the Transferor will immediately cease to transfer Principal
Receivables to the Trust and promptly give notice to the Trustee of such event.
Notwithstanding any cessation of the transfer to the Trust of additional
Principal Receivables, Finance Charge Receivables (other than Discount
Receivables), whenever created, which arise in respect of Receivables that have
been transferred to the Trust, shall continue to be a part of the Trust, and
Collections with respect thereto shall continue to be allocated and paid in
accordance with the Pooling and Servicing Agreement and any Supplements.
If the only Pay Out Event to occur is either the bankruptcy or insolvency of
the Transferor or the appointment of a bankruptcy trustee or receiver for the
Transferor, the bankruptcy trustee or receiver may
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have the power to prevent the early commencement of the Early Amortization
Period. In addition, a bankruptcy trustee or receiver may have the power to
cause the early sale of the Receivables and the early retirement of the
Securities.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer's compensation for its servicing activities and reimbursement
for its expenses allocable to the Series 1998-2 Securityholders' Interest will
take the form of the payment to it of a servicing fee in an amount for any
Monthly Period (the "Monthly Servicing Fee") equal to the product of (i) a
fraction the numerator of which is the actual number of days in such Monthly
Period and the denominator of which is 365 or 366, (ii) 2.00% and (iii) the
Adjusted Invested Amount as of the beginning of the day on the first day of such
Monthly Period, or, in the case of the first Distribution Date, the Initial
Invested Amount. The Monthly Servicing Fee will be funded from Available Series
1998-2 Finance Charge Collections and will be paid from the amount so allocated
and on deposit in the Collection Account. See "--Application of
Collections--Payment of Fees, Interest and Other Items" above. The remainder of
the servicing fee will be allocable to the Transferor Interest, the holders of
Participations and the investor interests of other Series. Neither the Trust nor
the Securityholders will have any obligation to pay such portion of the
servicing fee.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with the servicing of the Receivables, including without
limitation payment of the fees and disbursements of the Trustee and independent
certified public accountants and other fees which are not expressly stated in
the Pooling and Servicing Agreement to be payable by the Trust or the
Securityholders other than federal, state, and local income and franchise taxes,
if any, of the Trust.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement, except upon determination that performance of
its duties is no longer permissible under applicable law. No such resignation
will become effective until the Trustee or a successor to the Servicer has
assumed the Servicer's responsibilities and obligations under the Pooling and
Servicing Agreement. The Servicer may delegate some or all of its servicing
duties; PROVIDED, HOWEVER, such delegation will not relieve the Servicer of its
obligation to perform such duties in accordance with the Pooling and Servicing
Agreement and the Trustee and the Rating Agencies must be notified in writing of
any material delegation. In addition, any affiliate of FNB may be substituted in
all respects for FNB as Servicer, provided that such affiliate expressly assumes
the performance of every covenant and obligation of the Servicer under the
Pooling and Servicing Agreement and that the Rating Agencies shall have received
prior written notice of such designation. Fingerhut will remain jointly and
severally liable with any such affiliate.
The Pooling and Servicing Agreement provides that the Servicer will
indemnify the Transferor, the Trust and the Trustee from and against any
reasonable loss, liability, expense, damage, or injury suffered or sustained by
reason of any acts or omissions or alleged acts or omissions of the Servicer
with respect to the activities of the Trust or the Trustee; PROVIDED, HOWEVER,
that the Servicer will not indemnify or hold harmless (a) an indemnified party
if such acts, omissions or alleged acts or omissions constitute or are caused by
fraud, gross negligence, or willful misconduct by such indemnified party (or any
of such indemnified party's officers, directors, employees or agents) or the
Investor Securityholders, (b) the Trust, the Investor Securityholders or the
security owners for any losses, liabilities, expenses, damages or injuries
suffered or sustained by any of them with respect to any action taken by the
Trustee at the request of the Investor Securityholders, (c) the Trust, the
Investor Securityholders or the security owners as to any losses, liabilities,
expenses, damages or injuries suffered or sustained by any of them in their
capacities as investors, including without limitation losses incurred as a
result of Defaulted Accounts, or (d) the Transferor, the Trust, the Investor
Securityholders or the security owners for any losses, liabilities, expenses,
damages or injuries suffered or sustained by the Trust, the Investor
Securityholders or the security owners arising under any tax law, including
without limitation, any federal, state, local or foreign
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income or franchise taxes or any other tax imposed on or measured by income (or
any interest, penalties or additions with respect thereto or arising from a
failure to comply therewith) required to be paid by the Trust, the Investor
Securityholders or the security owners in connection herewith to any taxing
authority.
The Pooling and Servicing Agreement provides that, except for the foregoing
indemnity by the Servicer and the liability described in the next paragraph,
neither the Transferor nor the Servicer nor any of their respective directors,
officers, employees, or agents will be under any liability to the Trust, the
Securityholders, or any other Person for any action taken, or for refraining
from taking any action pursuant to the Pooling and Servicing Agreement. Neither
the Transferor nor the Servicer nor any of their respective directors, officers,
employees, or agents will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith, or gross
negligence of the Transferor, the Servicer, or any such Person in the
performance of its duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, the Pooling and Servicing
Agreement provides that the Servicer is not under any obligation to appear in,
prosecute, or defend any legal action that is not incidental to its servicing
responsibilities under the Pooling and Servicing Agreement and which in its
opinion may expose it to any expense or liability.
Under the Pooling and Servicing Agreement, the Transferor will be liable
directly to an injured party for the entire amount of any taxes and related
expenses imposed on or payable by the Trust. Under the Pooling and Servicing
Agreement, the Transferor agrees to pay, indemnify and hold harmless each
Investor Securityholder against and from any and all such taxes and expenses.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the Trustee
or Investor Securityholders representing undivided interests aggregating more
than 50 percent of the aggregate investor interests for all outstanding Series,
by written notice to the Servicer (and to the Trustee if given by the Investor
Securityholders), may terminate all of the rights and obligations of the
Servicer as servicer under the Pooling and Servicing Agreement and in and to the
Receivables and the proceeds thereof and the Trustee may appoint a new Servicer
(a "Service Transfer"). The rights and interest of the Transferor under the
Pooling and Servicing Agreement and in the Transferor Interest will not be
affected by such termination. Upon such termination, the Trustee will as
promptly as possible appoint a successor Servicer. If no such Servicer has been
appointed and has accepted such appointment by the time the Servicer ceases to
act as Servicer, all authority, power, and obligations of the Servicer under the
Pooling and Servicing Agreement will pass to and be vested in the Trustee. If
the Trustee is unable to obtain any bids from eligible servicers and the
Servicer delivers an officer's certificate to the effect that it cannot in good
faith cure the applicable Servicer Default, and if the Trustee is legally unable
to act as a successor Servicer, then the Trustee will give the Transferor the
right to accept reassignment of all of the Receivables for an amount equal to
the aggregate invested amount of all outstanding securities and the amount of
any Participation as of the date of purchase plus all accrued but unpaid
interest on the securities.
A "Servicer Default" refers to any of the following events:
(i) failure by the Servicer to make any payment, transfer, or deposit,
or to give instructions to the Trustee to make certain payments, transfers,
or deposits within five business days after the date the Servicer is
required to do so under the Pooling and Servicing Agreement or any
Supplement; PROVIDED, HOWEVER, that any such failure caused by a nonwillful
act of the Servicer shall not constitute a Servicer Default if the Servicer
promptly remedies such failure within five business days after receiving
notice of such failure or otherwise becoming aware of such failure;
(ii) failure on the part of the Servicer duly to observe or perform in
any respect any other covenants or agreements of the Servicer which has a
material adverse effect on the securityholders of any Series then
outstanding and which continues unremedied for a period of 60 days after
written notice of such failure, requiring the same to be remedied, shall
have been given to the Servicer by the
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Trustee, or to the Servicer and the Trustee by holders of securities
evidencing undivided interests aggregating not less than 50 percent of the
invested amount of any Series materially adversely affected thereby and
continues to have a material adverse effect on the securityholders of any
Series then outstanding for such period; or the delegation by the Servicer
of its duties under the Pooling and Servicing Agreement, except as
specifically permitted thereunder;
(iii) any representation, warranty, or certification made by the Servicer
in the Pooling and Servicing Agreement, or in any certificate delivered
pursuant to the Pooling and Servicing Agreement, proves to have been
incorrect when made which has a material adverse effect on the
securityholders of any Series then outstanding, and which continues to be
incorrect in any material respect for a period of 60 days after written
notice of such failure, requiring the same to be remedied, shall have been
given to the Servicer by the Trustee, or to the Servicer and Trustee by the
holders of securities evidencing undivided interests aggregating not less
than 50 percent of the invested amount of any Series materially adversely
affected thereby and continues to have a material adverse effect on such
securityholders for such period; or
(iv) the occurrence of certain events of bankruptcy, insolvency, or
receivership of the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance referred
to in clause (i) above for a period of five business days, or referred to under
clause (ii) or (iii) for a period of 60 business days, will not constitute a
Servicer Default if such delay or failure could not be prevented by the exercise
of reasonable diligence by the Servicer and such delay or failure was caused by
an act of God or other similar occurrence. Upon the Servicer becoming aware of
any such event, the Servicer will not be relieved from using its best efforts to
perform its obligations in a timely manner in accordance with the terms of the
Pooling and Servicing Agreement, and the Servicer will provide the Trustee, any
provider of Enhancement, the Transferor, and the holders of securities of all
Series outstanding prompt notice of such failure or delay by it, together with a
description of the cause of such failure or delay and its efforts to perform its
obligations.
In the event of a Servicer Default, if a bankruptcy trustee or receiver were
appointed for the Servicer and no Servicer Default other than such bankruptcy or
receivership or the insolvency of the Servicer exists, the bankruptcy trustee or
receiver may have the power to prevent either the Trustee or the majority of the
securityholders from effecting a Service Transfer.
REPORTS TO SECURITYHOLDERS
On each Distribution Date, the Paying Agent will forward to each
Securityholder of record a statement prepared by the Servicer setting forth with
respect to such Series: (a) the total amount distributed, (b) the amount of the
distribution allocable to Class A Principal, the Class B Principal, the CTO
Principal and the Class D Principal, (c) the amount of such distribution
allocable to interest on the Class A Securities, the Class B Securities and the
Collateralized Trust Obligations Collateralized Trust Obligations, (d) the
amount of Principal Collections processed during the related Monthly Period and
allocated in respect of the Class A Securities, the Class B Securities, the
Collateralized Trust Obligations and the Class D Securities, respectively, (e)
the amount of Finance Charge Collections processed during the preceding Monthly
Period and allocated in respect of the Class A Securities, the Class B
Securities, the Collateralized Trust Obligations and the Class D Securities,
respectively, and, after the Defeasance Reserve Account Funding Date, the amount
of Defeasance Funding Account Investment Proceeds and investment earnings on
amounts on deposit in the Defeasance Reserve Account, (f) the aggregate amount
of Principal Receivables, the Invested Amount, the Class A Invested Amount, the
Class B Invested Amount, the CTO Invested Amount, the Class D Invested Amount,
the Floating Percentage, and, during the Amortization Period, the Fixed/Floating
Percentage as of the end of the day on the last day of the related Monthly
Period, (g) the aggregate outstanding balance of Receivables which are current,
and 30-59, 60-89 and 90 days and over contractually delinquent as of the end of
the day on the last day of the related
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Monthly Period, (h) the aggregate Series Default Amount for the related Monthly
Period, (i) the aggregate amount of Class A Charge-Offs, Class B Charge-Offs,
CTO Charge-Offs and Class D Charge-Offs for the preceding Monthly Period, (j)
the amount of the Monthly Servicing Fee for the preceding Monthly Period, (k)
the amount of unreimbursed Redirected Class B Principal Collections, Redirected
CTO Principal Collections and Redirected Class D Principal Collections for the
related Monthly Period, (l) the aggregate amount of funds in the Excess Funding
Account as of the last day of the Monthly Period immediately preceding the
Distribution Date, (m) certain information with respect to the Collateralized
Trust Obligations, (n) the number of new Accounts the Receivables in which have
been added to the Trust during the related Monthly Period, (o) the Portfolio
Yield for the related Monthly Period, (p) the Base Rate for the related Monthly
Period, (q) the balance in the Defeasance Funding Account on the related
Transfer Date, (r) the Revolving Receivables Reserve Account balance on the
related Transfer Date and (s) the amount of Defeasance Funding Account
Investment Proceeds deposited in the Collection Account on the related Transfer
Date, the Required Defeasance Reserve Account Amount and the Available
Defeasance Reserve Account Amount as of the related Transfer Date.
The Paying Agent will furnish to each Person who at any time during the
preceding calendar year was a Securityholder of record a statement prepared by
the Servicer containing the information required to be contained in the regular
monthly report to Securityholders, as set forth in clauses (a), (b), and (c)
above aggregated for such calendar year or the applicable portion thereof during
which such Person was a Securityholder, together with, on or before January 31
of each year, beginning in 1999, such customary information (consistent with the
treatment of the Securities as debt) as the Servicer or Trustee deems necessary
or desirable for tax reporting purposes.
REPORTS; NOTICES
Following the listing of the Offered Securities on the Luxembourg Stock
Exchange, the Trustee will publish or will cause to be published following each
Distribution Date in a daily newspaper in Luxembourg (expected to be the
LUXEMBURGER WORT) a notice to the effect that the information set forth in the
second preceding paragraph will be available for review at the main office of
the listing agent of the Trust in Luxembourg, Luxembourg. Following the listing
of the Offered Securities on the Luxembourg Stock Exchange and prior to each
Distribution Date with respect to the Amortization Period, the Luxembourg Stock
Exchange will be advised of the principal amount of the Class A Securities and
the Class B Securities that will be outstanding after the principal distribution
to be made on such Distribution Date.
Following the listing of the Offered Securities on the Luxembourg Stock
Exchange, notices to Securityholders will be given by publication in a daily
newspaper in Luxembourg, which is expected to be the LUXEMBURGER WORT. In the
event that Definitive Securities are issued, notices to Securityholders will
also be given by mail to the addresses of such holders as they appear in the
security register.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides that within 100 days of the end
of each fiscal year the Servicer will cause a firm of independent certified
public accountants to furnish to the Trustee a report to the effect that such
firm has compared the amounts and percentages set forth in four of the monthly
settlement statements for the Monthly Periods covered by such report with the
computer reports (which may include personal computer generated reports that
summarize data from the computer reports generated by either the Transferor or
the Servicer which are used to prepare daily reports) which were the source of
such amounts and percentages and that, on the basis of such comparison, such
amounts and percentages are in agreement, except as shall be set forth in such
report; PROVIDED, HOWEVER, that in the event that the independent certified
public accountants who are preparing such report are not the accounting firm
that is the independent accountants for FCI during the relevant period, then the
independent certified public accountants who are preparing such report will
compare the amounts set forth
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in each of the monthly certificates forwarded by the Servicer during the period
covered by the report with the applicable computer reports. A copy of such
report will be sent by the Trustee to each Securityholder.
The Pooling and Servicing Agreement provides that within 100 days of the end
of each fiscal year, the Servicer will cause a firm of nationally recognized
independent accountants to furnish a report to the effect that such firm has
applied certain procedures, as agreed upon between such firm and the Servicer,
which would re-perform certain accounting procedures performed by the Servicer
pursuant to certain documents and records relating to the servicing of the
Receivables. Each report shall set forth the agreed upon procedures performed
and the results of such procedures.
The Pooling and Servicing Agreement also provides for delivery to the
Trustee on an annual basis, within 100 days of the end of the fiscal year, of a
statement signed by an officer of the Servicer to the effect that the Servicer
has, or has caused to be, fully performed its obligations in all material
respects under the Pooling and Servicing Agreement throughout the preceding year
or, if there has been a default in the performance of any such obligation,
specifying the nature and status of the default. A copy of such certificate may
be obtained by any Securityholder upon the submission of a written request
therefor addressed to the Trustee's Corporate Trust Office.
AMENDMENTS
The Pooling and Servicing Agreement and the Series 1998-2 Supplement may be
amended by the Transferor, the Servicer, and the Trustee, without the consent of
any of the Investor Securityholders, for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such Pooling
and Servicing Agreement and Supplement or of modifying in any manner the rights
of such Securityholders; provided that (i) the Servicer shall have provided an
officer's certificate to the effect that such action will not adversely affect
the interests of such Investor Securityholders or any holders of a
Participation, (ii) except in the case of any amendment for the sole purpose of
curing any ambiguity or correcting or supplementing any inconsistent provision
of the Pooling and Servicing Agreement or revising any schedule thereto (other
than certain disclosure regarding tax filings and payment), the Rating Agencies
shall have been notified of such amendment and shall have provided written
confirmation that they would not lower the rating of any Series or any class of
any Series, and (iii) such action will not, in the opinion of counsel
satisfactory to the Trustee, result in certain adverse tax consequences. In
addition, the Pooling and Servicing Agreement and the Series 1998-2 Supplement
may be amended from time to time by the Transferor, the Servicer, and the
Trustee, without the consent of Securityholders, to add to or change any of the
provisions of the Pooling and Servicing Agreement to provide that bearer
securities issued with respect to any Series may be registrable as to principal,
to change or eliminate any restrictions on the payment of principal of or any
interest on such bearer securities, to permit such bearer securities to be
issued in exchange for registered securities or bearer securities of other
authorized denominations or to permit the issuance of uncertificated securities.
The Pooling and Servicing Agreement and the Supplement may be amended by the
Transferor, the Servicer, and the Trustee with the consent of the holders of
securities evidencing undivided interests aggregating not less than 66 2/3% of
the investor interests of each and every Series adversely affected, for the
purpose of adding any provisions to, changing in any manner or eliminating any
of the provisions of the Pooling and Servicing Agreement or any Supplement or of
modifying in any manner the rights of securityholders of any then outstanding
Series. No such amendment, however, may (a) reduce in any manner the amount of,
or delay the timing of, distributions required to be made on any such Series,
(b) change the definition of or the manner of calculating the interest of any
Securityholder of such Series, or (c) reduce the aforesaid percentage of
investor interests the holders of which are required to consent to any such
amendment, in each case without the consent of all securityholders of all Series
adversely affected.
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Additionally, upon the receipt by the Transferor, the Servicer and the
Trustee of a Tax Opinion and an opinion of counsel to the effect that such
action shall not materially adversely affect the Applicable Tax State income tax
characterization of any outstanding Series or the taxability of the Trust under
Applicable Tax State income tax law, the Pooling and Servicing Agreement may be
amended by the Transferor, the Servicer and the Trustee without the consent of
any of the Securityholders (i) to add, modify or eliminate such provisions as
may be necessary or advisable in order to enable all or a portion of the Trust
to qualify as, and to permit an election to be made to cause all or a portion of
the Trust to be treated as, a "financial asset securitization trust" as
described in the provisions of the FASIT legislation, or to enable all or a
portion of the Trust to qualify and an election to be made for similar treatment
under comparable subsequent federal income tax provisions as may ultimately be
enacted into law, and (ii) in connection with any such election, to modify or
eliminate existing provisions of the Pooling and Servicing Agreement and any
Supplement relating to the intended federal income tax treatment of the
Securities and the Trust in the absence of the election.
Promptly following the execution of any amendment to the Pooling and
Servicing Agreement requiring Securityholder consent, the Trustee will furnish
written notice of the substance of such amendment to each Securityholder.
Following the listing of the Offered Securities on the Luxembourg Stock
Exchange, such notice will be published in a daily newspaper in Luxembourg,
which is expected to be the LUXEMBURGER WORT. Any Supplement and any amendments
regarding the addition or removal of Receivables from the Trust will not be
considered an amendment requiring Securityholder consent under the provisions of
the Pooling and Servicing Agreement and any Supplement.
LIST OF SECURITYHOLDERS
Upon written request of Investor Securityholders representing undivided
interests in the Trust aggregating not less than 10 percent of the invested
amount of any Series, the Trustee after having been adequately indemnified by
such Investor Securityholders for its costs and expenses, and having given the
Servicer notice that such request has been made, will afford such Investor
Securityholders access during business hours to the current list of Investor
Securityholders of the Trust for purposes of communicating with other
Securityholders with respect to their rights under the Pooling and Servicing
Agreement. See "--Book-Entry Registration" and "--Definitive Securities."
THE TRUSTEE
The Bank of New York (Delaware) is the Trustee under the Pooling and
Servicing Agreement. The Trustee's corporate trust office is located at White
Clay Center, Route 273, Newark, Delaware 19711. The Transferor, the Servicer,
and their respective affiliates may from time to time enter into normal banking,
lending and trustee relationships with the Trustee and its affiliates. The
Trustee, the Transferor, the Servicer, and any of their respective affiliates
may hold Securities in their own names. In addition, for purposes of meeting the
legal requirements of certain local jurisdictions, the Trustee will have the
power to appoint a co-trustee or separate trustees of all or any part of the
Trust. In the event of such appointment, all rights, powers, duties, and
obligations conferred or imposed upon the Trustee by the Pooling and Servicing
Agreement will be conferred or imposed upon the Trustee and such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who will exercise and perform such rights,
powers, duties, and obligations solely at the direction of the Trustee.
The Trustee may resign at any time. The Transferor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. The Trustee
at all times must not be a Related Person. In such circumstances, the Transferor
will be obligated to appoint a successor Trustee. Any resignation or removal of
the Trustee and appointment of a successor Trustee does not become effective
until acceptance of the appointment by the successor trustee.
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If the Trustee fails to perform any of its obligations under the Pooling and
Servicing Agreement, and a Securityholder delivers written notice of such
failure to the Trustee, and the Trustee shall not have corrected such failure
for 60 days thereafter, then the holders of investor securities representing
more than 50 percent of the aggregate invested amount of all Series (including
related commitments) shall have the right to remove the Trustee and (with the
consent of the Transferor, which shall not be unreasonably withheld) promptly
appoint a successor Trustee by written instrument, in duplicate, one copy of
which instrument shall be delivered to the Trustee so removed and one copy to
the successor Trustee.
CONSTITUENT CLASS D SECURITIES
Under the Pooling and Servicing Agreement and pursuant to the Series 1998-2
Supplement, the Transferor as holder of the Class D Securities may at any time
(i) subdivide the Class D Securities into two or more subsidiary securities, or
(ii) redirect all or any portion of the amounts distributable to the Class D
Securityholders (pursuant to the application of collections allocable to the
Class D Securityholders) to any other Securityholder. In connection with such
subdivision, the Transferor may assign an interest rate to the Class D
Securities or a portion thereof and make payments of interest with respect to
such securities from amounts initially allocated to the Securities which would
otherwise constitute Excess Finance Charge Collections. The Pooling and
Servicing Agreement provides that before any Class D Securities can be
subdivided or transferred, the following conditions must be met: (i) the Trustee
and the Transferor shall have received an opinion of counsel that such transfer
does not adversely affect the conclusions reached in any of the federal or state
income tax opinions issued in connection with the original issuance of the
Securities, (ii) the Transferor shall deliver to the Trustee an officers'
certificate stating that in the reasonable belief of the Transferor, such
subdivision would not cause a Pay Out Event with respect to Series 1998-2 to
occur, or an event which, with notice or lapse of time or both, would constitute
a Pay Out Event with respect to Series 1998-2, and (iii) the Rating Agency
Condition shall have been satisfied.
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DESCRIPTION OF THE PURCHASE AGREEMENTS
PURCHASES OF RECEIVABLES
On and after the Initial Closing Date and prior to January 12, 1997, all
Receivables that were transferred to the Trust by the Transferor were closed-end
installment sale contracts originated by Fingerhut. Such Receivables were sold
by Fingerhut to the Transferor pursuant to the Fingerhut Purchase Agreement.
Beginning in January 1997, Fingerhut ceased extending credit to its customers
and FNB commenced the origination of closed-end credit card loans to finance
purchases of merchandise and services from Fingerhut. In addition, in November
1996, FNB commenced the origination of revolving credit card loans to finance
purchases of merchandise and services from Fingerhut. Since January 12, 1997,
all closed-end credit card loans and revolving credit card loans originated by
FNB have been sold on an ongoing basis by FNB to FCI pursuant to the Bank
Purchase Agreement and, all such closed-end credit card loans that are
Receivables, have been transferred by FCI to the Transferor pursuant to the FCI
Purchase Agreement. Since January 12, 1997, the Transferor has been transferring
to the Trust the closed-end credit card loans originated by FNB that it
purchases from FCI. On March 18, 1998, the FCI Purchase Agreement and the
Pooling and Servicing Agreement were amended to provide for the sale on an
ongoing basis by FCI to the Transferor, and by the Transferor to the Trust,
respectively, of the revolving credit card loans originated by FNB.
Pursuant to the Fingerhut Purchase Agreement, the Transferor purchased from
Fingerhut the Receivables originated by Fingerhut that arose from time to time.
As described above, Fingerhut stopped originating new closed-end installment
sale contracts in January 1997. Pursuant to the FCI Purchase Agreement, the
Transferor purchases from FCI Receivables arising from time to time. On each
business day prior to the Purchase Termination Date, FCI will transfer
Receivables acquired from FNB to the Transferor. Pursuant to the Pooling and
Servicing Agreement, such Receivables are thereafter transferred immediately by
the Transferor to the Trust, and the Transferor has assigned its rights in, to
and under the Fingerhut Purchase Agreement and the FCI Purchase Agreement with
respect to such Receivables to the Trust.
REPRESENTATIONS AND WARRANTIES
BANK PURCHASE AGREEMENT. In the Bank Purchase Agreement, FNB represents and
warrants that, among other things, (a) FNB is a national banking association
validly existing in good standing under the laws of the United States, and has
corporate power, authority and legal right to execute, deliver and perform its
obligations under the Bank Purchase Agreement, (b) the Bank Purchase Agreement
constitutes the valid and binding obligations of FNB, enforceable against FNB in
accordance with its terms, subject to customary bankruptcy and equity related
exceptions, (c) FNB is the legal and beneficial owner of all right, title and
interest in and to each Receivable conveyed to FCI pursuant to the Bank Purchase
Agreement and each such Receivable has been or will be transferred to FCI free
and clear of any lien other than Permitted Liens, (d) the Bank Purchase
Agreement constitutes a valid transfer and assignment to FCI of all right, title
and interest of FNB in and to the Receivables, all monies due or to become due
and all proceeds related thereto, or an absolute sale of such property and the
proceeds thereof, (e) each Account classified as an "Eligible Account" by FNB in
any document or report delivered under the Bank Purchase Agreement will satisfy
the requirements contained in the definition of Eligible Account and each
Receivable classified as an "Eligible Receivable" by FNB in any document or
report delivered under the Bank Purchase Agreement will satisfy the requirements
contained in the definition of Eligible Receivable, (f) the execution and
delivery of the Bank Purchase Agreement and the performance of the transactions
contemplated thereby do not contravene FNB's charter or by-laws, violate any
material provision of law applicable to it, require any filing (except for
filings under the UCC), registration, consent or approval under any such law
except for such filings, registrations, consents, or approvals as have already
been obtained and are in full force and effect, (g) except as described in the
Bank Purchase Agreement, FNB has filed all tax returns required to be filed and
has paid or made adequate provision for the payment of all taxes, assessments,
and other governmental charges due from FNB or is contesting any such tax,
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assessment or other governmental charge in good faith through appropriate
proceedings, (h) there are no proceedings or investigations pending or, to the
best knowledge of FNB, threatened against FNB before any Governmental Authority
asserting the invalidity of the Bank Purchase Agreement, seeking to prevent the
consummation of any of the transactions contemplated by the Bank Purchase
Agreement, seeking any determination or ruling that would materially and
adversely affect the performance by FNB of its obligations thereunder or seeking
any determination or ruling that would materially and adversely affect the
validity or enforceability thereof, and (i) FNB is not insolvent and will not be
rendered insolvent upon the sale of the Receivables to the Transferor. In the
event of a breach of any of the representations or warranties with respect to a
Receivable under the Bank Purchase Agreement by FNB, FNB will be required,
within thirty (30) business days of such breach, to pay FCI an amount in cash
equal to the purchase price paid for such Receivables.
PURCHASE AGREEMENTS. Pursuant to the Fingerhut Purchase Agreement and the
FCI Purchase Agreement (collectively the "Purchase Agreement"), Fingerhut has
represented and warranted to the Transferor, and FCI represents and warrants to
the Transferor (each of Fingerhut and FCI, the "Seller"), each under their
respective agreement that, among other things, subject to specified exceptions
and limitations, the Seller is duly organized, validly existing, and in good
standing under the laws of the State of Minnesota, the Seller is duly qualified
to do business and in good standing (or is exempt from such requirement) in any
state required in order to conduct its business and has obtained all necessary
licenses and approvals required under applicable law; PROVIDED, HOWEVER, that no
representation or warranty is made with respect to any qualifications, licenses
or approvals which the Transferor would have to obtain to do business in any
state in which the transferor seeks to enforce any Receivables. Pursuant to the
Purchase Agreement, the Seller additionally represents and warrants that, among
other things, subject to specified exceptions and limitations, (i) the execution
and delivery of the Purchase Agreement and the consummation of the transactions
provided for in the Purchase Agreement have been duly authorized by the Seller
by all necessary corporate action on its part, (ii) the execution and delivery
of the Purchase Agreement and the performance of the transactions contemplated
thereby do not contravene the Seller's charter or by-laws, violate any material
provision of law applicable to it, require any filing (except for filings under
the UCC), registration, consent or approval under any such law except for such
filings, registrations, consents, or approvals as have already been obtained and
are in full force and effect, (iii) except as described in the Purchase
Agreement, the Seller has filed all tax returns required to be filed and has
paid or made adequate provision for the payment of all taxes, assessments, and
other governmental charges due from the Seller or is contesting any such tax,
assessment or other governmental charge in good faith through appropriate
proceedings, (iv) there are no proceedings or investigations pending or, to the
best knowledge of the Seller threatened against the Seller before any
Governmental Authority asserting the invalidity of the Purchase Agreement,
seeking to prevent the consummation of any of the transactions contemplated by
the Purchase Agreement, seeking any determination or ruling that would
materially and adversely affect the performance by the Seller of its obligations
thereunder or seeking any determination or ruling that would materially and
adversely affect the validity or enforceability thereof, (v) (A) with respect to
the Fingerhut Purchase Agreement, each Receivable is or will be an account
receivable arising out of the sale of consumer goods, services or financial
service products by Fingerhut and (B) with respect to the FCI Purchase
Agreement, each Receivable is or will be an account receivable arising out of
the performance by the applicable Originator in accordance with the terms of the
Contract giving rise to such Receivable and in each Purchase Agreement, the
Seller has no knowledge of any fact which should have led it to expect at the
time of the classification of any Receivable as an Eligible Receivable that such
Receivable would not be paid in full when due, and each Receivable classified as
an Eligible Receivable by the Seller in any document or report delivered under
the Purchase Agreement satisfies the requirements of eligibility contained in
the definition of Eligible Receivable set forth in the Pooling and Servicing
Agreement, (vi) the Purchase Agreement constitutes the legal, valid, and binding
obligation of the Seller, (vii) the Seller is not insolvent and will not be
rendered insolvent upon the sale of the Receivables to the Transferor, (viii)
the Seller is not an "investment company" within the meaning of the Investment
Company Act (or is exempt
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from all provisions of such Act), (ix) the Seller is or will be on the date of
sale the legal and beneficial owner of all right, title and interest in and to
each Receivable conveyed to the Transferor by the Seller pursuant to the
Purchase Agreement, and each such Receivable has been or will be transferred to
the Transferor free and clear of any lien other than Permitted Liens and in
compliance in all material respects with all requirements of law applicable to
the Seller and (x) the transfer of Receivables by the Seller to the Transferor
under the Purchase Agreement constitutes a valid sale, transfer, assignment,
set-over and conveyance to the Trust of all right, title and interest of the
Seller in and to the Receivables whether existing or thereafter created (except
for Permitted Liens).
If certain of the representations or warranties described above are not true
with respect to any Receivable at the time such representation or warranty was
made or any Receivable becomes an Ineligible Receivable, then the Seller will be
obligated to pay to the Transferor an amount equal to the principal amount of
such Receivable.
The Pooling and Servicing Agreement requires the Transferor to make a demand
on the applicable Seller to repurchase Receivables in such cases where the
Transferor is required under the Pooling and Servicing Agreement to repurchase
Receivables from the Trust.
CERTAIN COVENANTS
BANK PURCHASE AGREEMENT. It is the intention of FNB and FCI that the
conveyance of the Receivables by FNB to FCI contemplated by the Bank Purchase
Agreement be construed as an absolute sale of the Receivables by FNB to FCI. It
is not intended that such conveyance be deemed a pledge of the Receivables by
FNB to FCI to secure a debt or other obligation of FNB, but the Bank Purchase
Agreement shall also be deemed to be a security agreement within the meaning of
Article 9 of the UCC and the conveyance provided for in the Bank Purchase
Agreement shall be deemed to be a grant by FNB to FCI of a "security interest"
within the meaning of Article 9 of the UCC in all of FNB's right, title and
interest in and to the Receivables. In the Bank Purchase Agreement, FNB
covenants that, among other things, except as required by law or as FNB may
determine to be appropriate and subject to specified exceptions and limitations,
(i) it will take no action to cause any Receivable to be anything other than an
account, general intangible or chattel paper, (ii) except for the conveyances
under the Bank Purchase Agreement, it will not sell any Receivable or grant a
lien (other than a Permitted Lien) on any Receivable, (iii) unless FNB deems
such action necessary to maintain its credit card business on a competitive
basis or as required by law, it will not reduce the annual percentage rates of
the Periodic Finance Charges assessed on the Receivables or other fees charged
on the Accounts if, as a result of any such reduction, a Pay Out Event (or other
early termination event) would occur but FNB may, subject to compliance with all
Requirements of Law and the foregoing restriction, change the terms of the
Contracts or the Credit and Collection Policy in any respect (a) if it would
not, in the reasonable belief of FNB, materially impair the collectibility of
any Receivable or cause, immediately or with the passage of time, a Pay Out
Event to occur under the Pooling and Servicing Agreement and (B) if such change
(x) is made to a comparable segment of receivables owned by FNB, if any, which
have characteristics the same as or substantially similar to, the Receivables
that are the subject of such change and (y) if FNB does not own such a
comparable segment of receivables, will not be made with the intent to
materially benefit FNB over the buyer of such Receivables or to materially
adversely affect such buyer, except as otherwise restricted by an endorsement,
sponsorship or other agreement between FNB and an unrelated third party or by
the terms of the Contracts, (iv) it will comply with and perform its obligations
under the Contracts and the Accounts and the Credit and Collection Policy except
insofar as any failure to comply or perform would not materially and adversely
affect the rights of the Trust or the securityholders, and that it will not
enter into any amendment to the Bank Purchase Agreement that would cause a
Ratings Event to occur so long as any securities under any Series are
outstanding, and (v) in the event it receives a collection on any Receivable, it
will pay such collection to FCI or its designee as soon as practicable.
PURCHASE AGREEMENT. It is the intention of Fingerhut and FCI, each under
its respective Purchase Agreement, and the Transferor that the conveyance of the
Receivables be construed as an absolute sale of
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the Receivables to the Transferor. It is not intended that such conveyance be
deemed a pledge of the Receivables to the Transferor to secure a debt or other
obligation, but the Purchase Agreement shall also be deemed to be a security
agreement within the meaning of Article 9 of the UCC and the conveyance provided
for in the Purchase Agreement shall be deemed to be a grant to the Transferor of
a "security interest" within the meaning of Article 9 of the UCC in all of the
Seller's right, title and interest in and to the Receivables. Pursuant to the
Purchase Agreement, Fingerhut and FCI each covenant that, among other things,
subject to specified exceptions and limitations, (i) it will take no action to
cause any Receivable to be anything other than an account (with respect to the
Fingerhut Purchase Agreement) or an account, general intangible or chattel paper
(with respect to the FCI Purchase Agreement), (ii) except for the conveyances
under the Purchase Agreement, it will not sell any Receivable or grant a lien
(other than a Permitted Lien) on any Receivable, (iii) with respect to FCI
Purchase Agreement, except as the Originator deems necessary to maintain its
business on a competitive basis or as required by law, the Seller will cause
such Originator to not reduce the Periodic Finance Charges assessed on the
Receivables or other fees charged on the Accounts if, as a result of any such
reduction, a pay out event with respect to any Series would occur but, with
respect to each Purchase Agreement, the Seller may, subject to requirements of
law and the foregoing restriction, change the terms of the Contracts or the
Credit and Collection Policy in any respect (A) if it would not, in the
reasonable belief of the Seller, materially impair the collectibility of any
Receivable or cause, immediately or with the passage of time, a Pay Out Event to
occur under the Pooling and Servicing Agreement and (B) if such change (x) is
made to a comparable segment of receivables owned by the Seller, if any, which
have characteristics the same as or substantially similar to, the Receivables
that are the subject of such change and (y) if the Seller does not own such a
comparable segment of receivables, will not be made with the intent to
materially benefit the Seller over the Transferor or to materially adversely
affect the Transferor, except as otherwise restricted by an endorsement,
sponsorship or other agreement between the Seller and an unrelated third party
or by the terms of the Contracts, (iv) it will comply with and perform its
obligations under the Contracts relating to the Accounts and the Credit and
Collection Policy except insofar as any failure to comply or perform would not
materially and adversely affect the rights of the Transferor, (v) in the event
it receives a collection on any Receivable, it will pay such collection to the
Transferor as soon as practicable, (vi) it will not convey or transfer any
Receivable, except as otherwise provided in the Purchase Agreement, and (vii)
with respect to the FCI Purchase Agreement, the Seller agrees to take all action
necessary and appropriate to enforce its rights and claims under the Bank
Purchase Agreement and the FCI Purchase Agreement, including without limitation,
the covenants in the Bank Purchase Agreement with respect to the Credit and
Collection Policy, and agrees not to consent to any amendments to the Bank
Purchase Agreement or the FCI Purchase Agreement unless such amendment would be
permitted under certain provisions of the Pooling and Servicing Agreement (as if
such provisions applied to the Bank Purchase Agreement) or the Rating Agency
Condition has been satisfied. Pursuant to the Purchase Agreement, the Transferor
has covenanted that, among other things, subject to specified exceptions and
limitations, (i) it shall treat each conveyance of the Receivables as a sale on
all relevant books and records and (ii) with respect to the FCI Purchase
Agreement, it shall maintain its existence as a corporation, separate from any
of its affiliates.
PURCHASE TERMINATION DATE
BANK PURCHASE AGREEMENT. If FNB becomes insolvent, FCI's obligations under
the Bank Purchase Agreement will automatically be terminated. In addition, if
FCI becomes insolvent, or shall become unable for any reason to purchase
Receivables from FNB in accordance with the provisions of the Bank Purchase
Agreement, FCI's obligations under the Bank Purchase Agreement as to FNB will
automatically be terminated.
PURCHASE AGREEMENT. If Fingerhut or FCI become insolvent, the Transferor's
obligations under the Purchase Agreement will automatically be terminated. In
addition, if the Transferor becomes insolvent or shall become unable for any
reason to purchase Receivables in accordance with the provisions of the Purchase
Agreement, the Transferor's obligations under the Purchase Agreement will
automatically be terminated. The date of any such termination will be the
"Purchase Termination Date."
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The Transferor has represented and warranted in the Pooling and Servicing
Agreement that the transfer of Receivables by it to the Trust constitutes either
a valid transfer and assignment to the Trust of all right, title, and interest
of the Transferor in and to the Receivables, except for Permitted Liens and the
interest of the Transferor as holder of the Exchangeable Transferor Security and
any other investor security of any Series then held by it, or the grant to the
Trust of a security interest in the Receivables. The Transferor has also
represented and warranted in the Pooling and Servicing Agreement that, in the
event the transfer of Receivables by the Transferor to the Trust is deemed to
create a security interest under the UCC, there will exist a valid, subsisting,
and enforceable first priority perfected security interest in such Receivables
created thereafter in favor of the Trust on and after their creation, subject
only to Permitted Liens. For a discussion of the Trust's rights arising from a
breach of these warranties, see "Description of the Offered
Securities--Representations and Warranties."
The Transferor has represented that the Receivables are "accounts," "general
intangibles" or "chattel paper" as each is defined in Article 9 of the UCC as
then in effect in each Relevant UCC State. Both the sale of accounts and chattel
paper and the transfer of accounts and chattel paper as security for an
obligation are treated under Article 9 of the UCC as creating a security
interest therein and are subject to its provisions, and the filing of an
appropriate financing statement will perfect the security interest of the Trust.
If a transfer of general intangibles is deemed to constitute the creation of a
security interest, rather than a sale, Article 9 of the UCC applies and the
filing of one or more appropriate financing statements is also required in order
to perfect the security interest of the Trust. In order to protect the interests
of the Trust in the Receivables, financing statements covering the Receivables
have been filed under the UCC.
If the transfer of Receivables constituting general intangibles is deemed to
be a sale, then the UCC is not applicable and no further action is required to
protect the Trust's interest from third parties. Although the priority of future
generated general intangibles is not as clear as the priority of interests
governed by the UCC, FNB, FCI and the Transferor believe that it would be
inconsistent for a court to afford the Trust less favorable treatment if the
transfer of the Receivables is deemed to be a sale than if it were deemed to be
a security interest and that a court should conclude that a sale of Receivables
consisting of general intangibles would be deemed to have occurred as of the
Initial Closing Date or, as applicable, the relevant date of designation for
inclusion in the Trust.
There are certain limited circumstances under the UCC in which a prior or
subsequent transferee of Receivables coming into existence after the Initial
Closing Date could have an interest in such Receivables with priority over the
Trust's interest. Under the Pooling and Servicing Agreement, however, the
Transferor has represented and warranted that it transferred the Receivables to
the Trust free and clear of the lien of any third party. In addition, the
Transferor has covenanted that it will not sell, pledge, assign, transfer, or
grant any lien on any Receivable (or any interest therein) other than a
Permitted Lien. A tax or other governmental lien on property of the Transferor
arising prior to the time a Receivable comes into existence may also have
priority over the interest of the Trust in such Receivable. There is a
significant possibility that the Trust may not have a perfected security
interest in any of the Receivables created after the filing of a petition for
relief by or against FCI or the Transferor under the United States federal
bankruptcy code or after the appointment of a receiver or conservator with
respect to FNB. Nevertheless, it is anticipated that the Trust will either own
or have a perfected security interest in Receivables existing on the date of
filing a petition by or against FCI or the Transferor under the United States
federal bankruptcy code or after the date of appointment of a receiver or
conservator with respect to FNB and will be able to make payments in respect of
principal and interest on the Offered Securities, although there can be no
assurance that any of such payments would be timely. Because the Trust's
interest in the Receivables is dependent upon the Transferor's interest in the
Receivables, which is dependent upon Fingerhut's or FCI's or FNB's interest in
the Receivables, any adverse change in the priority or perfection of the
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Transferor's, FCI's or Fingerhut's security interest would correspondingly
affect the Trust's interest in the affected Receivables. In addition, if a
receiver or conservator were appointed for FNB, certain administrative expenses
of the receiver or conservator also may have priority over the interest of the
Trust in such Receivables. While FNB is the Servicer, certain cash collections
on the Receivables may be held by FNB and commingled with its funds for brief
periods, and if an Insolvency Event occurs, the Trust may not have a perfected
interest in such commingled collections.
CERTAIN MATTERS RELATING TO BANKRUPTCY OR RECEIVERSHIP
The Transferor will not engage in any activities except purchasing accounts
receivable from FCI or any affiliate of FCI, forming trusts, transferring such
accounts Receivable to such trusts and engaging in activities incident to, or
necessary or convenient to accomplish, the foregoing. The Transferor has no
intention of filing a voluntary petition under the United States federal
bankruptcy code or any similar applicable state law so long as the Transferor is
solvent and does not reasonably foresee becoming insolvent.
The voluntary or involuntary application for relief under the United States
federal bankruptcy code or any similar applicable state law with respect to
Fingerhut or FCI should not necessarily result in a similar voluntary
application with respect to the Transferor so long as the Transferor is solvent
and does not reasonably foresee becoming insolvent either by reason of
Fingerhut's or FCI's insolvency or otherwise. Counsel has advised FCI and the
Transferor that (i) the assets and liabilities of the Transferor would not be
substantively consolidated with the assets and liabilities of Fingerhut or FCI
in the event of an application for relief under the United States federal
bankruptcy code with respect to Fingerhut or FCI, as the case may be, and (ii)
the sale of Receivables by Fingerhut or FCI would constitute a valid sale and,
therefore, such Receivables would not be property of Fingerhut or FCI, as the
case may be, in the event of the filing of an application for relief by or
against Fingerhut or FCI, as the case may be, under the United States federal
bankruptcy code. The foregoing conclusions are reasoned conclusions, based upon
various assumptions regarding factual matters and future events, as to which
there necessarily can be no assurance. If a bankruptcy trustee for Fingerhut or
FCI, Fingerhut or FCI as debtor-in-possession, or a creditor of Fingerhut or FCI
were to take the view that Fingerhut or FCI and the Transferor should be
substantively consolidated or that the transfer of the Receivables from
Fingerhut or FCI to the Transferor should be recharacterized as a pledge of such
Receivables, or if a bankruptcy trustee for Fingerhut or FCI, Fingerhut or FCI
as debtor-in-possession or a creditor of Fingerhut or FCI was to take the view
that Fingerhut or FCI and the Transferor should be substantively consolidated or
that the transfer of the Receivables from Fingerhut or FCI to the Transferor
should be recharacterized as a pledge of such Receivables, then delays in
payments on the Class A Securities, Class B Securities and Collateralized Trust
Obligations or (should the bankruptcy court rule in favor of any such trustee,
debtor-in-possession or creditor) reductions in such payments on such Securities
could result.
The Pooling and Servicing Agreement provides that, upon the bankruptcy or
appointment of a receiver for the Transferor, FNB or FCI a Pay Out Event with
respect to all Series will occur, and under the Pooling and Servicing Agreement,
no new Principal Receivables will be transferred to the Trust. In addition the
Series 1998-1 Supplement provides that, upon the bankruptcy or appointment of a
receiver for Fingerhut a Pay Out Event with respect to Series 1998-2 will occur.
If the only Pay Out Event to occur is either the insolvency of the Transferor or
the appointment of a bankruptcy trustee or receiver for the Transferor, the
receiver or bankruptcy trustee for the Transferor may have the power to continue
to require the Transferor to transfer new Principal Receivables to the Trust and
to prevent the early sale, liquidation or disposition of the Receivables and the
commencement of the Early Amortization Period. See "Description of the Offered
Securities--Pay Out Events."
FNB has represented and warranted to FCI in the Bank Receivables Purchase
Agreement, and Fingerhut and FCI have each represented and warranted to the
Transferor in the respective Purchase Agreements, that the sale of the
Receivables to FCI or the Transferor, respectively, is a valid sale of the
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Receivables to FCI or the Transferor, respectively. In addition, FNB, Fingerhut,
FCI and the Transferor have treated and will treat the transaction described in
the Bank Purchase Agreement and the Purchase Agreements as sales of the
Receivables to FCI and the Transferor, respectively, FNB, FCI and Fingerhut have
taken or will take all actions that are required under the UCC to perfect FCI's
and the Transferor's ownership interest, respectively, in the Receivables.
Notwithstanding the foregoing, if FCI or Fingerhut were to become a debtor in a
bankruptcy case and a creditor or trustee-in-bankruptcy of such debtor or such
debtor itself were to take the position that the sale of Receivables from FCI or
Fingerhut to the Transferor should be recharacterized as a pledge of such
Receivables to secure a borrowing from such debtor, then delays in payments of
collections of Receivables to the Transferor (and therefore to the Trust and to
Securityholders) could occur and (should the court rule in favor of any such
trustee, debtor-in-possession or creditor) reductions in the amount of such
payments could result.
The Federal Deposit Insurance Act ("FDIA"), as amended by FIRREA, which
became effective August 9, 1989, sets forth certain powers that the FDIC could
exercise if it were appointed as conservator or receiver of FNB. Among other
things, the FDIA grants such a conservator or receiver the power to repudiate
contracts of, and to request a stay of up to 90 days of any judicial action or
proceeding involving, FNB.
To the extent that (i) FNB granted a security interest in the Receivables to
FCI, (ii) the interest was validly perfected before FNB's insolvency, (iii) the
interest was not taken or granted in contemplation of FNB's insolvency or with
the intent to hinder, delay or defraud FNB or its creditors, (iv) the Pooling
and Servicing Agreement is continuously a record of FNB, and (v) the Pooling and
Servicing Agreement represents a bona fide and arm's length transaction
undertaken for adequate consideration in the ordinary course of business, such
valid perfected security interest of FCI should be enforceable (to the extent of
FCI's "actual direct compensatory damages") notwithstanding the insolvency of,
or the appointment of a receiver or conservator for, FNB and payments to the
Trust with respect to the Receivables (up to the amount of such damages) should
not be subject to an automatic stay of payment or to recovery by the FDIC as
conservator or receiver of FNB. If, however, the FDIC were to assert that the
security interest was unperfected or unenforceable or were to require FCI to
establish its rights to those payments by submitting to and completing the
administrative claims procedure established under FIRREA, or the conservator or
receiver were to request a stay of proceedings with respect to FNB as provided
under FIRREA, delays in payments on the Securities and possible reductions in
the amount of those payments could occur. The FDIA does not define the terms
"actual direct compensatory damages." On April 10, 1990, the RTC, formerly a
sister agency of the FDIC, adopted a statement of policy (the "RTC Policy
Statement") with respect to the payment of interest on collateralized
borrowings. The RTC Policy Statement states that interest on such borrowings
will be payable at the contract rate up to the date of the redemption or payment
by the conservator, receiver, or the trustee of an amount equal to the principal
owed plus the contract rate of interest up to the date of such payment or
redemption, plus any expenses of liquidation if provided for in the contract, to
the extent secured by the collateral. In a 1993 case involving zero-coupon
bonds, however, a federal district court held that the RTC was instead obligated
to pay bondholders the fair market value of repudiated bonds as of the date of
repudiation. The FDIC itself has not adopted a policy statement on payment of
interest on collateralized borrowings.
In OCTAGON GAS SYSTEMS, INC. V. RIMMER, 995 F.2d 948 (10th Cir. 1993), CERT.
DENIED, 114 S. Ct. 554 (1993), the United States Court of Appeals for the 10th
Circuit suggested that even where a transfer of accounts from a seller to a
buyer constitutes a "true sale," the accounts would nevertheless constitute
property of the seller's bankruptcy estate in a bankruptcy of the seller. If
FCI, Fingerhut or the Transferor were to become subject to a bankruptcy
proceeding or if FNB were to become subject to a receivership and a court were
to follow the 10th Circuit's reasoning, Securityholders might experience delays
in payment or possibly losses in their investment in the Securities. Counsel to
the Transferor has advised the Transferor that the facts of the Octagon case are
distinguishable from those in the sale transactions between FNB and
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FCI, FCI and the Transferor, Fingerhut and the Transferor and the Transferor and
the Trust and that the reasoning of the 10th Circuit appears to be inconsistent
with established precedent and the UCC.
The occurrence of certain events of insolvency, conservatorship or
receivership with respect to the Servicer will result in a Servicer Default,
which Servicer Default, in turn, could result in a Pay Out Event. If no other
Servicer Default other than the commencement of such bankruptcy or similar event
exists, a conservator or receiver of the Servicer may have the power to prevent
the Trustee and the Securityholders from appointing a successor Servicer.
CONSUMER PROTECTION LAWS
The Accounts and Receivables are subject to numerous federal and state
consumer protection laws that impose requirements related to offering and
extending credit. Any failure by an Originator or the Servicer to comply with
such legal requirements also could adversely affect the Servicer's ability to
collect the full amount of the Receivables. The United States Congress and the
states may enact laws and amendments to existing laws to further regulate
consumer credit or to reduce finance charges or other fees or charges applicable
to credit card and other consumer revolving loan accounts. Such laws, as well as
any new laws or rulings which may be adopted, may adversely affect the
Servicer's ability to collect on the Receivables or maintain previous levels of
collections.
The relationship of the Obligor and credit card issuer is extensively
regulated by federal and state consumer protection and related laws. With
respect to credit extended by FNB, the most significant laws include the federal
Truth-in-Lending Act, Fair Credit Billing Act, Fair Debt Collection Practices
Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Electronic Funds
Transfer Act and National Bank Act, as well as applicable state laws. Claims may
be brought under these statutes by private consumers as well as federal and
state regulators. These statutes impose disclosure requirements when a credit
card account is advertised, when it is opened, at the end of monthly billing
cycles and at year end and, in addition, prohibit certain discriminatory
practices in extending credit and impose certain limitations on the type of
account related charges that may be assessed. Federal law requires credit card
issuers to disclose to consumers the interest rates, cardholder fees, grace
periods and balance calculation methods associated with their credit card
accounts. In addition, cardholders are entitled under current laws to have
payments and credits applied to the credit card account promptly, to receive
prescribed notices and to require billing errors to be resolved promptly.
Certain laws, including the laws described above, may limit FNB's ability to
collect amounts owing with respect to the Receivables regardless of any act or
omission on the part of FNB. These laws further provide that in certain cases
cardholders cannot be held liable for, or the cardholder's liability is limited
with respect to, charges to the credit card account that result from
unauthorized use of the credit card.
Receivables originated by Fingerhut were generated under the Minnesota "time
price" doctrine. Under this doctrine, the difference between the time price and
cash price for the goods sold is not treated as interest subject to regulation
under Minnesota's usury laws. In certain states, these receivables are subject
to regulations that limit maximum finance charges and require refunding of
finance charges to customers under certain circumstances. Fingerhut believes
that the time payment pricing and credit practices applicable to these
receivables are in compliance with applicable state requirements. On August 14,
1997, Fingerhut was served with a summons and class action complaint commenced
in Minnesota District Court, Fourth Judicial District, on behalf of named
plaintiffs in ten states. The alleged class consists of "Fingerhut customers
whose contracts are declared by Fingerhut to be governed by Minnesota law." The
complaint alleges violations of the usury law, deceptive trade practices and
consumer fraud based on Fingerhut's use of the "time price" doctrine in its
credit sales. Fingerhut has filed a motion for summary judgment. The plaintiffs'
claims are substantially identical to the claims asserted in an earlier case
brought against Fingerhut in the same court. The court granted summary judgment
in favor of Fingerhut in that case in March 1997. The plaintiffs in the earlier
case did not appeal the summary
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judgment, and their counsel has refiled their claims on behalf of new members of
the purported plaintiff class.
Any change of law, including any changes to the "time price" doctrine with
retroactive application, negatively affecting the receivables or FNB's credit
practices could adversely affect the Servicer's ability to collect the full
amount of the Receivables.
Additional consumer protection laws may be enacted that would impose
requirements on the making, enforcement and collection of consumer credit loans.
Any new laws or rulings that may be adopted, and existing consumer protection
laws, may adversely affect the ability to collect on the Receivables. In
addition, failure of the Servicer to comply with such requirements could
adversely affect the Servicer's ability to enforce the Receivables.
Certain jurisdictions may attempt to require out-of-state credit card
issuers to comply with such jurisdictions' consumer protection laws (including
laws limiting the charges imposed by such credit card issuers) in connection
with their operations in such jurisdictions. If it were determined that
out-of-state credit card issuers must comply with a jurisdiction's laws limiting
the charges imposed by credit card issuers, such actions could have an adverse
impact on Fingerhut National Bank's credit card operations. Application of
federal and state bankruptcy and debtor relief laws (including the Soldiers' and
Sailors' Civil Relief Act of 1940) would affect the interests of the holders of
the Securities if the protection provided to debtors under such laws result in
any Receivables of the Trust being written off as uncollectible.
The Trust may be liable for certain violations of consumer protection laws
that apply to the Receivables transferred to it, either as assignee from the
Transferor with respect to obligations arising before the transfer or as a party
directly responsible for obligations arising after the transfer. In addition, a
cardholder may be entitled to assert such violations by way of set-off against
such cardholder's obligation to pay the amount of Receivables owing. The
Transferor will warrant to the Trust in the Pooling and Servicing Agreement that
all Receivables transferred to the Trust have been and will be created in
compliance with the requirements of such laws. For discussion of the Trust's
rights arising from the breach of these warranties, see "Description of the
Offered Securities--Representations and Warranties."
CLAIMS AND DEFENSES OF CARDHOLDERS AGAINST THE TRUST
The UCC provides that (a) unless an Obligor has made an enforceable
agreement not to assert defenses or claims arising out of a transaction, the
rights of the Trust, as assignee, are subject to all the terms of the Contract
between the Originator and such Obligor and any defense or claim arising
therefrom, to rights of set-off and to any other defense or claim of such
Obligor against the Originator that accrues before such Obligor receives
notification of the assignment and (b) any such Obligor is authorized to
continue to pay the Originator until (i) the Obligor receives notification,
reasonably identifying the rights assigned, that the amount due or to become due
has been assigned and that payment is to be made to the Trustee or successor
Servicer and (ii) if requested by the Obligors, the Trustee or successor
Servicer has furnished reasonable proof of assignment. No such agreement not to
assert defenses has been entered into and no notice of the assignment of the
Receivables to the Trust will be sent to the cardholders obligated on the
Accounts in connection with the transfer of the Receivables to the Trust.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL; SCOPE OF FEDERAL INCOME TAX OPINION
Set forth below is a general discussion of the material United States
federal income tax consequences of the purchase, ownership and disposition of
the Offered Securities which are anticipated to be relevant to most categories
of investors and has been prepared or reviewed by Skadden, Arps, Slate, Meagher
& Flom LLP, special federal income tax counsel to the Transferor ("Special Tax
Counsel"). Special Tax Counsel is of the opinion that this discussion is correct
in all material respects. As more fully described below, Special Tax Counsel
will render its opinion, subject to the analysis and assumptions contained
therein, that the Offered Securities will be characterized as indebtedness
secured by the Receivables for federal income tax purposes and that the Trust
will not be subject to federal income tax at the entity level. Except as
expressly provided below, Special Tax Counsel will render no other opinions to
the Transferor with respect to the Offered Securities. This discussion is
intended as an explanatory discussion of the possible effects of the
classification of the Offered Securities as indebtedness on investors generally
and or related tax matters affecting investors generally, but does not purport
to furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an investor's
tax advisor. This discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations ("Treasury Regulations") thereunder, current administrative rulings,
judicial decisions and other applicable authorities in effect as of the date
hereof, all of which are subject to change, possibly with retroactive effect.
There are no cases or Internal Revenue Service ("IRS") rulings on similar
transactions involving instruments issued by a trust with terms similar to those
of the Offered Securities. As a result, there can be no assurance that the IRS
will not challenge the conclusions reached herein, and no ruling from the IRS
has been or will be sought on any of the issues discussed below. Furthermore,
legislative, judicial or administrative changes may occur, perhaps with
retroactive effect, which could affect the accuracy of the statements and
conclusions set forth herein as well as the tax consequences to Securityholders.
This summary does not address all aspects of federal income taxation that
may be relevant to the Security Owners in light of their personal investment
circumstances nor, except for certain limited discussions of particular topics,
to certain types of holders subject to special treatment under the federal
income tax laws (e.g., financial institutions, broker-dealers, life insurance
companies and tax-exempt organizations). This information is directed to
prospective purchasers who purchase Offered Securities in the initial
distribution thereof, who are citizens or residents of the United States,
including domestic corporations and partnerships, and who hold the Offered
Securities as "capital assets" within the meaning of Section 1221 of the Code.
Taxpayers and preparers of tax returns (including those filed by any partnership
or other issuer) should be aware that under applicable Treasury Regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice is (i) given with respect to events that have
occurred at the time the advice is rendered and is not given with respect to the
consequences of contemplated actions, and (ii) is directly relevant to the
determination of an entry on a tax return. Accordingly, taxpayers should consult
their respective tax advisors and tax return preparers regarding the preparation
of any item on a tax return, even where the anticipated tax treatment has been
discussed herein. EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR
AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF OFFERED SECURITIES SPECIFIC TO SUCH
PROSPECTIVE INVESTOR.
CHARACTERIZATION OF THE OFFERED SECURITIES AS INDEBTEDNESS
The Transferor, the Servicer and each Security Owner will express in the
Pooling and Servicing Agreement the intent that, for federal, state and local
income and franchise tax purposes, the Offered Securities will be indebtedness
secured by the Receivables. The Transferor, by initially entering into, and the
Servicer, by accepting the assignment of, the Pooling and Servicing Agreement,
and each Security
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Owner, by acquiring an interest in an Offered Security, will agree to treat the
Offered Securities as indebtedness for federal, state and local income and
franchise tax purposes (except to the extent that different treatment is
explicitly required under state or local tax statutes). However, because
different criteria are used in determining the non-tax accounting treatment of
the transaction, the Transferor will treat the Pooling and Servicing Agreement,
for financial accounting purposes and certain other non-tax purposes, as
effecting a transfer of an ownership interest in the Receivables and not as
creating a debt obligation.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
the property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be taken into account in determining whether the substance of a transaction
is a sale of property or a secured indebtedness for federal income tax purposes,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Based upon its analysis of such
factors, Special Tax Counsel is of the opinion that the Transferor will be
treated as the owner of the Receivables for federal income tax purposes and,
accordingly, the Class A Securities and the Class B Securities will be
characterized for federal income tax purposes as indebtedness that is secured by
the Receivables. Furthermore, Special Tax Counsel is of the opinion that the
Trust will not be subject to federal income tax at the entity level.
Although, in some instances, courts have held that a taxpayer is bound by a
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form, Special Tax Counsel is of the opinion
that the rationale of those cases do not apply to the transaction evidenced by
the Offered Securities, because the form of the transaction, as reflected in the
operative provisions of the documents, either is not inconsistent with the
characterization of the Offered Securities as debt for federal income tax
purposes or otherwise makes the rationale of those cases inapplicable to this
situation.
TAXATION OF INTEREST INCOME TO SECURITYHOLDERS
The following discussion is based in part upon Treasury Regulations
interpreting the original issue discount ("OID") provisions of Sections 1271
through 1275 of the Code which were adopted as final on January 27, 1994 (the
"OID Regulations"). The OID Regulations are, however, subject to varying
interpretations and do not address all issues that could affect Security Owners.
STATED INTEREST. It is not expected that any of the Offered Securities will
be issued with OID. Based upon the foregoing opinions, and assuming that all of
the Offered Securities are treated as debt, the stated interest on Offered
Securities will be taxable as ordinary income for federal income tax purposes
when received or accrued in accordance with a Securityholder's method of tax
accounting.
OID. The Offered Securities may be issued at a discount from their stated
principal amounts. If the amount of such discount is greater than the statutory
DE MINIMIS amount (i.e., greater than 0.25% of the stated principal amount of
the Offered Securities multiplied by the weighted average maturity of such
Offered Security), the amount of such discount would be considered OID and would
be includible in income of Security Owners, as OID, on a daily economic accrual
basis. Any amount treated as OID would not, however, be includible in income
again when the cash is actually received by a Security Owner in respect of such
amount. If the yield on a Class of Offered Securities were not materially
different from its coupon, this treatment would have no significant effect on
Security Owners using the accrual method of accounting. However, cash method
Security Owners may be required to report income with respect to the Offered
Securities in advance of the receipt of cash attributable to such income.
While it is not anticipated that the Offered Securities will be issued at a
discount from their stated principal amount that is greater than the statutory
DE MINIMIS amount, under Treasury Regulations the Offered Securities may
nevertheless be deemed to have been issued with OID. This could be the case, for
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example, if interest payments are not deemed to be payments of "qualified stated
interest" because (i) no reasonable legal remedies exist to compel timely
payment of such interest payments and (ii) the Offered Securities do not have
terms and conditions that make the likelihood of late payment (other than a late
payment that occurs within a reasonable grace period) or nonpayment a remote
contingency. As a result, if such Treasury Regulations were to apply, all of the
taxable income to be recognized with respect to the Offered Securities would be
includible in income as OID but would not be includible again when the interest
is actually received. The OID Regulations provide, however, that in determining
whether interest is unconditionally payable, the possibility of nonpayment due
to default, insolvency, or similar circumstances is ignored. Accordingly, the
Transferor intends to take the position that interest payments constitute
payments of "qualified stated interest" with respect to the Offered Securities
if they are issued at a price that is less than a DE MINIMIS discount from their
stated principal amount.
If the Offered Securities are in fact issued at a greater than DE MINIMIS
discount, the following rules will apply. The excess of the "stated redemption
price at maturity" of an Offered Security (generally equal to its principal
amount as of the date of issuance plus all interest other than "qualified stated
interest" payable prior to or at maturity) over the original issue price (in
this case, the initial offering price at which a substantial amount of the
Offered Securities are sold to the public) will constitute OID. A Security Owner
must include OID in income as interest over the term of the Offered Security
under a constant yield method. In general, OID must be included in income in
advance of the receipt of cash representing that income. In the case of a debt
instrument as to which the repayment of principal may be accelerated as a result
of the prepayment of other obligations securing the debt instrument (a
"Prepayable Instrument"), the periodic accrual of OID is determined by taking
into account both the prepayment assumptions used in pricing the debt instrument
and the prepayment experience. If this provision applies to the Offered
Securities (which is not clear), the amount of OID which will accrue in any
given "accrual period" may either increase or decrease depending upon the actual
prepayment rate. Accordingly, each Securityholder should consult its own tax
advisor regarding the impact to such Securityholder of the OID rules if the
Offered Securities are issued with OID. An Offered Security issued with DE
MINIMIS OID must include such OID in income proportionately as principal
payments are made on such Offered Security.
DISCOUNT AND PREMIUM. A subsequent holder who purchases an Offered Security
at a discount may be subject to the "market discount" rules of Section 1276 of
the Code. These rules provide, in part, for the treatment of gain attributable
to accrued market discount as ordinary income upon the receipt of partial
principal payments or on the sale or other disposition of the Offered Security,
and for the deferral of interest deductions with respect to debt incurred to
acquire or carry the market discount Offered Security. A Security Owner may,
however, elect to include market discount in gross income as it accrues and, if
such election is made, is not subject to the deferral of interest deductions
provision. Any such election will apply to all debt instruments acquired by the
taxpayer on or after the first day of the first taxable year to which such
election applies. Further, the adjusted tax basis of an Offered Security subject
to such election will be increased to reflect market discount included in gross
income, thereby reducing any gain or increasing any loss on a sale or taxable
disposition.
A subsequent holder who purchases an Offered Security at a premium may elect
to amortize and deduct this premium over the remaining term of the Offered
Security in accordance with rules set forth in Section 171 of the Code.
OPTIONAL ELECTION. As an alternative to the above treatments, accrual
method holders may elect to include in gross income all interest with respect to
an Offered Security, including stated interest, acquisition discount, OID, DE
MINIMIS OID, market discount, DE MINIMIS market discount, and unstated interest,
as adjusted by any amortizable bond premium or acquisition premium, using the
constant yield method described above.
TREATMENT OF LOSSES. OID, if any (in excess of DE MINIMIS OID), must be
reported by all holders of Offered Securities, and other interest income must be
reported by holders of Offered Securities that report
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income on the accrual method, as it accrues, whether or not such holders of an
Offered Security have received cash equivalent to such income and without giving
effect to delays or reductions in distributions attributable to defaults and
delinquencies on the Receivables, except to the extent it can be established
that such amounts are uncollectible. As a result, if there were in excess of DE
MINIMIS OID, the amount of income reported by a holder of Offered Securities in
any period could exceed the amount of cash distributed to such holder in that
period. A holder of Offered Securities generally will realize a loss where
either principal or previously accrued interest are determined to be
uncollectible with respect to the Offered Security, although the timing and
character of such losses (or reductions in income) are uncertain,
and the deductibility of such losses may be subject to limitations.
DISPOSITION OF OFFERED SECURITIES
Generally, capital gain or loss will be recognized on a sale or other
taxable disposition of Offered Securities in an amount equal to the difference
between the amount realized (other than amounts attributable to, and taxable as,
accrued interest) and the seller's tax basis in the Offered Securities. A
Security Owner's tax basis in an Offered Security will generally equal such
Security Owner's cost increased by any OID, market discount and gain previously
included by such Security Owner in income with respect to the Offered Security
and decreased by any bond premium previously amortized and any payments of
principal or OID previously received by such Security Owner with respect to the
Offered Security. Subject to the market discount rules of the Code discussed
above under "--Taxation of Interest Income to Securityholders--Discount and
Premium," any such gain or loss will be capital gain or loss if the Offered
Security was held as a capital asset (except, however, with regard to Prepayable
Instruments, in which case in the event of a prepayment or redemption thereof
such gain is ordinary income to the extent of any not yet accrued OID). Capital
gain or loss will be long-term if the Offered Security was held by the holder
for more than one year and otherwise will be short-term. The Taxpayer Relief Act
of 1997 reduces the maximum rates on long-term capital gains recognized on
capital assets held by individual taxpayers for more than eighteen months as of
the date of disposition (and would further reduce the maximum rates on such
gains in the year 2001 and thereafter for certain individual taxpayers who meet
specified conditions). Prospective investors should consult their own tax
advisors concerning these tax law changes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trustee will be required to report annually to the IRS, and to each
Securityholder, the amount of interest paid on the Offered Securities (and the
amount withheld for federal income taxes, if any) for each calendar year, except
as to exempt recipients (generally, corporations, tax-exempt organizations,
qualified pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status). Each
Securityholder (other than holders who are not subject to the reporting
requirements) will be required to provide, under penalties of perjury, a
certificate containing the holder's name, address, correct federal taxpayer
identification number and a statement that the holder is not subject to backup
withholding. Should a nonexempt Securityholder fail to provide the required
certification, the Trustee will be required to withhold (or cause to be
withheld) 31 percent of the interest otherwise payable to the holder, and remit
the withheld amounts to the IRS as a credit against the holder's federal income
tax liability.
RECENTLY EFFECTIVE LEGISLATION
Legislation passed by Congress and signed into law by the President on
August 20, 1996 added Sections 860H through 860L to the Code (the "FASIT
Provisions") which provide for a new type of entity for federal income tax
purposes known as a "financial asset securitization investment trust" (a
"FASIT"). Although the legislation providing for the new FASIT entity became
effective on September 1, 1997, many technical issues are to be addressed in
Treasury Regulations which have not yet been issued. In general, the FASIT
legislation enables trusts such as the Trust to be treated as a pass-through
entity not subject to federal entity-level income tax (except with respect to
certain prohibited transactions) and to issue
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securities that would be treated as debt for federal income tax purposes.
Transition rules provided for by the FASIT legislation contemplate that entities
in existence on August 31, 1997 may elect to be taxed under the FASIT
Provisions. However, how such election is made and how outstanding interests of
such entity are to be treated subsequent to the election is not explained in the
FASIT legislation.
OTHER POSSIBLE CHARACTERIZATIONS OF THE POOLING AND SERVICING AGREEMENT
Although, as described above, it is the opinion of Special Tax Counsel that
the Class A Securities, the Class B Securities and the Collateralized Trust
Obligations (not offered hereby) will properly be characterized as indebtedness
for federal income tax purposes, such opinion is not binding on the IRS and thus
no assurance can be given that such characterization will prevail. If, however,
the IRS were to contend successfully that the Class A Securities, the Class B
Securities or the Collateralized Trust Obligations, or certain securities of
other outstanding series, were not debt for federal income tax purposes, the
arrangement among the Security Owners, the Transferor, and security owners of
such other Series might be classified for federal income tax purposes as a
publicly traded partnership taxable as a corporation.
If the arrangement created by the Pooling and Servicing Agreement were
treated as a publicly traded partnership taxable as a corporation, the resulting
entity would be subject to federal income taxes at corporate tax rates on its
taxable income generated by ownership of the Receivables. Moreover,
distributions by the Trust in respect of any Securities that were not treated as
debt for federal income tax purposes would not be deductible in computing the
Trust's taxable income and all or part of such distributions would probably be
treated as dividends. Such an entity-level tax could result in reduced
distributions to Securityholders and the Securityholders could be liable for a
share of such tax.
DEFEASANCE
The Securities are subject to Defeasance in certain circumstances. It is not
clear under the existing authorities whether Defeasance would, for federal
income tax purposes, result in a deemed taxable sale or exchange of the
Securities in exchange for the amounts deposited in the Defeasance Funding
Account and the Defeasance Reserve Account as a result of the Defeasance.
However, if such a sale or exchange were deemed to occur, because of the short
time period, the amount required to be deposited and the nature of the assets in
which such amount may be invested, such a result would not be expected to have a
material adverse effect on a Securityholder for federal income tax purposes,
notwithstanding that, if such a sale or exchange were deemed to occur, each
Securityholder would thereafter be deemed to own its pro rata share of the
assets in which such amount is invested, and would be required to report its
taxable income on such basis.
TAX CONSEQUENCES TO FOREIGN INVESTORS
Special Tax Counsel will render its opinion, subject to the analysis and
assumptions contained therein, that the Class A Securities and Class B
Securities will properly be characterized as indebtedness secured by the
Receivables for U.S. federal income tax purposes. Based upon that opinion, the
following information describes the U.S. federal income tax treatment of Foreign
Persons in Offered Securities. The term "Foreign Person" means any Person other
than (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity organized in or under the laws of the United States
or any state thereof (other than a partnership that is not treated as a U.S.
Person under any applicable Treasury Regulations), (iii) an estate the income of
which is includible in gross income for U.S. federal income tax purposes,
regardless of its source or (iv) a trust whose administration is subject to the
primary supervision of a United States court and which has one or more United
States fiduciaries who have the authority to control all substantial decisions
of the trust. Notwithstanding the preceding sentence, to the extent provided in
Treasury Regulations, certain trusts in existence on August 20, 1996, and
treated as U.S. Persons under the Code, and applicable Treasury Regulations
thereunder prior to such date, that elect to continue to be treated as U.S.
Persons under the Code or applicable Treasury Regulations thereunder will also
be considered a U.S. Person.
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(a) Interest paid or accrued to a Foreign Person that is not effectively
connected with the conduct of a trade or business within the United States by
the Foreign Person, will generally be considered "portfolio interest" and
generally will not be subject to U.S. federal income tax and withholding tax, as
long as the Foreign Person (i) is not actually or constructively a "10 percent
shareholder" of the Transferor or a "controlled foreign corporation" with
respect to which the Transferor is a "related person" within the meaning of the
Code, and (ii) provides an appropriate statement, signed under penalties of
perjury, certifying that the beneficial owner of the Offered Security is a
Foreign Person and providing that Foreign Person's name and address. If the
information provided in this statement changes, the Foreign Person must so
inform the Trustee within 30 days of such change. The statement generally must
be provided in the year a payment occurs or in either of the two preceding
years. If such interest were not portfolio interest, then it would be subject to
U.S. federal income and withholding tax at a rate of 30 percent unless reduced
or eliminated pursuant to an applicable income tax treaty.
(b) Any capital gain realized on the sale or other taxable disposition of an
Offered Security by a Foreign Person will be exempt from U.S. federal income and
withholding tax, PROVIDED that (i) the gain is not effectively connected with
the conduct of a trade or business in the United States by the Foreign Person,
and (ii) in the case of an individual Foreign Person, the Foreign Person is not
present in the United States for 183 days or more in the taxable year.
(c) If the interest, gain or income on an Offered Security held by a Foreign
Person is effectively connected with the conduct of a trade or business in the
United States by the Foreign Person, the holder (although exempt from the
withholding tax previously discussed if an appropriate statement is furnished)
generally will be subject to U.S. federal income tax on the interest, gain or
income at regular federal income tax rates. In addition, if the Foreign Person
is a foreign corporation, it may be subject to a branch profits tax equal to 30
percent of its "effectively connected earnings and profits" within the meaning
of the Code for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable tax treaty.
If the IRS were to contend successfully that any of the Offered Securities
are interests in a partnership (not taxable as a corporation), a Security Owner
that is a Foreign Person might be required to file a United States individual or
corporate income tax return and pay tax on its share of partnership income at
regular United States rates including, in the case of a corporate Security
Owner, the branch profits tax (and would be subject to withholding tax on its
share of partnership income). If any of the Offered Securities were
recharacterized as interests in a "publicly traded partnership" taxable as a
corporation, to the extent distributions on such Offered Securities were treated
as dividends, a Foreign Person would generally be subject to tax (and
withholding) on the gross amount of such dividends at a rate of 30 percent
unless reduced or eliminated pursuant to an applicable income tax treaty.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Department of the Treasury issued new regulations
(the "New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
CERTAIN STATE TAX CONSEQUENCES
Because of the differences in state tax laws and their applicability to
different investors, it is not possible to summarize the potential state tax
consequences of holding the Offered Securities. ACCORDINGLY, PURCHASERS OF
OFFERED SECURITIES SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE STATE TAX
CONSEQUENCES OF PURCHASING ANY CLASS OF OFFERED SECURITIES.
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EMPLOYEE BENEFIT PLAN CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain restrictions on (a) employee benefit plans (as
defined in Section 3(3) of ERISA), (b) plans described in Section 4975(e)(1) of
the Code, including individual retirement accounts and Keogh Plans, (c) any
entities whose underlying assets include plan assets by reason of a plan's
investment in such entities (each of (a), (b) and (c) a "Plan") and (d) Persons
who have certain specified relationships to such Plans ("Parties in Interest"
under ERISA and "Disqualified Persons" under the Code). Moreover, based on the
reasoning of the United States Supreme Court in JOHN HANCOCK MUTUAL LIFE
INSURANCE CO. V. HARRIS TRUST AND SAVINGS BANK, 114 S. Ct. 517 (1993), an
insurance company's general account may be deemed to include assets of the Plans
investing in the general account (e.g., through the purchase of an annuity
contract), and the insurance company might be treated as a Party in Interest
with respect to such Plans by virtue of such investment. ERISA also imposes
certain duties on Persons who are fiduciaries of Plans, and ERISA, the Code and
any substantially similar federal, state or local law prohibit certain
transactions involving "plan assets" between a Plan and Parties in Interest or
Disqualified Persons with respect to such Plans. Violation of these rules may
result in the imposition of an excise tax or penalty. Thus, a Plan fiduciary
considering an investment in the Offered Securities should consider, among other
things, whether such an investment might constitute or give rise to a prohibited
transaction under ERISA, the Code or any substantially similar federal, state or
local law.
Neither ERISA nor the Code defines the term "plan assets." Under Section
2510.3-101 of the United States Department of Labor ("DOL") regulations (the
"Plan Assets Regulation"), a Plan's assets may be deemed to include an interest
in the underlying assets of an entity (such as a trust) for certain purposes,
including the prohibited transaction provisions of ERISA and the Code, if the
Plan acquires an "equity interest" in such entity. Accordingly, an investment in
the Offered Securities by a Plan might result in the assets of the Trust being
deemed to constitute plan assets, which in turn could have the consequence that
certain aspects of such investment, including the operation of the Trust, might
give rise to or result in prohibited transactions under ERISA and the Code.
CLASS A SECURITIES
The Plan Assets Regulation contains an exception to the plan asset rules
that provides that if a Plan acquires a "publicly-offered security," the issuer
of the security is not deemed to hold plan assets, regardless of the fact that
the security might otherwise represent an equity interest in the issuer. A
publicly-offered security is a security that is (i) freely transferable, (ii)
part of a class of securities that is "widely-held," i.e., owned by 100 or more
investors independent of the issuer and of one another and (iii) either is (A)
part of a class of securities registered under Section 12(b) or 12(g) of the
Exchange Act or (B) sold to a Plan as part of an offering of securities to the
public pursuant to an effective registration statement under the Securities Act
and the class of securities of which such security is a part is registered under
the Exchange Act within 120 days (or such later time as may be allowed by the
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. Under the Plan Assets
Regulation, a class of securities will not fail to be widely-held solely because
subsequent to the initial offering the number of independent investors falls
below 100 as a result of events beyond the control of the issuer.
The Class A Underwriters expect, although no assurances can be given, that
the Class A Securities will be held by at least 100 independent investors at the
conclusion of the offering and the Transferor anticipates that the other
conditions of the Plan Assets Regulation will be met with respect to the Class A
Securities. No monitoring or other measures will be taken to ensure that any
such conditions will be met with respect to the Class A Securities. If the
Trust's assets were deemed to be "plan assets" of a Plan investor, there is
uncertainty whether existing exemptions from the "prohibited transaction" rules
of ERISA, the Code and any substantially similar federal, state or local law
would apply to all transactions
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involving the Trust's assets. Accordingly, Plan fiduciaries should consult with
counsel before making a purchase of Class A Securities.
CLASS B SECURITIES
The Class B Underwriter does not expect that the Class B Securities will be
held by 100 or more independent investors. Accordingly, the Class B Securities
may not be purchased by Plans subject to Title I of ERISA, Section 4975 of the
Code or any substantially similar federal, state or local law.
Each Security Owner of a Class B Security will be deemed to have represented
and warranted that it is not (i) an employee benefit plan (as defined in Section
3(3) of ERISA) that is subject to the provisions of Title I of ERISA, (ii) a
plan described in Section 4975(e)(1) of the Code that is subject to Section 4975
of the Code, (iii) a governmental plan, as defined in Section 3(32) of ERISA,
subject to any federal, state or local law which is, to a material extent,
similar to the provisions of Section 406 of ERISA or Section 4975 of the Code,
(iv) an entity whose underlying assets include plan assets (as defined in the
Plan Assets Regulation or otherwise under ERISA) by reason of a plan's
investment in the entity or (v) a Person investing plan assets of any such plan
(including without limitation for purposes of clause (iv) and this clause (v),
as applicable, an insurance company general account, but excluding any entity
registered under the Investment Company Act).
SPECIAL CONSIDERATIONS FOR INSURANCE COMPANY GENERAL ACCOUNTS
It should be noted that the Small Business Job Protection Act of 1996 added
new Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Code. Pursuant to
Section 401(c), the DOL is required to issue final regulations (the "General
Account Regulations") with respect to insurance policies issued on or before
December 31, 1998 that are supported by an insurer's general account. The
General Account Regulations are to provide guidance on which assets held by the
insurer constitute "plan assets" for purposes of the fiduciary responsibility
provisions of ERISA and Section 4975 of the Code. Section 401(c) also provides
that, except in the case of avoidance of the General Account Regulations and
actions brought by the Secretary of Labor relating to certain breaches of
fiduciary duties that also constitute breaches of state or federal criminal law,
until the date that is 18 months after the General Account Regulations become
final, no liability under the fiduciary responsibility and prohibited
transaction provisions of ERISA and Section 4975 of the Code may result on the
basis of a claim that the assets of the general account of an insurance company
constitute the plan assets of any Plan. The plan asset status of insurance
company separate accounts is unaffected by new Section 401(c) of ERISA, and
separate account assets continue to be treated as the plan assets of any Plan
invested in a separate account. Potential investors that are insurance company
general accounts should consult their legal advisors concerning the effect of
the General Account Regulations on such investment.
As of the date hereof, the DOL has issued proposed regulations pursuant to
Section 401(c) of ERISA. If adopted substantially in the form in which proposed,
the General Account Regulations may not exempt the assets of an insurance
company general account from treatment as "plan assets" after December 31, 1998.
GENERAL INVESTMENT CONSIDERATIONS
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code and the potential consequences of
making an investment in the Offered Securities with respect to their specific
circumstances. Moreover, each Plan fiduciary should take into account, among
other considerations, whether the fiduciary has the authority to make the
investment; the composition of the Plan's portfolio with respect to
diversification by type of asset; the Plan's funding objectives; the tax effects
of the investment; and whether under the general fiduciary standards of
investment prudence and
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diversification an investment in the Offered Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to the provisions of Title I of ERISA and Section 4975 of
the Code. Accordingly, assets of such plans may, subject to the provisions of
any other applicable federal and state law (including, without limitation,
federal or state law which is, to a material extent, similar to the provisions
of Section 406 of ERISA or Section 4975 of the Code), be invested in any class
of Offered Securities without regard to the ERISA considerations described
herein. It should be noted, however, that any such plan that is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
dated April 21, 1998 (the "Underwriting Agreement"), among the Transferor, FCI
and the underwriters named below (the "Underwriters"), the Transferor has agreed
to sell to each of the Underwriters, and each of the Underwriters has severally
agreed to purchase from the Transferor, the principal amount of the Offered
Securities set forth opposite its name below.
<TABLE>
<CAPTION>
AMOUNT AMOUNT
OF CLASS A OF CLASS B
UNDERWRITER SECURITIES SECURITIES
- ---------------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Chase Securities Inc. $ 84,375,000 $ 51,136,000
BancAmerica Robertson Stephens 84,375,000 --
NationsBanc Montgomery Securities LLC 84,375,000 --
UBS Securities LLC 84,375,000 --
-------------- -------------
Total $ 337,500,000 $ 51,136,000
-------------- -------------
-------------- -------------
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Offered Securities
offered hereby if any Offered Securities are purchased. In the event of a
default by any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Transferor has been advised by the Class A Underwriters that the Class A
Underwriters propose initially to offer the Class A Securities to the public at
the public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of .200% of the
principal amount of the Class A Securities. The Class A Underwriters may allow,
and such dealers may reallow, a discount with respect to the Class A Securities
not in excess of .125% of such principal amount to certain other dealers. The
Transferor has been advised by the Class B Underwriter that the Class B
Underwriter proposes initially to offer the Class B Securities to the public at
the public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of .225% of the
principal amount of the Class B Securities. The Class B Underwriter may allow,
and such dealers may reallow, a discount with respect to the Class B Securities
not in excess of .125% of such principal amount to certain other dealers. After
the initial public offering, the public offering price, concession and discount
may be changed.
The Underwriting Agreement provides that the Transferor and FCI will
indemnify the Underwriters against certain liabilities, including liabilities
under applicable securities laws, or contribute to payments the Underwriters may
be required to make in respect thereof.
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Chase Securities Inc., on behalf of the Underwriters, may engage in
over-allotment transactions, stabilizing transactions, syndicate covering
transactions and penalty bids with respect to the Offered Securities in
accordance with Regulation M under the Exchange Act. Over-allotment transactions
involve syndicate sales in excess of the offering size creating a syndicate
short position. Stabilizing transactions permit bids to purchase the Offered
Securities so long as the stabilizing bids do not exceed a specific maximum.
Syndicate covering transactions involve purchases of the Offered Securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit Chase Securities Inc. to reclaim
a selling concession from a syndicate member when the Offered Securities
originally sold by such syndicate member are purchased in a syndicate covering
transaction. Such over-allotment transactions, stabilizing transactions,
syndicate covering transactions and penalty bids may cause prices of the Offered
Securities to be higher than they would otherwise be in the absence of such
transactions. Neither the Trust nor the Underwriters represent that the
Underwriters will engage in any such transactions nor that such transactions,
once commenced, will not be discontinued without notice.
Each Underwriter has represented and agreed that (a) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the Offered Securities to a
person who is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or who is a person to
whom the document may otherwise lawfully be issued or passed on, (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 of Great Britain with respect to anything done by it in
relation to the Offered Securities in, from or otherwise involving the United
Kingdom and (c) if that Underwriter is an authorized person under the Financial
Services Act 1986, it has only promoted and will only promote (as that term is
defined in Regulation 1.02 of the Financial Services (Promotion of Unregulated
Schemes) Regulations 1991) to any person in the United Kingdom the scheme
described herein if that person is of a kind described either in Section 76(2)
of the Financial Services Act 1986 or in Regulation 1.04 of the Financial
Services (Promotion Unregulated Schemes) Regulations 1991.
In the ordinary course of their respective businesses, the Underwriters and
their respective affiliates have engaged and may in the future engage in
commercial banking and investment banking transactions with FCI and its
affiliates.
As discussed under "Use of Proceeds," a portion of the proceeds of the sale
of the Receivables will be used to repay amounts owing to the holders of certain
of the Variable Funding Trust Certificates, including certain of the
Underwriters or their affiliates. Accordingly, because more than 10% of the net
offering proceeds may be paid to any affiliate of a member of the National
Association of Securities Dealers, Inc., (the "NASD") which is participating in
the distribution of the Offered Securities, the offering of the Offered
Securities is being made pursuant to the provisions of Article III, Section
2710(c)(8) of the Conduct Rules of the NASD.
LISTING AND GENERAL INFORMATION
Application has been made to list the Offered Securities on the Luxembourg
Stock Exchange. In connection with the listing application, the Certificate of
Incorporation and By-laws of the Transferor, as well as legal notice relating to
the issuance of the Securities will be deposited prior to listing with the Chief
Registrar of the District Court of Luxembourg, where copies thereof may be
obtained upon request. Once the Offered Securities have been so listed, trading
of the Offered Securities may be effected on the Luxembourg Stock Exchange. The
Class A Securities and the Class B Securities have been accepted for clearance
through the facilities of DTC, Cedel and Euroclear. The International Securities
Identification Numbers (ISIN) for the Class A Securities and the Class B
Securities are US31786YAF79 and US31786YAG52, respectively; the Common Code
numbers for the Class A Securities and the Class B Securities are 8498121 and
8498130, respectively.
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The transactions contemplated in this Prospectus were authorized by
resolutions adopted by the Transferor on January 26, 1998 and April 16, 1998.
Copies of the Pooling and Servicing Agreement, the Series 1998-2 Supplement,
all other Supplements, the Purchase Agreements and all amendments thereto, the
reports and statements described in "Description of the Offered
Securities--Evidence as to Compliance," each document listed under "Available
Information" and all of the reports referred to under "Reports to
Securityholders" and "Description of the Offered Securities--Reports to
Securityholders" in the Prospectus will be available free of charge at the
office of the listing agent of the Trust in Luxembourg, whose address is Banque
Generale du Luxembourg S.A., 50, avenue J.F. Kennedy, L-2951, Luxembourg.
Financial information regarding Transferor is included in the consolidated
financial statements of Fingerhut Companies, Inc. in its Annual Report and Form
10-K for the fiscal year ended December 26, 1997, also available at the office
of the listing agent in Luxembourg. For so long as the Offered Securities are
outstanding, copies of each Annual Report and Form 10-K for subsequent fiscal
years and Form 10-Q for subsequent fiscal quarters will also be available at the
office of the listing agent in Luxembourg.
The Transferor confirms that there has been no material adverse change in
the performance of the Trust since February 27, 1998, the date of the
information with respect to the Trust set forth in "The Receivables."
In the event that Definitive Securities are issued and the rules of the
Luxembourg Stock Exchange require a Luxembourg Transfer Agent the Luxembourg
Paying Agent will be appointed as a Transfer Agent.
LEGAL MATTERS
Certain legal matters relating to the Offered Securities will be passed upon
for the Transferor, FNB, FCI and Fingerhut by Michael P. Sherman, General
Counsel of FCI, and by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York. Certain legal matters relating to the Offered Securities will be passed
upon for the Underwriters by Simpson Thacher & Bartlett, New York, New York.
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GLOSSARY OF TERMS
The following terms, which are used in this Prospectus, have the meanings
indicated:
"ABC Adjusted Invested Amount" means, as of any business day, the sum of the
Class A Adjusted Invested Amount, the Class B Adjusted Invested Amount and the
CTO Adjusted Invested Amount, less the amount then on deposit in the Defeasance
Funding Account.
"ABC Invested Amount" means, as of any business day, the sum of the Class A
Invested Amount, the Class B Invested Amount and the CTO Invested Amount.
"Account" means (a) on the Amendment Closing Date, (i) each consumer
revolving credit card account established pursuant to a Contract between an
Originator and any Person, which on the Amendment Closing Date is an Eligible
Account and (ii) each closed-end installment sale or closed-end installment loan
made pursuant to a Contract between an Originator and any Person, which on the
Amendment Closing Date is an Eligible Account and (b) after the Amendment
Closing Date, the accounts specified in clause (a) and each Additional Account
and each Supplemental Account from and after the date such Additional Account
and Supplemental Account is included in the Trust pursuant to the Pooling and
Servicing Agreement. The definition of Account shall include each Transferred
Account but shall not include any Account that is not an Eligible Account and
that has been reassigned to the Transferor or any Removed Account after the
Removal Date with respect thereto.
"Additional Account" means (a) each consumer revolving credit card account
established pursuant to a Contract between an Originator and any Person, which,
on the date on which a Receivable arising in such account is first transferred
to the Trust, is an Eligible Account and (b) each closed-end installment sale or
closed-end installment loan made pursuant to a Contract between an Originator
and any Person which, on the date on which a Receivable arising in such account
is first transferred to the Trust, is an Eligible Account coming into existence
after the Amendment Closing Date; PROVIDED, HOWEVER, that in each case an
"Additional Account" shall only include (i) accounts as described in clauses (a)
and (b) originated by FNB generated in connection with sales by Fingerhut that
the Transferor has not elected to exclude from the Trust and (ii) accounts
described in clauses (a) and (b) originated by FNB (and not described in clause
(i)) of any other Originator that have been designated for inclusion by the
Transferor and with respect to which the Rating Agency Condition has been
satisfied.
"Addition Date" is defined at page 67 in "Description of the Offered
Securities--Addition of Trust Assets."
"Adjusted Invested Amount" means, as of any business day, the Invested
Amount minus the sum of the amount then on deposit in the Principal Account and
the Series 1998-2 Percentage of the amount then on deposit in the Excess Funding
Account.
"Adjustment Payment" is defined at page 81 in "Description of the Offered
Securities--Defaulted Receivables; Dilution."
"Aggregate Investor Percentage" means, with respect to Principal
Collections, Finance Charge Collections and Default Amounts, as the case may be,
as of any date of determination, the sum of the applicable Investor Percentages
of all Series of securities issued and outstanding on such date of
determination; PROVIDED, HOWEVER, that the Aggregate Investor Percentage shall
not exceed 100%.
"Aggregate Principal Receivables" means, for any day, the aggregate amount
of Principal Receivables at the end of such day.
"Amendment Closing Date" means March 18, 1998.
"Amortization Period" means the period commencing on the Amortization Period
Commencement Date and continuing until the earlier of (x) the Invested Amount of
the Securities being paid in full or (y) the Termination Date.
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"Amortization Period Commencement Date" means the earlier of the first day
of the August 2002 Monthly Period or the Pay Out Commencement Date.
"Applicable Tax State" means, as of any date of determination, each state as
to which any of the following is then applicable: (a) a state in which the
Trustee maintains its principal corporate trust office, (b) a state in which the
Transferor maintains its principal executive offices, and (c) a state in which
the Servicer regularly conducts servicing and collections operations which are
not limited to ministerial activities and which relate to a material portion of
the Receivables.
"Assignment" is defined at page 67 in "Description of the Offered
Securities--Addition of Trust Assets."
"Automatic Addition Suspension Date" is defined at page 67 in "Description
of Offered Securities-- Addition of Trust Assets."
"Automatic Addition Termination Date" is defined at page 67 in "Description
of the Offered Securities--Addition of Trust Assets."
"Available Defeasance Reserve Account Amount" is defined at page 84 in
"Description of the Offered Securities--Defeasance Reserve Account."
"Available Series 1998-2 Finance Charge Collections" is defined at page 76
in "Description of the Offered Securities--Application of Collections--Payment
of Fees, Interest and Other Items."
"Available Series 1998-2 Principal Collections" is defined at page 57 in
"Description of the Offered Securities--Principal Payments."
"Back End Customer" means, with respect to any date of determination, a
Person or Obligor who has made at least one payment on any installment credit
card loan from, installment sales contract with, or consumer revolving credit
consumer credit card account with an Originator; PROVIDED, HOWEVER, that any
Person or Obligor who has made a negotiated initial down payment in connection
with any installment credit card loan shall not be a Back End Customer prior to
making at least one payment on any subsequent installment credit card loan or
consumer revolving credit card account with an Originator.
"Bank Purchase Agreement" means that certain Amended and Restated Bank
Receivables Purchase Agreement dated as of March 18, 1998, between Fingerhut
National Bank, as seller, and FCI, as purchaser, as supplemented or amended in
accordance with its terms, and, if the context requires, the Bank Receivables
Purchase Agreement dated as of January 12, 1997, and any other receivables
purchase agreement between FCI, as purchaser of Receivables, and an Originator,
as seller of such Receivables.
"Base Rate" is defined at page 51 in "Maturity Considerations."
"Cash Equivalents" is defined at page 70 in "Description of the Offered
Securities--Trust Accounts."
"Cedel" is defined at page 55 in "Description of the Offered
Securities--Book-Entry Registration."
"Cedel Participants" is defined at page 55 in "Description of the Offered
Securities--Book-Entry Registration."
"Class" means any of the Class A Securities, the Class B Securities, the
Collateralized Trust Obligations or the Class D Securities.
"Class A Adjusted Invested Amount" is defined at page 72 in "Description of
the Offered Securities--Allocation Percentages."
"Class A Charge-Off" is defined at page 82 in "Description of the Offered
Securities--Series Charge-Offs."
"Class A Controlled Amortization Amount" means an amount equal to
$22,500,000.
"Class A Controlled Distribution Amount" is defined at page 50 in "Maturity
Considerations."
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"Class A Deficit Controlled Amortization Amount" is defined at page 50 in
"Maturity Considerations."
"Class A Expected Final Payment Date" means the November 2003 Distribution
Date.
"Class A Floating Percentage" means, with respect to any business day, the
percentage equivalent of a fraction, the numerator of which is the Class A
Adjusted Invested Amount as of the beginning of such business day after giving
effect to any deposits to be made to the Principal Account on such business day
and the denominator of which is the greater of (a) the sum of the aggregate
amount of Principal Receivables as of the beginning of such business day and the
amounts on deposit in the Excess Funding Account as of the beginning of such
business day after giving effect to any deposits or withdrawals to be made to
the Excess Funding Account on such business day and (b) the sum of the
numerators used to calculate the applicable floating or fixed/floating
percentages with respect to all Participations and all classes of all Series
then outstanding.
"Class A Interest Rate" is defined at page 12 in "Prospectus
Summary--Interest."
"Class A Invested Amount" is defined at page 72 in "Description of the
Offered Securities-- Allocation Percentages."
"Class A Monthly Interest" is defined at page 79 in "Description of the
Offered Securities-- Application of Collections--Payment of Fees, Interest and
Other Items."
"Class A Percentage" means a fraction the numerator of which is the Class A
Invested Amount and the denominator of which is the sum of the Class A Invested
Amount, the Class B Invested Amount and the CTO Invested Amount.
"Class A Principal" is defined at page 80 in "Description of the Offered
Securities--Application of Collections--Payment of Principal."
"Class A Required Amount" means the amount determined by the Servicer for
each business day equal to the excess, if any, of (x) the sum of (i) the Class A
Monthly Interest for the Interest Accrual Period beginning in the then current
Monthly Period, (ii) any Class A Monthly Interest due but not paid on any
previous Distribution Date plus any interest due on the next succeeding
Distribution Date with respect to such Class A Monthly Interest due but not
paid, (iii) the Class A Percentage of the Series Default Amount, if any, for
such business day and for any previous business day in such Monthly Period, (iv)
the Class A Percentage of the Monthly Servicing Fee for the then current Monthly
Period and (v) the Class A Percentage of the Series 1998-2 Percentage of any
Adjustment Payment the Transferor is required but fails to make on such business
day and on each previous business day during such Monthly Period over (y) the
Available Series 1998-2 Finance Charge Collections plus any Excess Finance
Charge Collections from other Series and any Transferor Finance Charge
Collections allocated with respect to the amounts described in clauses (x)(i)
through (v) above with respect to such business day and on all previous business
days in such Monthly Period.
"Class A Securities" means the 6.23% Asset Backed Securities, Series 1998-2,
Class A.
"Class A Securityholders" means the record holders of the Class A
Securities.
"Class A Securityholders' Interest" means the interest in the assets of the
Trust allocated to the Class A Securityholders.
"Class A Underwriters" means Chase Securities Inc., BancAmerica Robertson
Stephens, NationsBanc Montgomery Securities LLC and UBS Securities LLC.
"Class B Adjusted Invested Amount" is defined at page 72 in "Description of
the Offered Securities-- Allocation Percentages."
"Class B Charge-Off" is defined at page 82 in "Description of the Offered
Securities--Series Charge-Offs."
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"Class B Controlled Amortization Amount" means an amount equal to
$17,045,333.33.
"Class B Controlled Distribution Amount" is defined at page 50 in "Maturity
Considerations."
"Class B Deficit Controlled Amortization Amount" is defined at page 50 in
"Maturity Considerations."
"Class B Expected Final Payment Date" means the February 2004 Distribution
Date.
"Class B Fixed/Floating Percentage" means for any business day on or after
the Amortization Period Commencement Date, the percentage equivalent of a
fraction, the numerator of which is the Class B Invested Amount at the end of
the last day of the Revolving Period and the denominator of which is the greater
of (a) the sum of the aggregate amount of Principal Receivables and the amount
on deposit in the Excess Funding Account as of the beginning of such business
day after giving effect to any deposits or withdrawals to be made to the Excess
Funding Account on such business day and (b) the sum of the numerators used to
calculate the applicable floating or fixed/floating percentages with respect to
all Participations and all classes of all Series then outstanding.
"Class B Floating Percentage" means, with respect to any business day, the
percentage equivalent of a fraction, the numerator of which is the Class B
Adjusted Invested Amount as of the beginning of such business day after giving
effect to any deposits to be made to the Principal Account on such business day
and the denominator of which is the greater of (a) sum of the aggregate amount
of Principal Receivables as of the beginning of such business day and the
amounts on deposit in the Excess Funding Account as of the beginning of such
business day after giving effect to any deposits or withdrawals to be made to
the Excess Funding Account on such business day and (b) the sum of the
numerators used to calculate the applicable floating or fixed/floating
percentages with respect to all Participations and all classes of all Series
then outstanding.
"Class B Interest Rate" is defined at page 12 in "Prospectus
Summary--Interest."
"Class B Invested Amount" is defined at page 72 in "Description of the
Offered Securities-- Allocation Percentages."
"Class B Monthly Interest" is defined at page 79 in "Description of the
Offered Securities-- Application of Collections--Payment of Fees, Interest and
Other Items."
"Class B Percentage" means a fraction the numerator of which is the Class B
Invested Amount and the denominator of which is the sum of the Class A Invested
Amount, the Class B Invested Amount and the CTO Invested Amount.
"Class B Principal" is defined at page 80 in "Description of the Offered
Securities--Application of Collections--Payment of Principal."
"Class B Principal Payment Commencement Date" means the earlier of (a) the
Distribution Date on which the Class A Invested Amount is paid in full or, if
the Class A Invested Amount is paid in full on the Class A Expected Final
Payment Date, and the Early Amortization Period has not commenced, the
Distribution Date following the Class A Expected Final Payment Date and (b) the
Distribution Date following a sale or repurchase of the Receivables pursuant to
the Pooling and Servicing Agreement.
"Class B Required Amount" means the amount determined by the Servicer for
each business day equal to the excess, if any, of (x) the sum of (i) the Class B
Monthly Interest for the Interest Accrual Period beginning in the then current
Monthly Period, (ii) any Class B Monthly Interest due but not paid on any
previous Distribution Date plus any interest due on the next succeeding
Distribution Date with respect to such Class B Monthly Interest due but not
paid, (iii) the Class B Percentage of the Series Default Amount, if any, for
such business day and for any previous business day in such Monthly Period, (iv)
the Class B Percentage of the Monthly Servicing Fee for the then current Monthly
Period and (v) the Class B Percentage of the Series 1998-2 Percentage of the
Adjustment Payment the Transferor is required but fails to make on such business
day and on each previous business day during such Monthly Period over (y) the
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Available Series 1998-2 Finance Charge Collections plus any Excess Finance
Charge Collections from other Series and any Transferor Finance Charge
Collections in each case allocated with respect to the amounts described in
clauses (x)(i) through (v) above with respect to such business day and all
previous business days in such Monthly Period.
"Class B Securities" means the 6.51% Asset Backed Securities, Series 1998-2,
Class B.
"Class B Securityholders" means the record holders of the Class B
Securities.
"Class B Securityholders' Interest" means the interest in the assets of the
Trust allocated to the Class B Securityholders.
"Class B Underwriter" means Chase Securities Inc.
"Class D Charge-Off" is defined at page 82 in "Description of the Offered
Securities--Series Charge-Offs."
"Class D Excess Amount" means, with respect to any business day, the excess
of the Class D Invested Amount over the Stated Class D Amount on such business
day after taking into account all adjustments of the ABC Adjusted Invested
Amount on such day.
"Class D Fixed/Floating Percentage" means for any business day on or after
the Amortization Period Commencement Date, the percentage equivalent of a
fraction, the numerator of which is the Class D Invested Amount at the end of
the last day of the Revolving Period and the denominator of which is the greater
of (a) the sum of the aggregate amount of Principal Receivables and the amount
on deposit in the Excess Funding Account as of the beginning of such business
day after giving effect to any deposits or withdrawals to be made to the Excess
Funding Account on such business day and (b) the sum of the numerators used to
calculate the applicable floating or fixed/floating percentages with respect to
all Participations and all classes of all Series then outstanding.
"Class D Floating Percentage" means, with respect to any business day, the
percentage equivalent of a fraction, the numerator of which is the Class D
Invested Amount as of the beginning of such business day and the denominator of
which is the greater of (a) the sum of the aggregate amount of Principal
Receivables as of the beginning of such business day and the amounts on deposit
in the Excess Funding Account as of the beginning of such business day after
giving effect to any deposits or withdrawals to be made to the Excess Funding
Account on such business day and (b) the sum of the numerators used to calculate
the applicable floating or fixed/floating percentages with respect to all
Participations and all classes of all Series then outstanding.
"Class D Interest Rate" means a rate assigned by the Transferor to the Class
D Securities, or a portion thereof, pursuant to the Series 1998-2 Supplement.
"Class D Invested Amount" is defined at page 72 in "Description of the
Offered Securities-- Allocation Percentages."
"Class D Principal" is defined at page 81 in "Description of the Offered
Securities--Application of Collections--Payment of Principal."
"Class D Principal Payment Commencement Date" means the earlier of (a) the
first Distribution Date on which the CTO Invested Amount is paid in full or, if
there are no Principal Collections allocable to such Series remaining after
payments have been made to the Collateralized Trust Obligations on such
Distribution Date, the next succeeding Distribution Date and (b) the
Distribution Date following a sale or repurchase of the Receivables pursuant to
the Pooling and Servicing Agreement.
"Class D Securities" means the Asset Backed Securities, Series 1998-2, Class
D.
"Class D Securityholders" means the record holders of the Class D
Securities.
"Class D Securityholders' Interest" means the interest in the assets of the
Trust allocated to the Class D Securityholders.
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"Closed End Receivable" means (a) any right to payment of amounts owed by an
Obligor under an Eligible Account with respect to a closed-end installment sale
or a closed-end installment loan, including, without limitation, all rights of
the Originator and obligations of the Obligor under the applicable Contract,
other than insurance premiums and (b) those rights to payment with respect to
certain Receivables arising under any Eligible Account that is a consumer
revolving credit card account that, pursuant to the terms of the applicable
Contract, have a 0% interest rate.
"Closing Date" means the date of the initial issuance of the Securities.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateralized Trust Obligations" means the Floating Rate Asset Backed
Collateralized Trust Obligations, Series 1998-2.
"Collection Account" means an account established and maintained by the
Servicer for the purpose of depositing all collections of Receivables.
"Collections" is defined at page 58 in "Description of the Offered
Securities--Finance Charge Collections; Principal Collections."
"Commission" means the Securities and Exchange Commission.
"Contract" means an agreement between (a) an Originator and another Person
for the extension of revolving credit, including pursuant to a credit card, in
the form of a cardholder agreement, written contract or invoice, as such
agreement may be amended, modified or otherwise changed from time to time or (b)
an Originator and another Person for the extension of closed-end credit,
including pursuant to a credit card, in the form of a written contract, invoice
or closed-end agreement, in each case pursuant to or under which such other
Person shall be obligated to either pay for, or to pay a loan made to finance
the purchase of, merchandise, financial service products or services or return
any such merchandise to the related merchant.
"Controlled Amortization Period" means, with respect to the Series 1998-2
Securities, unless a Pay Out Event shall have occurred with respect to such
Series prior thereto, the period commencing on the Amortization Period
Commencement Date and ending upon the earlier to occur of (x) the payment in
full to the holders of the Series 1998-2 Securities of the Invested Amount, and
(y) the Termination Date.
"Cooperative" is defined at page 55 in "Description of the Offered
Securities--Book-Entry Registration."
"Corporate Trust Office" means the Trustee's office located at White Clay
Center, Route 273, Newark, Delaware 19711.
"Credit and Collection Policy" means those credit, collection, customer
relations and customer service policies and practices and other written policies
and procedures of the applicable Originator relating to the operation of its
Accounts, Contracts and Receivables (including, without limitation, the written
policies and procedures for determining creditworthiness and relating to the
extension of credit, the maintenance of Accounts and the collection of
receivables with respect thereto) in effect on the Amendment Closing Date and as
such policies and procedures may be amended, modified or otherwise changed from
time to time.
"CTO Adjusted Invested Amount" is defined at page 72 in "Description of the
Offered Securities-- Allocation Percentages."
"CTO Charge-Off" is defined at page 82 in "Description of the Offered
Securities--Series Charge-Offs."
"CTO Expected Final Payment Date" means the April 2004 Distribution Date.
"CTO Fixed/Floating Percentage" means for any business day on or after the
Amortization Period Commencement Date, the percentage equivalent of a fraction,
the numerator of which is the CTO
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Invested Amount at the end of the last day of the Revolving Period and the
denominator of which is the greater of (a) the sum of the aggregate amount of
Principal Receivables and the amount on deposit in the Excess Funding Account as
of the beginning of such business day after giving effect to any deposits or
withdrawals to be made to the Excess Funding Account on such business day and
(b) the sum of the numerators used to calculate the applicable floating or
fixed/floating percentages with respect to all Participations and all classes of
all Series then outstanding.
"CTO Floating Percentage" means, with respect to any business day, the
percentage equivalent of a fraction, the numerator of which is the CTO Adjusted
Invested Amount as of the beginning of such business day after giving effect to
any deposits to be made to the Principal Account on such business day and the
denominator of which is the greater of (a) the sum of the aggregate amount of
Principal Receivables as of the beginning of such business day and the amounts
on deposit in the Excess Funding Account as of the beginning of such business
day after giving effect to any deposits or withdrawals to be made to the Excess
Funding Account on such business day and (b) the sum of the numerators used to
calculate the applicable floating or fixed/floating percentages with respect to
all Participations and all classes of all Series then outstanding.
"CTO Interest Rate" means LIBOR plus 1% per annum or such lesser rate as
specified in the Series 1998-2 Supplement.
"CTO Invested Amount" is defined at page 72 in "Description of the Offered
Securities--Allocation Percentages."
"CTO Monthly Interest" is defined at page 79 in "Description of the Offered
Securities--Application of Collections--Payment of Fees, Interest and Other
Items."
"CTO Percentage" means a fraction the numerator of which is the CTO Invested
Amount and the denominator of which is the sum of the Class A Invested Amount,
the Class B Invested Amount and the CTO Invested Amount.
"CTO Principal" is defined at page 80 in "Description of the Offered
Securities--Application of Collections--Payment of Principal."
"CTO Principal Payment Commencement Date" means the earlier of (a) the
Distribution Date on which the Class A Invested Amount and the Class B Invested
Amount have each been paid in full or, if the Class B Invested Amount is paid in
full on the Class B Expected Final Payment Date and the Early Amortization
Period has not commenced, the Distribution Date following the Class B Expected
Final Payment Date and (b) the Distribution Date following a sale or repurchase
of the Receivables pursuant to the Pooling and Servicing Agreement.
"CTO Required Amount" means the amount determined by the Servicer for each
business day equal to the excess, if any, of (x) the sum of (i) the CTO Monthly
Interest for the Interest Accrual Period beginning in the then current Monthly
Period, (ii) any CTO Monthly Interest due but not paid on any previous
Distribution Date plus any interest due on the next succeeding Distribution Date
with respect to such CTO Monthly Interest due but not paid, (iii) the CTO
Percentage of the Series Default Amount, if any, for such business day and for
any previous business day in such Monthly Period, (iv) the CTO Percentage of the
Monthly Servicing Fee for the related Monthly Period and (v) the CTO Percentage
of the Series 1998-2 Percentage of the Adjustment Payment the Transferor is
required but fails to make on such business day and on each previous business
day during such Monthly Period over (y) the Available Series 1998-2 Finance
Charge Collections plus any Excess Finance Charge Collections from other Series
and any Transferor Finance Charge Collections in each case allocated with
respect to the amounts described in clauses (x)(i) through (v) above with
respect to such business day and all previous business days in such Monthly
Period.
"CTO Securityholders" means the record holders of the Collateralized Trust
Obligations.
"CTO Securityholders' Interest" means the interest in the assets of the
Trust allocated to the CTO Securityholders.
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"Default Amount" means, on any business day, the aggregate amount of
Principal Receivables in Accounts that became Defaulted Accounts on such
business day.
"Defaulted Account" means each Eligible Account with respect to which, in
accordance with the applicable Credit and Collection Policy or the Servicer's
customary and usual servicing procedures, the Servicer has charged off the
Receivables in such Account as uncollectible; an Account shall become a
Defaulted Account on the day on which such Receivables are recorded as charged
off as uncollectible on the Servicer's computer master file of Accounts.
Notwithstanding any other provision hereof, any Receivables in a Defaulted
Account that are Ineligible Receivables shall be treated as Ineligible
Receivables rather than Receivables in Defaulted Accounts.
"Defeasance" is defined at page 83 in "Description of the Offered
Securities--Defeasance."
"Defeasance Funding Account" is defined at page 83 in "Description of the
Offered Securities-- Defeasance Funding Account."
"Defeasance Funding Account Investment Proceeds" is defined at page 84 in
"Description of the Offered Securities--Defeasance Funding Account."
"Defeasance Reserve Account" is defined at page 84 in "Description of the
Offered Securities-- Defeasance Reserve Account."
"Defeasance Reserve Account Funding Date" is defined at page 84 in
"Description of the Offered Securities --Defeasance Reserve Account."
"Definitive Securities" is defined at page 56 in "Description of the Offered
Securities--Definitive Securities."
"Depositaries" is defined at page 53 in "Description of the Offered
Securities--Book-Entry Registration."
"Depository" is defined at page 53 in "Description of the Offered
Securities--General."
"Determination Date" is defined at page 82 in "Description of the Offered
Securities--Series Charge-Offs."
"Dilution" is defined at page 45 in "The Receivables--Dilution Experience."
"Discount Factor" means (a) 25% for Closed End Receivables generated in
connection with sales by Fingerhut, (b) 9% for Revolving Receivables generated
in connection with sales by Fingerhut and (c) such other discount rate or rates
(which may be a fixed percentage or a variable percentage based on a formula)
approved from time to time by the Rating Agencies for Receivables generated in
connection with sales by a Person other than Fingerhut; provided, however, that
such percentages or formulas may be (i) increased from time to time by the
Transferor, following written notice to the Rating Agencies, without the
approval of the Rating Agencies in an amount not to exceed two percentage points
from the amounts set forth in the Pooling and Servicing Agreement or the amounts
otherwise approved by the Rating Agencies if such change will not cause a Pay
Out Event to occur or (ii) adjusted from time to time by the Transferor
(including changing any fixed percentage to a variable percentage) if such
change will not cause a Pay Out Event to occur and the Rating Agencies will have
confirmed that the change will not result in any of the Rating Agencies reducing
or withdrawing its original rating on any then outstanding Series rated by it.
"Discount Receivables" means the sum of (a) with respect to Closed End
Receivables, the product of (i) the applicable Discount Factor and (ii) the
aggregate amount shown on the Servicer's records as amounts payable by Obligors
with respect to such Receivables (or, with respect to any Closed End Receivables
defined in clause (b) of the definition thereof, the aggregate principal amount
shown on the Servicer's records as principal amounts payable by Obligors with
respect to such Receivables) and (b) with respect to Revolving Receivables, the
product of (i) the applicable Discount Factor and (ii) the aggregate
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amount shown on the Servicer's records as amounts payable by Obligors with
respect to such Receivables minus the amount of Periodic Finance Charges,
overlimit fees, late charges, returned check fees, annual account fees or
service charges, transaction charges and similar fees and charges which
constitute Finance Charge Receivables with respect to such Revolving
Receivables.
"Discount Receivables Collections" means on any day, the sum of (a) with
respect to Closed End Receivables, the product of (i) the applicable Discount
Factor and (ii) Collections (or, with respect to any Closed End Receivables
defined in clause (b) of the definition thereof, Collections not including
amounts specified in clause (i) of the definition of "Finance Charge
Receivables") with respect to such Closed End Receivables on such day, and (b)
with respect to Revolving Receivables, the product of (i) the applicable
Discount Factor and (ii) Collections with respect to such Revolving Receivables
on such day minus the amount of Collections that represent payments of Periodic
Finance Charges, overlimit fees, late charges, returned check fees, annual
account fees or service charges, transaction charges and similar fees and
charges which represent Finance Charge Receivables with respect to such Eligible
Receivables.
"Disqualified Persons" is defined at page 111 in "Employee Benefit Plan
Considerations."
"Distribution Account" is defined at page 69 in "Description of the Offered
Securities--Trust Accounts."
"Distribution Date" means June 15, 1998 and the fifteenth day of each month
thereafter, or if such day is not a business day, the next succeeding business
day.
"DOL" means the U.S. Department of Labor.
"Dollars" or "$" means United States dollars.
"DTC" means The Depository Trust Company.
"DTC Participants" is defined at page 53 in "Description of the Offered
Securities--Book-Entry Registration."
"Early Amortization Period" means the period beginning on the earlier of (a)
the day on which a Pay Out Event occurs or is deemed to have occurred and (b)
the CTO Expected Final Payment Date if the CTO Invested Amount has not been paid
in full on or prior to such date, and ending on the earlier of (i) the date on
which the Class A Invested Amount, the Class B Invested Amount, the CTO Invested
Amount and the Class D Invested Amount have been paid in full and (ii) the
Termination Date.
"Eligible Account" is defined at page 66 in "Description of the Offered
Securities--Eligible Accounts."
"Eligible Receivable" is defined at page 66 in "Description of the Offered
Securities--Eligible Receivables."
"Enhancement" means, with respect to any Series, any letter of credit, cash
collateral account, cash collateral guaranty, guaranty, collateral invested
amount, guaranteed rate agreement, maturity guaranty facility, tax protection
agreement, interest rate cap, interest rate swap, currency swap, subordination
of the rights of one class or one Series to another, or any other contract,
agreement or arrangement for the benefit of the securityholders of such Series
(or securityholders of any class within such Series) as designated in the
applicable Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Euroclear" is defined at page 55 in "Description of the Offered
Securities--Book-Entry Registration."
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"Euroclear Operator" is defined at page 55 in "Description of the Offered
Securities--Book-Entry Registration."
"Euroclear Participants" is defined at page 55 in "Description of the
Offered Securities--Book-Entry Registration."
"Excess Finance Charge Collections" means, with respect to any business day,
as the context requires, either (x) the amount described in clause (xviii) under
"Description of the Offered Securities--Application of Collections--Payment of
Fees, Interest and Other Items" available to cover shortfalls in amounts paid
from Finance Charge Collections for other Series, if any, or (y) the aggregate
amount of Finance Charge Collections allocable to other Series in excess of the
amounts necessary to make required payments with respect to such Series, if any,
and available to cover shortfalls with respect to the Securities.
"Excess Funding Account" is defined at page 71 in "Description of the
Offered Securities--Excess Funding Account."
"Exchange" means any tender by the Transferor to the Trustee of the
Exchangeable Transferor Security, pursuant to any one or more Supplements or, if
provided in the relevant Supplement, securities representing any Series and the
Exchangeable Transferor Security, in exchange for one or more new Series and a
reissued Exchangeable Transferor Security.
"Exchangeable Transferor Security" means the security which evidences the
Transferor Interest.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FASIT" is defined at page 108 in "Certain Federal Income Tax
Consequences--Recently Effective Legislation."
"FASIT Provisions" is defined at page 108 in "Certain Federal Income Tax
Consequences--Recently Effective Legislation."
"FCI" means Fingerhut Companies, Inc., a Minnesota corporation.
"FCI Purchase Agreement" means the Amended and Restated Purchase Agreement,
dated as of March 18, 1998, between FCI, as seller, and the Transferor, as
buyer, as supplemented or amended in accordance with its terms and, if the
context requires, the Purchase Agreement dated as of January 12, 1997.
"FDIA" means the Federal Deposit Insurance Act.
"FDIC" means the Federal Deposit Insurance Corporation.
"Finance Charge Collections" means, with respect to any business day,
collections received with respect to Finance Charge Receivables (other than
Discount Receivables) and Discount Receivable Collections.
"Finance Charge Receivables" is defined at page 7 in "Prospectus
Summary--Receivables."
"Fingerhut" means Fingerhut Corporation, a Minnesota corporation.
"Fingerhut Database" is defined at page 36 in "Fingerhut Corporation's and
Fingerhut National Bank's Businesses."
"Fingerhut Purchase Agreement" means that certain Purchase Agreement, dated
as of June 29, 1994, between Fingerhut, as seller, and the Transferor, as buyer,
as supplemented or amended in accordance with its terms.
"FIRREA" is defined at page 27 in "Risk Factors--Transfer of the
Receivables; Insolvency Risk Considerations."
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"Fixed/Floating Percentage" is defined at page 72 in "Description of the
Offered Securities-- Allocation Percentages."
"Floating Percentage" means the sum of the Class A Floating Percentage, the
Class B Floating Percentage, the CTO Floating Percentage and the Class D
Floating Percentage.
"FNB" means Fingerhut National Bank, a national banking association.
"Foreign Person" is defined at page 109 in "Certain Federal Income Tax
Consequences--Tax Consequences to Foreign Investors."
"FRI" means Fingerhut Receivables, Inc., a Delaware corporation.
"General Account Regulations" is defined at page 112 in "Employee Benefit
Plan Considerations."
"Global Securities" is defined at page B-1-i in "Annex II."
"Governmental Authority" means the United States of America, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Indirect Participants" is defined at page 53 in "Description of the Offered
Securities--Book-Entry Registration."
"Ineligible Receivable" means any Receivable that does not satisfy the
definition of Eligible Receivable.
"Initial Closing Date" means June 29, 1994.
"Initial Invested Amount" is defined at page 10 in "Prospectus
Summary--Allocation of Trust Assets."
"Insolvency Event" is defined at page 88 in "Description of the Offered
Securities--Pay Out Events."
"Interest Accrual Period" means, with respect to a Distribution Date, the
period from and including the preceding Distribution Date to but excluding such
Distribution Date; provided, however, that the initial Interest Accrual Period
shall be the period from the Closing Date to but excluding the initial
Distribution Date.
"Interest Funding Account" is defined at page 69 in "Description of the
Offered Securities--Trust Accounts."
"Interest Rate(s)" is defined at page 12 in "Prospectus Summary--Interest."
"Invested Amount" means the sum of the Class A Invested Amount, the Class B
Invested Amount, the CTO Invested Amount, and the Class D Invested Amount.
"Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time.
"Investor Percentage" means, (a) with respect to Finance Charge Collections
prior to the commencement of the Early Amortization Period, Default Amounts at
any time and Principal Collections during the Revolving Period, the Floating
Percentage and (b) with respect to Finance Charge Collections during the Early
Amortization Period and Principal Collections during the Amortization Period,
the Fixed/ Floating Percentage, and with respect to any other Series of
securities, the percentage specified in the related Supplement.
"Investor Security" means any one of the securities (including, without
limitation, securities issued in bearer form or securities in fully registered
form) executed by the Transferor and authenticated by the Trustee substantially
in the form (or forms in the case of a Series with multiple classes) of the
investor
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<PAGE>
security or variable funding security attached to the related Supplement, but
not including any securities which the Transferor retains (and continues to
retain) or Participation.
"Investor Securityholder" means the Holder of an Investor Security.
"IRS" means the Internal Revenue Service.
"LIBOR" means the London interbank offered quotations for one-month United
States dollar deposits.
"Minimum Aggregate Principal Receivables" means, as of any date of
determination, (a) the sum of the numerators used in the calculation of the
Investor Percentages for Principal Collections for all outstanding Series and of
the Participation Percentages for all outstanding Participations on such date of
determination, minus (b) the amount on deposit in the Excess Funding Account and
each pre-funding account and principal funding account for any Series on such
date of determination.
"Minimum Retained Interest" means the product of the weighted average
Minimum Retained Percentages for all Series and the sum of the outstanding
principal amounts of all Classes of all Series.
"Minimum Retained Percentage" means, for Series 1998-2, 2%.
"Minimum Transferor Interest" means, as of any date of determination, the
product of (i) the sum of (a) the aggregate amount of Principal Receivables at
the end of the day immediately prior to such date of determination plus (b) all
amounts on deposit in the Excess Funding Account and each pre-funding account
and principal funding account, if any, for each Series (but not including
investment earnings on such amounts) and (ii) the Minimum Transferor Percentage.
"Minimum Transferor Percentage" means, for Series 1998-2, 0%; provided,
however, that in certain circumstances such percentage may be increased.
"Monthly Period" means the period from and including the first day of each
fiscal month of the Transferor to and including the last day of such fiscal
month except that the first Monthly Period with respect to the Securities shall
begin on and include the Closing Date and shall end on and include May 29, 1998.
"Monthly Servicing Fee" is defined at page 89 in "Description of the Offered
Securities--Servicing Compensation and Payment of Expenses."
"Moody's" means Moody's Investors Service, Inc. or its successor.
"Negative Carry Amount" is defined at page 19 in "Prospectus
Summary--Coverage of Interest Shortfalls from Transferor Finance Charge
Collections."
"New Regulations" is defined at page 110 in "Certain Federal Income Tax
Consequences--New Withholding Regulations."
"Notice Date" is defined at page 67 in "Description of the Offered
Securities--Addition of Trust Assets."
"Obligor" means a Person obligated to make payments with respect to a
Receivable pursuant to a Contract.
"Offered Securities" is defined at page 1.
"OID" means original issue discount.
"OID Regulations" is defined at page 106 in "Certain Federal Income Tax
Consequences--Taxation of Interest Income to Securityholders."
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"Originator" means (i) each of Fingerhut and FNB and any of their respective
successors or assigns and (ii) any of their affiliates.
"Other Series" is defined at page 63 in "Description of the Offered
Securities--Other Series."
"Paired Series" is defined at page 82 in "Description of the Offered
Securities--Paired Series."
"Participants" is defined at page 53 in "Description of the Offered
Securities--General."
"Participation" is defined at page 63 in "Description of the Offered
Securities--Participations."
"Participation Amount" means with respect to any Participation on any date
of determination the amount of the interest in the Principal Receivables
represented by such Participation as specified in the applicable Participation
Supplement.
"Participation Percentage" is defined at page 63 in "Description of the
Offered Securities-- Participations."
"Participation Supplement" is defined at page 63 in "Description of the
Offered Securities-- Participations."
"Parties in Interest" is defined at page 111 in "Employee Benefit Plan
Considerations."
"Pay Out Commencement Date" means the date on which a Pay Out Event is
deemed to occur pursuant to the Pooling and Servicing Agreement or the Series
1998-2 Supplement.
"Pay Out Event" is defined at page 87 in "Description of the Offered
Securities--Pay Out Events."
"Paying Agent" is defined at page 70 in "Description of the Offered
Securities--Trust Accounts."
"Payment Reserve Account" is defined at page 86 in "Description of the
Offered Securities--Payment Reserve Account."
"Periodic Finance Charge" has, with respect to any Account, the meaning
specified in the Contract applicable to such Account for finance charges (due to
periodic rate) or any similar term.
"Permitted Lien" means, with respect to the Receivables: (i) liens in favor
of FCI created pursuant to the Bank Purchase Agreement and the Transferor
pursuant to the Purchase Agreement and the Bank Purchase Agreement and assigned
to the Trustee pursuant to the Pooling and Servicing Agreement; (ii) liens in
favor of the Trustee pursuant to the Pooling and Servicing Agreement; (iii)
liens in favor of the holder of any Participation pursuant to any Participation
Supplement; and (iv) liens which secure the payment of taxes, assessments, and
governmental charges or levies, if such taxes are either (a) not delinquent or
(b) being contested in good faith by appropriate legal or administrative
proceedings and as to which adequate reserves in accordance with generally
accepted accounting principles shall have been established.
"Person" means any legal person, including any individual, corporation,
partnership, limited liability company, joint venture, association, joint stock
company, trust, unincorporated organization, governmental entity or other entity
of similar nature.
"Plan" is defined at page 111 in "Employee Benefit Plan Considerations."
"Plan Assets Regulation" is defined at page 111 in "Employee Benefit Plan
Considerations."
"Pooling and Servicing Agreement" means the Amended and Restated Pooling and
Servicing Agreement, dated as of March 18, 1998, among the Transferor, the
Servicer, and the Trustee, as supplemented or amended in accordance with its
terms, and, if the context requires, the prior versions thereof, including the
original Pooling and Servicing Agreement dated as of June 29, 1994 and the
Amended and Restated Pooling and Servicing Agreement dated as of January 12,
1997. Unless the context
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<PAGE>
requires otherwise, the term "Pooling and Servicing Agreement" refers to the
Pooling and Servicing Agreement as supplemented by the Series 1998-2 Supplement.
"Portfolio Yield" is defined at page 51 in "Maturity Considerations."
"Prepayable Instrument" is defined at page 107 in "Certain Federal Income
Tax Consequences-- Taxation of Interest Income to Securityholders--OID."
"Previously Issued Series" means the Series 1994-1 Asset Backed Securities,
the Series 1994-2 Variable Funding Securities and the Series 1997-1 Variable
Funding Trust Securities.
"Principal Account" is defined at page 69 in "Description of the Offered
Securities--Trust Accounts."
"Principal Collections" means, with respect to any business day, collections
received with respect to Principal Receivables on such business day.
"Principal Receivables" means, for any business day, the aggregate amount
shown on the Servicer's records as amounts payable by Obligors with respect to
Eligible Receivables other than such amounts that are Finance Charge Receivables
or Default Amounts.
"Principal Shortfalls" is defined at page 58 in "Description of the Offered
Securities--Principal Payments."
"Principal Terms" is defined at page 61 in "Description of the Offered
Securities--Exchanges."
"Purchase Agreement" means the Fingerhut Purchase Agreement with respect to
Fingerhut and the FCI Purchase Agreement with respect to FCI.
"Purchase Termination Date" is defined at page 99 in "Description of the
Purchase Agreements-- Purchase Termination Date."
"Qualified Institution" is defined at page 69 in "Description of the Offered
Securities--Trust Accounts."
"Rating Agencies" means Standard & Poor's and Moody's.
"Rating Agency Condition" means the notification in writing by each Rating
Agency to the Transferor, the Servicer and the Trustee that any action will not
result in any Rating Agency's reducing or withdrawing its then existing rating
of the Investor Securities of any outstanding Series or class with respect to
which it is a Rating Agency.
"Ratings Event" means with respect to any Class of any outstanding series
rated by a Rating Agency, a reduction or withdrawal of the rating of any such
Class by a Rating Agency.
"Reassignment" is defined at page 68 in "Description of the Offered
Securities--Removal of Accounts."
"Reassignment Date" is defined at page 64 in "Description of the Offered
Securities--Representations and Warranties."
"Receivable" means, with respect to any Obligor, any right to payment of
amounts owed by that Obligor under an Account, including, without limitation,
all rights of each Originator and obligations of the Obligor under the
applicable Account.
"Record Date" means, with respect to any Distribution Date, the business day
preceding such Distribution Date, except that, with respect to any Definitive
Securities, Record Date shall mean the fifth day of the then current Monthly
Period.
"Recoveries" means any amounts received by the Servicer or the Transferor
with respect to Receivables in Defaulted Accounts, including Collections
received from Obligors and disposition proceeds.
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"Redirected Class B Principal Collections" is defined at page 74 in
"Description of the Offered Securities--Redirected Principal Collections."
"Redirected Class D Principal Collections" is defined at page 74 in
"Description of the Offered Securities--Redirected Principal Collections."
"Redirected CTO Principal Collections" is defined at page 74 in "Description
of the Offered Securities--Redirected Principal Collections."
"Redirected Principal Collections" means the sum of Redirected Class B
Principal Collections, Redirected CTO Principal Collections and Redirected Class
D Principal Collections.
"Related Person" means an entity that is an affiliate of FCI, any Investor
Securityholder, any Enhancement provider, or any Person whose status would
violate the conditions for a trustee contained in Section (4)(i) of Rule 3a-7
under the Investment Company Act of 1940, as amended.
"Relevant UCC State" means each jurisdiction in which the filing of a UCC
financing statement is necessary to perfect the ownership interest and security
interest of the Transferor pursuant to the Purchase Agreement or the ownership
or security interest of the Trustee.
"Removal Date" is defined at page 68 in "Description of the Offered
Securities--Removal of Accounts."
"Removal Notice Date" means the day, no later than the fifth business day
prior to a Removal Date, on which the Transferor gives notice to the Trustee of
its intention to remove Accounts from the Trust pursuant to the Pooling and
Servicing Agreement.
"Removed Accounts" is defined at page 68 in "Description of the Offered
Securities--Removal of Accounts."
"Required Amount" is defined at page 79 in "Description of the Offered
Securities--Application of Collections--Payment of Fees, Interest and Other
Items."
"Required Defeasance Reserve Account Amount" is defined at page 83 in
"Description of the Offered Securities--Defeasance."
"Requirements of Law" means, for any Person, the certificate of
incorporation or articles of association and by-laws or other organizational or
governing documents of such Person, and any material law, treaty, rule or
regulation or determination of an arbitrator or Governmental Authority, in each
case applicable to or binding upon such Person or to which such Person is
subject.
"Reserve Account Investment Proceeds" means, with respect to any business
day, the sum of the investment earnings on funds on deposit in (i) the reserve
account established for the benefit of the CTO Securityholders available on such
business day and (ii) the Payment Reserve Account available on such business
day.
"Restart Date" is defined at page 67 in "Description of the Offered
Securities--Addition of Trust Assets."
"Retained Interest" means, on any date of determination, the sum of the
Transferor Interest and the Invested Amount represented by any class of
securities retained by the Transferor.
"Retained Percentage" means, on any date of determination, the percentage
equivalent of a fraction the numerator of which is the Retained Interest and the
denominator of which is the aggregate amount of Principal Receivables at the end
of the day immediately prior to such date of determination plus all amounts on
deposit in the Excess Funding Account (but not including investment earnings on
such amounts).
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"Revolving Period" means the period from and including the Closing Date to,
but not including, the Amortization Period Commencement Date.
"Revolving Receivable" means any right to payment arising under an Eligible
Account that is a consumer revolving credit card account which is not a Closed
End Receivable pursuant to clause (b) of the definition thereof.
"Revolving Receivables Reserve Account" is defined at page 85 in
"Description of the Offered Securities--Revolving Receivables Reserve Account."
"RTC" means the Resolution Trust Corporation.
"RTC Policy Statement" is defined at page 102 in "Certain Legal Aspects of
the Receivables--Certain Matters Relating to Bankruptcy or Receivership."
"Securities" means, collectively, the Class A Securities, the Class B
Securities, the Collateralized Trust Obligations and the Class D Securities.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Security Owners" is defined at page 2 in "Reports to Securityholders."
"Securityholders" means the record holders of the Securities.
"Securityholders' Interest" means the interest in the assets of the Trust
allocated to the Securityholders.
"Seller" is defined at page 97 in "Description of the Purchase
Agreements--Representations and Warranties."
"Series" means any series of securities issued by the Trust pursuant to a
Supplement, including the Securities.
"Series Account" shall mean any account or accounts established pursuant to
a Supplement for the benefit of the related Series.
"Series 1998-1 Securities" is defined at page 4 in "Prospectus
Summary--Other Securities."
"Series 1998-2" is defined at page 2.
"Series 1998-2 Percentage" means, on any date of determination, the
percentage equivalent of a fraction the numerator of which is the Invested
Amount and the denominator of which is the sum of the invested amounts of all
Series then outstanding.
"Series 1998-2 Securities" means the Securities.
"Series 1998-2 Supplement" means the Supplement, dated as of the Closing
Date, among the Transferor, the Servicer, and the Trustee relating to the
Securities.
"Series Charge-Off" means the sum of the Class A Charge-Offs, Class B
Charge-Offs, CTO Charge-Offs and Class D Charge-Offs.
"Series Default Amount" is defined at page 81 in "Description of the Offered
Securities--Defaulted Receivables; Dilution."
"Service Transfer" is defined at page 90 in "Description of the Offered
Securities--Servicer Default."
"Servicer" means FNB in its capacity as Servicer of the Receivables pursuant
to the Pooling and Servicing Agreement, and any replacement Servicer as provided
in the Pooling and Servicing Agreement, or any Person appointed as successor to
service the Receivables.
"Servicer Default" is defined at page 90 in "Description of the Offered
Securities--Servicer Default."
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"Shared Principal Collections" means, as the context requires, (a) the
amount of Principal Collections for any business day applied to the Series
1998-2 Securities remaining after covering required deposits or payments to the
Securityholders and any similar amount remaining for any other Series or (b) the
amounts applied to the Investor Securities of other Series which the applicable
Supplements for such Series specify are to be treated as "Shared Principal
Collections" or (c) the amounts specified in any Participation Supplement to be
treated as "Shared Principal Collections" and which may be applied to cover
Principal Shortfalls with respect to the Series 1998-2 Securities.
"Special Tax Counsel" means Skadden, Arps, Slate, Meagher & Flom LLP,
counsel to the Transferor or such other counsel reasonably acceptable to the
Trustee.
"Specified Revolving Receivables Reserve Amount" means, on any date of
determination, an amount equal to the product of (x) the Floating Percentage on
such date and (y) 1% of the aggregate amount of Principal Receivables which are
Revolving Receivables on such date; provided, however, that such percentage may
be reduced at the option of the Transferor at any time if the Rating Agency
Condition shall have been satisfied with respect thereto.
"Spin Off" is defined at page 49 in "The Transferor and Related
Parties--Fingerhut Companies, Inc."
"Standard & Poor's" means Standard & Poor's, a Division of The McGraw-Hill
Companies, Inc. or any successor.
"Stated Class D Amount" is defined at page 73 in "Description of the Offered
Securities--Allocation Percentages."
"Supplement" means any Supplement to the Pooling and Servicing Agreement
executed in connection with the issuance of securities of such Series.
"Supplemental Accounts" is defined at page 67 in "Description of the Offered
Securities--Addition of Trust Assets."
"Supplemental Security" is defined at page 63 in "Description of the Offered
Securities--Exchanges."
"Tax Certificate" is defined at page B-1-iii in "Annex II."
"Tax Opinion" means, with respect to any action, an opinion of counsel
delivered to the Trust and the Trustee to the effect that, for United States
federal income tax purposes, (i) such action will not adversely affect the tax
characterization as debt of Securities or Participations of any outstanding
Series or Class that were characterized as debt for such purposes at the time of
their issuance, (ii) following such action the Trust will not be deemed to be an
association or a "publicly traded partnership" (within the meaning of Section
7704(b) of the Code) taxable as a corporation and (iii) such action will not
cause or constitute a taxable event in which gain or loss would be recognized by
any security owner or the Trust.
"Termination Date" means the February 2007 Distribution Date.
"Terms and Conditions" is defined at page 55 in "Description of the Offered
Securities--Book-Entry Registration."
"Transfer Agent and Registrar" is defined at page 56 in "Description of the
Offered Securities-- Definitive Securities."
"Transfer Date" is defined at page 75 in "Description of the Offered
Securities--Application of Collections--In General."
"Transferor" means Fingerhut Receivables, Inc., a Delaware corporation.
"Transferor Finance Charge Collections" is defined at page 19 in "Prospectus
Summary--Coverage of Interest Shortfalls from Transferor Finance Charge
Collections."
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"Transferor Interest" means, on any date of determination, the sum of (i)
the aggregate amount of Principal Receivables at the end of the day immediately
prior to such date of determination plus (ii) all amounts on deposit in the
Excess Funding Account, and each pre-funding account and principal funding
account, if any, for each Series (but not including investment earnings on such
amounts at the end of the immediately preceding day), minus the sum of (x) the
aggregate invested amount of all Series at the end of the immediately preceding
day and (y) the Participation Amount of each Participation then outstanding.
"Transferor Percentage" means, on any date of determination, when used with
respect to Principal Collections, Finance Charge Collections and Default
Amounts, a percentage equal to 100% MINUS the sum of (i) the applicable
Aggregate Investor Percentage with respect to the relevant category and (ii) the
applicable Participation Percentages with respect to all Participations.
"Transferred Account" means an Account with respect to which a new account
number has been issued by the applicable Originator under circumstances
resulting from a lost or stolen credit card and not requiring standard
application and credit evaluation procedures under the applicable Credit and
Collection Policy.
"Treasury Regulations" is defined at page 105 in "Certain Federal Income Tax
Consequences-- General; Scope of Federal Income Tax Opinion."
"Trust" means the Fingerhut Master Trust.
"Trustee" means The Bank of New York (Delaware), a banking corporation
organized and existing under the laws of Delaware, and its successors and any
Person resulting from or surviving any consolidation or merger to which it or
its successors may be a party and any successor trustee appointed as provided in
the Pooling and Servicing Agreement.
"UCC" means the Uniform Commercial Code, as amended from time to time, as in
effect in the applicable jurisdiction.
"Underwriters" is defined at page 113 in "Underwriting."
"Underwriting Agreement" means the underwriting agreement with respect to
the Offered Securities dated April 21, 1998 among the Transferor, FCI and the
Underwriters.
"U.S. Person" is defined at page B-1-iv in "Annex II."
"Variable Funding Securities" means a series of investor securities, issued
pursuant to the Pooling and Servicing Agreement, in one or more classes, at
least one of which may vary in invested amount during the revolving period for
such Series.
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ANNEX I
OTHER SERIES
The table below sets forth the principal characteristics of the Series
1994-2 Variable Funding Trust Certificates which is the only Previously Issued
Series that will remain outstanding upon the issuance of the Securities. In
addition, the table sets forth the principal characteristics of the Series
1998-1 Securities that are being offered by the Trust concurrently with the
issuance of Series 1998-2. For more specific information with respect to any
Series, any prospective investor should contact the Transferor at (612)
936-5035. The Transferor will provide, without charge, to any prospective
purchaser of the Securities a copy of the disclosure documents for any previous
publicly issued Series.
<TABLE>
<S> <C>
SERIES 1994-2
CLASS A CERTIFICATES
Invested Amount as of April 8, 1998........ $191,400,000
Expected Invested Amount as of Closing Date
(after application of proceeds).......... $61,400,000
Maximum Permitted Invested Amount.......... $412,400,000 (subject to change)
Certificate Rate........................... Commercial Paper
Certificate Rate as of March 27, 1998...... 5.82%
Commencement of Amortization Period........ May 28, 1999 or earlier as determined in the
Pooling and Servicing Agreement (extendible)
Annual Servicing Fee Percentage............ 2.00%
Enhancement................................ Subordination of Class B Certificates, Class
C Certificates and Class D Certificates
Scheduled Series Termination Date.......... May 30, 2003 (extendible)
Series Issuance Date....................... November 15, 1994
CLASS B CERTIFICATES
Initial Invested Amount.................... $27,865,000
Certificate Rate........................... LIBOR + 0.625%
Annual Servicing Fee Percentage............ Same as above for Class A Certificates
Enhancement................................ Subordination of Class C Certificates and
Class D Certificates
Scheduled Series Termination Date.......... Same as above for Class A Certificates
CLASS C CERTIFICATES
Initial Invested Amount.................... $50,157,000
Certificate Rate........................... LIBOR + 0.750%
Annual Servicing Fee Percentage............ Same as above for Class A Certificates
Enhancement................................ Subordination of Class D Certificates
Scheduled Series Termination Date.......... Same as above for Class A Certificates
CLASS D CERTIFICATES
Invested Amount as of April 8, 1998........ $36,739,000
Expected Invested Amount as of Closing Date
(after reduction of Class A Invested
Amount).................................. $19,012,091
Maximum Permitted Invested Amount.......... $66,876,000
Certificate Rate........................... None
Annual Servicing Fee Percentage............ Same as above for Class A Certificates
Scheduled Series Termination Date.......... Same as above for Class A Certificates
</TABLE>
A-i
<PAGE>
<TABLE>
<S> <C>
SERIES 1998-1
CLASS A SECURITIES
Initial Invested Amount.................... $337,500,000
Interest Rate.............................. 6.07%
Commencement of Amortization Period........ August 2000 or the Pay Out Commencement Date
Annual Servicing Fee Percentage............ 2.00%
Enhancement................................ Subordination of Class B Securities,
Collateralized Trust Obligations and Class D
Securities
Scheduled Series Termination Date.......... February 2005 Distribution Date
Series Issuance Date....................... April 28, 1998
CLASS B SECURITIES
Initial Invested Amount.................... $51,136,000
Interest Rate.............................. 6.29%
Annual Servicing Fee Percentage............ Same as above for Class A Securities
Enhancement................................ Subordination of Collateralized Trust
Obligations and Class D Securities
Scheduled Series Termination Date.......... Same as above for Class A Securities
COLLATERALIZED TRUST OBLIGATIONS
Initial Invested Amount.................... $61,364,000
Interest Rate.............................. LIBOR + 1% per annum or such lesser rate as
specified in the Series 1998-1 Supplement
Annual Servicing Fee Percentage............ Same as above for Class A Securities
Enhancement................................ Subordination of Class D Securities
Scheduled Series Termination Date.......... Same as above for Class A Securities
CLASS D SECURITIES
Invested Amount as of ............... $61,364,000
Interest Rate.............................. None
Annual Servicing Fee Percentage............ Same as above for Class A Securities
Scheduled Series Termination Date.......... Same as above for Class A Securities
</TABLE>
A-ii
<PAGE>
ANNEX II
GLOBAL CLEARANCE SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Asset Backed
Securities, Series 1998-2 (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("DTC"), Cedel or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
Cedel and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Securities will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional credit card security issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in the
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to conventional
credit card security issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
B-1-i
<PAGE>
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Securities are to be transferred from the account of a DTC Participant to the
accounts of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of actual days elapsed and a 360 day
year. Payment will then be made by the respective Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The Global Securities credit will appear the next day (European time) and the
cash debit will be back-valued to, and the interest on the Global Securities
will accrue from, the value date (which would be the preceding day when
settlement occurred in New York). If settlement is not completed on the intended
value date (i.e., the trade fails), the Cedel or Euroclear cash debit will be
valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to pre-position
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross-market transaction will
settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the bonds to
the DTC Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date on the basis of actual days elapsed and a
360 day year. The payment will then be reflected in the account of the Cedel
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Cedel Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails),
B-1-ii
<PAGE>
receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Securities
that are non-U.S. Persons can obtain a complete exemption from the withholding
tax by filing a signed Form W-8 (Certificate of Foreign Status) and a
certificate under penalties of perjury (the "Tax Certificate") that such
beneficial owner is (i) not a controlled foreign corporation (within the meaning
of Section 957(a) of the Code) that is related (within the meaning of Section
864(d)(4) of the Code) to the Trust or the Transferor and (ii) not a 10 percent
shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the
Trust or the Transferor. If the information shown on Form W-8 or the Tax
Certificate changes, a new Form W-8 or Tax Certificate, as the case may be, must
be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Security Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Security Owner or
such Security Owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
B-1-iii
<PAGE>
U.S. Federal Income Tax Reporting Procedure. The Security Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, such Security
Owner's agent, files by submitting the appropriate form to the Person through
whom it holds (the clearing agency, in the case of Persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof or (iii) an estate the income of
which is includible in gross income for United States tax purposes, regardless
of its source or, for trusts whose taxable years begin after December 31, 1996,
a trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States fiduciaries who have the
authority to control all substantial decisions of the trust. This summary does
not deal with all aspects of U.S. federal income tax withholding that may be
relevant to foreign holders of the Global Securities. Investors are advised to
consult their own tax advisors for specific tax advice concerning their holding
and disposing of the Global Securities.
B-1-iv
<PAGE>
PRINCIPAL OFFICE OF
FINGERHUT RECEIVABLES, INC.
4400 Baker Road
Suite F480
Minnetonka, Minnesota 55343
SERVICER
for the Trust
Fingerhut National Bank
3904 West Technology Circle
Suite 102
Sioux Falls, South Dakota 57100
TRUSTEE
The Bank of New York (Delaware)
White Clay Center
Route 273
Newark, Delaware 19711
PAYING AGENTS AND TRANSFER AGENTS
The Bank of New York
White Clay Center
Route 273
Newark, Delaware 19711
Banque Generale du Luxembourg S.A.
50, Avenue J.F. Kennedy
L-2951 Luxembourg
LISTING AGENT
Banque Generale du Luxembourg S.A.
50, Avenue J.F. Kennedy
L-2951 Luxembourg
LEGAL ADVISOR TO THE TRANSFEROR
as to United States Law
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
LEGAL ADVISOR TO THE UNDERWRITERS
as to United States Law
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS TO THE TRANSFEROR
KPMG Peat Marwick LLP
4200 Norwest Center
90 South 7th Street
Minneapolis, Minnesota 55402-3900
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRANSFEROR OR THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF FINGERHUT CORPORATION, FINGERHUT COMPANIES, INC., FINGERHUT NATIONAL
BANK, FINGERHUT RECEIVABLES, INC. OR THE RECEIVABLES SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
- ------------------------------------------------------
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Reports to Securityholders 2
Available Information 3
Other Information 3
Cautionary Notice Regarding Forward-Looking
Statements 3
Prospectus Summary 4
Risk Factors 26
The Trust 35
Fingerhut Corporation's and Fingerhut National
Bank's Businesses 35
The Receivables 40
The Transferor and Related Parties 49
Maturity Considerations 49
Use of Proceeds 52
Description of the Offered Securities 52
Description of the Purchase Agreements 96
Certain Legal Aspects of the Receivables 100
Certain Federal Income Tax Consequences 105
Certain State Tax Consequences 110
Employee Benefit Plan Considerations 111
Underwriting 113
Listing and General Information 114
Legal Matters 115
Glossary of Terms 116
</TABLE>
- ------------------------------------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL DEALERS EFFECTING
TRANSACTIONS IN THE OFFERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
Fingerhut
Master Trust
$337,500,000 6.23%
ASSET BACKED SECURITIES,
SERIES 1998-2, CLASS A
$51,136,000 6.51%
ASSET BACKED SECURITIES,
SERIES 1998-2, CLASS B
Fingerhut Receivables, Inc.
Transferor
Fingerhut National Bank
Servicer
- ---------------------
PROSPECTUS
- ---------------------
Underwriters of the Class A Securities
Chase Securities Inc.
BancAmerica Robertson Stephens
NationsBanc Montgomery
Securities LLC
UBS Securities
Underwriter of the Class B Securities
Chase Securities Inc.
April 21, 1998
