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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e) (2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Advanta Corp.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement (if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction
applies: N/A
2) Aggregate number of securities to which transaction applies:
N/A
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined): N/A
4) Proposed maximum aggregate value of transaction: N/A
5) Total fee paid: N/A
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement no.:
3) Filing Party:
4) Date Filed:
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[ADVANTA LOGO]
December __, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of
Stockholders of Advanta Corp. to be held on [ ], at 10:00 a.m., local time, at
[ ].
At this important meeting, you will be asked to consider and
to vote upon a proposal to approve the contribution of the consumer credit card
business of Advanta to a company controlled by Fleet Financial Group, Inc.
pursuant to a Contribution Agreement, dated as of October 28, 1997, between
Advanta and Fleet. In the transaction, each of Advanta and Fleet will contribute
substantially all of the assets of their respective consumer credit card
businesses, subject to liabilities, to a newly formed Rhode Island limited
liability company ("LLC"). Advanta will own a minority membership interest in
the LLC. Following the transaction, Advanta will continue to operate its
mortgage and business services companies, including Advanta National Bank, which
will continue to be well capitalized. Advanta will utilize approximately $1.3
billion in cash, cash equivalents and investments no longer required in
connection with Advanta's consumer credit card business for the working capital
needs of Advanta's continuing businesses and the purchase of shares of Advanta's
outstanding common stock through an issuer tender offer. Your Board of Directors
presently intends to authorize the purchase of between $750 million and $850
million of Advanta common stock at a price of between $40 and $45 per share. It
is expected that the tender offer would be consummated shortly after the closing
of the proposed transaction with Fleet.
Details of the proposed transaction and other important
information concerning Advanta, including certain pro forma financial
information, are set forth in the accompanying Proxy Statement, which you are
urged to read.
Your Board of Directors has carefully reviewed and considered
the terms and conditions of the proposed transaction and has received the
opinion of its
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financial advisor, BT Wolfensohn, as to the fairness of the consideration, from
a financial point of view, to Advanta.
YOUR BOARD OF DIRECTORS HAS APPROVED THE TRANSACTION AND
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE TRANSACTION. The transaction
represents an important step in our efforts at Advanta to deliver value to our
stockholders.
The transaction will be consummated only if it is approved by
a majority of the votes which are entitled to be cast by holders of outstanding
shares of Advanta's Class A Common Stock and Class A Preferred Stock. Whether or
not you plan to attend the Special Meeting, we urge you to complete, sign, date
and return the enclosed proxy card promptly in the accompanying prepaid
envelope. You may, of course, attend the Special Meeting and vote in person,
even if you have previously returned your proxy.
Sincerely,
Chairman of the Board
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[ADVANTA LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
, 1998
A Special Meeting of stockholders of Advanta Corp. ("Advanta")
will be held on ______________, 1998 at 10:00 a.m., local time, at
_________________________________ for the following purpose:
To consider and vote upon a proposal to approve the
contribution of the consumer credit card business of Advanta
(the "Transaction") to a newly formed Rhode Island limited
liability company ("LLC") pursuant to a Contribution
Agreement, dated as of October 28, 1997, between Advanta and
Fleet Financial Group, Inc. ("Fleet"), a copy of which is
attached as Annex I to the Proxy Statement accompanying this
Notice, which provides, among other things, that each of
Advanta and Fleet and their respective subsidiaries will
contribute substantially all of the assets of their respective
consumer credit card businesses, subject to liabilities, to
the LLC in which Advanta will acquire a minority membership
interest.
Only holders of record of Advanta Class A Common Stock and
Class A Preferred Stock at the close of business on ________, 1997 will be
entitled to notice of and to vote at the Special Meeting.
Under the applicable provisions of the Delaware General
Corporation Law, Advanta's stockholders will not have any right in connection
with the Transaction to dissent and seek appraisal of their shares of Advanta
capital stock.
All holders of Advanta Class A Common Stock and Class A
Preferred Stock, whether or not they plan to attend the Special Meeting, are
asked to complete, date and sign the enclosed proxy card and return it promptly
in the enclosed envelope, which requires no postage if mailed in the United
States. A proxy may be revoked in
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the manner described in the accompanying Proxy Statement at any time before it
has been voted at the Special Meeting.
By Order of the Board of Directors,
Senior Vice President, Secretary and
General Counsel
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, YOU ARE URGED TO COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED REPLY
ENVELOPE. THIS WILL ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY, OF COURSE, VOTE YOUR SHARES OF CLASS A
COMMON STOCK AND CLASS A PREFERRED STOCK IN PERSON EVEN THOUGH YOU HAVE SENT IN
YOUR PROXY.
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[ADVANTA LOGO]
ADVANTA CORP.
------------
PROXY STATEMENT
------------
SPECIAL MEETING OF STOCKHOLDERS
, 1998
------------
This Proxy Statement is being furnished to holders of shares
of Class A Common Stock, par value $0.01 per share, and Class A Preferred Stock,
par value $1,000 per share, of Advanta Corp., a Delaware corporation
("Advanta"), in connection with the solicitation of proxies by the Board of
Directors of Advanta (the "Board") from holders of outstanding shares of Advanta
Class A Common Stock and Class A Preferred Stock for use at the Special Meeting
of Stockholders of Advanta to be held on _____________, 1998, at 10:00 a.m.,
local time, at _________________, and any and all adjournments or postponements
thereof (the "Special Meeting"). This Proxy Statement, the attached Notice of
Special Meeting of Stockholders and the enclosed form of proxy are first being
mailed to Advanta's stockholders on or about _____________, 1997.
At the Special Meeting, holders of shares of Advanta Class A
Common Stock and Class A Preferred Stock entitled to notice of and to vote at
the Special Meeting will be asked to approve the contribution of the consumer
credit card business of Advanta (the "Transaction") to a newly formed Rhode
Island limited liability company ("LLC") pursuant to a Contribution Agreement
(the "Contribution Agreement"), dated as of October 28, 1997, between Advanta
and Fleet Financial Group, Inc. ("Fleet"). In the Transaction, each of Advanta
and Fleet, and their respective subsidiaries, will contribute substantially all
of the assets of their respective consumer credit card businesses, subject to
liabilities, to the LLC, which will be controlled by Fleet. Advanta will receive
a 4.99% membership interest in the
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LLC in consideration of its contribution. Following the Transaction, Advanta
will continue to operate its mortgage and business services companies, including
Advanta National Bank which will continue to be well capitalized. Advanta will
utilize approximately $1.3 billion in cash, cash equivalents and investments no
longer required in connection with Advanta's consumer credit card business for
the working capital needs of Advanta's continuing businesses and the purchase of
shares of Advanta's outstanding common stock through an issuer tender offer.
Advanta presently intends to purchase between $750 million and $850 million of
Advanta's Class A Common Stock and Class B Common Stock at a price of between
$40 and $45 per share. It is expected that the tender offer would be consummated
shortly after the closing of the Transaction. See "The Contribution and Related
Transactions -- Structure of the Transaction; Certain Effects of the
Transaction; Conduct of Advanta's Business After the Contribution." All
summaries and references to the Contribution Agreement in this Proxy Statement
are qualified in their entirety by reference to the text of the Contribution
Agreement which is attached hereto as Annex I.
At a meeting of the Board held on October 23, 1997, all of the
members of the Board present at the meeting (none of whom is affiliated with
Fleet) determined that, subject to the resolution of certain significant open
issues, the Transaction was in the best interests of Advanta and its
stockholders, approved and adopted the Contribution Agreement and the
transactions contemplated thereby and recommended that holders of Class A Common
Stock and Class A Preferred Stock approve the Transaction. Three of Advanta's
thirteen directors were not present at the October 23, 1997 meeting of the
Board, but all three indicated that they approved of the proposed transaction
based on the information available to them prior to the meeting. Subsequently,
each of such directors confirmed his approval of the Transaction. The open
issues addressed at the October 23, 1997 meeting of the Board included matters
relating directly to the value of the Transaction. The Contribution Agreement
was executed by the parties on October 28, 1997 promptly after such open issues
were resolved. See "The Contribution and Related Transactions -- Recommendation
of the Board of Directors and Reasons for the Transaction."
Under the applicable provisions of the Delaware General
Corporation Law, Advanta's stockholders will have no right in connection with
the Transaction
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to dissent and seek appraisal of their shares. See "The Contribution and Related
Transactions -- No Appraisal Rights."
No other matter will be brought before the Special Meeting.
This Proxy Statement contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, but not limited to, projections of future earnings and predictions
regarding the use of cash available to Advanta following the closing of the
Transaction, including the consummation of an issuer tender offer, that are
subject to certain risks and uncertainties that could cause actual uses of funds
and results to differ materially from those projected. Significant risks and
uncertainties include: Advanta's managed net interest margin, which in turn is
affected by Advanta's success in originating new credit card accounts, the
receivables volume and initial pricing of new accounts, which in turn affects
the amount of cash available to Advanta following consummation of the
Transaction, the impact of repricing existing accounts and account attrition,
the mix of account types and interest rate fluctuations; the level of
delinquencies, customer bankruptcies, and charge-offs; and the amount and rate
of growth in Advanta's expenses. Advanta's earnings also may be significantly
affected by factors that affect consumer debt, competitive pressures from other
providers of financial services, the effects of governmental regulation, the
amount and cost of financing available to Advanta and its subsidiaries, the
difficulty or inability to securitize Advanta's receivables and the impact of
the ratings on debt of Advanta and its subsidiaries.
The date of this Proxy Statement is __________, 1997.
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TABLE OF CONTENTS
SUMMARY ......................................................................i
INTRODUCTION..................................................................1
Date, Time and Place of Meeting of Holders of Shares..................1
Record Date and Outstanding Shares....................................1
Voting Rights; Quorum and Vote Required...............................2
Proxies...............................................................3
Solicitation of Proxies and Expenses..................................3
THE CONTRIBUTION AND RELATED TRANSACTIONS.....................................4
General...............................................................4
Background of the Transaction.........................................6
Recommendation of the Board of Directors and Reasons for
the Transaction.....................................................8
Opinion of Financial Advisor..........................................9
Structure of the Transaction.........................................15
LLC Operating Agreement..............................................16
Certain Effects of the Transaction; Conduct of Advanta's Business
After the Contribution.............................................18
Certain Transactions.................................................19
Statement of Accounting Treatment....................................21
Certain Federal Income Tax Consequences..............................22
No Appraisal Rights..................................................25
THE CONTRIBUTION AGREEMENT...................................................25
Effective Time of the Contribution...................................25
Conditions to the Contribution.......................................25
No Solicitation......................................................27
Fees and Expenses....................................................28
Employee Matters.....................................................29
Compensation and Benefits............................................29
Certain Covenants....................................................30
Representations and Warranties; Termination..........................34
Indemnification......................................................37
OWNERSHIP OF ADVANTA SHARES..................................................38
MARKET PRICES AND DIVIDENDS..................................................44
SELECTED FINANCIAL INFORMATION...............................................46
INFORMATION CONCERNING ADVANTA...............................................75
INFORMATION CONCERNING THE LLC...............................................75
REGULATORY AND OTHER APPROVALS...............................................75
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS.............................76
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AVAILABLE INFORMATION........................................................76
INCORPORATION BY REFERENCE...................................................77
STOCKHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
OF ADVANTA STOCKHOLDERS..............................................78
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SUMMARY
The following is a brief summary of certain information
contained elsewhere in this Proxy Statement. Reference is made to, and this
Summary is qualified in its entirety by, the more detailed information contained
in this Proxy Statement, the Annexes attached hereto and the documents referred
to herein, including the Contribution Agreement, a copy of which is attached as
Annex I to this Proxy Statement. Holders of shares of Advanta Class A Common
Stock and Class A Preferred Stock are urged to read this Proxy Statement and the
Annexes hereto in their entirety.
DATE, TIME AND PLACE OF MEETING OF HOLDERS OF SHARES
The Special Meeting of Stockholders of Advanta will be held on
______________, 1998, at 10:00 a.m., local time, at _____________. See
"Introduction -- Date, Time and Place of Meeting of Holders of Shares."
RECORD DATE AND OUTSTANDING SHARES
The Board of Directors of Advanta has fixed the close of
business on ________________, 1997 as the record date (the "Record Date") for
the determination of holders of outstanding shares of Class A Common Stock and
Class A Preferred Stock (collectively, the "Shares"), entitled to notice of and
to vote at the Special Meeting. On the Record Date, Advanta had [18,193,471]
issued and outstanding shares of Class A Common Stock held by approximately
[424] holders of record and 1,010 shares of Class A Preferred held by one holder
of record. See "Introduction -- Record Date and Outstanding Shares."
PURPOSE OF SPECIAL MEETING; QUORUM; VOTES REQUIRED
At the Special Meeting, holders of Shares will be asked to
consider and vote upon a proposal to approve the contribution of the consumer
credit card business of Advanta to the LLC, a newly formed Rhode Island limited
liability company, pursuant to a Contribution Agreement, dated as of October 28,
1997, between Advanta and Fleet. In the Transaction, each of Advanta and Fleet,
and their respective subsidiaries, will contribute substantially all of the
assets of their respective consumer credit card businesses, subject to
liabilities, to the LLC, which
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will be controlled by Fleet. Advanta will receive a 4.99% membership interest in
the LLC, which Advanta presently values at approximately $20 million, in
consideration of its contribution. The LLC Operating Agreement provides that the
profits, losses and cash distributions of the LLC will be allocated and
distributed to the members in accordance with their respective percentage
interests in the LLC. In addition, special distributions of up to $100 million
of the LLC income will be made to Advanta if adjusted base operating earnings of
the LLC exceed specified amounts during the first five calendar years of
operation of the LLC. Following the Transaction, Advanta will continue to
operate its mortgage and business services companies, including Advanta National
Bank which will continue to be well capitalized. Advanta will utilize
approximately $1.3 billion in cash, cash equivalents and investments no longer
required in connection with Advanta's consumer credit card business for the
working capital needs of Advanta's continuing businesses and the purchase of
shares of Advanta's outstanding common stock through an issuer tender offer.
Advanta presently intends to purchase between $750 million and $850 million of
Advanta's Class A Common Stock and Class B Common Stock at a price of between
$40 and $45 per share. It is expected that the tender offer would be consummated
shortly after the closing of the Transaction. The amount of cash, cash
equivalents and investments available to Advanta after consummation of the
Transaction and, correspondingly, the total amounts to be used in repurchase of
Advanta's outstanding common stock, will depend on the amount of managed
receivables contributed to the LLC and the percentage of such receivables which
are characterized by introductory interest rates, as provided in the
Contribution Agreement. See "The Contribution and Related Transactions --
Structure of the Transaction; Certain Effects of the Transaction; Conduct of
Advanta's Business After the Contribution."
The presence, either in person or by duly executed proxy, of
stockholders entitled to cast a majority of the votes which all stockholders are
entitled to cast is necessary to constitute a quorum at the Special Meeting.
Athough stockholder approval of the Transaction is not required by Delaware law,
the Contribution Agreement provides that the affirmative vote of holders of
Shares representing a majority of the votes which all stockholders are entitled
to cast approving the Transaction is a condition to consummation of the
Transaction. On the Record Date, Advanta had [18,193,471] issued and outstanding
shares of Class A Common Stock and 1,010 issued and outstanding shares of Class
A Preferred Stock. Each record holder of Class A Common Stock is entitled to one
vote per share, and each record
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holder of Class A Preferred Stock is entitled to one-half vote per share. As of
October 25, 1997, Advanta executive officers and directors (as a group) had the
right to vote an aggregate of 5,003,377 shares of Class A Common Stock and no
shares of Class A Preferred Stock, representing approximately 27.5% of the votes
which may be cast by holders of the Shares then outstanding. Such voting rights
do not include 1,010 shares of Advanta's Class A Preferred Stock and 499,465
shares of Class A Common Stock owned by the Estate of J. R. Alter, the father of
Dennis Alter, Chairman of the Board, and 75,000 shares of Class A Common Stock
owned by Helen Alter, the mother of Dennis Alter, as to which Dennis Alter
disclaims beneficial ownership and voting control. On October 28, 1997, Dennis
Alter entered into a Voting Agreement with Fleet pursuant to which Mr. Alter
agreed, among other things, to vote at the Special Meeting all of the 3,400,570
shares of Advanta's Class A Common Stock beneficially owned by him in favor of
the proposal relating to the Transaction. Fleet has advised Advanta that Fleet
and its subsidiaries beneficially own 280,000 shares of Class A Common Stock and
250,000 shares of Class B Common Stock and that Fleet intends to vote its shares
of Class A Common Stock at the Special Meeting in favor of the proposal relating
to the Transaction. Accordingly, assuming that all of the outstanding shares of
Class A Preferred Stock are voted in favor of the proposal relating to the
Transaction, the affirmative vote of the holders of an additional [5,415,914]
shares of Class A Common Stock, or approximately 37.3% of the outstanding shares
of Class A Common Stock not beneficially owned by Mr Alter or Fleet, is required
to approve and adopt the proposal relating to the Transaction. The Contribution
Agreement provides that Fleet will not acquire any additional shares of capital
stock of Advanta prior to the closing of the Transaction and for a period of
twelve months thereafter. See "Introduction -- Voting Rights; Quorum and Vote
Required."
PROXIES, VOTING AND REVOCATION
All eligible Shares represented by properly executed proxies
will, unless such proxies have previously been revoked, be voted at the Special
Meeting, and any adjournments or postponements thereof, in accordance with the
directions on the proxies. IF A PROXY IS DULY EXECUTED AND SUBMITTED WITHOUT
DIRECTIONS, THE SHARES WILL BE VOTED FOR THE APPROVAL OF THE TRANSACTION.
A proxy may be revoked by (i) delivering to the Secretary of
Advanta at or before the Special Meeting a written notice of revocation bearing
a later date than the proxy, (ii) duly executing a subsequent proxy relating to
the same Shares and
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delivering it to the Secretary of Advanta at or before the Special Meeting or
(iii) attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute revocation of a proxy).
Any written notice revoking a proxy should be delivered to the principal
executive offices of Advanta Corp., Welsh and McKean Roads, Spring House,
Pennsylvania 19477, Attention: Secretary. See "Introduction -- Proxies."
RECOMMENDATION OF THE BOARD OF DIRECTORS; OPINION OF FINANCIAL ADVISOR
After an evaluation of business, financial and market factors
and consultation with its legal and financial advisors, all of the members of
the Board present at a meeting thereof held on October 23, 1997, approved the
Contribution Agreement and the transactions contemplated thereby, subject to the
resolution of certain significant open issues, including matters relating
directly to the value of the Transaction, and recommended that stockholders of
Advanta vote FOR the approval of the Transaction. In arriving at its decision,
the Board considered, among other things, the opinion of BT Wolfensohn,
financial advisor to Advanta, that the consideration to be received in the
Transaction is fair to Advanta from a financial point of view. See "The
Contribution and Related Transactions -- Recommendation of the Board of
Directors and Reasons for the Contribution; Opinion of Financial Advisor."
LLC OPERATING AGREEMENT
Prior to closing of the Transaction, Fleet and Advanta will
jointly organize the LLC as a Rhode Island limited liability company. The LLC
Operating Agreement provides, among other things, that the members of the LLC
establish a management committee to provide for management of the LLC. The
members of the LLC which are affiliates of Fleet have the right to appoint all
members of the management committee. However, other actions of the LLC require
the affirmative vote of the majority of the LLC interests owned by the members
of the LLC which are affiliates of Advanta. The LLC Operating Agreement further
provides that the profits, losses and cash distributions of the LLC will be
allocated and distributed to the members in accordance with their respective
percentage interests in the LLC. In addition, special distributions of LLC
income may be made to Advanta and its subsidiaries under certain circumstances.
See "The Contribution and Related Transactions -- LLC Operating Agreement."
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CERTAIN TRANSACTIONS
Certain members of Advanta's management (as well as other
employees of Advanta) may receive certain direct or indirect benefits in
connection with the Contribution Agreement and the transactions contemplated
thereby. See "The Contribution and Related Transactions -- Certain
Transactions."
THE CONTRIBUTION
Pursuant to the terms of the Contribution Agreement, at the
closing of the Transaction (the "Closing"), each of Advanta and its subsidiaries
will contribute and transfer to the LLC (the "Contribution"), and the LLC will
accept and assume, substantially all of the assets and liabilities of Advanta's
consumer credit card business, and each of Fleet and its subsidiaries will
contribute and transfer to the LLC, and the LLC will accept and assume,
substantially all of the assets and liabilities of Fleet's consumer credit card
business. The assets which Advanta will contribute to the LLC have been valued
at $530 million (subject to an increase or decrease) in excess of the book value
of such assets on the financial statements of Advanta. In connection therewith,
the Contribution Agreement provides that the book value of the liabilities
assumed by the LLC from Advanta will exceed the book value of the assets
assigned to the LLC by Advanta by $510 million, subject to an increase or
decrease dependent on the amount of the managed receivables assigned to the LLC
on the Closing Date and the percentage of those managed receivables which carry
introductory interest rates. Also, following the Transaction, Advanta will hold
a 4.99% membership interest in the LLC which Advanta presently values at
approximately $20 million. In addition to the assets of its mortgage and
business services companies, Advanta will retain certain immaterial assets of
its consumer credit card business which are not required in the operation of
such business and will retain certain liabilities relating to its consumer
credit card business, including, among others, all reserves relating to the
Credit Insurance Business (as such term is defined in the Contribution
Agreement) and any liability or obligation relating to certain consumer credit
card accounts generated in specific programs which comprise a very small
portion of Advanta's consumer credit card receivables. Pursuant to the terms of
the LLC Operating Agreement, special distributions of up to $100 million of the
LLC income will be made to Advanta if pretax adjusted operating earnings of the
LLC and any other consumer credit card businesses of
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Fleet exceed specified amounts during the first five calendar years of operation
of the LLC. Following the Transaction, Advanta will continue to operate its
mortgage and business services companies, including Advanta National Bank which
will continue to be well capitalized. Advanta will utilize approximately $1.3
billion in cash, cash equivalents and investments no longer required in
connection with Advanta's consumer credit card business for the working capital
needs of Advanta's continuing businesses and the purchase of shares of Advanta's
outstanding common stock through an issuer tender offer. See "The Contribution
and Related Transactions -- Structure of the Transaction" and "The Contribution
Agreement."
CONDITIONS TO CLOSING; REGULATORY APPROVALS
Although stockholder approval of the Transaction is not
required under Delaware law, the Contribution Agreement provides that the
affirmative vote of holders of Shares representing a majority of the votes which
all stockholders are entitled to cast is a condition to Closing. In addition,
the consummation of the Transaction is subject to certain other customary
closing conditions, including certain third party consents. Furthermore, there
are various federal and state regulatory requirements which remain to be
complied with in order to consummate the Transaction, including approval from
the Office of the Comptroller of the Currency and the expiration of applicable
statutory waiting periods. See "The Contribution Agreement -- Conditions to the
Contribution" and "Regulatory and Other Approvals."
TERMINATION OF THE CONTRIBUTION AGREEMENT
The Contribution Agreement may be terminated at any time prior
to Closing by, among other things, the mutual agreement of the parties, by
either party if the transactions contemplated by the Contribution Agreement have
not been consummated by March 31, 1998 (as such date may be extended by mutual
agreement) or, after the occurrence of certain events or actions, by one of the
parties acting independently. Under certain circumstances, a termination of the
Contribution Agreement would require Advanta to pay to Fleet a termination fee
of $50,000,000. See "The Contribution Agreement -- Representations and
Warranties; Termination."
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NO SOLICITATION
Under the Contribution Agreement, Advanta has agreed that,
until closing of the Transaction or termination of the Contribution Agreement,
it will not solicit, engage in discussions or negotiate with any person or take
any other action to facilitate the efforts of any person (other than Fleet)
relating to a possible acquisition of Advanta's consumer credit card business.
See "The Contribution Agreement -- No Solicitation."
FEES AND EXPENSES
Generally, all costs and expenses incurred in connection with
the Transaction will be paid by the party incurring such expenses. In certain
situations, the costs and expenses incurred in connection with the consents
required to consummate the Transaction will be shared equally between Advanta
and Fleet. See "The Contribution Agreement -- Fees and Expenses."
EMPLOYEE MATTERS
The Contribution Agreement contains certain covenants relating
to Fleet's obligation to offer, on behalf of the LLC, employment to individuals
employed in Advanta's consumer credit card business. See "The Contribution
Agreement -- Employee Matters."
CERTAIN COVENANTS
The Contribution Agreement contains certain covenants,
including, without limitation, covenants relating to the conduct of business in
the ordinary and usual course, employment matters, use of commercially
reasonable efforts to secure all governmental approvals to consummate the
transactions contemplated by the Contribution Agreement, promptly effecting all
necessary filings under federal and state banking statutes, cooperation in
obtaining certain approvals in connection with Advanta's securitization
activities and non-competition and non-solicitation. See "The Contribution --
Certain Covenants."
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INDEMNIFICATION
The Contribution Agreement provides for certain
indemnification by Advanta and certain of its subsidiaries for losses sustained
by the LLC, Fleet or certain of Fleet's subsidiaries arising from the breach of
any representation, warranty or covenant set forth in the Contribution Agreement
and any other liabilities of Advanta and its subsidiaries not otherwise assumed
by the LLC in connection with the Transaction. In certain situations, Advanta's
indemnification obligations are not triggered until the aggregate losses exceed
$15,000,000. Similar provisions exist with respect to Fleet's indemnification
obligations to the LLC, Advanta and certain of Advanta's subsidiaries. In
addition, the LLC Operating Agreement provides for Advanta's indemnification of
the LLC, Fleet and its affiliates for any taxes owed by the LLC, Fleet and its
affiliates and produced by the contribution of Advanta's or Fleet's consumer
credit card business assets and liabilities to the LLC. See "The Contribution
Agreement -- Indemnification."
STATEMENT OF ACCOUNTING TREATMENT
The Transaction will be accounted for as a transfer of
financial assets, extinguishment of financial liabilities and sale of
non-financial assets and liabilities under generally accepted accounting
principles. See "The Contribution and Related Transactions -- Statement of
Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Advanta has received an opinion from its tax counsel, Wolf,
Block, Schorr, and Solis-Cohen LLP, to the effect that, among other things, no
taxable gain or loss will be recognized by Advanta as a result of the
Transaction. See "The Contribution and Related Transactions -- Certain Federal
Income Tax Consequences."
NO APPRAISAL RIGHTS OF ADVANTA STOCKHOLDERS
Under the applicable provisions of the Delaware General
Corporation Law, Advanta's stockholders will not have any right in connection
with the Transaction to dissent and seek appraisal of their Shares. See "The
Contribution and Related Transactions -- No Appraisal Rights."
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MARKET PRICES
The Class A Common Stock, the Class B Common Stock and
depositary shares representing one one-hundredth of a share of the 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income
Linked Securities (SAILS)) ("Class B Preferred Stock (SAILS) Depositary Shares")
are traded on the Nasdaq National Market under the symbols "ADVNA", "ADVNB" and
"ADVNZ," respectively. On October 27, 1997, the last full trading day prior to
the public announcement of the execution of the Contribution Agreement, the last
reported sale quotation of the Class A Common Stock, the Class B Common Stock
and the Class B Preferred Stock (SAILS) Depositary Shares on the Nasdaq National
Market was $33 1/2, $32 1/4 and $35-5/8, respectively. See "Market Prices and
Dividends."
SELECTED FINANCIAL DATA
For selected financial data regarding Advanta, including
historical combined financial statements of Advanta Personal Payment Services
and certain pro forma financial information of Advanta, see "Selected Financial
Information."
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ADVANTA CORP.
------------
PROXY STATEMENT
------------
SPECIAL MEETING OF STOCKHOLDERS
, 1998
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INTRODUCTION
DATE, TIME AND PLACE OF MEETING OF HOLDERS OF SHARES
The Special Meeting will be held on_____________, 1998, at
10:00 a.m., local time, to consider and vote upon a proposal to approve the
Transaction pursuant to which Advanta will contribute substantially all of the
assets, subject to the liabilities, of its consumer credit card business to the
LLC, a newly formed Rhode Island limited liability company which, after the
Closing, will be controlled by Fleet. The Special Meeting will be held at
_______________.
RECORD DATE AND OUTSTANDING SHARES
The Board has fixed the close of business on ________________,
1997 as the Record Date for the determination of holders of outstanding shares
of Class A Common Stock and Class A Preferred Stock entitled to notice of and to
vote at the Special Meeting. On the Record Date, Advanta had [18,193,471] issued
and outstanding shares of Class A Common Stock held by approximately 474 holders
of record, and 1,010 issued and outstanding shares of Class A Preferred Stock
held by one holder of record.
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VOTING RIGHTS; QUORUM AND VOTE REQUIRED
On the matter to be voted upon at the Special Meeting and any
adjournment or postponement thereof, the holders of the Class A Common Stock and
the Class A Preferred Stock vote together as a single class, with each record
holder of Class A Common Stock entitled to one vote per share, and each record
holder of Class A Preferred Stock entitled to one-half vote per share. The
presence, either in person or by duly executed proxy, of stockholders entitled
to cast a majority of the votes which all stockholders are entitled to cast will
constitute a quorum for the conduct of business at the Special Meeting. Although
stockholder approval of the Transaction is not required by Delaware law, the
Contribution Agreement provides that the affirmative vote of holders of Shares
representing a majority of the votes which all stockholders are entitled to cast
approving the Transaction is a condition to consummation of the Transaction.
Advanta intends to count Shares (i) whose holders are present in person at the
Special Meeting but not voting or (ii) for which it has received proxies but
with respect to which authority has been withheld to vote on any matter, as
present at the Special Meeting only for purposes of determining the presence or
absence of a quorum. Advanta will treat broker non-votes in a similar manner.
As of October 25, 1997, Advanta executive officers and
directors (as a group) had the right to vote an aggregate of 5,003,377 shares of
Class A Common Stock and no shares of Class A Preferred Stock, representing
approximately 27.5% of the votes which may be cast by holders of the Shares then
outstanding. Such voting rights do not include 1,010 shares of Advanta's Class A
Preferred Stock and 499,465 shares of Class A Common Stock owned by the Estate
of J. R. Alter, the father of Dennis Alter, Chairman of the Board, and 75,000
shares of Class A Common Stock owned by Helen Alter, the mother of Dennis Alter,
as to which Dennis Alter disclaims beneficial ownership and voting control. See
"Ownership of Advanta Shares." On October 28, 1997, Dennis Alter entered into a
Voting Agreement with Fleet pursuant to which Mr. Alter agreed, among other
things, to vote at the Special Meeting all of the 3,400,570 shares of Advanta's
Class A Common Stock beneficially owned by him in favor of the proposal relating
to the Transaction. Fleet has advised Advanta that Fleet and its subsidiaries
beneficially own 280,000 shares of Class A Common Stock and 250,000 shares of
Class B Common Stock and that Fleet intends to vote its shares of Class A Common
Stock at the Special Meeting in favor of the proposal relating to the
Transaction. Accordingly, assuming that all of the outstanding shares of Class A
Preferred Stock are voted in favor of the proposal relating to the Transaction,
the affirmative vote of the holders of an additional [5,415,914] shares of
Class A Common Stock, or approximately 37.3% of the outstanding shares of Class
A Common Stock not beneficially owned by Mr.
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Alter or Fleet, is required to approve and adopt the proposal relating to the
Transaction. The Contribution Agreement provides that Fleet will not acquire any
additional shares of capital stock of Advanta prior to the closing of the
Transaction and for a period of twelve months thereafter.
PROXIES
All Shares represented at the Special Meeting by properly
executed proxies received prior to or at the Special Meeting, and not revoked,
will be voted at the Special Meeting in accordance with the instructions
thereon. If no instructions are marked thereon, proxies will be voted FOR
approval of the Transaction, except as otherwise set forth in this Proxy
Statement. Such proxies are solicited on behalf of the Board.
A proxy given pursuant to this solicitation may be revoked at
any time before it is voted. Proxies may be revoked by (i) delivering to the
Secretary of Advanta at or before the Special Meeting a written notice of
revocation bearing a later date than the proxy, (ii) duly executing a subsequent
proxy relating to the same Shares and delivering it to the Secretary of Advanta
at or before the Special Meeting or (iii) attending the Special Meeting and
voting in person (although attendance at the Special Meeting will not in and of
itself constitute revocation of a proxy). Any written notice revoking a proxy
should be delivered to the principal executive offices of Advanta Corp., Welsh
and McKean Roads, Spring House, Pennsylvania 19477, Attention: Secretary.
SOLICITATION OF PROXIES AND EXPENSES
Advanta will bear the entire cost of solicitation of proxies
from its stockholders. Copies of solicitation material will be furnished to
brokerage houses, fiduciaries and custodians holding in their names Shares
beneficially owned by others to forward to such beneficial owners. Upon request,
Advanta will reimburse persons representing beneficial owners of Shares for
their expenses in forwarding solicitation material to such beneficial owners.
Original solicitation of proxies by mail may be supplemented by telephone or
personal solicitations by directors, officers or other regular employees of
Advanta. No additional compensation will be paid to directors or officers or
other regular employees for such services. In
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addition, Advanta has retained D.F. King & Co. Inc. to assist in the search for,
and distribution of proxies to, beneficial owners of Advanta's Class A Common
Stock held in street name or by other nominees, and will pay such firm a fee of
$7,500, plus reimbursement of direct out-of-pocket expenses incurred by such
firm in such activity. Beneficial owners of shares of Class B Common Stock and
Series B Preferred Stock (SAILS) Depositary Shares, which will not be voting at
the Special Meeting, also will receive all proxy material (other than the proxy
card itself). The expenses of such additional mailing will be borne by Advanta.
THE CONTRIBUTION AND RELATED TRANSACTIONS
GENERAL
The Contribution Agreement provides, among other things, for
the contribution by Advanta and its subsidiaries, and by Fleet and its
subsidiaries, to the LLC of the assets and liabilities of their respective
consumer credit card businesses. The assets which Advanta will contribute to the
LLC have been valued at $530 million (subject to an increase or decrease) in
excess of the balance sheet value of such assets on the financial statements of
Advanta. In connection therewith, pursuant to the terms of the Contribution
Agreement, the balance sheet value of the liabilities assumed by the LLC from
Advanta will exceed the balance sheet value of the assets assigned to the LLC by
Advanta by $510 million, subject to an increase or decrease dependent on the
aggregate value of the managed receivables assigned to the LLC on the Closing
Date and the percentage of those managed receivables which carry introductory
interest rates. In addition Advanta and its subsidiaries will acquire, in the
aggregate, a 4.99% membership interest in the LLC in exchange for its
contribution to the LLC. Advanta presently values such membership interest in
the LLC at approximately $20 million. See "The Contribution and Related
Transactions --Structure of the Transaction." Advanta will retain certain
liabilities relating to its consumer credit card business including: (i) any
liability or obligation relating to certain consumer credit card accounts
generated in specific programs which comprise a very small portion of
Advanta's consumer credit card receivables and (ii) any obligations incurred on
or prior to the Closing Date under the credit insurance policies and debt
cancellation contracts sold by or on behalf of Advanta to certain of its
customers on or before the Closing Date (the "Credit Insurance Business"). In
addition to the assets of its mortgage and business services companies, Advanta
will also retain certain immaterial assets relating to its
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consumer credit card business which are not necessary for the operation of the
business, including all reserves relating to the Credit Insurance Business. See
"The Contribution and Related Transactions -- Structure of the Transaction." To
the extent that as a consequence of regulatory or contractual requirements
certain liabilities of the consumer credit card businesses may not be held
directly by the LLC, the LLC will direct that such liabilities be assigned to
and assumed by Fleet Credit Card Bank or Fleet National Bank, and the LLC will
reimburse Fleet Credit Card Bank and Fleet National Bank on account of any
payments made by either of them in respect of such liabilities as if the LLC
were the sole obligor in respect of such liabilities. The Contribution Agreement
provides that Fleet National Bank, Fleet and the LLC will join as joint and
several indemnitors, and as the irrevocable and unconditional guarantors and
sureties of the obligations of the LLC and Fleet Credit Card Bank with respect
to any obligations of Advanta National Bank which are part of the liabilities
transferred by Advanta in the Transaction. See "The Contribution and Related
Transactions -- Structure of the Transaction." In connection with its membership
interest in the LLC, Advanta will be allocated its proportionate share of net
income and net loss of the LLC. In addition, if Adjusted Base Operating Earnings
(as defined in the LLC Operating Agreement) exceed specified target earnings and
a specified return on average managed assets of the LLC in any of the five
calendar years beginning in 1998, the LLC would pay to Advanta a special
distribution equal to the excess of the Adjusted Base Operating Earnings over
the target earnings, provided that in no event could total payments exceed $100
million or payments in any year exceed $33.33 million (subject to adjustment as
provided in the LLC Operating Agreement). See "The Contribution and Related
Transactions -- LLC Operating Agreement." Following the Transaction, Advanta
will continue to operate its mortgage and business services companies, including
Advanta National Bank, which will continue to be well capitalized.
Advanta will utilize approximately $1.3 billion in cash, cash
equivalents and investments no longer required in connection with Advanta's
consumer credit card business for the working capital needs of Advanta's
continuing businesses and the purchase of shares of Advanta's outstanding common
stock through an issuer tender offer. Advanta presently intends to purchase
between $750 million and $850 million of Advanta's Class A Common Stock and
Class B Common Stock at a price of between $40 and $45 per share. It is expected
that the tender offer would be consummated shortly after the closing of the
Transaction. The amount of cash, cash equivalents and investments available to
Advanta after consummation of the
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Transaction and, correspondingly, the total amounts to be used in the purchase
of Advanta's outstanding common stock, will depend on the aggregate amount of
managed receivables contributed to the LLC and the percentage of such
receivables which are subject to introductory interest rates, as provided in
the Contribution Agreement. See "The Contribution and Related Transactions --
Certain Effects of the Transaction; Conduct of the Business After the
Contribution." As soon as practicable following the approval of the Transaction
by the stockholders of Advanta and the satisfaction or waiver (to the extent
such waiver is permissible) of certain other conditions to the Contribution, the
Contribution will be consummated. The Contribution Agreement provides that the
closing of the Transaction will occur on the last business day of a calendar
quarter. However, at Fleet's discretion, the Closing may occur at any time after
the conditions to the Contribution have been satisfied or waived, although in
such event the aggregate amount of managed receivables and the Agreed Deficit
(as defined in the Contribution Agreement) will be computed as of the end of the
immediately preceding calendar quarter, if such computation would be more
favorable to Advanta. See "The Contribution Agreement -- Effective Time of the
Contribution."
BACKGROUND OF THE TRANSACTION
On March 17, 1997, Advanta announced that it expected to
report a net profit for 1997 of approximately $1.50 per share, which was well
below previous expectations. For the first quarter of 1997, Advanta reported a
loss of $19.8 million, or $0.43 per share. On July 16, 1997, Advanta announced
its return to profitability and reported net income of $5.4 million, or earnings
per share of $0.12, for the second quarter. On October 15, 1997, Advanta
announced that net income for the third quarter totaled $42.4 million, or $0.92
per share. This interruption in Advanta's historical pattern of strong financial
results reflected a number of factors, including continuing increases in
consumer bankruptcies and charge-offs and lower receivables balances than
originally anticipated in its consumer credit card business. Advanta announced
in March 1997 that it was pursuing a number of steps designed to return Advanta
to its historical level of financial performance by increasing revenues and
stemming consumer credit card losses. These steps included repricing certain
segments of the consumer credit card portfolio, improving Advanta's collection
process, tightening underwriting standards and developing new marketing
programs. Advanta's mortgage financing, leasing and insurance businesses have
continued to perform well.
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On March 17, 1997, Advanta also announced that it had retained
BT Wolfensohn to explore strategic alternatives that would build upon the
historic strength and success of Advanta as a whole and of its business units
with the aim of maximizing Advanta's value. In connection with its investigation
of strategic alternatives, Advanta stated that it would explore a possible
strategic alliance with another company, an alliance or initial public offering
involving one or more of Advanta's operating units, a sale of one or more of
Advanta's operating units or a merger or sale involving Advanta as a whole. In
that regard Advanta provided a number of financial services companies with
information regarding Advanta's financial services businesses. After preliminary
due diligence review, six of the companies showing interest were permitted to
undertake more extensive due diligence, including meetings with management. As
part of such due diligence, representatives of Advanta met with representatives
of each of the companies to determine whether a transaction which would be in
the best interests of Advanta and its stockholders was feasible. There were also
discussions with a seventh company. Each of the parties interested in exploring
a possible transaction with Advanta was primarily motivated by its interest in
acquiring the consumer credit card business.
During such discussions representatives of Fleet advised
Advanta that based on their initial due diligence investigations, Fleet valued
Advanta's consumer credit card business at approximately $1.3 billion.
Thereafter, representatives of the two companies held a number of meetings to
discuss a possible transaction and to negotiate the terms of the Contribution
Agreement, the LLC Operating Agreement and related ancillary agreements.
On October 23, 1997, the Boards of Directors of both Advanta
and Fleet met independently to consider the proposed transaction. The
Transaction was approved by all of Advanta's directors present at the meeting
subject to the resolution of certain significant open issues, including matters
relating directly to the value of the Transaction such as the applicable
adjustment to the consideration in the event that aggregate managed receivables
at the time of the Closing were less than or exceeded $12.1 billion. The Board
authorized the Chairman and the Vice Chairman to negotiate the open issues with
representatives of Fleet and to execute definitive agreements if such open
issues could be resolved. At the October 23, 1997 meeting, Advanta's Board of
Directors also approved the Voting Agreement which was proposed to be entered
into between Fleet and Dennis Alter and thereby provided
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that Section 203 of the Delaware General Corporation Law would not be applicable
to Fleet as a result of entering into such Voting Agreement. Three of Advanta's
thirteen directors were not present at the October 23, 1997 meeting, but all
three indicated that they approved of the proposed transaction based on the
information available to them prior to the meeting. Subsequently, each of such
directors confirmed his approval of the Transaction. Fleet's Board of Directors
also approved the Transaction at its meeting held on October 23, 1997, subject
to resolution of certain open issues. Following the meetings of the respective
Boards of Directors, Advanta and Fleet negotiated resolutions to the outstanding
open issues. The Contribution Agreement was executed on October 28, 1997.
RECOMMENDATION OF THE BOARD OF DIRECTORS AND REASONS FOR THE TRANSACTION
In approving the Contribution Agreement and the transactions
contemplated thereby, the Board considered a number of factors, including:
(i) the financial condition, results of operations,
business and prospects of Advanta, including the consumer
credit card business and the other businesses in which Advanta
is presently engaged;
(ii) information regarding the financial services
industry in which Advanta operates and the financial,
operating and stock price history of Advanta in comparison to
selected comparable companies including certain of Advanta's
competitors;
(iii) earnings forecasts prepared by Advanta's
management and a comparison of such forecasted earnings with
Advanta's historical earnings performance;
(iv) the opinion of BT Wolfensohn to the effect that,
as of the date of the opinion, the consideration is fair, from
a financial point of view, to Advanta;
(v) the utilization by Advanta following the Closing
of approximately $1.3 billion no longer required in connection
with the operation of the consumer credit card business to
provide for the working capital needs of the other continuing
businesses of Advanta and also to
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permit stockholders to obtain cash for a portion of their
shares in Advanta through an issuer cash tender offer;
(vi) consideration of a transaction with other
possible parties involving the assets and liabilities of
Advanta's consumer credit card business and the indications of
interest in a possible transaction with Advanta following the
other parties respective due diligence investigations of
Advanta's business;
(vii) the terms and conditions of the Contribution
Agreement and the LLC Operating Agreement, including the
contingent distribution by the LLC to Advanta of up to $100
million if operating earnings of the LLC exceeded specified
targets;
(viii) the Board's belief that the Transaction,
together with the continued operation of Advanta's other
businesses, would offer opportunities to Advanta's employees;
and
(ix) the fact that Advanta would have the opportunity
to further develop other areas of its business and bring value
to stockholders through their continued ownership interest in
Advanta.
The foregoing discussion of the information and factors
considered and given weight by the Board is not intended to be exhaustive. In
view of the variety of factors considered in connection with its evaluation of
the Transaction, the Board did not find it practicable to, and did not, quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the Board may
have given different weights to different factors.
OPINION OF FINANCIAL ADVISOR
BT Wolfensohn has acted as financial advisor to Advanta in
connection with the Transaction. On October 23, 1997, BT Wolfensohn delivered
its oral opinion to the Advanta Board of Directors. BT Wolfensohn subsequently
delivered its written opinion, dated October 28, 1997, addressed to the Advanta
Board of Directors (the "BT Wolfensohn Opinion"). The BT Wolfensohn Opinion
states that, as of the date of such opinion, based upon and subject to the
assumptions made, matters considered
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and limits of the review undertaken by BT Wolfensohn, the Consideration (as
defined in the BT Wolfensohn Opinion) was fair, from a financial point of view,
to Advanta.
The full text of the BT Wolfensohn Opinion, which sets forth,
among other things, the assumptions made, matters considered and limits on the
review undertaken by BT Wolfensohn in connection with the opinion, is attached
as Annex II to this Proxy Statement and is incorporated herein by reference.
Advanta stockholders are urged to read the BT Wolfensohn Opinion in its
entirety. The summary of the BT Wolfensohn Opinion set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of such
opinion.
In connection with BT Wolfensohn's role as financial advisor
to Advanta, and in arriving at its opinion, BT Wolfensohn has, among other
things: (i) reviewed the publicly available consolidated financial statements of
Advanta for recent years and interim periods to date and certain other relevant
financial and operating data of Advanta and Advanta's consumer credit card
business (the "Business") available from public sources or provided to BT
Wolfensohn by Advanta; (ii) reviewed certain internal financial analyses,
projections and operating information relating to Advanta and the Business,
provided by Advanta management to BT Wolfensohn; (iii) discussed the business,
financial condition and prospects of Advanta and the Business with certain
officers and certain members of management of Advanta and the Business; (iv)
analyzed the pro forma impact of the Transaction on the capital of Advanta; (v)
considered the strategic objectives of Advanta as outlined to BT Wolfensohn by
Advanta management; (vi) reviewed the trading prices and activity for the Class
A Common Stock and Class B Common Stock of Advanta; (vii) reviewed the financial
and other terms of the Contribution Agreement; (viii) reviewed the financial
terms of selected transactions in the credit card industry; (ix) reviewed
certain public information pertaining to companies engaged in businesses that BT
Wolfensohn believed to be generally comparable to the Business, including,
without limitation, the trading prices for the equity securities of such
companies; and (x) performed such other analyses and examinations and considered
such other information, financial studies, analyses and investigations and
financial, economic and market data as BT Wolfensohn deemed relevant.
In preparing its opinion, BT Wolfensohn did not assume
responsibility for the independent verification of any information, whether
publicly available or furnished
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to it, concerning Advanta or the Business, including, without limitation, any
financial information, forecasts or projections, considered in connection with
the rendering of its opinion. Accordingly, for purposes of its opinion, BT
Wolfensohn assumed and relied upon the accuracy and completeness of all such
information, including that the allowances for loan losses for Advanta and the
Business are in the aggregate adequate to cover such losses. In addition, BT
Wolfensohn has not reviewed individual credit files or conducted a physical
inspection of the properties or assets and has not prepared or obtained any
independent evaluation or appraisal of the assets and liabilities, of Advanta,
the Business or any of Advanta's other subsidiaries. With respect to the
financial forecasts and projections made available to BT Wolfensohn and used in
its analysis, BT Wolfensohn has assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
management of Advanta and the Business as to the matters covered thereby. In
rendering its opinion, BT Wolfensohn expressed no view as to the reasonableness
of such forecasts and projections or the assumptions on which they were based.
The BT Wolfensohn Opinion was necessarily based upon economic, market and other
conditions as in effect on, and the information made available to BT Wolfensohn
as of, the date of such opinion.
For purposes of rendering its opinion, BT Wolfensohn assumed
that in all respects material to its analysis, the representations and
warranties of Advanta and Fleet contained in the Contribution Agreement are true
and correct, that Advanta and Fleet will each perform all of the covenants and
agreements required to be performed by it under the Contribution Agreement and
all conditions to the obligation of each of Advanta and Fleet to consummate the
Transaction will be satisfied without the waiver thereof. In addition, BT
Wolfensohn has assumed that the Transaction will be tax-free to Advanta.
Set forth below is a brief description of certain financial
analyses performed by BT Wolfensohn in connection with its opinion and reviewed
with the Advanta Board of Directors at its meeting on October 23, 1997.
BT Wolfensohn performed a dividend discount analysis of
Advanta using projections prepared by Advanta management. BT Wolfensohn
calculated a range of dividend discount values as the sum of the net present
values of (1) the estimated future dividend stream that the Business will
generate for the years 1998 through 2002, plus (2) the value of the Business at
the end of such period. The estimated
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future dividend streams were based on information prepared by Advanta management
for the financial performance of the Business for the years 1998 through 2002.
The terminal value of the Business was calculated using a range of multiples of
the projected net income for 2002.
BT Wolfensohn analyzed the financial performance of the
Business using certain key performance measures and compared it to the
corresponding performance measures of a group of public companies (consisting of
Capital One Financial Corp., Household International Inc., MBNA Corporation and
Providian Financial Corp. (collectively the "Selected Companies")) that BT
Wolfensohn considered appropriate for the purpose. BT Wolfensohn also compared
the implied transaction price for the Business as a multiple of earnings and as
a premium to managed receivables to the corresponding trading multiples of the
Selected Companies.
None of the companies utilized as a comparison are identical
to the Business. Accordingly, BT Wolfensohn believes the analysis of publicly
traded comparable companies is not simply mathematical. Rather, it involves
complex considerations and qualitative judgments, reflected in BT Wolfensohn's
opinion, concerning differences in financial and operating characteristics of
the comparable companies and other factors that could affect the public trading
value of the comparable companies.
BT Wolfensohn reviewed and analyzed certain financial,
operating and stock market information relating to selected transactions
including acquisitions, portfolio sales and spin-offs. BT Wolfensohn analyzed
six credit card portfolio sales for which the purchase price was publicly
disclosed: Chase Manhattan Corp./Bank of New York (announced October 21, 1997),
Associates First/Bank of New York (announced March 5, 1997), PNC Bank/Mellon
Bank (announced November 1, 1996), Household International/Bank of New York
(announced June 17, 1996), and Household International/US Bancorp (announced
November 17, 1995). BT Wolfensohn also analyzed BancOne's acquisition of
FirstUSA.
Because the reasons for, and circumstances surrounding, each
of the transactions analyzed were so diverse, and because of the inherent
differences between the operations and financial conditions of the Business and
the selected companies, BT Wolfensohn believes that a comparable transaction
analysis is not simply mathematical. Rather, it involves complex considerations
and qualitative
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judgments, reflected in BT Wolfensohn's opinion, concerning differences between
the characteristics of these transactions and the Transaction that could affect
the value of the subject companies and businesses and Advanta.
The foregoing sets forth a description of the analyses and
factors that BT Wolfensohn deemed material in its presentation to the Advanta
Board of Directors, but it is not a comprehensive description of all analyses
performed and factors considered by BT Wolfensohn in connection with preparing
its opinion. The preparation of a fairness opinion is a complex process
involving the application of subjective business judgment in determining the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, is not readily
susceptible to summary description. BT Wolfensohn believes that its analyses
must be considered as a whole and that considering any portions of such analyses
and of the factors considered, without considering all analyses and factors,
could create a misleading view of the process underlying the opinion. In view of
the lack of comparability of the Selected Companies and precedent transactions,
BT Wolfensohn assigned more weight to the range of values based upon dividend
discount analyses in arriving at the fairness determination.
In conducting its analyses and arriving at its opinions, BT
Wolfensohn utilized a variety of generally accepted valuation methods. The
analyses were prepared solely for the purpose of enabling BT Wolfensohn to
provide its opinion to the Advanta Board of Directors as to the fairness to
Advanta of the consideration and does not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold, which are inherently subject to uncertainty. In connection with its
analyses, BT Wolfensohn made, and was provided by Advanta management with,
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond Advanta's
control. Analysis based on estimates or forecasts of future results incorporated
in the analyses performed by BT Wolfensohn are not necessarily indicative of
actual past or future values or results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of Advanta, neither Advanta nor BT Wolfensohn or any other person
assumes responsibility if future results or actual values are materially
different from these forecasts or assumptions.
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Advanta selected BT Wolfensohn as financial advisor in
connection with the Transaction based on BT Wolfensohn's qualifications,
expertise, reputation and experience in mergers and acquisitions. Advanta has
retained BT Wolfensohn pursuant to a letter agreement dated March 14, 1997 (the
"Engagement Letter"). As compensation for BT Wolfensohn's services in connection
with the Transaction, Advanta has paid BT Wolfensohn $1,500,000 and agreed to
pay an additional $6,950,000 upon consummation of the Transaction. Regardless of
whether the Transaction is consummated, Advanta has agreed to reimburse BT
Wolfensohn for all reasonable fees and disbursements of BT Wolfensohn's counsel
and all of BT Wolfensohn's reasonable travel and other out-of-pocket expenses
incurred in connection with the Transaction or otherwise arising out of the
retention of BT Wolfensohn under the Engagement Letter. Advanta has also agreed
to indemnify BT Wolfensohn and certain related persons to the full extent lawful
against certain liabilities, including certain liabilities under the federal
securities laws, arising out of its engagement or the Transaction. The terms of
the Transaction were determined through negotiations between Advanta and Fleet
and were approved by the Advanta Board. Although BT Wolfensohn provided advice
to Advanta during the course of these negotiations, the decision to enter into
the Transaction was solely that of the Advanta Board. As described above, the
opinion and presentation of BT Wolfensohn to the Advanta Board were only one of
a number of factors taken into consideration by the Advanta Board in making its
determination to approve the Transaction. BT Wolfensohn's opinion was provided
to the Advanta Board to assist it in connection with its consideration of the
Transaction and does not constitute a recommendation to any holder of Advanta
Class A Common Stock or Class A Preferred Stock as to how to vote at the Special
Meeting.
BT Wolfensohn is an internationally recognized investment
banking firm experienced in providing advice in connection with mergers and
acquisitions and related transactions. BT Wolfensohn is familiar with Advanta,
having provided financial advisory and investment banking services to Advanta.
BT Wolfensohn receives fees for the rendering of these services. BT Wolfensohn
or its affiliates may actively trade equity securities of Advanta or Fleet for
their own account or the account of their customers and, accordingly, may from
time to time hold a long or short position in such securities.
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STRUCTURE OF THE TRANSACTION
Pursuant to the Contribution Agreement, in exchange for the
issuance of an aggregate 4.99% membership interest in the LLC at the Closing and
the assumption of liabilities by the LLC relating to Advanta's consumer credit
card business, Advanta and certain of its subsidiaries will transfer and assign
to the LLC substantially all of the assets of Advanta's consumer credit card
business. Advanta will retain certain liabilities relating to its consumer
credit card business including: (i) any liability or obligation relating to
certain consumer credit card accounts generated in specific programs which
comprise a very small portion of Advanta's consumer credit card receivables and
(ii) any obligations of Advanta incurred on or prior to the Closing Date under
the credit insurance policies and debt cancellation contracts sold by or on
behalf of the Advanta to certain of its customers on or before the Closing Date.
Advanta will also retain certain immaterial assets relating to its consumer
credit card business which are not necessary for the operation of the business,
including all reserves relating to the Credit Insurance Business.
The Contribution Agreement provides that the balance sheet
value of the liabilities transferred to the LLC by Advanta at the Closing will
exceed the balance sheet value of the assets transferred by $510 million (the
"Agreed Deficit"), subject to an increase or decrease depending on the amount of
managed receivables so transferred and the percentage of managed receivables so
transferred with introductory interest rates. The Agreed Deficit will be
decreased or increased by 4.38% of the amount by which the managed receivables
transferred to the LLC by Advanta are less than or exceed $12.1 billion. The
Agreed Deficit will be further decreased or increased by 2.19% of the amount by
which managed receivables with introductory interest rates exceed or are less
than $2,192,520,000. If the Closing had taken place on November 27, 1997, the
amount of managed receivables available to Advanta for transfer to the LLC would
have been approximately $10.3 billion and the amount of such receivables with
introductory interest rates would have been approximately $1.06 billion. Advanta
can not predict the amount of managed receivables which will be transferred to
the LLC on the Closing Date or the percentage of such receivables which will be
characterized by introductory interest rates. Such financial forecasts are
necessarily uncertain and make numerous assumptions with respect to factors
which are not in the control of Advanta, such as general business and economic
conditions. Accordingly, the actual amount of receivables transferred at the
time of the Closing may be materially higher or lower
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than those set forth above if the Closing had occurred on November 27, 1997.
Following the closing of the Transaction, an audit of the assets and liabilities
transferred by Advanta to the LLC will be performed and to the extent that the
amount by which the balance sheet value of the transferred liabilities exceeds
the balance sheet value of the transferred assets is not equal to the Agreed
Deficit, as adjusted, Advanta will pay to the LLC, or the LLC will pay to
Advanta, cash in an amount equal to the difference.
To the extent that as a consequence of regulatory or
contractual requirements certain liabilities of the consumer credit card
businesses may not be held directly by the LLC, the LLC will direct that such
liabilities be assigned to and assumed by Fleet Credit Card Bank or Fleet
National Bank, and the LLC will reimburse Fleet Credit Card Bank and Fleet
National Bank on account of any payments made by either of them in respect of
such liabilities as if the LLC were the sole obligor in respect of such
liabilities. The Contribution Agreement provides that Fleet National Bank and
the LLC will join as joint and several indemnitors, and as the irrevocable and
unconditional guarantors and sureties of the obligations of the LLC and Fleet
Credit Card Bank with respect to any obligations of Advanta National Bank which
are part of the liabilities transferred by Advanta in the Transaction. In
addition, Fleet and its subsidiaries will contribute the assets and liabilities
of Fleet's consumer credit card business to the LLC in consideration of the
remaining membership interests in LLC. Following the Closing, Fleet will operate
and control the LLC, although certain actions of the LLC will be restricted,
such as the distribution of any portion of the Advanta contributed assets
relating to goodwill, going concern value or work force in place, without the
consent of Advanta.
LLC OPERATING AGREEMENT
Prior to closing of the Transaction, Fleet and Advanta will
jointly organize the LLC as a Rhode Island limited liability company. The LLC
Operating Agreement provides, among other things, that the members of the LLC
establish a management committee to provide for management of the LLC. The
members of the LLC which are affiliates of Fleet have the right to appoint all
members of the management committee. However, the following actions of the LLC,
among others, require the affirmative vote of a majority of the LLC interests
owned by the members of the LLC which are affiliates of Advanta, unless certain
conditions are satisfied: (i) approval of any capital contributions to the LLC
which would reduce
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the membership interest of the Advanta members below one percent, (ii) reducing
the amount of indebtedness of the LLC which can be allocated to any Advanta
member below the amount of such Advanta member's deficit balance in its capital
account, (iii) approving any sale, transfer or other disposition of the
goodwill, going concern value or the value attributable to the workforce in
place contributed to the LLC by Advanta or its affiliates, (iv) discontinuing
the operation of the Advanta consumer credit card business or causing the
dissolution of the LLC unless prior thereto, the Advanta members are offered an
opportunity to acquire such Advanta credit card business on mutually acceptable
terms, and (v) approving any activities of the LLC that are not part of, or
incidental to, the business of banking or are not permissible for an operating
subsidiary of a national bank.
The LLC Operating Agreement generally provides that the
profits, losses and cash distributions of the LLC will be allocated and
distributed to the members in accordance with their respective percentage
interests in the LLC. The LLC Operating Agreement also provides for special
distributions of the LLC income to Advanta and its subsidiaries. If pretax
operating earnings of the LLC, together with pretax operating earnings of Fleet
and its other subsidiaries from their consumer credit card business, as adjusted
pursuant to the terms of the LLC Operating Agreement, for the years ended
December 31, 1998, 1999, 2000, 2001 or 2002 exceed $303 million, $363 million,
$418 million, $427 million or $452 million, respectively (each such amount, a
"Target Earnings"), and the adjusted base operating earnings for such year equal
or exceed 1.67%, 1.87%, 2.00%, 1.85% and 1.80%, respectively, of average managed
assets for such year, then Advanta and its subsidiaries would be entitled to a
contingent distribution from the LLC in an aggregate amount equal to the lesser
of (a) the excess of the adjusted base operating earnings for such year over the
target earnings for such year or (b) one-third of the maximum aggregate
contingent distribution over the five year period. In no event would the total
amount distributed to Advanta and its subsidiaries under the contingent
distribution provision of the LLC Operating Agreement exceed $100 million plus
the amount, if any, by which the Agreed Deficit was reduced at the Closing
because of the volume of managed receivables or the percentage of managed
receivables subject to introductory interest rates.
The LLC Operating Agreement provides for indemnification by
Fleet and the LLC of certain damages which may be incurred by Advanta. In
addition, the LLC Operating Agreement provides for the indemnification by
Advanta of certain
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damages which may be incurred by Fleet and its affiliates, including damages for
any taxes owed by the LLC, Fleet or Fleet's affiliates as a result of taxable
income or gain recognized by the LLC, Fleet or Fleet's affiliates and produced
by the contribution of the assets and liabilities of the Advanta consumer credit
card business and the Fleet consumer credit card business to the LLC.
The LLC Operating Agreement further provides that, under
certain conditions, at any time after the seventh anniversary of the Closing,
the LLC may elect to cause the retirement and withdrawal of Advanta and its
affiliates as members of the LLC. If the LLC so elects to redeem Advanta's
membership interest, the redemption price shall be agreed between the parties
and in the absence of such agreement, would be determined by an independent
investment banking firm selected in accordance with procedures set forth in the
LLC Operating Agreement. The LLC Operating Agreement further provides for
certain requirements regarding the form of consideration to be distributed to
Advanta and its affiliates in connection with the withdrawal from the LLC.
CERTAIN EFFECTS OF THE TRANSACTION; CONDUCT OF ADVANTA'S BUSINESS AFTER THE
CONTRIBUTION
If the Transaction is consummated, Advanta will acquire a
4.99% percent membership interest in LLC and will cease operation of a consumer
credit card business. Advanta will continue to operate its other financial
services businesses, the products of which include mortgage loans, commercial
equipment leasing, business credit cards, automobile loans, insurance, and
deposit products.
Following the closing of the Transaction, Advanta will utilize
approximately $1.3 billion in cash, cash equivalents and investments no longer
required in connection with Advanta's consumer credit card business for the
working capital needs of Advanta's continuing businesses and the purchase of
shares of Advanta's outstanding common stock through an issuer tender offer.
Advanta presently intends to purchase between $750 million and $850 million of
Advanta's Class A Common Stock and Class B Common Stock at a price of between
$40 and $45 per share. It is expected that the tender offer would be consummated
shortly after the closing of the Transaction. The amount of cash, cash
equivalents and investments available to Advanta after consummation of the
Transaction and, correspondingly, the total amounts to be used in redemption of
Advanta's outstanding common stock, will
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depend, among other things, on the increase or decrease, if any, which may be
made to the Agreed Deficit at the Closing, as described above. See " The
Contribution and Related Transactions -- Structure of the Transaction."
CERTAIN TRANSACTIONS
In considering the recommendation of the Board with respect to
the Transaction, holders of Shares should be aware that certain directors and
executive officers of Advanta (as well as other employees of Advanta and its
subsidiaries) may receive certain direct or indirect benefits in connection with
the Transaction.
As a result of the Transaction, each of Dennis Alter, Chairman
of the Board, and William A. Rosoff, Vice Chairman of the Board, would be
entitled to receive an amount between $3 million and $5 million under the terms
of the Office of the Chairman Supplemental Compensation Program, which was
adopted by the Board in May 1997. The Compensation Committee of the Board has
not met to determine the exact amount of supplemental compensation under the
Program which would be awarded to Messrs. Alter or Rosoff under the Office of
the Chairman Supplemental Program. In addition, certain provisions of Mr.
Rosoff's employment agreement with Advanta relating to restricted shares of
Class B Common Stock granted to him may be affected by the Transaction.
In March 1997, the Compensation Committee of Advanta's Board
of Directors approved the Advanta Senior Management Change of Control Severance
Plan which would provide benefits to executive officers of Advanta in the event
of a Change of Control (as defined in the Plan). Although the Transaction would
not be a Change of Control for purposes of the Advanta Senior Management Change
of Control Severance Plan or the Advanta Employees Change of Control Severance
Plan, in connection with the Transaction Advanta intends to amend each of the
Plans to provide that the Transaction would be deemed to be a "Change of
Control" with respect to those individuals employed by Advanta who become
employees of the LLC in connection with the Transaction and that employment with
the LLC would be treated as employment with Advanta for purposes of such Plans.
The Contribution Agreement provides that the obligations under the Plans with
respect to those individuals who become employees of the LLC in connection with
the Transaction will be assumed by the LLC. In addition, management of Advanta
will recommend to the Board that such Plans be similarly amended with respect to
those
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individuals employed by Advanta who will not receive comparable offers from the
LLC and who are otherwise terminated by Advanta as a consequence of the
Transaction. In addition, certain executive officers of Advanta will receive
bonuses upon the consummation of the Transaction in recognition of their efforts
on behalf of Advanta in the strategic alternatives process. Although the
qualification for such bonuses will be determined by Advanta, the Contribution
Agreement provides that Advanta will pay 50% of the aggregate of such bonus
payments to Advanta employees who are offered positions with the LLC and the LLC
will pay the other 50%. Although all decisions have not been made with respect
to amounts which will be paid to executive officers in connection with such
bonuses or the Senior Management Change of Control Severance Plan, Advanta
anticipates that an aggregate total of up to $7 million may be paid to
executive officers in this regard.
In connection with the Transaction, Advanta has agreed to
amend the terms of outstanding stock options under Advanta's 1992 Stock Option
Plan with respect to options held by employees of Advanta who become employees
of the LLC in connection with the Transaction. The amendment will provide that a
specified fraction of outstanding options which are not otherwise exercisable at
the time of the closing of the Transaction will become immediately exercisable.
In addition, the amendments to the stock options will provide that with respect
to individuals who become employees of the LLC in connection with the
Transaction, such options would remain exercisable for six months after the
closing of the Transaction. The fraction of options which will become
exercisable will be equal to the same fraction of outstanding shares of Advanta
Common Stock, on a fully diluted basis, which Advanta offers to purchase in
connection with its proposed tender offer following consummation of the
Transaction. Management will recommend that the Board of Directors will adopt
similar amendments with respect to options held by all directors and employees
of Advanta. As of October 25, 1997, the directors and executive officers of
Advanta as a group held options which were not then exercisable to purchase a
total of 1,153,000 shares of Class B Common Stock of Advanta.
On October 28, 1997, Advanta announced that Alex W. Hart, the
former Chief Executive Officer, and Jim Allhusen, the former Group Executive of
the Advanta Personal Payment Services, were leaving Advanta. Prior to such date,
Mr. Hart was eligible to receive benefits under the Office of the Chairman
Supplemental Compensation Program and various other benefit plans, as well as
pursuant to his employment agreement with Advanta. Mr. Allhusen was eligible to
receive benefits under the
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Senior Management Change of Control Severance Plan and various other benefit
plans. Advanta is presently discussing the terms of Mr. Hart's and Mr.
Allhusen's separations which may depend in part upon the consummation of the
Transaction.
STATEMENT OF ACCOUNTING TREATMENT
The Contribution will be accounted for as a transfer of
financial assets (cash, loans and other receivables), extinguishment of
financial liabilities (deposits, debt and other borrowings and payables) and
sale of non-financial assets and liabilities (principally property and
equipment, prepaid assets, deferred costs and certain contractual obligations)
under generally accepted accounting principles. The financial assets and
non-financial assets and liabilities of Advanta's consumer credit card business
will be removed from Advanta's balance sheet. The financial liabilities for
which Advanta is legally released from being the primary obligor will also be
removed from Advanta's balance sheet. Financial liabilities for which Advanta is
not legally released from being the primary obligor will not be removed from
Advanta's balance sheet, and an amount receivable from the LLC will be recorded
for the fair value of the related financial liabilities. Advanta will record a
gain on the contribution in an amount equal to (1) the excess of the liabilities
assumed by the LLC over the book value of assets assigned to the LLC of $510
million, subject to the increase or decrease described above (see "The
Contribution and Related Transactions - Structure of the Transaction") plus (2)
the fair value of Advanta's membership interest in the LLC minus (3) the fair
value of liabilities assumed and retained and (4) transaction expenses. Shortly
after the Closing, it is expected that other related transactions will occur:
(1) an issuer tender offer will be consummated of between $750 million and $850
million of Advanta common stock, (2) a restructuring charge will be incurred
related to a planned reduction of corporate expenses and (3) other transactions
including the anticipated exercise of outstanding stock options associated with
the amendment of Advanta's 1992 Stock Option Plan. See "The Contribution and
Related Transactions - Certain Transactions." A final determination of these
amounts has not yet been made. Accordingly, the Pro Forma Adjustments made in
connection with the development of the pro forma financial information appearing
elsewhere in this Proxy Statement (see "Selected Financial Information") are
preliminary and have been made solely for purposes of developing such pro forma
financial information to comply with the disclosure requirements of the
Securities and Exchange Commission (the "Commission").
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is based on the provisions of the Code,
Treasury Department Regulations issued pursuant thereto and published rulings
and court decisions in effect as of the date hereof, all of which are subject to
change. This summary does not take into account possible changes in such laws or
interpretations; such changes may have retroactive effect and may adversely
affect the discussion in this summary.
No taxable gain or loss will be recognized by Advanta as a
result of the transactions carried out pursuant to the Contribution Agreement.
In exchange for the issuance of an aggregate 4.99% membership in the LLC at the
Closing, Advanta and certain of its subsidiaries will transfer and assign to the
LLC the assets and liabilities of Advanta's consumer credit card business.
Advanta, Fleet and the LLC will account for the transaction as a contribution by
Advanta and its subsidiaries to the LLC with respect to which neither gain nor
loss is recognized for federal income tax purposes. Neither Advanta nor the LLC
has requested, nor do they intend to request, a ruling from the Internal Revenue
Service with respect to the federal income tax consequences of the Transaction.
Advanta will rely on an opinion of its counsel, Wolf, Block, Schorr and
Solis-Cohen LLP, as to the foregoing federal income tax consequences of the
Transaction. The opinion of counsel is not binding upon the Internal Revenue
Service and the Internal Revenue Service could challenge the manner in which the
Transaction is reported for tax purposes. If the Internal Revenue Service were
successful in such challenge, taxable gain could be recognized by Advanta as a
result of the contribution pursuant to the Contribution Agreement, or otherwise.
Under Treas. Reg. Section 301.7701-2(a), a business entity
having two or more members is classified as either a corporation or partnership
for federal income tax purposes. A business entity which is not a corporate
entity described in Treas. Reg. Section 301.7701-2(b), such as the LLC, and
which has at least two members is classified as a partnership for federal income
tax purposes, provided that the entity has not elected to be classified as an
association. Under the terms of the LLC Agreement, the LLC cannot elect to be
classified as other than a partnership for federal income tax purposes without
the consent of Advanta. Under Treas. Reg. Section 1.701-2, the Internal Revenue
Service is authorized to recast partnership transactions as appropriate to
achieve tax results that are consistent with the intent of Subchapter K
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of the Code, if the Service can determine that the partnership was formed or
availed of in connection with a transaction having a principal purpose to reduce
substantially the present value of the partners' aggregate federal tax
liabilities in a manner inconsistent with the intent of Subchapter K. The
examples illustrating the application of the anti-avoidance rule of Treas. Reg.
Section 1.701-2 state that the purpose of conducting a "joint business activity
through a flexible economic arrangement without incurring an entity-level tax"
is a use of a partnership vehicle that is consistent with the intent of
Subchapter K. Further, there is an example illustrating that the anti-avoidance
rule is not applicable, despite the fact that a principal purpose was to avoid
recognizing substantial taxable gain by the use of a partnership, because the
partners intended to form a joint arrangement to conduct a business without
incurring an entity level tax. Advanta and Fleet have formed the LLC to combine
their consumer credit card businesses, including the employees and assets
necessary for the operation of the contributed businesses, to operate the
combined businesses jointly for the production of income, and to avoid incurring
an entity-level tax. The LLC will combine assets to reach a scale that will
enable the combined business to compete effectively in the consumer credit card
market. In addition, the aggregation of assets in the LLC will result in a
diversification of the geographic source of the revenue streams generated by the
business. Although management of the LLC is vested in Fleet, Advanta retains
significant approval rights with respect to the conduct of the LLC business.
Generally, no gain or loss is recognized by a partner upon the
contribution of assets to a partnership in exchange for an interest as a partner
in the partnership. A partner would recognize taxable gain, however, if the
transfer resulted in the receipt by the partner of cash in excess of the income
tax basis of the transferor for its interest in the LLC (including cash treated
as received because of the constructive cash distribution rules of Code Sec.
752), or the transaction was treated as a "disguised sale" of some or all the
contributed assets under the rules of Code Sec. 707. The Advanta transferred
liabilities and the Advanta transferred assets will be transferred to the LLC in
a transaction that will, as to the liabilities, cause the "economic risk of
loss" with respect to the liabilities to be shifted to the LLC, and, as to the
assets, cause the benefits and burdens of ownership of the assets to be
transferred to the LLC. In the case of liabilities which constitute deposit
accounts liabilities, although Fleet National Bank must be the obligor with
respect to the liabilities, the LLC will also be liable to depositors, and, as
between Fleet National Bank and the LLC, the LLC will be the ultimate obligor.
The provisions of the LLC
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Operating Agreement allow for Advanta to be allocated a percentage of the
liabilities of the LLC that will be sufficient to prevent there being a
constructive cash distribution to Advanta in excess of its income tax basis for
its interest in the LLC as a result of the transfer of the liabilities to the
LLC. See "The Contribution Agreement and Related Transactions -- LLC Operating
Agreement." Because the Advanta contributed assets, together with liabilities,
are being transferred to the LLC in exchange for an interest in the LLC, the
transaction will not constitute a "disguised sale" of the Advanta contributed
assets under the principles of Treas. Reg. Sections 1.707-3 - 1.707.9. The
Advanta transferred liabilities will be treated as "qualified liabilities"
within these provisions because the liabilities were incurred in the ordinary
course of the trade or business in which the Advanta contributed assets were
used or held and all of the assets related to that business are transferred to
the LLC, other than assets that are not material to a continuation of the trade
or business. Moreover, the amount of the liabilities does not exceed the fair
market value of the transferred property. Therefore, the LLC is not treated as
having transferred consideration to Advanta by reason of the transfer to the LLC
of the Advanta transferred liabilities.
The provisions of the LLC Operating Agreement prohibit the LLC
from distributing any portion of the Advanta contributed assets relating to its
goodwill, going concern value, or work force in place to any other member of the
LLC within seven years of the date of the contribution without the consent of
Advanta. See "The Contribution and Related Transactions -- LLC Operating
Agreement." In general, none of these assets can be disposed of by the LLC in a
taxable transaction in which gain is recognized to Advanta under Code Sec.
704(c) without the consent of Advanta.
Consequently, counsel is of the opinion that the LLC will be
regarded as a partnership for federal income tax purposes, that Advanta will be
regarded as a partner in the partnership, and that the Transaction will not
constitute a "disguised sale" of the Advanta contributed assets under the
principles of Treas. Reg. Sections 1.707-3 - 1.707-9.
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NO APPRAISAL RIGHTS
Delaware law governs stockholders' rights in connection with
the Transaction. Under the applicable provisions of the Delaware General
Corporation Law, Advanta's stockholders will not have any right in connection
with the Transaction to dissent and seek appraisal of their shares of capital
stock.
THE CONTRIBUTION AGREEMENT
EFFECTIVE TIME OF THE CONTRIBUTION
The Transaction will close on the last business day of the
calendar quarter to occur after the vote of the stockholders of Advanta in favor
of the approval of the Transaction, and the satisfaction or waiver of the other
conditions to the Contribution Agreement, or such other date to which Fleet and
Advanta may agree in writing. The Contribution Agreement provides that Fleet may
elect to give notice that a closing of the Transaction shall occur at any time
other than at the end of a calendar quarter, provided that if such a mid-quarter
Closing occurs, then the calculation of managed receivables, gain receivable and
Agreed Deficit in connection with the Transaction shall be made as of either the
Closing Date or the last business day of the previous calendar quarter,
whichever is most favorable to Advanta.
CONDITIONS TO THE CONTRIBUTION
The respective obligations of the parties to the Contribution
Agreement to effect the Transaction are subject to the satisfaction or waiver,
where permissible, prior to or concurrently with the Closing, of each of the
following conditions: (i) the Transaction shall have been adopted by the
affirmative vote of the holders of a majority of the shares of Class A Common
Stock and the Class A Preferred Stock entitled to vote, voting together as a
single class; (ii) all regulatory approvals required to be obtained by such
party to consummate the transactions contemplated by the Contribution Agreement,
including, without limitation, any required approval of applicable bank
authorities, shall have been obtained and shall remain in full force and effect
and all statutory waiting periods in respect thereof shall have expired; and no
such approvals shall contain any conditions or restrictions which the Board of
Directors of either Fleet or Advanta reasonably determines in good faith will
have a Material Adverse Effect (as such term is defined in the Contribution
Agreement) or a
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Fleet Material Adverse Effect (as such term is defined in the Contribution
Agreement) or a material limitation on the ability of Fleet to operate the LLC
or Advanta to redeem shares of its capital stock following consummation of the
Transaction; (iii) no statute, rule or regulation shall have been enacted or
promulgated by any governmental authority of competent jurisdiction which
prohibits the consummation of the transactions contemplated by the Contribution
Agreement; (iv) there shall be no order, judgment, decree or injunction (whether
temporary, preliminary or permanent) of a United States Federal or state court
of competent jurisdiction in effect precluding or materially restricting or
making illegal consummation of the transactions contemplated by the Contribution
Agreement; (v) certain ancillary agreements (including the LLC Operating
Agreement) shall have been executed; provided that this clause (v) shall not be
a condition to the obligations of any party to effect the Transaction and the
other transactions contemplated thereby if such party has not negotiated in good
faith and used its best efforts to negotiate and execute such agreements.
The obligations of Advanta and its subsidiaries to effect the
Transaction are also subject to the satisfaction or waiver, where permissible,
prior to or concurrently with the Closing of each of the following conditions:
(i) Fleet and its subsidiaries shall have performed in all material respects
their agreements and covenants contained in or contemplated by the Contribution
Agreement which are required to be performed by them at or prior to the Closing;
(ii) the representations and warranties of Fleet set forth in the Contribution
Agreement (without regard to any Fleet Material Adverse Effect qualification in
such representation or warranty) shall be true and correct (a) on and as of the
date of the Contribution Agreement, and (b) on and as of the Closing Date, with
the same effect as though such representations and warranties had been made on
and as of the Closing Date, except for such failures to be true and correct as
individually or in the aggregate will not have a Fleet Material Adverse Effect;
(iii) Advanta and its subsidiaries shall have sufficient liabilities which may
be transferred to the LLC in accordance with the terms of the Contribution
Agreement to permit the closing balance sheet to reflect the Agreed Deficit;
provided that in the event Advanta is unable to satisfy this condition and all
other conditions to closing have been satisfied or waived, then the Closing
shall be delayed until a date which is within 20 business days after Advanta is
first able to satisfy this condition; (iv) Advanta shall have received a
certificate signed on behalf of Fleet by an executive officer of Fleet, dated as
of the Closing Date, to the effect that the conditions set forth in clauses (i)
and (ii) of this paragraph have been
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satisfied; (v) Advanta shall have received the opinion of Edwards & Angell,
counsel to Fleet, relying on Pennsylvania counsel as necessary, in form and
substance reasonably satisfactory to Advanta.
The obligations of Fleet and its subsidiaries to effect the
Transaction are subject to the satisfaction or waiver, where permissible, prior
to or concurrently with the Closing of each of the following conditions: (i)
Advanta and its subsidiaries shall have performed in all material respects their
agreements and covenants contained in or contemplated by the Contribution
Agreement which are required to be performed by it at or prior to the Closing;
(ii) the representations and warranties of Advanta set forth in the Contribution
Agreement (without regard to any Material Adverse Effect qualification in such
representation or warranty) shall be true and correct (a) on and as of the date
of the Contribution Agreement, and (b) on and as of the Closing Date, with the
same effect as though such representations and warranties had been made on and
as of the Closing Date, except for such failures to be true and correct as will
individually or in the aggregate not have a Material Adverse Effect; provided,
that for purposes of this clause (ii), any change in the financial condition or
results of operations of the consumer credit card business shall be deemed not
to result in a breach of any of the representations and warranties of Advanta
set forth in the Contribution Agreement; (iii) Fleet shall have received a
certificate signed on Advanta's behalf by an executive officer of Advanta, dated
the Closing Date, to the effect that the conditions set forth in clauses (i) and
(ii) of this paragraph have been satisfied; (iv) Fleet shall have received the
opinion of Wolf, Block, Schorr and Solis-Cohen LLP, counsel to Advanta, in form
and substance reasonably satisfactory to Fleet; (v) since the date of the
Contribution Agreement, no bona fide claim which challenges the consummation of
the transactions contemplated by the Contribution Agreement shall have been
filed which is reasonably likely to materially and adversely affect the ability
of the LLC to operate the consumer credit cared business in substantially the
same manner as it is presently operated; and (vi) all consents and approvals of
any persons required in connection with the assignment of the Material Company
Contributed Contracts (as such term is defined in the Contribution Agreement)
shall have been obtained.
NO SOLICITATION
In the Contribution Agreement, Advanta agreed that, until the
earlier of the Closing or the termination of the Contribution Agreement, Advanta
and its
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subsidiaries and their respective executive officers shall not (and will use
their respective commercially reasonable efforts to not permit any of its other
officers, directors, agents or affiliates to) directly or indirectly (i) solicit
or encourage inquiries or proposals with respect to, engage in discussions or
negotiate with any person or take any other action intended or designed to
facilitate the efforts of any person (other than Fleet) relating to the possible
acquisition of Advanta's consumer credit card business (whether by way of
contribution, purchase of capital stock, purchase of assets or otherwise) (with
any such efforts by any such person, including a firm proposal to make such an
acquisition, to be referred to as an "Alternative Acquisition"), (ii) provide
information with respect to Advanta's consumer credit card business to any
person, other than the Fleet, relating to a possible Alternative Acquisition by
any person, other than Fleet, (iii) enter into an agreement with any person,
other than Fleet, providing for a possible Alternative Acquisition, or (iv) make
or authorize any statement, recommendation or solicitation in support of any
possible Alternative Acquisition by any person, other than Fleet.
The Contribution Agreement further provides that Advanta shall
immediately cease any of its activities, discussions or negotiations conducted
prior to the date of the Contribution Agreement, with any parties other than
Fleet with respect to any of the foregoing, and shall use its commercially
reasonable efforts to enforce any confidentiality or similar agreement relating
to an Alternative Acquisition. In the event Advanta shall receive a proposal for
an Alternative Acquisition, it shall promptly inform Fleet as to the Alternative
Acquisition and the substance thereof (including the identity of the person
making such Alternative Acquisition), and advise Fleet of any developments with
respect to such Alternative Acquisition promptly after the occurrence thereof.
FEES AND EXPENSES
All costs and expenses incurred in connection with the
Transaction will be paid by the party incurring such expenses; provided, that
all costs and expenses (including transfer fees, consent fees and penalty fees)
incurred in connection with the assignments of the Material Company Contributed
Contracts (except one such agreement as to which the parties have agreed that
all costs and expenses shall be borne by Advanta) and the Material Information
Technology Contracts (as defined in the Contribution Agreement), and all
recording fees, transfer fees, documentary stamps and sales taxes payable in
connection with the contribution of Advanta's
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owned real property and personal property, shall be paid 50% by Advanta and 50%
by Fleet, and the LLC shall bear all costs and expenses (including transfer
fees, consent fees and penalty fees) incurred either before or after the Closing
in connection with the contribution of all other Advanta contributed contracts
and Fleet contributed contracts.
EMPLOYEE MATTERS
The Contribution Agreement provides that Fleet shall offer, on
behalf of the LLC, employment effective as of the close of business on the
Closing Date to all Company Credit Card Business Employees (as such term is
defined in the Contribution Agreement).
The Contribution Agreement provides that the LLC will assume
certain severance costs of Transferred Employees and reimburse Advanta and its
subsidiaries in connection with any severance costs incurred by any of them with
respect to Company Credit Card Business Employees. See "The Contribution and
Related Transactions -- Certain Transactions."
COMPENSATION AND BENEFITS
Advanta has agreed in the Contribution Agreement to take
reasonable actions necessary to provide that: (i) effective on the Closing Date,
the Advanta Corporation Employee Savings Plan account balances of all Company
Credit Card Business Employees shall become fully vested; (ii) Advanta, or its
affiliates, pay, or cause to be paid, all claims by Transferred Employees (as
such term is defined in the Contribution Agreement) and their dependents for
medical and dental benefits covered by any of Advanta's medical or dental plans
which relate to services rendered on or before the Closing Date to the extent
such plans would honor such claims in accordance with their terms; (iii) the
Advanta Management Incentive Plans with Stock Election (II, III and IV) ("AMIP")
are amended to provide, among other things, that employment with the LLC by
Transferred Employees will be deemed to be employment with Advanta for the
purpose of permitting such employees to receive benefits under the terms of
AMIP, to the extent otherwise entitled, with respect to the period ending as of
December 31, 1997; (iv) the Advanta Corp. 1992 Stock Option Plan (as amended and
restated) is amended, as necessary, to provide with respect to the Transferred
Employees for the early vesting of a presently non-
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exercisable portion of outstanding options as specified above; (v) Advanta makes
its election to distribute funds held by it pursuant to its Executive Deferral
Plan to Company Credit Card Business Employees by lump sum or over three years,
as determined by Advanta; (vi) the change of control plans assumed by the LLC
are amended to provide, among other things, that the LLC will assume the
liability for payment of benefits under such plans with respect to Transferred
Employees; and (vii) Advanta shall pay 50% of the aggregate bonuses payable to
certain Transferred Employees. See " The Contribution and Related Transactions -
Certain Transactions."
The Contribution Agreement further provides that Fleet will
ensure that: (i) the LLC will maintain employee benefit plans, programs,
policies and arrangements for the Transferred Employees on terms and conditions
generally applicable to similarly situated employees of Fleet; (ii) with respect
to eligible Transferred Employees, the LLC shall assume certain Advanta bonuses
and severance plans and will pay benefits to the Transferred Employees in
accordance with such bonuses and plans; (iii) there will be a trustee to trustee
transfer of the account balances of all Transferred Employees held under the
Advanta Corp. Employee Savings Plan to a defined contribution plan meeting the
requirements of Section 401(a) of the Code maintained for the benefit of
employees of the LLC; (iv) Transferred Employees (to the extent otherwise
eligible) shall be given credit for all service with Advanta and its affiliates
(and predecessors) to the same extent as such service was credited for such
purpose by Advanta and its affiliates, under all Fleet benefit plans (other than
the Fleet Financial Group, Inc. Pension Plan) for purposes of eligibility and
vesting but not for benefit accrual purposes; (v) preexisting conditions under
the LLC's medical, dental and disability plans will be waived; and (vi) each
Transferred Employee's current level of vacation or paid time off entitlement
will be grandfathered, so that vacation or paid time off entitlement under the
LLC's vacation policy will never be less than what such Transferred Employee is
entitled to on the date of the Contribution Agreement.
CERTAIN COVENANTS
CONDUCT OF THE BUSINESS OF ADVANTA AND FLEET
The Contribution Agreement provides that during the period
from the date of the Contribution Agreement until the Closing Date, Advanta and
its subsidiaries will
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each conduct its operations relating to the consumer credit card business
according to its ordinary and usual course of business, consistent with past
practice. During such period, except as expressly contemplated by the
Contribution Agreement, without the prior written consent of Fleet, Advanta will
not, and will cause each of its subsidiaries involved in the consumer credit
card business not to engage in certain practices, including, among others, the
conduct of the consumer credit card business other than in the ordinary and
usual course or fail to use commercially reasonable efforts to preserve
Advanta's consumer credit card business and the Advanta contributed assets, and
maintain their rights, franchises and existing relations with customers,
suppliers, employees and business associates, or take any action reasonably
likely to have a material adverse effect upon Advanta's or any of its
subsidiaries' ability to perform any of their respective obligations under the
Contribution Agreement or to materially adversely affect or delay the ability of
any of Advanta or its subsidiaries to obtain any necessary governmental
approvals of any regulatory agency or governmental body required for the
transactions contemplated by the Contribution Agreement.
COMMERCIALLY REASONABLE EFFORTS
The Contribution Agreement provides that each of the parties
to the Contribution Agreement agrees to promptly effect all necessary filings
under applicable statutes and use its commercially reasonable efforts to secure
all government clearances (including by taking all reasonable steps to avoid or
set aside any preliminary or permanent injunction or other order of any federal
or state court of competent jurisdiction or other governmental authority) to
consummate and make effective the transactions contemplated by the Contribution
Agreement.
The Contribution Agreement further provides that the parties
will use their reasonable efforts to take, or cause to be taken, all action, and
to do, or cause to be done, all other things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by the Contribution Agreement. In particular, Fleet
and Advanta will use their respective commercially reasonable efforts to obtain
all other consents, authorizations, orders and approvals required in connection
with, and waivers of any material violations, breaches and defaults that may be
caused by, the consummation of the Contribution or the other transactions
contemplated thereby.
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With respect to the Material Information Technology Contracts (as such term is
defined in the Contribution Agreement) which require consent (or any other form
of conditional approval) from any third party prior to or after assignment by
Advanta, Advanta and Fleet will each diligently and in good faith exercise
reasonable commercial efforts towards obtaining such consents or satisfying any
conditions imposed by any third party.
TAX REPORTING
The Contribution Agreement provides that Advanta and its
subsidiaries and Fleet and its subsidiaries acknowledge that they will treat the
Transaction as an exchange for membership interests in the LLC that will qualify
for nonrecognition of gain or loss to each contributor and the LLC pursuant to
the provisions of Subchapter K of the Code and, accordingly, Fleet and Advanta
agreed that each of them and the LLC will report the income tax consequences of
the Transaction in a manner fully consistent with viewing the Transaction as
resulting in the nonrecognition of gain or loss and further agree that they will
not take any income tax position inconsistent with viewing the Transaction as
resulting in the nonrecognition of gain or loss unless such position would
subject the reporting person to a penalty. See "The Contribution and Related
Transactions -- Certain Federal Income Tax Consequences."
COOPERATION IN OBTAINING APPROVAL AND CONSENTS
The terms of the Contribution Agreement provide that the LLC
and Fleet agree, and Fleet shall cause Fleet's affiliates to agree, to cause
Fleet National Bank to join as joint and several indemnitors, and as irrevocable
and unconditional guarantors and sureties of the obligations of the LLC and
Fleet Credit Card Bank (a) to the extent requested by any party whose consent,
approval or action is required in connection with transfer of the assets and
liabilities of Advanta and its subsidiaries relating to the securitization
trusts, and (b) with respect to any obligations of Advanta National Bank which
are part of the Advanta transferred liabilities, including, without limitation,
those arising under promissory notes and certificates of deposit.
The Contribution Agreement further provides that each of the
parties agrees to use all reasonable efforts to take, or cause to be taken, all
action, to do, or cause to
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be done, and to assist and cooperate with the other party hereto in doing, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective, in the most expeditious manner practicable, the
transactions contemplated by the Contribution Agreement.
NON-COMPETITION AND NON-SOLICITATION
The Contribution Agreement provides that during the period
beginning on the Closing Date and ending on the fifth anniversary thereof (the
"Non-Competition Period"), except as required in connection with certain
retained consumer credit card accounts, neither Advanta nor any of its
subsidiaries or any entity which is an affiliate of Advanta (individually and
collectively, the "Advanta Parties@) shall (a) directly or indirectly engage in
any consumer credit card business or activity which is in competition with
Advanta's consumer credit card business or the Fleet consumer credit card
business in the United States; provided, that ownership of less than 2% of the
outstanding capital stock of any publicly traded corporation which is in direct
competition with Advanta's consumer credit card business or the Fleet consumer
credit card business in the United States shall not violate the foregoing
agreement not to compete or (b) use any past or present customer list of
Advanta's consumer credit card business or any list of prospective customers
generated by use of the know-how, trade secrets or other intellectual property
of Advanta's consumer credit card business to solicit, directly or indirectly,
any customer of Advanta's consumer credit card business or the Fleet consumer
credit card business for any consumer debt product or in its business credit
card operations; provided, that nothing in the Contribution Agreement shall
require Advanta to destroy any customer lists relating to the consumer credit
card business that it may have in its possession or to sort or cull any customer
list used by its other businesses or restrict the general use of know-how by
Advanta in the conduct of its business.
The Contribution Agreement further provides that for the
period beginning as of the close of business on the Closing Date and ending on
the third anniversary thereof, (a) neither Advanta nor any of its subsidiaries
shall, directly or indirectly, solicit for employment, retain as an independent
contractor or consultant, induce to terminate employment with Fleet, any of its
subsidiaries or the LLC or otherwise interfere with any employee of Fleet, any
of its subsidiaries or the LLC, in all such cases, engaged in the consumer
credit card business or the Fleet consumer credit
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card business; provided, that persons solicited by Advanta and its subsidiaries
pursuant to the use of any general advertisements or general solicitations not
specifically directed to employees of Fleet, any of its subsidiaries or the LLC
shall not violate the terms of this covenant and (b) neither Fleet nor any of
its subsidiaries shall, directly or indirectly, solicit for employment, retain
as an independent contractor or consultant, induce to terminate employment with
Advanta or any of its subsidiaries or otherwise interfere with any employee of
Advanta or any of its subsidiaries; provided, that persons solicited by Fleet
and its subsidiaries pursuant to the use of any general advertisements or
general solicitations not specifically directed to employees of Advanta or any
of its subsidiaries shall not violate the terms of this covenant.
INSURANCE
The Contribution Agreement provides that Advanta will retain
any and all of its obligations and the obligations of its subsidiaries to pay
claims incurred on or prior to the Closing Date under the credit insurance
policies and debt cancellation contracts sold by or on behalf of Advanta to
certain of its customers on or before the Closing Date. In addition, the
Contribution Agreement provides that Advanta will retain all reserves relating
to the Credit Insurance Business and will contribute to the LLC all deferred
acquisition costs related to the Credit Insurance Business.
REPRESENTATIONS AND WARRANTIES; TERMINATION
The Contribution Agreement, contains certain representations
and warranties of Advanta and Fleet as to, among other things, due organization
and good standing, corporate power and authority to enter into the contemplated
transactions, material damages or events, reports filed with the Commission,
financial statements, information supplied for use in this Proxy Statement,
contractual defaults and consents, litigation, title to properties, licenses,
intellectual property and information technology, material contracts,
environmental matters, condition of contributed assets, real property,
compliance with laws, employee benefit plans, labor relations, and conflicts
with organizational documents or certain material agreements.
The Contribution Agreement may be terminated and the
transactions contemplated thereby may be abandoned at any time prior to Closing:
(i) by mutual
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written consent of Fleet and Advanta; (ii) by either Fleet or Advanta if the
transactions contemplated by the Contribution Agreement have not been
consummated by March 31, 1998 (as such date may be extended by mutual agreement,
the "Outside Termination Date"); provided, that the right to terminate the
Contribution Agreement shall not be available to any party whose failure to
fulfill any obligation under the Contribution Agreement has been the cause of,
or resulted in, the failure to consummate the transactions contemplated thereby
by the Outside Termination Date; provided, further, that if the failure to
consummate the transactions contemplated by the Contribution Agreement by the
Outside Termination Date results from the failure of Advanta and its
subsidiaries to have sufficient liabilities which may be transferred to the LLC
in accordance with the terms of the Contribution Agreement to permit the closing
balance sheet to reflect the Agreed Deficit, then the Outside Termination Date
shall be extended to June 30, 1998; (iii) by either Fleet or Advanta if any
court of competent jurisdiction or other governmental body within the United
States shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the Transaction and
such order, decree, ruling or other action shall have become final and
nonappealable; or (iv) by Fleet, if (a) Fleet shall discover that any
representation or warranty made by Advanta in the Contribution Agreement
(without regard to any Material Adverse Effect qualification in such
representation or warranty) is untrue at the time such representation or
warranty was made or shall not be true and correct as of the Closing Date,
except where the failure to be so true and correct individually or in the
aggregate would not have a Material Adverse Effect, provided that if any such
failure to be so true and correct is capable of being cured prior to the Outside
Termination Date, then Fleet may not terminate the Contribution Agreement under
this clause (iv) until the Outside Termination Date, unless Fleet provides
notice to Advanta, at or prior to the date originally scheduled for closing by
Advanta specifying in reasonable detail the untruthfulness in the
representations or warranties claimed by Fleet, and in no event may Fleet
terminate the Contribution Agreement under this clause (iv) if such failure is
corrected prior to the Outside Termination Date, (b) there shall have been a
breach of any covenant or agreement on the part of Advanta or any of its
subsidiaries under the Contribution Agreement resulting in a Material Adverse
Effect which shall not be capable of being cured prior to the Outside
Termination Date, (c) the stockholders of Advanta fail to approve the
Transaction, or (d) Advanta's Board (x) fails to recommend approval and adoption
of the Transaction by the stockholders of Advanta or withdraws or amends or
modifies in a manner adverse to Fleet its recommendation or approval in
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respect of the Transaction, (y) makes any recommendation with respect to an
Alternative Acquisition other than a recommendation to reject such Alternative
Acquisition or (z) fails to convene the Special Meeting on or prior to the
Outside Termination Date (other than as a result of any restraining order or
injunction or court order or failure of the Commission to clear the Proxy
Statement for mailing to Advanta's stockholders on or before that date which is
35 days prior to the Outside Termination Date); or (v) by Advanta, if (a)
Advanta shall discover that any representation or warranty made by Fleet in the
Contribution Agreement (without regard to any Fleet Material Adverse Effect
qualification in such representation or warranty) is untrue at the time such
representation or warranty was made or shall not be true and correct as of the
Closing Date, except where the failure to be so true and correct would not have
a Fleet Material Adverse Effect or materially adversely affect (or materially
delay) the consummation of the Contribution and the other transactions
contemplated by the Contribution Agreement, provided that if any such failure to
be so true and correct is capable of being cured prior to the Outside
Termination Date, then Advanta may not terminate the Contribution Agreement
under this clause (v) until the Outside Termination Date, unless Advanta
provides notice to Fleet, at or prior to the date originally scheduled for
closing by Advanta specifying in reasonable detail the untruthfulness in the
representations and warranties claimed) by Advanta, and in no event may Advanta
terminate the Contribution Agreement under this clause (v) if such failure is
corrected prior to the Outside Termination Date or (b) there shall have been a
material breach of any covenant or agreement in the Contribution Agreement on
the part of Fleet which shall not be capable of being cured prior to the Outside
Termination Date.
If the Contribution Agreement is terminated, it will become
void, without liability on the part of any party, except as provided in the
following paragraph and except that if the Contribution Agreement is terminated
pursuant to clause (iv)(c) or clause (iv)(d)(z) above and an Alternative
Acquisition is approved by the Board of Directors of Advanta prior to the first
anniversary of the termination of the Contribution Agreement, then Advanta shall
be obligated to pay to Fleet within two Business Days after approval by the
Board of Directors of an Alternative Acquisition, a termination fee equal to $50
million and shall have no obligation to pay any other amounts or have any other
liability on account of damages, expenses or otherwise. No fee or other amount
shall be paid to Fleet if it or any subsidiary of Fleet shall be in material
breach of its material obligations under the Contribution Agreement.
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Other than in the case of a termination under clause (iv)(c)
above, termination will not relieve a party in breach of the Contribution
Agreement from liability for any wilful breach of the Contribution Agreement
giving rise to the termination.
INDEMNIFICATION
Following the Closing, Advanta and its subsidiaries which
contributed assets to the LLC in the Transaction shall jointly and severally
indemnify and hold the LLC, Fleet and the Fleet Contributors harmless from and
against any losses sustained by the LLC, Fleet or any of the Fleet Contributors:
(i) arising from any breach of any representation or warranty on the part of
Advanta or any of such subsidiaries (and for this purpose the representations
and warranties of Advanta, except for those relating to material litigation,
shall not be deemed to include qualifications as to materiality or Material
Adverse Effect); (ii) arising from any breach of any covenant on the part of
Advanta or any of such subsidiaries; (iii) arising from a challenge to the
validity of the transfer of the securitization trusts (other than arising out of
actions or failures to act of Fleet and its affiliates); (iv) related to any
action taken by Advanta or any of such subsidiaries with respect to any of its
employee benefit plans, including any amendment thereto resulting from the
transactions contemplated by the Contribution Agreement; and (v) related to any
Non-Assumed Liability (as such term is defined in the Contribution Agreement)
which is a liability of Advanta or any of its subsidiaries. Any and all losses
shall be computed on a net basis, after taking into account any amounts received
or, in the reasonable opinion of Fleet, receivable by Fleet or any its
subsidiaries under any insurance policies.
Neither Advanta nor its subsidiaries shall have any obligation
with respect to any indemnification payments under clauses (i) or (iii) above
except to the extent that the aggregate indemnification obligations of Advanta
and its subsidiaries exceed $15,000,000 in the aggregate, and Advanta and its
subsidiaries shall have no obligation with respect to such initial $15,000,000
amount.
The indemnification provided for in the Contribution Agreement
does not cover, and in no event shall any party be liable for, any
consequential, incidental or special damages, and in no event may any claim for
indemnification be made in an amount which is less than $50,000.
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The Contribution Agreement provides for analogous
indemnifications of Advanta and its affiliates by Fleet and certain of its
subsidiaries and the LLC.
OWNERSHIP OF ADVANTA SHARES
The information set forth on the following table is furnished
as of November 12, 1997, with respect to any person (including any "group" as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) who is known to Advanta to be the beneficial owner
of more than 5% of any class of Advanta's voting securities.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
TITLE OF NAME AND ADDRESS BENEFICIAL PERCENT OF CLASS
CLASS OF BENEFICIAL OWNER OWNERSHIP
- ----- ------------------- ---------
<S> <C> <C>
Class A The Estate of J. R. Alter(1)............. 1,010 100.00%
Preferred
Class A Dennis Alter(1).......................... 4,868,856(2)(3)(4) 26.76%
Common
Neuberger & Berman, LLC(5)............... 2,117,950 11.66%
</TABLE>
(1) The address for the Estate of J. R. Alter and Dennis Alter is c/o
Advanta Corp., Welsh and McKean Roads, P.O. Box 844, Spring House,
Pennsylvania, 19477-0844.
(2) Includes 999,462 shares owned by a trust, the beneficiary of which is
Linda Alter, the sister of Dennis Alter and pursuant to which Dennis
Alter is sole trustee. Mr. Alter disclaims beneficial ownership of
these shares.
(3) Includes 150,000 shares owned by Dennis Alter's wife and 168,824 shares
owned by several trusts established by Mr. Alter for the benefit of his
minor children, for which trusts Mrs. Alter serves as a trustee. Also
includes an
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aggregate of 75,000 shares held by a charitable foundation established
by Mr. Alter, as to which Mr. Alter shares voting and investment
powers, and 75,000 shares held by a trust established by Mr. Alter,
through which he has made certain charitable gifts of shares and as to
which Mr. Alter has sole voting and investment powers. Mr. Alter
disclaims beneficial ownership of all such shares.
(4) Does not include 1,010 shares of Advanta's Class A Preferred Stock and
499,465 shares of Class A Common Stock owned by the Estate of J. R.
Alter, the father of Dennis Alter, and 75,000 shares of Class A Common
Stock owned by Helen Alter, the mother of Dennis Alter, as to which
Dennis Alter disclaims beneficial ownership.
(5) Information as to shares held by Neuberger & Berman, LLC, a registered
investment advisor ("Neuberger"), is as of June 2, 1997, as set forth
in a Schedule 13G filed with the Commission. Under applicable
Commission rules, Neuberger is deemed to be the beneficial owner of
these shares because it shares the power to vote or direct the vote of
and/or shares the power to exercise investment discretion (dispositive
power) with respect to these shares. Of these shares, 1,542,500, or
8.49% of the class, are beneficially owned by Neuberger & Berman Focus
Portfolio ("Neuberger Portfolio"). Neuberger and Neuberger & Berman
Management, Inc. ("Neuberger Management") are deemed to be beneficial
owners of the shares beneficially owned by Neuberger Portfolio because
Neuberger and Neuberger Management serve as subadviser and investment
manager, respectively, of Neuberger Portfolio and thus share power to
make decisions regarding whether to retain or dispose of the shares
held by Neuberger Portfolio. The address of Neuberger, Neuberger
Portfolio and Neuberger Management is 605 Third Avenue, New York, NY
10158-3698.
The following table sets forth certain information regarding
the Class A Common Stock and Class B Common Stock beneficially owned by each
director of Advanta, by Advanta's Chief Executive Officer, by each of Advanta's
four other most highly compensated executive officers whose compensation
exceeded $100,000 during 1996, and by all directors and executive officers as a
group, as of October 25, 1997, unless otherwise noted. Shares issuable pursuant
to the exercise of stock options are included in the table below if such options
are currently exercisable or
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will become exercisable by December 24, 1997. None of Advanta's executive
officers or directors beneficially owns any shares of the Class A Preferred
Stock or the Class B Preferred Stock (SAILS) Depositary Shares.
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
-------------- --------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
BENEFICIAL PERCENT BENEFICIAL PERCENT OF
NAME OWNERSHIP OF CLASS OWNERSHIP CLASS
----- --------- ----- --------- -----
OFFICER/DIRECTORS
<S> <C> <C> <C> <C>
Dennis Alter(1)(2)(3)(4).............. 4,868,854 26.76% 2,687,922 10.00%
William A. Rosoff(5)(6)............... 0 * 166,794 *
Alex W. Hart (7)...................... 0 * 576,503 2.15%
Richard A. Greenawalt (8)............. 497,482 2.73% 534,537 2.01%
OFFICERS
Robert A. Marshall (9)................ 585 * 86,119 *
DIRECTORS
Arthur P. Bellis(10).................. 60,478 * 141,978 *
Max Botel(11)......................... 8,712 * 49,512 *
Richard J. Braemer(12)(13)............ 64,940 * 88,940 *
William C. Dunkelberg(14)............. 4,500 * 30,500 *
Dana Becker Dunn(15).................. 0 * 3,750 *
Robert C. Hall(16).................... 0 * 19,000 *
James E. Ksansnak(17)................. 0 * 10,050 *
Ronald Lubner(18)..................... 0 * 3,750 *
Ronald J. Naples(19).................. 750 * 38,250 *
Philip A. Turberg(20)................. 29,886 * 76,886 *
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Dana Becker Dunn(15).................... 0 * 3,750 *
All officers and directors 5,102,821 27.98% 4,537,811 16.48%
as a group (24 persons)
(1)(2)(4)(6)(13)(21)
</TABLE>
* Represents less than 1% of the indicated class of Advanta's Common
Stock outstanding as of March 14, 1997.
(1) Ownership includes 999,462 shares of Advanta's Class A Common Stock
owned by a trust, the beneficiary of which is Linda Alter, the sister
of Dennis Alter, and pursuant to which Mr. Alter is sole trustee. Mr.
Alter disclaims beneficial ownership of these shares.
(2) Ownership includes 150,000 shares of Class A Common Stock and 75,000
shares of Class B Common Stock held by Mr. Alter's wife, as well as
168,824 shares of Class A Common Stock and 175,194 shares of Class B
Common Stock held by several trusts established by Mr. Alter for the
benefit of his minor children, for which trusts Mrs. Alter serves as a
trustee. Also includes 75,000 shares of Advanta's Class A Common Stock
and 75,000 shares of Advanta's Class B Common Stock held by a
charitable foundation established by Mr. Alter, as to which Mr. Alter
shares voting and investment powers, and 75,000 shares of Advanta's
Class A Common Stock and 22,600 of Advanta's Class B Common Stock held
by a trust established by Mr. Alter, through which he has made certain
charitable gifts of shares and as to which Mr. Alter has sole voting
and investment powers. Mr. Alter disclaims beneficial ownership of all
such shares.
(3) Ownership includes options to purchase 337,500 shares of Advanta's
Class B Common Stock pursuant to Advanta's Stock Option Plans.
(4) Ownership does not include 1,010 shares of Advanta's Class A Preferred
Stock, 499,465 shares of Advanta's Class A Common Stock and 337,885
shares of Class B Common Stock owned by the estate of J.R. Alter, the
father of Dennis Alter, and 75,000 shares of both Advanta's Class A
Common Stock and Class B Common Stock owned by Helen Alter, the mother
of
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Dennis Alter, as to all of which shares Dennis Alter disclaims
beneficial ownership.
(5) Ownership includes options to purchase 12,500 shares of Advanta's Class
B Common Stock pursuant to Advanta's Stock Option Plans.
(6) Ownership does not include 150,000 shares of each of Advanta's Class A
and Class B Common Stock held by a trust established by Mr. Alter for
the benefit of his minor children, as to which shares Mr. Rosoff shares
voting and investment powers as a co-trustee of the trust. Such share
ownership is reflected in the ownership table under Mr. Alter's name.
(7) Ownership includes options to purchase 262,500 shares of the Advanta's
Class B Common Stock pursuant to Advanta's Stock Option Plans.
(8) Information as to shares owned by Mr. Greenawalt is as of March 14,
1997, the most recent practicable date for which Advanta has
information. Ownership includes 63,475 shares of Advanta's Class A
Common Stock and 49,450 shares of Advanta's Class B Common Stock owned
by Mr. Greenawalt's wife and 41,442 shares of Class A Common Stock and
470 shares of Class B Common Stock held by Mr. Greenawalt as custodian
for his children. Mr. Greenawalt disclaims beneficial ownership of all
such shares.
(9) Information as to shares owned by Mr. Marshall is as of March 14, 1997,
the most recent practicable date for which Advanta has information.
Ownership includes options to purchase 41,250 shares of Advanta's Class
B Common Stock pursuant to Advanta's Stock Option Plans.
(10) Ownership includes options to purchase 31,500 shares of Advanta's Class
B Common Stock pursuant to Advanta's Stock Option Plans and otherwise.
(11) Ownership includes options to purchase 5,000 shares of Advanta's Class
A Common Stock and 36,500 shares of Advanta's Class B Common Stock
pursuant to Advanta's Stock Option Plans and otherwise.
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(12) Ownership includes options to purchase 26,670 shares of Advanta's Class
A Common Stock and 58,170 shares of Advanta's Class B Common Stock
pursuant to Advanta's Stock Option Plans and otherwise.
(13) Ownership does not include 75,000 shares of Advanta's Class A Common
Stock and 75,000 shares of Advanta's Class B Common Stock held by a
charitable foundation established by Mr. Alter, as to which shares Mr.
Braemer shares voting and investment powers as a trustee of the
foundation. Such share ownership is reflected in the ownership table
under Mr. Alter's name.
(14) Ownership includes options to purchase 3,000 shares of Advanta's Class
A Common Stock and 30,500 shares of Advanta's Class B Common Stock
pursuant to Advanta's Stock Option Plans.
(15) Ownership includes options to purchase 3,750 shares of Advanta's Class
B Common Stock pursuant to Advanta's Stock Options Plans.
(16) Ownership includes options to purchase 18,000 shares of Advanta's Class
B Common Stock pursuant to Advanta's Stock Option Plans.
(17) Ownership includes options to purchase 9,750 shares of Advanta's Class
B Common Stock pursuant to Advanta's Stock Option Plans.
(18) Ownership includes options to purchase 3,750 shares of Advanta's Class
B Common Stock pursuant to Advanta's Stock Option Plans.
(19) Ownership includes options to purchase 37,500 shares of Advanta's Class
B Common Stock pursuant to Advanta's Stock Option Plans.
(20) Ownership includes options to purchase 7,500 shares of Advanta's Class
A Common Stock and 39,000 shares of Advanta's Class B Common Stock
pursuant to Advanta's Stock Option Plans.
(21) Ownership includes options to purchase 60,920 shares of Advanta's Class
A Common Stock and 1,295,720 shares of Advanta's Class B Common Stock
pursuant to Advanta's Stock Option Plans. Ownership does not include
any
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amounts in respect of Messrs. Greenawalt or Marshall, as neither of
them was serving as a director or officer of Advanta as of October 25,
1997.
MARKET PRICES AND DIVIDENDS
The Class A Common Stock, Class B Common Stock and Class B
Preferred Stock (SAILS) Depositary Shares are traded in the Nasdaq National
Market and prices are quoted on Nasdaq under the symbol "ADVNA", "ADVNB" and
"ADVNZ," respectively. The following table sets forth, for each of the periods
indicated, the high and low reported quotations per Share as quoted on Nasdaq
and reported by the Dow Jones News Retrieval Service.
<TABLE>
<CAPTION>
Calendar Year High Low
- ------------- ---- ---
Class A Common Stock
1995
<S> <C> <C>
First Quarter........................................ $34.75 $25.50
Second Quarter....................................... 42.50 33.00
Third Quarter........................................ 46.25 39.50
Fourth Quarter....................................... 48.88 37.50
1996
First Quarter........................................ $53.50 $34.75
Second Quarter....................................... 58.25 46.50
Third Quarter........................................ 53.00 41.00
Fourth Quarter....................................... 50.00 40.00
</TABLE>
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<TABLE>
<CAPTION>
1997
<S> <C> <C>
First Quarter........................................ $53.25 $26.88
Second Quarter....................................... 36.75 20.31
Third Quarter........................................ 36.69 28.06
Fourth Quarter (through October 31, 1997)............ 38.50 28.56
</TABLE>
<TABLE>
<CAPTION>
Calendar Year High Low
Class B Common Stock
1995
<S> <C> <C>
First Quarter........................................ $32.25 $24.50
Second Quarter....................................... 38.75 30.75
Third Quarter........................................ 42.50 36.00
Fourth Quarter....................................... 45.00 35.13
1996
First Quarter........................................ $49.25 $33.75
Second Quarter....................................... 52.50 43.50
Third Quarter........................................ 48.25 39.75
Fourth Quarter....................................... 48.50 38.25
1997
First Quarter........................................ $51.56 $25.88
Second Quarter....................................... 35.69 19.50
Third Quarter........................................ 35.63 26.50
Fourth Quarter (through October 31, 1997)............ 37.50 26.75
</TABLE>
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<TABLE>
<CAPTION>
Calendar Year High Low
- ------------- ---- ---
Class B Preferred Stock (SAILS) Depositary Shares
1995
<S> <C> <C>
First Quarter........................................ NA NA
Second Quarter....................................... NA NA
Third Quarter........................................ $43.00 $37.13
Fourth Quarter....................................... 44.00 36.63
1996
First Quarter........................................ $46.75 $36.25
Second Quarter....................................... 49.25 42.50
Third Quarter........................................ 47.00 39.13
Fourth Quarter....................................... 45.75 38.00
1997
First Quarter........................................ $49.50 $28.50
Second Quarter....................................... 35.75 22.00
Third Quarter........................................ 37.00 29.75
Fourth Quarter (through October 31, 1997)............ 39.13 29.88
</TABLE>
On October 27, 1997, the last full trading day prior to the
public announcement of the Transaction, the last reported sale quotation of the
Class A Common Stock was $33 1/2, the last reported sale quotation of the Class
B Common Stock was $32 1/4 and the last reported sale quotation of the Class B
Preferred Stock (SAILS) Depositary Shares was $35-5/8.
SELECTED FINANCIAL INFORMATION
The following pro forma financial information has been
prepared by Advanta to illustrate the estimated effects of the Transaction as
described under "The Contribution and Related Transactions" in this Proxy
Statement. The following tables present (i) the historical consolidated income
statements for the nine months ended September 30, 1997 (unaudited) and the year
ended December 31, 1996, and the unaudited historical consolidated balance sheet
as of September 30, 1997 for
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Advanta and its subsidiaries and (ii) the unaudited pro forma consolidated
income statements for the nine months ended September 30, 1997 and the year
ended December 31, 1996 and the unaudited pro forma consolidated balance sheet
as of September 30, 1997 for Advanta giving effect to the Pro Forma Adjustments
described below. The pro forma consolidated income statements were prepared
assuming that the Pro Forma Adjustments had occurred January 1, 1996. The pro
forma consolidated balance sheet was prepared assuming that the Pro Forma
Adjustments had occurred September 30, 1997.
The unaudited pro forma consolidated financial statements
presented below do not purport to represent what the results of operations or
financial position would actually have been if the Transaction had occurred on
the dates referred to above. Also, the unaudited pro forma consolidated
financial statements are not indicative of the future results of operations or
financial position of Advanta to be expected in future periods. A substantial
portion of corporate expenses incurred in the past have been to support the
operations to be contributed. Also, Advanta has incurred expenditures in the
past for new businesses and product development. Associated with the
Transaction, Advanta intends to substantially reduce corporate expenses and
expenses associated with business and product development not directly
associated with its mortgage and business service companies. No pro forma
adjustments have been reflected associated with Advanta's plans to reduce these
expenses. Further, the Pro Forma Adjustments do not reflect a restructuring
charge related to the planned reduction in corporate expenses or transaction
expenses associated with the Transaction. The Pro Forma Adjustments also do not
reflect any impact for the intended purchase of between $750 million and $850
million of Advanta's common stock. The restructuring charge and transaction
expenses will be incurred in the period that the Transaction is consummated. The
Pro Forma Adjustments are based upon available information and certain
assumptions that Advanta believes are reasonable.
Set forth below are (i) the unaudited historical combined income
statements for the nine months ended September 30, 1997 and September 30, 1996
and the years ended December 31, 1996, December 31, 1995 and December 31, 1994,
and (ii) the unaudited historical combined balance sheet as of September 30,
1997, December 31, 1996 and December 31, 1995 and (iii) the unaudited historical
combined statements of changes in division capital for the nine months ended
September 30, 1997 and the years ended December 31, 1996, December 31, 1995
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and December 31, 1994 and (iv) the unaudited historical combined statements of
cash flows for the nine months ended September 30, 1997 and September 30, 1996
and the years ended December 31, 1996, December 31, 1995 and December 31 1994,
for the Advanta Personal Payment Services, the division of Advanta which
conducts its consumer credit card business.
48
<PAGE> 68
Advanta Corp. and Subsidiaries
Pro Forma Unaudited Consolidated Income Statement
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
($ in thousands, except per share data) Advanta Corp. Advanta Corp.
and Subsidiaries Pro Forma and Subsidiaries
Historical Adjustments Pro Forma
---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans and leases $ 224,994 $(154,490) [A] $ 70,504
Investments 107,051 (22,522) [A] 84,529
---------------- ---------------- ----------------
Total interest income 332,045 (177,012) 155,033
Total interest expense 239,673 (138,947) [B] 100,726
---------------- ---------------- ----------------
NET INTEREST INCOME 92,372 (38,065) 54,307
---------------- ---------------- ----------------
Provision for credit losses 158,886 (141,231) [A] 17,655
---------------- ---------------- ----------------
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR CREDIT LOSSES (66,514) 103,166 36,652
---------------- ---------------- ----------------
Noninterest revenues:
Gain on sale of credit cards -- -- [A] --
Other noninterest revenues 560,547 (405,747) [A] 154,800
---------------- ---------------- ----------------
Total noninterest revenues 560,547 (405,747) 154,800
---------------- ---------------- ----------------
Operating expenses:
Amortization of credit card deferred origination costs, net 47,916 (44,543) [A] 3,373
Other operating expenses 408,363 (216,937) [C] 191,426
---------------- ---------------- ----------------
Total operating expenses 456,279 (261,480) 194,799
INCOME (LOSS) BEFORE INCOME TAXES 37,754 (41,101) (3,347)
---------------- ---------------- ----------------
PROVISION (BENEFIT) FOR INCOME TAXES 9,741 (14,385) [D] (4,644)
---------------- ---------------- ----------------
NET INCOME (LOSS) $ 28,013 $ (26,716) $ 1,297
================ ================ ================
Earnings per common share $ 0.60 $ 0.03
================ ================
Average common shares outstanding 46,108 46,108
================ ================
</TABLE>
[A] The pro forma consolidated income statement reflects the elimination of
income and expense related to the results of operations reflected in the
Unaudited Historical Combined Financial Statements of Advanta Personal Payment
Services (the "Division") as if the transaction had occurred for the periods
presented.
[B] The pro forma consolidated income statement reflects (1) interest expense
reflected in the Unaudited Historical Combined Financial Statements of the
Division, and (2) an adjustment of approximately $55.2 million to reflect
approximately $1.3 billion of additional interest bearing liabilities to be
transferred in the Contribution above the amount of interest bearing liabilities
reflected in the Unaudited Historical Combined Financial Statements of the
Division. The $1.3 billion of additional interest bearing liabilities will be
transferred from Advanta National Bank (ANB), where the predominance of the
credit card operations are conducted and were incurred in the ordinary course of
ANB's business.
[C] The pro forma consolidated income statement reflects the reduction in other
operating expenses related to (1) the results of operations reflected in the
Unaudited Historical Combined Financial Statements of the Division had the
transaction occurred for the periods presented, (2) $399,000 of additional
depreciation expense for fixed assets to be transferred to the LLC that were not
dedicated to the Division, and (3) $3.2 million of operating expenses for an
Advanta Corp. support group whose operations will be transferred to the LLC.
[D] The pro forma consolidated income statement reflects the net effects of the
Pro Forma Adjustments at the statutory federal tax rate of 35% for the period
presented.
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Advanta Corp. and Subsidiaries
Pro Forma Unaudited Consolidated Income Statement
Year Ended December 31, 1996
<TABLE>
<CAPTION>
($ in thousands, except per share data) Advanta Corp. Advanta Corp.
and Subsidiaries Pro Forma and Subsidiaries
Historical Adjustments Pro Forma
---------------- -------------- ----------------
<S> <C> <C> <C>
Interest income:
Loans and leases $ 267,823 $(220,745) [A] $ 47,078
Investments 80,142 (14,657) [A] 65,485
---------------- -------------- ----------------
Total interest income 347,965 (235,402) 112,563
Total interest expense 269,700 (230,642) [B] 39,058
---------------- -------------- ----------------
NET INTEREST INCOME 78,265 (4,760) 73,505
---------------- -------------- ----------------
Provision for credit losses 96,862 (104,128) [A] (7,266)
---------------- -------------- ----------------
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR CREDIT LOSSES (18,597) 99,368 80,771
Noninterest revenues:
Gain on sale of credit cards 33,820 (33,820) [A] --
Other noninterest revenues 772,712 (605,000) [A] 167,712
---------------- -------------- ----------------
Total noninterest revenues 806,532 (638,820) 167,712
---------------- -------------- ----------------
Operating expenses:
Amortization of credit card deferred origination costs, net 88,517 (86,088) [A] 2,429
Other operating expenses 434,657 (246,467) [C] 188,190
---------------- -------------- ----------------
Total operating expenses 523,174 (332,555) 190,619
INCOME BEFORE INCOME TAXES 264,761 (206,897) 57,864
PROVISION FOR INCOME TAXES 89,104 (72,414) [D] 16,690
---------------- -------------- ----------------
NET INCOME $ 175,657 $(134,483) $ 41,174
================ ============== ================
Earnings per common share $ 3.89 $ 0.91
================ ================
Average common shares outstanding 45,073 45,073
================ ================
</TABLE>
[A] The pro forma consolidated income statement reflects the elimination of
income and expense related to the results of operations reflected in the
Unaudited Historical Combined Financial Statements of Advanta Personal Payment
Services (the "Division") as if the transaction had occurred for the periods
presented.
[B] The pro forma consolidated income statement reflects (1) interest expense
reflected in the Unaudited Historical Combined Financial Statements of the
Division, and (2) an adjustment of approximately $67.4 million to reflect
approximately $1.3 billion of additional interest bearing liabilities to be
transferred in the Contribution above the amount of interest bearing liabilities
reflected in the Unaudited Historical Combined Financial Statements of the
Division. The $1.3 billion of additional interest bearing liabilities will be
transferred from Advanta National Bank (ANB), where the predominance of the
credit card operations are conducted and were incurred in the ordinary course of
ANB's business.
[C] The pro forma consolidated income statement reflects the reduction in other
operating expenses related to (1) the results of operations reflected in the
Unaudited Historical Combined Financial Statements of the Division had the
transaction occurred for the periods presented, (2) $302,000 of additional
depreciation expense for fixed assets to be transferred to the LLC that were not
dedicated to the Division, and (3) $3.9 million of operating expenses for an
Advanta Corp. support group whose operations will be transferred to the LLC.
[D] The pro forma consolidated income statement reflects the net effects of the
Pro Forma Adjustments at the statutory federal tax rate of 35% for the period
presented.
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Advanta Corp. and Subsidiaries
Pro Forma Unaudited Consolidated Balance Sheet
As of September 30, 1997
($ in thousands)
<TABLE>
<CAPTION>
Advanta Corp. Advanta Corp.
and Subsidiaries Pro Forma and Subsidiaries
ASSETS Historical Adjustments Pro Forma
---------------- --------------- ----------------
<S> <C> <C> <C>
Cash $ 109,787 $ (106,179) [A] $ 3,608
Federal funds sold and interest-bearing
deposits with banks 1,406,688 (515,430) [A] 891,258
Investments available for sale 1,399,007 -- 1,399,007
Loan and lease receivables, net:
Available for sale 1,040,028 (374,431) [A] 665,597
Other loan and lease receivables, net 1,599,045 (1,239,534) [A] 359,511
---------------- --------------- ----------------
Total loan and lease receivables, net 2,639,073 (1,613,965) 1,025,108
---------------- --------------- ----------------
Premises and equipment, net 136,636 (84,243) [B] 52,393
Amounts due from credit card
securitizations 286,680 (286,680) [A] --
Other assets 724,796 (231,650) [C] 493,146
---------------- --------------- ----------------
Total assets $ 6,702,667 $(2,838,147) $ 3,864,520
================ =============== ================
LIABILITIES
Deposits $ 2,942,115 $(2,184,938) [D] $ 757,177
Debt and other borrowings 2,517,552 (1,089,931) [D] 1,427,621
Other liabilities 262,813 (93,278) [E] 169,535
---------------- --------------- ----------------
Total liabilities 5,722,480 (3,368,147) 2,354,333
---------------- --------------- ----------------
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures
of the Company 100,000 -- 100,000
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par
value: authorized, issued and
outstanding -- 1,010 shares in 1997
and 1996 1,010 -- 1,010
Class B preferred stock, $.01 par
value: authorized -- 1,000,000 shares
in 1997 and 1996; issued -- 25,000
shares in 1997 and 1996 -- -- --
Class A common stock, $.01 par value:
authorized -- 200,000,000 shares;
issued -- 18,176,112 shares in 1997,
and 17,945,471 shares in 1996 182 -- 182
Class B common stock, $.01 par value:
authorized -- 200,000,000 shares;
issued -- 26,187,682 shares in 1997,
and 25,592,764 in 1996 264 -- 264
Additional paid-in capital, net 342,806 -- 342,806
Retained earnings, net 548,638 530,000 [F] 1,078,638
Less: Treasury stock at cost,
295,475 Class B common shares in 1997,
1,231 Class B common shares in 1996 (12,713) -- (12,713)
---------------- --------------- ----------------
Total stockholders' equity 880,187 530,000 1,410,187
---------------- --------------- ----------------
Total liabilities and stockholders'
equity $ 6,702,667 $(2,838,147) $ 3,864,520
================ =============== ================
</TABLE>
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Advanta Corp. and Subsidiaries
Notes to Pro Forma Unaudited Consolidated Balance Sheet
As of September 30, 1997
[A] Represents the contribution to the LLC of assets and liabilities reflected
in the Unaudited Historical Combined Financial Statements of Advanta Personal
Payment Services (the "Division") had the Contribution occurred at the balance
sheet date.
[B] Represents (1) the contribution to the LLC of property and equipment
dedicated to the Division and (2) $6.3 million of fixed assets to be transferred
to the LLC that were not dedicated to the Division.
[C] Represents (1) the contribution to the LLC of other assets dedicated to the
Division except for $8.7 million of Credit Insurance Business related assets
that will not be transferred to the LLC and (2) Advanta's membership interest in
the LLC valued at $20 million.
[D] Represents the contribution to the LLC of deposits, debt and other
borrowings by an amount equaling total assets of the Division plus an additional
$510 million of liabilities representing a portion of the premium received by
Advanta, less other liabilities transferred to the LLC in accordance with the
Contribution Agreement.
[E] Represents the reduction of other liabilities related to (1) the balance
reflected in the Unaudited Historical Combined Financial Statements of the
Division had the Contribution occurred at the balance sheet date and (2) $40
million of accrued interest payable on the deposits, debt and other borrowings
discussed in [D] above, net of (3) $11.8 million of Credit Insurance Business
related liabilities that will not be transferred to the LLC.
[F] Represents the increase in retained earnings resulting from the gain of $530
million on the transaction, consisting of liabilities in excess of assets
transferred of $510 million and Advanta's membership interest in the LLC valued
at $20 million.
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<PAGE> 72
ADVANTA PERSONAL PAYMENT SERVICES
(A DIVISION OF ADVANTA CORP.)
HISTORICAL COMBINED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
53
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ADVANTA PERSONAL PAYMENT SERVICES
(A DIVISION OF ADVANTA CORP.)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
HISTORICAL COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Combined Balance Sheets 55
Combined Statements of Income 56
Combined Statements of Changes in Division Capital 57
Combined Statements of Cash Flows 58
Notes to Combined Financial Statements 59
</TABLE>
54
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ADVANTA PERSONAL PAYMENT SERVICES
(A DIVISION OF ADVANTA CORP.)
COMBINED BALANCE SHEETS
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
ASSETS:
Cash $ 106,179 $ 166,982 $ 50,383
Restricted interest-bearing deposits 515,430 333,923 262,392
Loan receivables, net:
Available for sale 374,431 1,062,930 776,737
Other loan receivables, net 1,239,534 941,157 1,540,622
---------- ---------- ----------
Total loan receivables, net 1,613,965 2,004,087 2,317,359
Premises and equipment (at cost less accumulated
depreciation of $43,091 for September 30,
1997, $32,456 for 1996, and $22,052 for 1995) 77,976 65,016 25,470
Amounts due from securitizations 286,680 399,359 190,819
Other assets 260,340 211,709 145,561
---------- ---------- ----------
Total assets $2,860,570 $3,181,076 $2,991,984
========== ========== ==========
LIABILITIES AND DIVISION CAPITAL:
Payable to Advanta Corp. and affiliates $2,112,488 $2,449,808 $2,325,225
Other liabilities 65,057 70,232 143,795
---------- ---------- ----------
Total liabilities 2,177,545 2,520,040 2,469,020
Division capital 683,025 661,036 522,964
---------- ---------- ----------
Total liabilities and division capital $2,860,570 $3,181,076 $2,991,984
========== ========== ==========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these financial statements.
-55-
<PAGE> 75
ADVANTA PERSONAL PAYMENT SERVICES
(A DIVISION OF ADVANTA CORP.)
COMBINED STATEMENTS OF INCOME
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- ----------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 154,490 $ 167,551 $ 220,745 $161,116 $117,603
Interest-bearing deposits 22,522 10,269 14,657 11,286 5,496
--------- --------- --------- -------- --------
Total interest income 177,012 177,820 235,402 172,402 123,099
--------- --------- --------- -------- --------
Total interest expense 83,717 128,350 163,200 103,171 64,999
--------- --------- --------- -------- --------
NET INTEREST INCOME 93,295 49,470 72,202 69,231 58,100
--------- --------- --------- -------- --------
Provision for credit losses 141,231 59,018 104,128 41,661 24,295
--------- --------- --------- -------- --------
NET INTEREST (LOSS) INCOME AFTER
PROVISION FOR CREDIT LOSSES (47,936) (9,548) (31,926) 27,570 33,805
--------- --------- --------- -------- --------
NON-INTEREST REVENUES:
Gain on sale of credit cards -- 33,820 33,820 -- 18,352
Other non-interest revenues 405,747 436,010 605,000 433,965 317,493
--------- --------- --------- -------- --------
Total non-interest revenues 405,747 469,830 638,820 433,965 335,845
--------- --------- --------- -------- --------
OPERATING EXPENSES:
Amortization of credit card deferred
origination costs, net 44,543 66,021 86,088 71,805 39,370
Other operating expenses 213,369 174,239 242,274 167,011 132,607
--------- --------- --------- -------- --------
Total operating expenses 257,912 240,260 328,362 238,816 171,977
--------- --------- --------- -------- --------
INCOME BEFORE INCOME TAXES 99,899 220,022 278,532 222,719 197,673
--------- --------- --------- -------- --------
PROVISION FOR INCOME TAXES 36,791 77,488 101,198 81,224 72,365
--------- --------- --------- -------- --------
NET INCOME $ 63,108 $ 142,534 $ 177,334 $141,495 $125,308
========= ========= ========= ======== ========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
-56-
<PAGE> 76
ADVANTA PERSONAL PAYMENT SERVICES
(A DIVISION OF ADVANTA CORP.)
COMBINED STATEMENTS OF CHANGES IN DIVISION CAPITAL
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Unaudited)
($ in thousands)
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1994 $ 265,946
Changes in division capital (48,503)
Net income 125,308
---------
BALANCE, DECEMBER 31, 1994 342,751
Changes in division capital 38,718
Net income 141,495
---------
BALANCE, DECEMBER 31, 1995 522,964
Changes in division capital (39,262)
Net income 177,334
---------
BALANCE, DECEMBER 31, 1996 661,036
Changes in division capital (41,119)
Net income 63,108
---------
BALANCE, SEPTEMBER 30, 1997 $ 683,025
=========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
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<PAGE> 77
ADVANTA PERSONAL PAYMENT SERVICES
(A DIVISION OF ADVANTA CORP.)
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------------- -------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,108 $ 142,534 $ 177,334 $ 141,495 $ 125,308
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Provision for credit losses 141,231 59,018 104,128 41,661 24,295
Depreciation and amortization 10,487 5,607 8,210 3,824 3,382
Net increase in other assets and amounts due from
securitizations (55,952) (221,359) (274,688) (129,812) (46,168)
Net (decrease) increase in other liabilities (5,175) (64,613) (73,563) 38,278 41,612
--------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities 153,699 (78,813) (58,579) 95,446 148,429
--------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits (181,507) 21,939 (71,531) (88,245) (69,433)
Net change in credit card receivables, excluding sales 368,891 (3,343,124) (3,328,875) (4,176,388) (2,787,389)
Proceeds from sales/securitizations of receivables -- 3,048,019 3,538,019 3,572,541 2,150,000
Net (acquisition) sale of property and equipment (23,447) (27,354) (47,756) (11,732) (11,569)
--------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities 163,937 (300,520) 89,857 (703,824) (718,391)
--------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in payable to Advanta Corp. and affiliates (337,320) 467,556 124,583 575,608 630,379
Change in division capital for transactions with
Advanta Corp. (41,119) (45,943) (39,262) 38,718 (48,503)
--------- ----------- ----------- ----------- -----------
Net cash (used in) provided by financing activities (378,439) 421,613 85,321 614,326 581,876
--------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash (60,803) 42,280 116,599 5,948 11,914
CASH AT BEGINNING OF YEAR 166,982 50,383 50,383 44,435 32,521
CASH AT END OF YEAR $ 106,179 $ 92,663 $ 166,982 $ 50,383 $ 44,435
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
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<PAGE> 78
ADVANTA PERSONAL PAYMENT SERVICES
(A DIVISION OF ADVANTA CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, DECEMBER 31, 1996, 1995 AND 1994
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
Advanta Corp. conducts its consumer credit card business through a division,
Advanta Personal Payment Services (the "Division"). The activities of the
Division have been conducted to date by various entities that are wholly owned
subsidiaries of Advanta Corp. These entities include Advanta National Bank USA,
Advanta National Bank, Advanta Service Corp., Colorado Credit Card Service, LLC,
Advanta National Corp., Advanta UK, Advanta Life Insurance Company, and Advanta
Insurance Company. All of the activities of Advanta UK and Colorado Credit Card
Service, LLC are part of the Division. However, the Division represents only a
portion of the activities, operations, and assets of Advanta Corp., Advanta
National Bank USA, Advanta National Bank, Advanta Service Corp., Advanta
National Corp., Advanta Life Insurance Company, and Advanta Insurance Company.
The Division had no separate legal status or existence through September 30,
1997, and operates as a division of Advanta Corp. The Division operates, in
part, through Advanta National Bank (Advanta National), formerly Advanta
National Bank USA and Advanta National Bank (ANB), which merged into Advanta
National on June 30, 1997. Operating as a national bank, Advanta National
generally has the legal authority to market its products in all geographic
regions across to country with uniform rates and fees. Absent this affiliation,
the Division would not have these rights and powers. To obtain similar rights
and powers, the Division would have to become licensed to operate in all
geographic regions or avail itself of a relationship with another bank. As a
result, the operating results would likely differ from the results presented in
the accompanying combined financial statements.
The combined financial statements include all of the accounts of Advanta UK and
Colorado Credit Card Service, LLC, and only the accounts of Advanta Corp.,
Advanta National , ANB, Advanta Service Corp., Advanta National Corp., Advanta
Life Insurance Company and Advanta Insurance Company that relate to the consumer
credit card activities of Advanta Corp. The combined financial statements
reflect the necessary adjustments to eliminate intercompany items, transactions
and profits. The combined financial statements also reflect key assumptions
regarding the allocation of certain expense items and balance sheet accounts,
certain of which are material to the financial statements. The combined
financial statements exclude allocations of corporate expenses for Board of
Directors and executive management oversight, legal, certain human resources
services, treasury and financial management and reporting support. Accordingly,
the combined historical financial statements of the Division
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<PAGE> 79
would not necessarily be indicative of the conditions that would have existed if
the Division had operated as an independent entity.
Nature of Operations
The Division issues consumer credit cards primarily through two wholly owned
subsidiaries of Advanta Corp., Advanta National and ANB. Substantially all of
the Division's credit card processing is performed by a single outside third
party processor. Managed credit card receivables at September 30, 1997 and
December 31, 1996 totaled $10.5 billion and $12.7 billion, respectively. The
Division also offers credit insurance and other related products to its credit
card customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the combined financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Statements
In the opinion of management, the financial statements as of September 30, 1997
and for the nine month periods ended September 30, 1997 and 1996 include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for those
interim periods and exclude certain corporate expenses as described in Note 10.
The results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
Credit Card Origination Costs
The Division accounts for credit card origination costs under Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases" ("SFAS 91"). This accounting standard requires certain loan origination
fees and costs to be deferred and amortized over the life of a loan. Origination
costs are defined under this standard to include costs of loan origination
associated with transactions with independent third parties and certain costs
relating to underwriting activities and preparing and processing loan documents.
The Division engages third parties to solicit and originate credit card account
relationships. Amounts deferred under these arrangements approximated $39.0
million for the first nine months of 1997, compared to $43.9 million for the
same period of 1996 and $54.6 million, $71.9 million, and $55.2 million for the
years ended December 31, 1996, 1995, and 1994, respectively.
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<PAGE> 80
The Division amortizes deferred credit card origination costs following the
consensus reached at the May 20, 1993 meeting of the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board ("FASB") regarding the
acquisition of individual credit card accounts from independent third parties
(EITF Issue 93-1). Under this consensus amounts paid to third parties are
deferred and amortized on a straight-line basis over one year. Costs incurred
for originations which were initiated prior to May 20, 1993 continue to be
amortized over a 60 month period as was the practice prior to the EITF Issue
93-1 consensus.
Credit Card Securitization Income
The Division adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125"), effective January 1, 1997. Under SFAS 125, a
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
SFAS 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer. The adoption of SFAS 125 did not have a material effect on the
Division's financial statements.
Prior to January 1, 1997 the Division recorded excess servicing income on credit
card securitizations representing additional cash flow from the receivables
initially sold based on estimates of the repayment term, including prepayments.
As the estimates used to record excess servicing income were influenced by
factors outside the Division's control, there was uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. Excess servicing income recorded at the time of each transaction was
substantially offset by the establishment of recourse reserves for anticipated
charge-offs. During the "revolving period" of each trust, income was recorded
based on additional cash flows from the new receivables which were sold to the
trusts on a continual basis to replenish the investors' interest in trust
receivables which had been repaid by the credit cardholders. Credit card
securitization activities were affected by the adoption in the third quarter of
1996 of a new charge-off methodology relating to bankruptcies (see Credit Losses
below), the upward repricing of interest rates and fees, increases in
charge-offs and the related impact on reserves, all of which had an approximate
$50 million impact (earnings increase) in 1996, as well as a 57% increase in
average securitized receivables.
Under SFAS 125, the Division records a gain on the securitization of credit card
receivables sold based on the estimated fair value of assets obtained and
liabilities incurred in the sale. The gain recognized at the time of the sale,
which principally represents the estimated fair value of the retained
interest-only strip, is substantially offset by the estimated fair value of the
Division's recourse obligation for anticipated
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<PAGE> 81
charge-offs. As these estimates are influenced by factors outside the Division's
control, there is uncertainty inherent in these estimates, making it reasonably
possible that they could change in the near term. During the "revolving period"
of each trust, securitization income is recorded representing gains on the sale
of new receivables which are sold to the trusts on a continuous basis to
replenish the investors' interest in trust receivables which have been repaid by
the credit cardholders.
Interest Income
The Division recognizes interest income using a method which approximates the
level yield method. Credit card receivables, except those on bankrupt, decedent
and fraudulent accounts, continue to accrue interest until the time they
charge-off at 186 days contractually delinquent.
Loan Receivables Available for Sale
Loan receivables available for sale represent receivables that the Division
generally intends to sell or securitize within the next six months. These assets
are reported at the lower of aggregate cost or fair market value.
Derivative Financial Instruments
Advanta Corp. uses various derivative financial instruments ("derivatives") such
as interest rate swaps and caps, forward contracts, options on securities, and
financial futures as part of its risk management strategy to reduce interest
rate and foreign currency exposures, and where appropriate, to synthetically
lower its cost of funds. Derivatives are classified as hedges or synthetic
alterations of specific on-balance sheet items, off-balance sheet items or
anticipated transactions.
Advanta Corp. has conducted hedging activities on behalf of the Division. The
results of these activities are reflected in interest expense and non-interest
revenues in the results of operations for the periods presented.
Insurance
Reinsurance premiums, net of commissions on credit life, disability and
unemployment policies on credit cards, are earned monthly based upon the
outstanding balance of the underlying receivables. Reinsurance premiums are
earned ratably over the period of insurance coverage provided. The cost of
acquiring new reinsurance is deferred and amortized in order to match the
expense with the anticipated revenue.
Credit Losses
The Division's charge-off policy is to charge-off a receivable, if not paid, at
186 days contractual delinquency. Accounts suspected of being fraudulent are
written off after a 90-day investigation period, unless the investigation shows
no evidence of fraud.
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<PAGE> 82
In the third quarter of 1996, the Division adopted a new charge-off methodology
related to bankrupt credit card accounts, providing for up to a 90-day (rather
than up to a 30-day) investigative period following notification of the
bankruptcy petition, prior to charge-off. This new methodology is consistent
with others in the credit card industry.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets, which range from three to five years.
Leasehold improvements are amortized over the remaining term of the related
lease. Repairs and maintenance are charged to expense as incurred.
Joint Venture
In 1995, the Division formed a joint venture with The Royal Bank of Scotland,
RBS Advanta, to market, issue and service bankcards in the United Kingdom. The
Division owns 49% of the RBS Advanta joint venture, the investment in which is
accounted for under the equity method.
Income Taxes
The Division accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 utilizes the liability method, and deferred taxes are
determined based on the estimated future tax effects of differences between the
financial statement and tax basis of assets and liabilities given the provisions
of the enacted tax laws.
Cash Flow Reporting
Interest and taxes are considered to be settled when charged to the intercompany
accounts. All interest and taxes were paid by Advanta Corp. or affiliates of the
Division. For purposes of these combined financial statements, cash paid for
interest expense was approximately $83.7 million and $128.4 million for the nine
months ended September 30, 1997 and 1996, respectively, and $163.2 million,
$103.2 million and $65.0 million for the years ended December 31, 1996, 1995 and
1994, respectively. Cash paid for taxes during these periods was approximately
$36.8 million, $77.5 million, $101.2 million, $81.2 million, and $ 72.4 million,
respectively.
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<PAGE> 83
3. RECEIVABLES AVAILABLE FOR SALE, NET
Loan receivables consisted of the following:
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------------
($ in thousands) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Gross credit card loans (A) $ 1,651,977 $ 2,045,219 $ 2,291,828
Add: Deferred origination costs, net of
Deferred fees 72,072 34,952 61,221
Less: Reserve for credit losses (110,084) (76,084) (35,690)
----------- ----------- -----------
Net loan receivables $ 1,613,965 $ 2,004,087 $ 2,317,359
=========== =========== ===========
</TABLE>
(A) Includes receivables available for sale of approximately $1.1 billion
and $777 million in 1996 and 1995, respectively.
Receivables serviced for others were $8.9 billion, $10.6 billion and $7.7
billion at September 30, 1997 and December 31, 1996 and 1995, respectively.
The geographic concentration of managed receivables was as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 1995
----------------------- -----------------------
($ in millions) Receivables % Receivables %
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
California $ 1,943.8 15.3% $ 1,585.4 15.9%
New York 1,008.9 8.0 763.7 7.6
Texas 906.9 7.1 651.8 6.5
Florida 763.3 6.0 578.8 5.8
Illinois 520.3 4.1 435.5 4.4
All other 7,548.2 59.5 5,969.0 59.8
--------- ----- --------- -----
Total managed receivables $12,691.4 100.0% $ 9,984.2 100.0%
========= ===== ========= =====
</TABLE>
In the normal course of business, the Division makes commitments to extend
credit to its credit card customers. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any conditions
established in the contract. The Division does not require collateral to support
its financial commitment. At December 31, 1996 and 1995, the Division had $40.3
billion and $33.2 billion, respectively, of commitments to extend credit
outstanding for which there is potential credit risk. The Division believes that
its customers' utilization of these lines of credit will continue to be
substantially less than the amount of the commitments, as has been the
Division's experience to date. At December 31, 1996 and 1995, outstanding
managed consumer credit card receivables represented 32% and 30%, respectively,
of outstanding commitments.
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<PAGE> 84
4. CREDIT CARD SECURITIZATIONS
The Division had securitized credit card receivables outstanding of $10.6
billion at December 31, 1996. In each securitization transaction, credit card
receivables were transferred to a trust, which issued certificates representing
ownership interests in the trust primarily to institutional investors. The
Division retained a participation interest in each trust, reflecting the excess
of the total amount of receivables transferred to the trusts over the portion
represented by certificates sold to investors. The retained participation
interests in the credit card trusts were $900 million and $1.5 billion at
December 31, 1996 and 1995, respectively. Although the Division continues to
service the underlying credit card accounts and maintain the customer
relationships, these transactions are treated as sales for financial reporting
purposes to the extent of the investors' interests in the trusts. Accordingly,
the associated receivables are not reflected on the balance sheet.
The Division is subject to certain recourse provisions in connection with these
securitizations. At December 31, 1996 and 1995, the Division had reserves of
$334.6 million and $167.4 million, respectively, related to these recourse
provisions. These reserves are netted against the amounts due from credit card
securitizations.
At September 30, 1997 the Division had $286.7 million of amounts due from credit
card securitizations. This amount includes the balance of the retained
interest-only strip, accrued interest receivable and other amounts related to
these securitizations and is net of recourse reserves established. A portion of
this amount is subject to liens held by the providers of credit enhancement
facilities for the respective securitizations.
At December 31, 1996, the Division had amounts receivable from credit card
securitizations, including related interest-bearing deposits, of $733.3 million,
$333.9 million of which constitutes amounts which are subject to liens by the
providers of the credit enhancement facilities for the individual
securitizations and is inclusive of amounts awaiting distributions to investors.
At December 31, 1995, the amounts receivable were $453.2 million and amounts
subject to lien (inclusive of amounts due to investors) were $262.4 million.
As indicated above in Note 2, recourse reserves are established at the time of
the securitization transactions based on anticipated future cash flows,
prepayment rates and charge-offs. As these estimates are influenced by factors
outside the Division's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term.
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<PAGE> 85
5. RESERVE FOR CREDIT LOSSES
The activity in the reserve for credit losses is summarized as follows:
<TABLE>
<CAPTION>
Nine months
ended Year ended December 31,
September 30, -----------------------------------------------------------------
($ in thousands) 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of period $ 76,084 $ 35,690 $ 26,825 $ 25,325 $ 35,743 $ 31,193
Provision for
credit losses 141,231 104,128 41,661 24,295 13,127 41,932
Loans charged-off (122,281) (72,679) (38,744) (28,753) (33,727) (46,477)
Recoveries 15,050 8,945 5,948 5,958 10,182 9,095
--------- --------- -------- -------- -------- --------
Balance, end of period $ 110,084 $ 76,084 $ 35,690 $ 26,825 $ 25,325 $ 35,743
========= ========= ======== ======== ======== ========
</TABLE>
6. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended December 31,
September 30, ------------------------------------
($ in thousands) 1997 1996 1995 1994
------------- --------- -------- -------
<S> <C> <C> <C> <C>
Current Taxes:
Federal $ 36,877 $ 107,768 $ 72,797 $59,835
State
2,769 5,957 5,014 4,748
-------- --------- -------- -------
Total current taxes 39,646 113,725 77,811 64,583
-------- --------- -------- -------
Deferred Taxes:
Federal
(2,861) (12,390) 3,421 7,731
State 6 (137) (8) 51
-------- --------- -------- -------
Total deferred taxes (2,855) (12,527) 3,413 7,782
-------- --------- -------- -------
Total $ 36,791 $ 101,198 $ 81,224 $72,365
======== ========= ======== =======
</TABLE>
The difference between the total income tax provision expected, using a
statutory rate of 35% in 1996, 1995 and 1994, and the actual effective tax rates
of 36.3%, 36.5% and 36.6% for 1996, 1995 and 1994, respectively, is due to state
income taxes, net of the federal income tax benefit.
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<PAGE> 86
Deferred taxes are determined based on the estimated future tax effect of the
differences between the financial statement and tax basis of assets and
liabilities given the provisions of the enacted tax laws. The net deferred tax
liability is comprised of the following at September 30, 1997 and December 31,
1996 and 1995:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------
($ in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred taxes:
Gross assets $ 38,712 $ 26,812 $ 12,921
Gross liabilities (62,681) (53,685) (52,136)
-------- -------- --------
Net deferred tax liability $(23,969) $(26,873) $(39,215)
======== ======== ========
</TABLE>
The tax effect of significant temporary differences representing deferred tax
assets and liabilities is as follows at September 30, 1997 and December 31, 1996
and 1995:
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------
($ in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred acquisition costs $(34,820) $(25,506) $(28,530)
Credit card losses 38,529 26,629 12,492
Securitization income (27,628) (27,852) (23,442)
Other (50) (144) 265
-------- -------- --------
Net deferred tax liability $(23,969) $(26,873) $(39,215)
======== ======== ========
</TABLE>
The Division is included in the consolidated federal tax return filed by Advanta
Corp. and is liable to Advanta Corp., on demand, for its relative share of the
consolidated federal income tax liability. The combined financial statements of
the Division have been prepared by applying the provisions of SFAS No. 109 as if
the Division were a separate taxpayer. The current tax liability is reflected in
payable to Advanta Corp. and affiliates, net. This liability is considered to be
settled upon initial payment to Advanta Corp. or filing of the consolidated tax
return.
7. COMMITMENTS AND CONTINGENCIES
The Division is obligated under non-cancelable operating leases for property and
equipment expiring at various dates. The following represents the future minimum
lease payments for all non-cancelable operating leases:
<TABLE>
<CAPTION>
($ in thousands)
Year ended December 31,
<S> <C>
1997 $1,934
1998 1,433
1999 1,388
2000 1,388
2001 1,388
Thereafter 6,710
</TABLE>
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<PAGE> 87
8. CREDIT CARD SALES
In June 1996, the Division sold certain credit card customer relationships and
the related receivables balance to a domestic bank. The receivables associated
with these relationships represented less than 2% of the Division's managed
credit card portfolio as of June 30, 1996. The Division recorded a $33.8 million
net gain related to this transaction.
In April 1994, the Division reached an agreement with Nations Bank of Delaware,
N.A., to sell certain credit card customer relationships which at that time
represented approximately $150 million of securitized credit card receivables.
In the second quarter of 1994, the Division recorded an $18.4 million pretax
gain on the sale related to the value associated with the customer
relationships. In addition, the Division deferred a portion of the proceeds
related to the excess spread of the receivables to be generated over the
remaining life of the securitization trust, which terminated in the second
quarter of 1995. These proceeds were recognized as securitization income over
the related period.
9. BENEFIT PLANS
Advanta Corp. provides certain employee benefits including medical, dental and
life insurance to employees of the Division. The Division incurred expenses of
$4.8 million, $3.2 million and $2.5 million in 1996, 1995 and 1994,
respectively, for those benefits. The Division's employees are also eligible to
participate in certain retirement and deferred compensation plans sponsored by
Advanta
Corp.
The Division's employees are eligible to participate in the tax-deferred
Employee Savings Plan (the "Plan") of Advanta Corp. The Plan provides employees
with savings and investment opportunities, including the ability to invest in
the Class B common stock of Advanta Corp. The Plan provides for discretionary
contributions by Advanta Corp. equal to a portion of the first 5% of
participating employees' compensation contributed to the Plan. The Division's
share of these contributions was approximately $1.3 million, $1 million and
$741,000 in 1996, 1995 and 1994, respectively. Certain employees of the Division
are also eligible to participate in the Employee Stock Purchase Plan ("ESPP") of
Advanta Corp. The ESPP allows employees of the Division to purchase the Class B
common stock of Advanta Corp. at a 15% discount from the market price without
paying brokerage fees. The Division reports this 15% discount as compensation
expense, and incurred $83,000, $44,000 and $20,000 in 1996, 1995 and 1994,
respectively.
Certain employees of the Division are eligible to participate in Advanta Corp.'s
management incentive plans (AMIPWISE II, III and IV). Under these plans,
eligible employees of the Division were given the opportunity to elect to take
portions of their anticipated or "target" bonus payments for future years in the
form of restricted shares of common stock. To the extent that such elections
were made or taken, restricted shares were issued to employees, with the number
of shares granted to employees
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<PAGE> 88
determined by dividing the amount of future bonus payments the employee had
elected to receive in stock by the market price as determined under the
incentive plans. The restricted shares are subject to forfeiture should the
employee terminate employment with Advanta Corp. prior to vesting. Restricted
shares vest ten years from the date of grant, but with respect to the restricted
shares issued under each plan, vesting was and will be accelerated annually with
respect to one-third of the shares, to the extent that the employee and Advanta
Corp. met or meet their respective performance goals for a given plan
performance year.
In 1996, 1995 and 1994 the Division's share of expenses under AMIPWISE II, III
and IV was $2.8 million, $1.3 million and $985,000, respectively.
Certain employees of the Division are eligible to participate in the Advanta
Stock Option Plan ("Option Plan"). Under the Option Plan, employees are eligible
to purchase the Class A or Class B common stock of Advanta Corp. Generally,
option prices are the fair market value of the common stock at the date of
grant. Options are generally vested over a four-year period and expire after ten
years.
Certain qualified executives of the Division are eligible to participate in
Advanta Corp.'s elective, non-qualified deferred compensation plan, which allow
them to defer a portion of their cash compensation on a pre-tax basis. The plan
contains provisions related to minimum contribution levels and deferral periods
with respect to any individual's participation. The plan participant makes
irrevocable elections at the date of deferral as to deferral period and date of
distribution. Interest is credited to the participant's account at the rate of
125% of the 10 Year Rolling Average Interest Rate on 10-Year U.S. Treasury
Notes. Distribution from the plan may be either at retirement or at an earlier
date, and can be either in a lump sum or in installment payments.
10. RELATED-PARTY TRANSACTIONS
The balance of payable to Advanta Corp. and affiliates results from
inter-Division transactions and is due on demand.
The Division occupies space in several of Advanta Corp.'s facilities and is
charged a portion of the related rent expense. This expense includes charges
allocated for facility maintenance and services, and was $3.2 million, $1.7
million and $1.5 million for 1996, 1995 and 1994, respectively.
Advanta Corp. and its various subsidiaries have provided financial and
operational support to the Division. Direct expenses and certain indirect
administrative expenses that Advanta Corp. incurred on behalf of the Division
have been allocated to the Division using various allocation measures (i.e.,
headcount, estimated usage, production, etc.). The determination of the expenses
to be allocated is based first on identifying specific expenses that are
directly attributable to the Division. Interest expense has been allocated to
the Division to reflect the historical rates that Advanta Corp. paid to obtain
financing sources for the Division. The financial results of hedging
transactions and the related transaction costs for the transactions that Advanta
Corp.
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conducted for the Division have been allocated to the Division. (See Note 2.)
Second, the indirect expenses for general and administrative expenses are
estimated using the applicable measurement base. Indirect expenses that are
subject to allocation include charges for services such as information
technology, facilities, and general facility support services. The combined
financial statements exclude allocations of corporate expenses for Board of
Directors and executive management oversight, legal, certain human resources
services, treasury and financial management and reporting support.
Management of the Division believes that the method of allocation and the
resulting expenses are reasonable. Since the Division did not operate as a
separate legal entity for any of the periods presented, the allocations do not
necessarily represent expenses that would have been incurred directly if the
Division had operated on a stand-alone basis historically.
As indicated in Note 9, employees of the Division participate in certain benefit
plans offered by Advanta Corp. Further, as indicated in Note 6, the Division is
included in the consolidated federal tax return filed by Advanta Corp.
11. SELECTED INCOME STATEMENT INFORMATION
OTHER NON-INTEREST REVENUES
<TABLE>
<CAPTION>
For the nine months
ended September 30, For the year ended December 31,
($ in thousands) ----------------------- --------------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Credit card securitization income $130,486 $183,084 $258,066 $183,360 $149,043
Credit card servicing income 136,152 128,977 176,567 117,369 68,960
Credit card interchange income 63,222 75,431 102,804 91,685 71,710
Insurance revenues, net 37,031 32,961 45,082 28,130 12,152
Other 38,856 15,557 22,481 13,421 15,628
-------- -------- -------- -------- --------
Total other non-interest revenues $405,747 $436,010 $605,000 $433,965 $317,493
======== ======== ======== ======== ========
</TABLE>
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OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
For the nine months
ended September 30, For the year ended December 31,
($ in thousands) ----------------------- --------------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 65,451 $ 49,932 $ 71,050 $ 43,415 $ 37,129
External processing 24,160 28,771 39,689 27,498 21,217
Postage 17,755 16,173 21,927 16,688 13,260
Credit card fraud losses 17,372 16,759 23,176 19,911 16,550
Advertising 15,150 12,525 15,192 15,287 17,239
Professional fees 10,298 8,860 13,979 8,739 6,630
Telephone 10,153 9,905 11,685 9,110 7,293
Collections 8,492 5,871 8,401 5,775 4,376
Other expenses 44,538 25,443 37,175 20,588 8,913
-------- -------- -------- -------- --------
Total other operating expenses $213,369 $174,239 $242,274 $167,011 $132,607
======== ======== ======== ======== ========
</TABLE>
12. SELECTED BALANCE SHEET INFORMATION
OTHER LIABILITIES
Other liabilities consist of the following as of September 30, 1997 and December
31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------
($ in thousands) 1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Accounts payable and accrued expenses $13,502 $11,740 $ 12,424
Credit card checks 8,455 15,726 82,478
Unearned insurance premiums 19,131 15,893 9,678
Deferred state and federal income taxes 23,969 26,873 39,215
------- ------- --------
Total $65,057 $70,232 $143,795
======= ======= ========
</TABLE>
OTHER ASSETS
Other assets consist of the following as of September 30, 1997 and December 31,
1996 and 1995:
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------
($ in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Accrued interest receivable $ 72,530 $ 81,253 $ 57,226
Prepaid assets 64,787 31,618 25,090
Other receivables 6,460 3,342 2,629
Payments in process 23,753 28,897 31,145
Goodwill 478 510 551
Deferred costs 44,365 37,923 20,292
Investment in and advances to joint venture 39,256 17,925 730
Other 8,711 10,241 7,898
-------- -------- --------
Total $260,340 $211,709 $145,561
======== ======== ========
</TABLE>
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13. DIVISION CAPITAL
The Division conducts the consumer credit card business of Advanta Corp. Certain
legal entities and discrete portions of other legal entities combine to conduct
these operations. The legal entities are each direct or indirect wholly owned
subsidiaries of Advanta Corp. The entities comprising the Division are described
below:
<TABLE>
<CAPTION>
Entity Relationship to the Division Relationship to Advanta Corp.
- ----------------- ------------------------------------------ -----------------------------------------------
<S> <C> <C>
Advanta National Separate legal entity; however, 100% owned and direct subsidiary of
Corp. only specific consumer credit card related Advanta Corp.
accounts are part of the Division.
Advanta National Separate legal entity; however, Renamed Advanta National Bank
Bank USA only specific consumer credit card related effective July 1, 1997, and is 100% owned and
accounts are part of the Division. direct subsidiary of Advanta National Corp.
Advanta National Separate legal entity; however, Effective July 1, 1997, this entity
Bank only specific consumer credit card related was merged into Advanta National Bank USA. This
accounts are part of the Division. entity was a 100% owned and direct subsidiary of
Advanta Corp.
Advanta UK Separate legal entity 50% owned by Advanta International I
and 50% owned by Advanta International II, which
are 100% owned and direct subsidiaries of
Advanta Corp.
Colorado Credit Separate legal entity 50% owned by Service Partners I Corp.
Card Service, LLC and 50% owned by Service Partners II Corp.,
which are 100% owned and direct subsidiaries of
Advanta Corp.
Advanta Service Separate legal entity; however, 100% owned and direct subsidiary of
Corp. only specific consumer credit card related Advanta Corp.
accounts are part of the Division.
Advanta Life Separate legal entity; however, 100% owned and direct subsidiary of
Insurance Co. only specific consumer credit card related Advanta Corp.
accounts are part of the Division.
Advanta Separate legal entity; however, 100% owned and direct subsidiary of
Insurance Co. only specific consumer credit card related Advanta Life Insurance Co.
accounts are part of the Division.
Advanta Corp. Separate legal entity; however, Not applicable.
only specific consumer credit card related
accounts are part of the Division.
</TABLE>
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The accompanying combined financial statements reflect the assets, liabilities,
revenues and expenses of the consumer credit card operations of the entities
previously described. Division capital for each of the periods presented
represents approximately 78% of the total equity of Advanta Corp. Management has
treated changes to the Division's capital other than net income as a dividend to
or contribution by Advanta Corp., and has reflected this change in Payable to
Advanta Corp. and affiliates. The changes in the Division's capital other than
net income represent the net change in the amount that Advanta Corp. has
directly or indirectly invested in the net assets of the operations of the
Division.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Division's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Carrying Fair Carrying Fair
($ in thousands) Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 166,982 $ 166,982 $ 50,383 $ 50,383
Interest-bearing deposits 333,923 333,923 262,392 262,392
Loans, net of reserve for credit losses 2,004,087 2,011,551 2,317,359 2,376,266
Amounts due from securitizations 399,359 399,359 190,819 190,819
Financial Liabilities:
Due to Advanta Corp. and affiliates 2,449,808 2,449,808 2,325,225 2,325,225
</TABLE>
The above values do not necessarily reflect the premium or discount that could
result from offering for sale at one time the Division's entire holdings of a
particular instrument. In addition, these values, derived from the methods and
assumptions described below, do not consider the potential income taxes or other
expenses that would be incurred on an actual sale of an asset or settlement of a
liability. With respect to the fair value of liabilities, the above table is
prepared on the basis that the amounts necessary to discharge such liabilities
represent fair value.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
- CASH AND RESTRICTED INTEREST BEARING DEPOSITS: The carrying
value of these items is a reasonable estimate of the fair
value.
- LOANS, NET OF RESERVE FOR CREDIT LOSSES: The fair value is
estimated using quoted market prices for securities backed by
similar loans, adjusted for differences in
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loan characteristics.
- AMOUNTS DUE FROM SECURITIZATIONS: The fair value of the excess
servicing rights component of amounts due from securitizations
is estimated by discounting the future cash flows at rates
which management believes to be reasonable. However, because
there is no active market for these financial instruments,
management has no basis to determine whether the fair values
presented would be indicative of those negotiated in an actual
sale. The future cash flows used to estimate the fair values
of these financial instruments are adjusted for prepayments,
net of anticipated charge-offs under recourse provisions, and
allow for the value of servicing. For the other components of
amounts due from credit card securitizations, the carrying
amount is a reasonable estimate of the fair value.
- PAYABLE TO ADVANTA CORP. AND AFFILIATES: As amounts are due on
demand, the carrying value of this item is a reasonable
estimate of the fair value.
The fair value estimates made at December 31, 1996 and 1995, were based upon
pertinent market data and relevant information related to the financial
instruments at that time. Because no market exists for a portion of the
financial instruments, fair value estimates may be based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
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PRELIMINARY COPY
INFORMATION CONCERNING ADVANTA
Advanta is a Delaware corporation. Advanta is a financial
services company which serves consumers and small businesses through innovative
products and services primarily via direct, cost-effective delivery systems.
Advanta originates and services credit cards and mortgages and provides
small-ticket equipment, leasing, auto finance, credit insurance and deposit
products. The principal executive offices of Advanta are located at Welsh and
McKean Roads, Spring House, Pennsylvania 19477.
INFORMATION CONCERNING THE LLC
The LLC will be organized as a Rhode Island limited liability
company to acquire Advanta's and Fleet's consumer credit card businesses and
will have conducted no activities unrelated to such purpose since its
organization. The principal executive offices of the LLC will be located at 50
Kennedy Plaza, Providence, Rhode Island 02903.
REGULATORY AND OTHER APPROVALS
For bank regulatory purposes, the LLC will be treated as an
operating subsidiary of Fleet National Bank. The LLC will only engage in
activities that are permissible for a subsidiary of a national bank. Both
Fleet's and Advanta's investment in the LLC will be permissible investments for
a national bank and would comply with the rules and regulations of the Office of
the Comptroller of the Currency (the "OCC").
Advanta's investment in the LLC will require approval from the
OCC. Fleet's investment in the LLC will require the filing of a Bank Merger Act
application with the OCC for approval to acquire liabilities, including insured
deposits, from Advanta and Advanta National Bank through the LLC. In addition,
(a) Fleet will file a notice with the OCC that Fleet's investment in the LLC is
a permissible investment for Fleet without the OCC's prior approval and (b) a
notice will be provided to the Federal Deposit Insurance Corporation in
connection with the transfer of Advanta National Bank's insured deposits to
Fleet National Bank.
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PRELIMINARY COPY
Consummation of the Transaction will be subject to the
expiration or termination of waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, if applicable.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Advanta's independent public accountants are Arthur Andersen
LLP. A representative of Arthur Andersen LLP is expected to be present at the
Special Meeting and will have the opportunity to make a statement if he or she
desires to do so and will be available to respond to appropriate questions of
stockholders.
AVAILABLE INFORMATION
Advanta is subject to the informational filing requirements of
the Exchange Act, and, in accordance therewith, has filed periodic reports,
proxy statements and other information with the Commission relating to its
business, financial condition and other matters. Such reports, proxy statements
and other information may be inspected and copied at the Commission's public
reference facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and also should be available for inspection and copying
at the regional offices of the Commission located in the Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade
Center, 13th Floor, New York, New York 10048. The Commission maintains a Web
site at http://www.sec.gov that contains reports, proxy statements and other
information regarding Advanta. Copies of such materials may be obtained upon
payment of the Commission's customary fees by writing to its principal office at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. Such
material should also be available for inspection at the library of Nasdaq at
1735 K Street, N.W., Washington, D.C. 20006.
THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS THAT
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS (OTHER
THAN EXHIBITS THERETO WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE
HEREIN) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL
OWNER OF SHARES OF ADVANTA CLASS A COMMON STOCK OR CLASS B COMMON STOCK OR
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<PAGE> 96
PRELIMINARY COPY
CLASS A PREFERRED STOCK OR CLASS B PREFERRED STOCK (SAILS) DEPOSITARY SHARES TO
WHOM THIS PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO ADVANTA
CORP., WELSH AND MCKEAN ROADS, SPRING HOUSE, PENNSYLVANIA, ATTENTION: ELIZABETH
MAI, SECRETARY, TELEPHONE NUMBER (215) 444-5000. IN ORDER TO ENSURE DELIVERY OF
DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY REQUEST THEREFOR SHOULD BE MADE NOT
LATER THAN __________, 1997.
INCORPORATION BY REFERENCE
The following documents, which have been filed with
the Commission by Advanta pursuant to the Exchange Act, are incorporated by
reference into this Proxy Statement:
(1) Advanta's Annual Report on Form 10-K for the
year ended December 31, 1996;
(2) Advanta's Quarterly Reports on Form 10-Q for
the fiscal quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997; and
(3) Advanta's Current Reports on Form 8-K dated
March 17, 1997, April 16, 1997, July 14,
1997, July 16, 1997, July 28, 1997, August
7, 1997, September 26, 1997, October 15,
1997 and October 28, 1997.
All documents filed by Advanta with the Commission
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date hereof and prior to the Effective Date shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of filing
such documents.
All statements contained in a document incorporated
by reference herein shall be deemed to be modified or superseded for purposes
hereof to the extent that a statement contained herein (or in any other
subsequently filed document which also is incorporated by reference herein)
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed to constitute a part hereof except as so modified or
superseded.
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PRELIMINARY COPY
STOCKHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
OF ADVANTA STOCKHOLDERS
Proposals of stockholders intended to be presented at
the Annual Meeting of Stockholders in 1998 must have been received by December
12, 1997 in order to be considered for inclusion in the proxy materials for such
meeting.
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ANNEX I
CONTRIBUTION AGREEMENT
Agreement dated as of October 28, 1997 by and among Advanta
Corp., a Delaware corporation (the "Company") and Fleet Financial Group, Inc., a
Rhode Island corporation ("Fleet").
WHEREAS, the Boards of Directors of the parties hereto deem it
advisable that they and certain of their Affiliates contribute and transfer
certain assets and liabilities to a newly created limited liability company (the
"LLC") on the terms hereinafter stated.
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements hereinafter
contained, and intending to be legally bound hereby, the parties hereto hereby
agree as follows:
ARTICLE I. THE CONTRIBUTION.
SECTION 1.01 The Contribution.
(a) Upon the terms and subject to the conditions hereof, and
in consideration of the issuance of the membership interests to the Company and
Fleet (or Subsidiaries of either of them), pursuant to a Limited Liability
Company Agreement in substantially the form attached hereto as Exhibit A, at the
Closing hereunder the Company shall, and shall cause each of the Company
Contributors to, contribute and transfer to the LLC, and Fleet and the Company
shall cause the LLC to accept and assume, the assets and liabilities of the
Company and the Company Contributors set forth on Schedules 1 and 2 hereto,
respectively, and Fleet shall, and shall cause each of the Fleet Contributors
to, contribute and transfer to the LLC, and Fleet and the Company shall cause
the LLC to accept and assume, the assets and liabilities set forth on Schedules
3 and 4 hereto, respectively (all such contributions and transfers are
collectively referred to herein as the "Contribution").
(b) The assets and liabilities contributed and transferred by
the Company and the Company Contributors to the LLC (including, without
limitation, the Ordinary Course of Business Liabilities) are referred to herein
collectively as the "Company Contributed Assets" and the "Company Transferred
Liabilities", respectively. The assets and liabilities contributed and
transferred by Fleet and the Fleet Contributors to the LLC are referred to
herein collectively as the "Fleet Contributed Assets" and the "Fleet Transferred
Liabilities", respectively. The contracts listed on Schedule 1 hereto and those
entered into by the Company or any Company Contributor on or after the date
hereof and prior to the Closing Date in the ordinary course of business relating
to the Business are collectively referred to as the "Company Contributed
Contracts" and the contracts listed on Schedule 3 hereto and those entered into
by Fleet or any Fleet Contributor on or after the date hereof and prior to the
Closing Date in the ordinary course
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of business relating to the Fleet Business are collectively referred to as the
"Fleet Contributed Contracts."
(c) The parties hereto acknowledge that excluded from the
assets listed on Schedule 1 hereto are the assets listed on Schedule 4.13.
(d) Immediately prior to the Closing, Fleet shall cause the
LLC to enter into a Participation Agreement with Fleet Credit Card Bank (the
"CCB Participation Agreement") pursuant to which the LLC will receive all of the
economic benefit of, and retain all of the economic risk of, the assets set
forth on Schedules 1B and 3B hereto (the "CCB Assets") and the liabilities set
forth on Schedules 2B and 4B hereto (the "CCB Liabilities"). In connection
therewith, the LLC shall direct the Company and each of the Company Contributors
to transfer, at the Closing, the CCB Assets and the CCB Liabilities to Fleet
Credit Card Bank.
(e) Immediately prior to the Closing, Fleet shall cause the
LLC to enter into a Participation Agreement with Fleet National Bank (the "FNB
Participation Agreement") pursuant to which the LLC will receive all of the
economic benefit of, and retain all of the economic risk of, the assets set
forth on Schedules 1C and 3C hereto (the "FNB Assets") and the liabilities set
forth on Schedules 2C and 4C hereto (the "FNB Liabilities"). In connection
therewith, the LLC shall direct the Company and each of the Company Contributors
to transfer, at the Closing, the FNB Assets and the FNB Liabilities to Fleet
National Bank.
(f) The Company and Fleet acknowledge and agree that the LLC
shall remain fully liable for all of the liabilities (including the principal,
interest, fees and other charges related to each such liability) assumed by it
under this Agreement, and as between the LLC and Fleet Credit Card Bank with
respect to the CCB Liabilities and as between the LLC and Fleet National Bank
with respect to the FNB Liabilities, the LLC shall be the party which is the
ultimate obligor with respect to such liabilities and shall bear the economic
risk of loss with respect to such liabilities and shall hold Fleet Credit Card
Bank and Fleet National Bank harmless with respect to any Losses arising from
any such liabilities.
(g) Other than the Company Transferred Liabilities and the
Fleet Transferred Liabilities or as otherwise set forth in this Agreement, the
parties hereto agree that the LLC is not agreeing to, and shall not, assume any
other liability, obligation, undertaking, expense or agreement of any kind,
absolute or contingent, known or unknown, of the Company or any of the Company
Contributors or of Fleet or any of the Fleet Contributors (the "Non-Assumed
Liabilities"), and the execution, delivery and performance of this Agreement by
the parties hereto shall not render the LLC liable for any such liability,
obligation, undertaking, expense or agreement. Without limiting the generality
of the foregoing, the parties hereto agree that the LLC shall not assume or be
liable for, and shall not undertake to attempt to assume or discharge (except
with respect to the Company Transferred Liabilities and the Fleet Transferred
Liabilities): (i) any liability or obligation of the Company or any of the
Company Contributors or of Fleet or any of the Fleet Contributors arising out of
or relating to any contract or agreement not specifically assumed by the LLC
pursuant to Section 1.01(b) hereof; (ii) subject to Section
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6.17, any liability or obligation of the Company or any Company Contributor
relating to SmartMove Repricing of the Retained SmartMove Accounts; (iii) other
than as provided in Section 6.08 hereof, any liability or obligation of the
Company or any of the Company Contributors or of Fleet or any of the Fleet
Contributors arising out of or relating to any pension, retirement, employee
health or welfare or profit sharing plan or trust of the Company or any Company
Contributor; (iv) any liability or obligation of the Company or any of the
Company Contributors or Fleet or any of the Fleet Contributors arising out of or
relating to any oral or written employment agreement not included in the Company
Contributed Contracts or the Fleet Contributed Contracts or contemplated by this
Agreement; (v) any liability or obligation of the Company or any of the Company
Contributors or Fleet or any of the Fleet Contributors arising out of or
relating to any litigation, proceeding, or claim by any person relating to the
business or operation of, or otherwise relating to, the Company or any of the
Company Contributors or Fleet or any of the Fleet Contributors or the Company
Contributed Assets or the Fleet Contributed Assets before the Closing Date,
whether or not such litigation, proceeding or claim is pending, threatened or
asserted before, on or after the Closing Date; (vi) any liabilities or
obligations of the Company or any of the Company Contributors for any Taxes,
whether or not such Taxes become due before, on or after the Closing Date; and
(vii) any and all other liabilities, obligations, debts or commitments of any of
the Company or any of the Company Contributors or Fleet or any of the Fleet
Contributors whatsoever whether accrued now or hereafter, whether fixed or
contingent, whether known or unknown, or any claims asserted against the Company
Contributed Assets or the Fleet Contributed Assets or other items transferred to
the LLC by the Company Contributors or the Fleet Contributors relating to any
event (whether act or omission) prior to the Closing Date.
(h) Except as otherwise set forth in this Agreement, the
Company hereby acknowledges and agrees that, other than the CCB Liabilities,
Fleet Credit Card Bank shall not assume any other liability, obligation,
undertaking, expense or agreement of any other kind, whether absolute or
contingent, known or unknown, of the Company or any of the Company Contributors.
(i) Except as otherwise set forth in this Agreement, the
Company hereby acknowledges and agrees that, other than the FNB Liabilities,
Fleet National Bank shall not assume any other liability, obligation,
undertaking, expense or agreement of any other kind, whether absolute or
contingent, known or unknown, of the Company or any of the Company Contributors.
SECTION 1.02 Consummation of the Contribution. The
Contribution and the other transactions contemplated by this Agreement shall be
consummated and closing thereof (the "Closing") shall occur on (a) the last
Business Day of the calendar quarter in which the last of the conditions set
forth in Sections 8.01(a), 8.01(b), 8.02(c) and 8.03(f) hereof shall have been
satisfied or waived in accordance with the terms of this Agreement; provided,
however, that at Fleet's sole election, exercised by written notice thereof to
the Company at any time after the satisfaction or waiver of such conditions, the
Closing shall occur within ten(10) Business Days after delivery of such notice;
provided, further, however, that if Fleet so elects, after
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determination of a good faith estimate of the Managed Receivables and the Agreed
Deficit as of the proposed Closing Date and the last Business Day of the
preceding calendar quarter, Fleet shall have the right to withdraw the notice
referred to in the immediately preceding proviso promptly after determination of
such estimate and the Closing shall occur on the last Business Day of the
calendar quarter in which Fleet's original election notice was given, or (b)
such other date to which the parties may agree in writing. In no event may Fleet
give notice of a proposed mid quarter Closing Date more than once. The date on
which the Closing shall occur is referred to herein as the "Closing Date." The
exact date and time of closing of the transactions contemplated by this
Agreement shall be specified by the Company by notice to Fleet given at least
three Business Days prior thereto and the Closing shall be held at the offices
of Wolf, Block, Schorr and Solis-Cohen LLP, 111 South Fifteenth Street,
Philadelphia, Pennsylvania or such other place as the parties shall agree.
The parties acknowledge and agree that the foregoing
provisions are intended to provide that if Fleet elects to give notice that a
closing of the transactions contemplated by this Agreement shall occur at any
time other than at the end of a calendar quarter, and does not withdraw such
notice in accordance with the terms of this Agreement, then the calculation of
the Managed Receivables, the Agreed Deficit and the Gain Receivable shall be
made as of the Specified Date and shall be effective for all purposes of this
Agreement, including, without limitation, the Closing Balance Sheet.
SECTION 1.03 Deliveries at Closing. At the Closing,
(a) The Company or the Company Contributors, or any one or
more of them, as applicable, shall execute and deliver such conveyances, bills
of sale, deeds, assignments, assurances, certificates and other instruments as
Fleet may reasonably request in order to evidence the conveyance and transfer of
the Company Contributed Assets to the LLC, and, thereafter, the transfer of
title pursuant to the CCB Participation Agreement, the CCB Assets to Fleet
Credit Card Bank and pursuant to the FNB Participation Agreement, the FNB Assets
to Fleet National Bank.
(b) The Company and the Company Contributors or any one or
more of them, as applicable, shall cause to be delivered the items set forth in
Sections 8.01 and 8.03 hereto.
(c) The Company and the Company Contributors or any one or
more of them, as applicable, shall have delivered executed copies of the
Ancillary Agreements.
(d) Fleet shall cause to be executed and delivered such
instruments of assumption and such other instruments and documents as the
Company may reasonably request to evidence the assumption of (i) the Company
Contributed Liabilities by the LLC, (ii) the CCB Liabilities by Fleet Credit
Card Bank and (iii) the FNB Liabilities by Fleet National Bank.
(e) Fleet, the Fleet Contributors, the LLC, or any one or more
of them, as applicable, shall cause to be delivered the items set forth in
Sections 8.01 and 8.02 hereto.
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(f) Fleet, the Fleet Contributors, the LLC, or any one or more
of them, as applicable, shall have delivered executed copies of the Ancillary
Agreements.
SECTION 1.04 Certain Consents. Notwithstanding anything to the
contrary contained in this Agreement, nothing in this Agreement shall be
construed as an attempt to assign any Company Contributed Contract or Fleet
Contributed Contract or any other agreement, franchise, or claim which is part
of the Contribution which is by its terms or at law nonassignable without the
consent of the other party or parties thereto, unless such consent shall have
been given. In order, however, to provide the LLC, Fleet Credit Card Bank and
Fleet National Bank with the full realization and value of every Company
Contributed Contract or Fleet Contributed Contract and any other agreement,
franchise and claim which is part of the Contribution and the other transactions
contemplated by this Agreement, except as provided in Sections 6.10 and 11.09
hereof and except with respect to the Material Company Contributed Contracts,
each party hereto agrees that on and after the Closing, it will, at the request
of the LLC, and under the reasonable direction of LLC, in the name of the LLC or
otherwise as the LLC shall reasonably specify, take all reasonable action (i) to
attempt to assure that the rights of such party under such contracts,
agreements, franchises and claims shall be preserved for the benefit of the LLC
(or its assignee) and (ii) to facilitate receipt of the consideration payable to
such party in and under every such contract, agreement, franchise and claim,
which consideration shall be held for the benefit of, and shall be delivered to,
the LLC (or its assignee).
SECTION 1.05 Transfer of Company's Interest in RBS Advanta.
Fleet and the Company acknowledge and agree that the Company Contributed Assets
include the share capital (the "RBS Advanta Shares") of RBS Advanta (f/k/a
Roboscot (15)), an unlimited company organized under the Companies Act 1985,
registered in Scotland (No 157256) ("RBS Advanta"), which is held by Advanta UK,
an unlimited company organized under the Companies Act 1985, registered in
Scotland (No 158226) ("Advanta UK"). Pursuant to the Articles of Association of
RBS Advanta, the consent of the other member of RBS Advanta is required to
transfer the RBS Advanta Shares to the LLC and upon notice of the proposed
transfer, such member may exercise its right to purchase such RBS Advanta
Shares. Fleet and the Company hereby agree that the Company shall cause Advanta
UK to give the applicable notice to RBS Advanta promptly after the date of this
Agreement. If consent to the transfer of the RBS Advanta Shares is obtained
prior to the Closing Date, the RBS Advanta Shares shall be so transferred to the
LLC or such other person as the parties shall mutually agree at the Closing. If
such consent is obtained after the Closing Date, such RBS Advanta Shares will be
transferred promptly after receipt of the consent. In either event, the Closing
Balance Sheet shall reflect the value of such RBS Advanta Shares as a Company
Contributed Asset at the value for such RBS Advanta Shares on the Closing Date
calculated in accordance with Schedule 1.06(g). If the RBS Advanta Shares are
acquired by another person pursuant to the provisions of the Articles of
Association of RBS Advanta or if any other payment is made subsequent to the
Closing Date to Advanta UK in respect of the RBS Advanta Shares, the Company
will cause such amounts, net of applicable Taxes of the Company or its
Affiliates in respect thereof, if any, to be paid to the LLC promptly after
receipt thereof. If RBS Advanta gives notice to the Company or any of the
Company's Affiliates of a need for additional capital subsequent to the Closing
Date, the Company shall
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promptly deliver such notice to the LLC and shall, at the sole cost and expense
of the LLC, take such actions in response to the request for capital as the LLC
shall direct. If the RBS Advanta Shares are not transferred at the Closing, the
Company shall cause the designees of Advanta UK on the Board of Directors of RBS
Advanta to resign effective as of the Closing Date and shall use its best
efforts to cause to be elected to the Board of Directors of RBS Advanta the
designees of the LLC effective as of the Closing Date or as promptly as
practicable thereafter.
SECTION 1.06 Closing Balance Sheet Confirmation.
(a) No later than five Business Days' prior to the Closing
Date, the Company shall deliver to Fleet its good faith estimate of the Closing
Balance Sheet ("Estimated Closing Balance Sheet"), which Estimated Closing
Balance Sheet shall demonstrate that the book value of the Company Transferred
Liabilities over the Company Contributed Assets equals the Agreed Deficit. In
addition, the Company shall cause to be delivered therewith a certificate of the
Company signed on its behalf by the chief financial officer of the Company,
confirming that the Estimated Closing Balance Sheet was prepared in accordance
with the provisions of Section 1.06(g). The interest bearing liabilities which
are included in the Company Transferred Liabilities at Closing shall be subject
to the conditions set forth on Schedule 1.06(a). The Estimated Closing Balance
Sheet submitted by the Company to Fleet shall include a schedule of the interest
bearing liabilities to be contributed by the Company in substantially the form
of Exhibit A attached to Schedule 1.06(a), which shall detail the outstanding
balances by liability type, rate and maturity and demonstrate that the
characteristics of the interest bearing liabilities to be contributed by the
Company are substantially no less favorable than the characteristics of the
liabilities set forth in Schedule 1.06(a). Notwithstanding the foregoing, the
Managed Receivables, the Agreed Deficit and the Gain Receivable on Secured
Credit Cards referred to in Exhibit B to Schedule 1.06(g) shall be computed as
of the Specified Date.
(b) The term "Agreed Deficit" shall mean five hundred ten
million dollars ($510,000,000) minus the Agreed Adjustment, if any (the parties
acknowledge and agree that the Agreed Adjustment may be an amount which is less
than zero, in which event the Agreed Deficit would equal the sum of five hundred
ten million dollars ($510,000,000) plus the absolute value of the Agreed
Adjustment).
(c) The "Agreed Adjustment" shall be that amount which is the
sum of the Volume Adjustment and the Yield Adjustment.
(d) The Volume Adjustment (which may be less than zero as
noted in Section 1.06(b)) means that amount which is (i) ($12,100,000,000 minus
the amount of Managed Receivables as of the Specified Date) multiplied by (ii)
0.0438.
(e) The Yield Adjustment (which may be less than zero as noted
in Section 1.06(b)) shall be equal to the product of (A)(i) the amount of the
Managed Receivables with Introductory Rate Balances as of the Specified Date
minus (ii) $2,192,520,000 multiplied by (B) 0.5 multiplied by (C) 0.0438. For
example, if on the Specified Date the percentage of Managed
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Receivables with introductory rates equaled 15% and the amount of Managed
Receivables was equal to $12,100,000,000 then the Yield Adjustment would be
equal to:
($12,100,000,000 x .15 - $2,192,520,000) x .5 x 0.0438 =
- $8,267,688 (Yield Adjustment)
In such example, the Agreed Deficit would equal $518,267,688 (i.e., $510,000,000
plus the absolute value of the Yield Adjustment).
(f) As promptly as practicable, but in no event later than
sixty (60) days after the Closing Date, the Company shall prepare and deliver to
the LLC and Fleet the pro forma balance sheet of the Business as of the close of
business on the Closing Date, subject to the provisions of Section 1.02, but
without giving effect to the transactions occurring at the Closing (the "Closing
Balance Sheet"), together with the unqualified report of Arthur Andersen LLP
("Company's Auditor") on the Closing Balance Sheet, and a calculation in
reasonable detail of the Volume Adjustment, the Yield Adjustment, the Agreed
Adjustment and the Agreed Deficit together with a certificate of the Company
signed on its behalf by the Chief Financial Officer of the Company, confirming
that such calculations were made in accordance with the terms of this Agreement.
The report of the Company's Auditor shall be made to the Company, Fleet and the
LLC and shall be to the effect that (i) the Closing Balance Sheet (A) has been
prepared therein in conformity with the terms of this Agreement, including the
provisions of Section 1.06(g) hereof; (B) was prepared in conformity with GAAP
(except as set forth in Schedule 1.06(g)), applied on a consistent basis with
the Company's past practice; and (C) presents fairly the financial position of
the Business as of the close of business at the Closing Date, subject to the
provisions of Section 1.02, and (ii) the audit by the Company's Auditor was
conducted in accordance with generally accepted auditing standards. In addition,
the Company's Auditor shall confirm whether or not the interest bearing
liabilities contributed by the Company have characteristics substantially no
less favorable than the characteristics as set forth on Schedule 1.06(a). In the
event that the Company's Auditor does not so confirm the characteristics of the
interest bearing liabilities, the LLC and the Company shall determine in good
faith such amount as is necessary, consistent with the provisions of Schedule
1.06(a), to reimburse the LLC for any such failure to so conform to such
characteristics. In the event the LLC and the Company can not resolve any
dispute as to the amount of such reimbursement, such dispute will be resolved in
accordance with the procedures set forth below. The Company shall pay the amount
of any required reimbursement, if any, to the LLC promptly after determination
thereof.
(g) The Closing Balance Sheet shall be prepared in accordance
with the books and records of the Company and the Company Contributors and in
conformity with the provisions of, and pursuant to the procedures described on,
Schedule 1.06(g) hereto.
(h) After the Closing Date, the LLC shall permit the Company
and the Company's Auditor reasonable access upon reasonable notice and during
normal business hours to the deeds, documents and contracts and books of
account, records, files, invoices and other data associated with, necessary to
or used in the Business as conducted on or before the Closing
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Date. The Company and the LLC shall direct the appropriate personnel, regardless
of whether employed by the Company or the LLC, to provide the necessary
financial information regarding the Business as promptly as practicable after
the Closing Date to the Company and the Company's Auditor. Fleet shall, within
forty-five (45) days after its receipt of the Closing Balance Sheet, advise the
Company in writing (an "Objection Notice") in reasonable detail of the amounts
and descriptions of adjustments, if any, which Fleet believes are necessary to
be made to the Closing Balance Sheet or the Agreed Deficit in order to comply
with the provisions of this Agreement and Section 1.06(g) hereof. In the event
that Fleet fails to deliver an Objection Notice within the time period specified
herein, the pro forma Closing Balance Sheet and the calculation of the Agreed
Deficit delivered by the Company pursuant to Section 1.06(f) hereof shall be
deemed to be the Closing Balance Sheet and Agreed Deficit for all purposes of
this Agreement.
(i) In the event that Fleet shall deliver an Objection Notice
pursuant to Section 1.06(h) hereof, Fleet and the Company shall attempt, in good
faith, to resolve their differences within the thirty day period following the
receipt by the Company of the Objection Notice. In the event the Company and
Fleet are not able to resolve their good faith differences within such thirty
day period with respect to any line item of the Closing Balance Sheet, but the
differences with respect to any such line item are less than two hundred fifty
thousand dollars ($250,000), then such line item shall be deemed to be the
average of the amounts specified by the Company and Fleet, respectively, and the
differences on such line item shall be deemed to be resolved. In the event that
the Company and Fleet are able to resolve their differences within such thirty
day period (including any resolution pursuant to the immediately preceding
sentence), the Closing Balance Sheet and Agreed Deficit agreed to by Fleet and
the Company pursuant to this Section 1.06(i) shall be deemed to be the Closing
Balance Sheet and Agreed Deficit for all purposes of this Agreement. In the
event that all of the differences are not resolved within such thirty day
period, but the effect of such differences on the Agreed Deficit is less than
three million dollars ($3,000,000), in the aggregate, then all remaining
differences shall be resolved in the same manner set forth above with respect to
differences of less than $250,000 and the Closing Balance Sheet and the
calculation of the Agreed Deficit, as so adjusted, shall be deemed to be the
Closing Balance Sheet and the Agreed Deficit for all purposes of this Agreement.
(j) In the event that the Company and Fleet are unable to
resolve all differences with respect to the Closing Balance Sheet or Agreed
Deficit in the manner set forth in Section 1.06(i) hereof within the thirty (30)
days referred to in Section 1.06(i) hereof, then the issues remaining unresolved
shall be determined by Coopers & Lybrand L.L.P. (the "Independent Firm") as
follows:
(1) Within fifteen (15) days following retention of
the Independent Firm, the Company and Fleet shall present or
cause to be presented the disputed issue or issues that must
be resolved with respect to the Closing Balance Sheet.
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(2) The Company and Fleet shall use their
commercially reasonable efforts to cause the Independent Firm
to render its decision as soon as is reasonably practicable,
including, without limitation, prompt compliance with all
reasonable requests by the Independent Firm for information,
papers, books, records and the like; provided that (i) the
Company and Fleet agree that the scope of the retention of the
Independent Firm shall be limited to resolving the disputed
issues presented to it and matters related thereto and (ii) in
no event shall the resolution of any issue be outside the
parameters or amounts within which the issues were determined
by each of the Company and Fleet. All decisions of the
Independent Firm with respect to the Closing Balance Sheet and
the Agreed Deficit shall be final and binding upon Fleet, the
Company and their respective Affiliates, and the Closing
Balance Sheet and the Agreed Deficit as determined in
accordance with the provisions of this Section 1.06(j) shall
be deemed to be the Closing Balance Sheet and the Agreed
Deficit for all purposes of this Agreement.
(k) With respect to the performance of their respective
functions pursuant to this Section 1.06, (i) the Company shall bear all of the
fees, costs, disbursements and other expenses of the Company's Auditor; (ii)
Fleet shall bear all of the fees, costs, disbursements and other expenses of its
auditor; and (iii) the Company, on the one hand, and Fleet, on the other hand,
shall share equally all fees, costs, disbursements and other expenses of the
Independent Firm.
(l) If the value of Company Transferred Liabilities over the
Company Contributed Assets as reflected on the Closing Balance Sheet (the "Net
Deficit") exceeds the Agreed Deficit, then the Company shall pay to the LLC in
the manner and with interest as provided in Section 1.06(n), the amount of such
excess.
(m) If the Agreed Deficit exceeds the Net Deficit, then the
LLC shall pay to the Company in the manner and with interest as provided in
Section 1.06(n), the amount of such excess.
(n) Any payment pursuant to Sections 1.06(l) or 1.06(m) hereof
shall be made at a mutually convenient time and place within ten (10) days after
the Closing Balance Sheet has been finally determined, by delivery to the
Company or the LLC, as the case may be, of a wire transfer of immediately
available funds from such party to a designated account of such other party. The
amount of any payment to be made pursuant to Sections 1.06(l) or 1.06(m) shall
bear interest from and including the Closing Date to but excluding the date of
payment at a rate per annum equal to LIBOR as of the Closing Date. Such interest
shall be payable at the same time as the payment to which it relates and shall
be calculated on the basis of a year of 360 days and the actual number of days
elapsed.
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ARTICLE II
DEFINITIONS
SECTION 2.01. Definitions. As used in this Agreement the
following terms shall have the meanings set forth below:
(a) "Administration Agreement" shall mean that certain
administration agreement dated as of the Closing Date by and between the LLC or
an Affiliate thereof and the one or more of the Company Contributors and
containing the provisions set forth on Exhibit B hereto.
(b) "Advanta National Bank" shall mean Advanta National Bank,
a bank organized under the laws of the United States.
(c) "Advanta Service Mark License Agreement" shall mean that
certain license agreement dated as of the Closing Date by and between the
Company and the LLC containing the provisions set forth in Exhibit C hereto.
(d) "Affiliate" shall mean, with respect to any specified
Person, a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Person specified. As used in this definition, the term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through ownership
of voting securities, as trustee or executor, by contract or credit arrangement
or otherwise.
(e) "Agreed Adjustment" shall have the meaning set forth in
Section 1.06(c) of this Agreement.
(f) "Agreed Deficit" shall have the meaning set forth in
Section 1.06(b) of this Agreement.
(g) "Ancillary Agreements" means each of the LLC Agreement,
the Administration Agreement, the CCB Participation Agreement, the FNB
Participation Agreement, the Lease Agreements, the SmartMove Service Agreement,
the Advanta Service Mark License Agreement and the Interim Servicing Agreement.
(h) "Bank Acts" shall mean, collectively, the Bank Holding
Company Act of 1956, the National Bank Act, the Federal Reserve Act, the Federal
Deposit Insurance Act and any other federal or state banking statutes which may
govern the transactions contemplated by this Agreement, as they may be amended
from time to time, and the rules and regulations promulgated thereunder.
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(i) "Bank Authority" shall mean the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation and the Office of Thrift Supervision, and
any state banking authority or non-U.S. governmental banking authority having
jurisdiction over the Company, Fleet or any Related Entities.
(j) "Board" shall have the meaning set forth in Section 3.01
of this Agreement.
(k) "Business" shall mean the consumer credit card business of
the Company and the Company Contributors as of the Closing Date, including,
without limitation, the origination and servicing of consumer credit cards, the
determination of creditworthiness of consumer credit card account customers, the
extension of credit to consumer credit card account customers, and the
maintenance of consumer credit card accounts and collection of receivables with
respect thereto, anywhere in the world.
(l) "Business Day" shall mean any day that is not a Saturday,
a Sunday or a day on which banks in the Commonwealth of Massachusetts and the
Commonwealth of Pennsylvania are generally closed for regular banking business.
(m) "CCB Assets" shall have the meaning set forth in Section
1.01(d) of this Agreement.
(n) "CCB Liabilities" shall have the meaning set forth in
Section 1.01(d) of this Agreement.
(o) "CCB Participation Agreement" shall have the meaning set
forth in Section 1.01(d) of this Agreement.
(p) "Class A Preferred Shares" shall mean the shares of the
Company's Class A Preferred Stock, par value $1,000 per share.
(q) "Class A Shares" shall mean the shares of the Company's
Class A Common Stock, par value $.01 per share.
(r) "Closing" shall have the meaning set forth in Section 1.02
of the Agreement.
(s) "Closing Balance Sheet" shall have the meaning set forth
in Section 1.06(f) of this Agreement.
(t) "Company" shall have the meaning set forth in the preamble
to this Agreement.
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(u) "Company's Auditor" shall have the meaning set forth in
Section 1.06(f) of this Agreement.
(v) "Company Contributed Assets" shall have the meaning set
forth in Section 1.01(b) of this Agreement.
(w) "Company Contributors" shall mean Advanta National Bank,
an indirect wholly owned subsidiary of the Company and any Affiliates thereof
which contribute Company Contributed Assets or transfer Company Transferred
Liabilities in accordance with the terms of this Agreement.
(x) "Company Credit Card Business Employees" shall mean each
individual who is employed on a full-time or part-time basis in connection with
the Business on the Closing Date, composed of those individuals and groups of
individuals who are listed on Schedule 2.01(x) hereto, together with all
Potential Credit Card Business Employees who are deemed to be Company Credit
Card Business Employees pursuant to Section 6.22 of this Agreement.
(y) "Company Intellectual Property" shall have the meaning set
forth in Section 4.10 of this Agreement.
(z) "Company Transferred Liabilities" shall have the meaning
set forth in Section 1.01 of this Agreement.
(aa) "Contribution" shall have the meaning set forth in
Section 1.01 of this Agreement.
(bb) "Credit Insurance Business" shall have the meaning set
forth in Section 7.01 of this Agreement.
(cc) "Estimated Closing Balance Sheet" shall have the meaning
set forth in Section 1.06(a) of this Agreement.
(dd) "Exchange Act" shall have the meaning set forth in
Section 4.04 of this Agreement.
(ee) "Fleet" shall have the meaning set forth in the preamble
to this Agreement.
(ff) "Fleet Business" shall mean the consumer credit card
business of Fleet and the Fleet Contributors, including, without limitation, the
origination and servicing of consumer credit cards as of the Closing Date, the
determination of creditworthiness of consumer credit card account customers, the
extension of credit to consumer credit card account customers and the
maintenance of consumer credit card accounts and collection of receivables with
respect thereto, anywhere in the world.
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(gg) "Fleet Contributed Assets" shall have the meaning set
forth in Section 1.01(b) of this Agreement.
(hh) "Fleet Contributors" shall mean Fleet Credit Card Bank,
Fleet National Bank and any Affiliates thereof which contribute Fleet
Contributed Assets or transfer Fleet Transferred Liabilities in accordance with
the terms of this Agreement.
(ii) "Fleet Credit Card Bank" shall mean Fleet Bank, National
Association (DE), a credit card bank organized under the laws of the United
States, and any successor thereto.
(jj) "Fleet Material Adverse Effect" shall mean any effect
that (1) is material and adverse to the assets, liabilities, financial position,
business or results of operations of the Fleet Business, taken as a whole, or
(2) would materially impair the ability of Fleet and the Fleet Contributors,
taken as a whole, to perform their obligations under this Agreement or otherwise
materially impede the consummation of the transactions contemplated by this
Agreement (excluding any such impairment arising from any action taken by, or
omission of the Company, and any Company Contributor or any Affiliate thereof),
excluding, in (1) and (2) above, any effects relating to or arising from (A) the
transactions contemplated by this Agreement and any actions or omissions to act
required by this Agreement (including, without limitation, actions or inactions
of employees, customers or vendors) or (B) past, existing or prospective general
economic or regulatory conditions affecting the consumer revolving lending
business or the consumer credit card business in general. Notwithstanding the
foregoing, Fleet may, at its option, include in the Disclosure Schedules items
which would not have a Fleet Material Adverse Effect within the meaning of the
previous sentence or are not necessarily material, and such inclusion shall not
be deemed to be an acknowledgment by Fleet that such items would have a Fleet
Material Adverse Effect or further define the meaning of either such term for
purposes of this Agreement.
(kk) "Fleet National Bank" shall mean Fleet National Bank, a
bank organized under the laws of the United States.
(ll) "Fleet Transferred Liabilities" shall have the meaning
set forth in Section 1.01 of this Agreement.
(mm) "FNB Assets" shall have the meaning set forth in Section
1.01(e) of this Agreement.
(nn) "FNB Liabilities" shall have the meaning set forth in
Section 1.01(e) of this Agreement.
(oo) "FNB Participation Agreement" shall have the meaning set
forth in Section 1.01(e) of this Agreement.
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(pp) "GAAP" shall mean generally accepted accounting
principles.
(qq) "HSR Act" shall have the meaning set forth in Section
4.06 of this Agreement.
(rr) "Household Receivables" shall mean all consumer credit
card receivables owned, managed, or serviced by the Company or the Company
Contributors acquired by the Company or any of the Company Contributors pursuant
to that certain Credit Card Portfolio Purchase and Sale Agreement, dated as of
September 30, 1997, between Advanta National Bank and Household Bank (Nevada),
N.A. and that certain Line of Credit Portfolio Purchase and Sale Agreement,
dated as of September 30, 1997, between Household Bank, F.S.B. and Advanta
National Bank.
(ss) "Interim Servicing Agreement" shall mean that certain
Interim Servicing Agreement dated as of the Closing Date between the LLC and the
Company, substantially in the form attached hereto as Exhibit D.
(tt) "Introductory Rate Balances" shall mean consumer credit
card receivables accruing finance charges at a special introductory annual
percentage rate offered to new credit card customers only at the time of the
opening of a credit card account for a limited period, referred to as an
"introductory rate;" it is understood that the term Introductory Rate Balances
does not include any portion of a credit card holder's balances (i) resulting
from a cash advance and accruing interest at a cash advance rate; (ii) that no
longer carry a special introductory rate as a result of a delinquency; or (iii)
resulting from any other promotional campaign or relationship management
activities.
(uu) "Knowledge" of the Company or Fleet, as applicable, shall
be deemed to include only the actual knowledge of the executive officers of the
Company or Fleet, respectively, provided, however, that for the purposes of the
indemnification provisions of Article X hereof only (and for no other provision
of this Agreement) "Knowledge" of the Company or Fleet, as applicable, shall
mean the knowledge of all of the officers of the Company and its Subsidiaries
engaged in the Business or Fleet and its Subsidiaries engaged in the Fleet
Business, respectively.
(vv) "Lease Agreements" shall mean those certain lease
agreements dated as of the Closing Date between the LLC and certain of the
Company Contributors relating to shared facilities and containing the provisions
set forth on Exhibit E hereof.
(ww) "LIBOR" shall mean, as of any date, the London Interbank
Offered Rate for three-month deposits as shown at 11:00 a.m. London time on such
date on the display screen designated "Page 3570" by Dow Jones Markets, or such
other page as may replace such page on that service or such other services as
may be nominated by the British Bankers' Association for the purpose of
displaying London Interbank offered rates for U.S. Dollar Deposits.
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(xx) "Lien" shall have the meaning set forth in Section 4.08
hereof.
(yy) "LLC" shall mean a limited liability company formed by
the parties hereto or their Affiliates prior to the Closing Date and pursuant to
the terms of the LLC Agreement.
(zz) "LLC Agreement" shall mean the Limited Liability Company
Agreement of the LLC, substantially in the form of Exhibit A attached hereto.
(aaa) "Losses" shall mean any and all claims, losses,
liabilities, costs, penalties, fines, expenses (including reasonable expenses
for attorneys, accountants, consultants and experts), damages, obligations to
third parties, expenditures, proceedings, judgments, awards, settlements or
demands (including, without limitation, Taxes) that are imposed upon or
otherwise incurred, suffered or sustained by the relevant party.
(bbb) "Managed Receivables" shall mean all consumer credit
card receivables owned, managed or serviced by the Company or the Company
Contributors under Master Trust I or Master Trust II or under other agreements
relating to the securitization of such receivables by the Company or the Company
Contributors, or included as part of the Company Contributed Assets, except any
receivables relating to Retained SmartMove Accounts (other than Qualified
SmartMove Accounts), Household Receivables and Rewards Accelerator Receivables.
(ccc) "Master Trust I" and "Master Trust II" shall mean,
respectively, that certain Amended and Restated Master Pooling and Servicing
Agreement, dated as of April 1, 1992, between Colonial National Bank USA and
Chemical Bank, and all supplements and amendments thereto, and that certain
Amended and Restated Pooling and Servicing Agreement, dated as of December 1,
1993, as amended and restated on May 23, 1994, between Colonial National Bank
USA and Bankers Trust Company and all supplements and amendments thereto.
(ddd) "Material Adverse Effect" shall mean any effect that (1)
is material and adverse to the assets, liabilities, financial position, business
or results of operations of the Business, taken as a whole, or (2) would
materially impair the ability of the Company and the Company Contributors, taken
as a whole, to perform their obligations under this Agreement or otherwise
materially threaten or materially impede the consummation of the transactions
contemplated by this Agreement (excluding any such impairment arising from any
action taken by, or omission of, Fleet, any Fleet Contributor or any Affiliate
thereof) excluding, in (1) and (2) above, any effects relating to (A) the
announcement made by the Company relating to a possible reorganization or sale
of significant assets involving the Company and its Affiliates, (B) the
transactions contemplated by this Agreement and any actions or omissions to act
required by this Agreement (including, without limitation, actions or inactions
of employees, customers or vendors) or (C) past, existing or prospective general
economic or regulatory conditions affecting the consumer revolving lending
business or the consumer credit card business in general. Notwithstanding the
foregoing, the Company may, at its option, include in the Disclosure Schedules
items which would not have a Material Adverse Effect within the meaning of the
previous sentence or are not necessarily material, and such inclusion shall not
be deemed to be
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an acknowledgment by the Company that such items would have a Material Adverse
Effect or further define the meaning of either such term for purposes of this
Agreement.
(eee) "Material Company Contributed Contracts" shall mean
those Company Contributed Contracts listed on Schedule 1A(i) hereto.
(fff) "Non-Assumed Liabilities" shall have the meaning set
forth in Section 1.01(g) of this Agreement.
(ggg) "Ordinary Course of Business Liabilities" shall mean
liabilities relating to consumer credit matters arising from the operations of
the Business in the ordinary course in a manner substantially similar to the
operation of a credit card business by one or more of the 20 largest credit card
issuers in the United States.
(hhh) "Outside Termination Date" shall have the meaning set
forth in Section 9.01(b) of this Agreement.
(iii) "person" shall mean any individual, corporation,
partnership, association, joint stock company, business, trust, other entity or
group.
(jjj) "Proxy Statement" shall have the meaning set forth in
Section 3.02 of this Agreement.
(kkk) "Related Entities" shall mean any company, partnership,
trust or limited liability company of which the Company or Fleet, as the case
may be, directly or indirectly, owns 25% or more of the equity or can elect a
majority of the directors or partners or which the Company or Fleet is otherwise
deemed to control under any of the Bank Acts.
(lll) "Retained SmartMove Accounts" shall mean the credit card
accounts and all accounts receivable thereon for any credit card account holder
who either (i) received a notice of the SmartMove Repricing and, at the time of
the receipt of such notice, maintained a SmartMove Balance subject to the
SmartMove Repricing or (ii) maintained a SmartMove Balance which became subject
to the SmartMove Repricing.
(mmm) "Rewards Accelerator Accounts" shall mean the credit
card accounts and all accounts receivable thereon which are subject to the
Rewards Accelerator Program and as to which the Company does not have the right
to solicit the account holders for a replacement credit card which is not
subject to the program.
(nnn) "Rewards Accelerator Receivables" are receivables under
the Rewards Accelerator Accounts.
(ooo) "SEC" shall have the meaning set forth in Section 3.02
of this Agreement.
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(ppp) "Securities Act" shall have the meaning set forth in
Section 4.04 of this Agreement.
(qqq) "Shares" shall mean any Class A Share or Class A
Preferred Share.
(rrr) "SmartMove Balances" shall mean all credit card accounts
receivable generated by the SmartMove Campaign.
(sss) "SmartMove Campaign" shall mean the marketing campaigns
of any of the Company Contributors, referred to as "SmartMove," offering
existing credit card account holders a lower annual percentage rate on credit
card balances transferred to such card holders' accounts with any Company
Contributor from such card holders' credit card accounts with any other credit
card issuer.
(ttt) "SmartMove Repricing" shall mean all initiatives under
which the Company Contributors notified credit card account holders who
maintained SmartMove Balances that the annual percentage rate on such SmartMove
Balances would be increased.
(uuu) "SmartMove Service Agreement" shall mean that certain
service agreement dated as of the Closing Date between the LLC and Advanta
National Bank and containing the provisions set forth on Exhibit F hereto.
(vvv) "Special Meeting" shall have the meaning set forth in
Section 3.01 of this Agreement.
(www) "Specified Date" shall mean the Closing Date; provided,
however, that if the Closing Date is a date other than the last Business Day of
a calendar quarter, Specified Date shall mean, at the sole discretion of the
Company, the last Business Day of the immediately preceding calendar quarter.
(xxx) "Subsidiary" shall mean, when used with reference to an
entity, any corporation or other entity, a majority of the outstanding voting
securities of which are owned directly or indirectly by such entity.
(yyy) "Tax Return" shall mean any return, report, information
statement, schedule or other document (including any related or supporting
information and including any Form 1099 or other document or report required to
be provided by any of the parties to third parties) with respect to Taxes,
including any document required to be retained or provided to any governmental
authority pursuant to 31 U.S.C. Sections 5311-5328 and regulations promulgated
hereunder, relating to the parties or any consolidated group of which any such
entity was a member at the applicable time, and any amended Tax Returns.
(zzz) "Taxes" shall mean all federal, provincial, territorial,
state, municipal, local, foreign or other taxes, imposts, rates, levies,
assessments and other charges (and all
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interest and penalties thereon), including, without limitation, all income,
excise, franchise, gains, capital, real property, goods and services, transfer,
value added, gross receipts, windfall profits, severance, ad valorem, personal
property, mortgage recording, employment, payroll, social security,
unemployment, disability, estimated or withholding taxes, and all customs and
import duties, and all interest, penalties and losses thereon or associated
therewith or associated with any Tax Return.
(aaaa) "Volume Adjustment" shall have the meaning set forth in
Section 1.06(d) of this Agreement.
(bbbb) "Yield Adjustment" shall have the meaning set forth in
Section 1.06(e) of this Agreement.
(cccc) "1996 Bonus Protection Payment" shall mean a payment to
a Transferred Employee pursuant to the terms of the Advanta Corp. Management
Incentive Plan with Stock Election II, Advanta Corp. Management Incentive Plan
with Stock Election III and Advanta Corp. Management Incentive Plan with Stock
Election IV, as applicable, for the year ended December 31, 1996.
(dddd) "1997 Bonus Payment" shall mean a payment or issuance
or vesting of stock to a Transferred Employee pursuant to the terms of the
Advanta Corp. Senior Management Incentive Plan with Stock Election II, Advanta
Corp. Management Incentive Plan with Stock Election III and Advanta Corp.
Management Incentive Plan with Stock Election IV, as applicable, for the year
ended December 31, 1997.
(eeee) "1997 Bonus Protection Payment" shall mean a payment
from the Company to a Transferred Employee pursuant to the terms of the Advanta
Corp. Management Incentive Plan with Stock Election II, Advanta Corp. Management
Incentive Plan with Stock Election III and Advanta Corp. Management Incentive
Plan with Stock Election IV, as applicable, for the year ended December 31,
1997.
ARTICLE III
STOCKHOLDERS' MEETING AND PROXY STATEMENT
SECTION 3.01 Stockholders' Meeting. The Company, acting
through its Board of Directors (the "Board"), will, in accordance with
applicable law and the Company's charter and bylaws, duly call, give notice of,
convene and hold a special meeting (including any adjournment or postponement
thereof, the "Special Meeting") of its stockholders as soon as practicable
following the date of this Agreement, but in any event no later than 20 Business
Days after the mailing of the Company's Proxy Statement for the purpose of
considering and taking action upon the approval of the Contribution and any
other related matters required under applicable law to be approved by such
stockholders (it being agreed that the parties hereto do not acknowledge that
such approval is required under applicable law). The Board shall recommend
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such approval by the stockholders and shall take all reasonable, lawful action
to solicit such approval by its stockholders.
SECTION 3.02 Proxy Statement. The Company will (i) as promptly
as practicable following the date of this Agreement, prepare and file with the
Securities and Exchange Commission ("SEC"), and use its best efforts to have
cleared by the SEC and thereafter mail to its stockholders as promptly as
practicable, a proxy statement and a form of proxy, in connection with the vote
of the Company's stockholders with respect to this Agreement and the
transactions contemplated hereby (such proxy statement, together with any
amendments thereof or supplements thereto, in each case in the form or forms
mailed to the Company's stockholders, is herein called the "Proxy Statement"),
(ii) use its best efforts to obtain the necessary approvals by its stockholders
of this Agreement and the transactions contemplated hereby and (iii) otherwise
comply with all legal requirements applicable to the Special Meeting. The
Company agrees to promptly provide Fleet with all comments or correspondence
received from the SEC with respect to the Proxy Statement. The Company will
include in the Proxy Statement the recommendation of its Board that stockholders
of the Company vote in favor of the approval of this Agreement and the
transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Company's Disclosure Schedule
delivered to Fleet by the Company prior to the execution of this Agreement, the
Company represents and warrants to Fleet, on behalf of itself and each of the
Company Contributors, as follows:
SECTION 4.01 Organization. Each of the Company and the Company
Contributors is a corporation or limited liability company duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation or a banking organization duly chartered by its chartering authority.
Each of the Company and the Company Contributors is duly qualified to conduct
the Business in the states of the United States and any foreign jurisdictions
where its ownership or leasing of properties or assets used in the conduct of
the Business or the assets of the Business requires it to be so qualified and
where the failure to be so qualified would have a Material Adverse Effect.
SECTION 4.02 Corporate Power, Authority Relative to this
Agreement. Each of the Company and the Company Contributors has the corporate
power and corporate authority to carry on its business as it is now being
conducted and to own or lease all of the properties and assets used in the
conduct of the Business and to conduct the Business in the manner currently
conducted by it. The Company has full corporate power and authority to execute
and deliver this Agreement and, upon approval of this Agreement by the holders
of Shares representing a majority of the votes entitled to be cast by holders of
the Class A Shares and Class A Preferred Shares, voting together as a single
class, as required to satisfy the condition set forth in Section 8.01(a), to
consummate the transactions contemplated hereby and to perform its obligations
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hereunder, including, without limitation, causing the Company Contributors
(after approval by their respective Boards of Directors) to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of the Company and no other
corporate proceedings on the part of the Company or any Company Contributor
(other than approval by the respective Boards of Directors of the Company
Contributors other than the Company) are necessary to authorize the execution,
delivery or performance of this Agreement or to consummate the transactions
contemplated hereby other than (subject to the last parenthetical clause in the
penultimate sentence of Section 3.01) the approval of this Agreement and the
transactions contemplated hereby by the holders of Shares representing a
majority of the votes entitled to be cast by holders of Class A Shares and Class
A Preferred Shares, voting together as a single class. This Agreement has been
duly and validly executed and delivered by the Company and, assuming this
Agreement has been duly authorized, executed and delivered by Fleet, this
Agreement constitutes a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms (but subject to obtaining the
approvals set forth in Section 4.06 hereof), except that (i) enforcement may be
subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws, now or hereafter in effect, affecting creditors' rights
generally and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
SECTION 4.03 Absence of Certain Changes. Except as disclosed
in the Company Filings, since June 30, 1997, (a) the Company and each of the
Company Contributors have conducted the Business in the ordinary and usual
course, consistent with past practice and (b) no event has occurred or fact or
circumstance arisen that, individually or taken together with all other facts,
circumstances and events, has had, or is reasonably likely to have a Material
Adverse Effect. Since June 30, 1997, there has not been (a) any entry into any
agreement, commitment or transaction by the Company or any Company Contributor
relating to the Business, which is material to the Business taken as a whole
(except agreements, commitments or transactions in the ordinary course of
business, consistent with past practice and described on the Company's
Disclosure Schedule); or (b) any change by the Company or any of the Company
Contributors in accounting methods, principles or practices relating to the
Business, except as required by GAAP.
SECTION 4.04 Reports and Financial Statements.
(a) The Company and each of its Subsidiaries and Master Trust
I and Master Trust II and, to the Knowledge of the Company, the trustees of
Master Trust I and Master Trust II, have filed all forms, reports, definitive
proxy statements, information statements and other documents (including all
prospectuses and all registration statements) with the SEC required to be filed
by it with respect to all periods commencing on or after January 1, 1994
pursuant to the federal securities laws and the rules and regulations
promulgated thereunder, all of which have complied in all material respects with
all applicable requirements of the Securities Act of 1933 (the "Securities Act")
and the Securities Exchange Act of 1934, as amended (the "Exchange
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Act"), and the rules and regulations promulgated thereunder (the "Company
Filings"). None of the Company Filings (excluding the financial statements
included therein), at the time filed or mailed, contained, with respect to the
Business, any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made, not
misleading.
(b) The pro forma balance sheet of the Business as of
September 30, 1997 (the "Pro Forma Balance Sheet") attached hereto as Schedule
4.04(b) has been prepared in accordance with GAAP applied on a consistent basis
with the Company's past practice and the procedures set forth on Schedule
1.06(g) hereto, and presents fairly in all material respects the assets and
liabilities of the Business at September 30, 1997. Notwithstanding the
foregoing, it is acknowledged and agreed that the information technology assets
and fixed assets set forth on the Pro Forma Balance Sheet are subject to change,
as mutually determined by the Company and Fleet, in each case based on a
physical inventory of information technology assets and fixed assets, having an
agreed minimum book value for any one item and an agreed minimum book value for
any single line item, to be performed prior to the Closing. Such changes will be
reflected in the Closing Balance Sheet. The Pro Forma Statement of Operations
(as defined in Section 6.21) for the year ended December 31, 1996 and the nine
months ended September 30, 1997 have been prepared in accordance with GAAP
applied on a consistent basis with the Company's past practice and presents
fairly in all material respects the results of operations of the Business for
the periods covered by the statement of operations.
(c) The Company and each of its Subsidiaries have filed all
reports, registrations, applications and statements, together with any
amendments required to be made with respect thereto, relating to the Business
that they were required to file since January 1, 1995 with any governmental
authority, and all other reports and statements required to be filed by them
since January 1, 1995, including, without limitation, any report or statement
required to be filed pursuant to the laws, rules or regulations of the United
States, any state thereof or any governmental authority, and have paid all fees
and assessments due and payable in connection therewith, except in any case
where the failure to file the same would not have a Material Adverse Effect.
Each of such reports, registrations, applications and statements complied (and
with respect to such reports, registrations, applications and statements filed
after the date hereof and prior to the Closing Date, will comply) at the date
thereof in all material respects with the rules and regulations of the
governmental authority relating thereto and fairly present in all material
respects the information required to be presented therein. Except for normal
examinations conducted by a governmental authority in the ordinary course of the
business of the Company and its Subsidiaries, no governmental authority has
initiated any proceeding or, to the Knowledge of the Company, investigation,
into the Business since January 1, 1995. There is no unresolved material
violation, or exception by any governmental authority with respect to any report
or statement relating to any examinations of the Company or any of its
Subsidiaries relating to the Business.
(d) Neither the Company nor any of its Subsidiaries is subject
to any cease- and-desist or other order issued by, or is a party to any consent
agreement or memorandum of
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understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any supervisory letter from or has adopted any board resolutions at the request
of any governmental authority, in any such case, that restricts the conduct of
the Business or that, in any manner, relates to the Business or the Company
Credit Card Business Employees (each, whether or not set forth in the Company's
Disclosure Schedule, a "Company Regulatory Agreement"), nor has the Company or
any of its Subsidiaries (A) been advised since January 1, 1995 by any
governmental authority that it is considering issuing or requesting any such
Company Regulatory Agreement or (B) have Knowledge of any pending or threatened
regulatory investigation relating to the Business .
(e) Each of the balance sheets contained or incorporated by
reference into any of the Company Filings since January 1, 1997 (including the
related notes and schedules thereto) fairly presents or will fairly present in
all material respects, the financial position of the Company and of its
Subsidiaries, or Master Trust I or Master Trust II, as applicable, as of its
date, and each of the statements of income and changes in stockholders' equity
and cash flows or equivalent statements in the Company Filings since January 1,
1997 fairly presents, or will fairly present, in all material respects, the
results of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of the Company and its Subsidiaries, for the periods
to which they relate, and in each case, in compliance in all material respects
with the applicable accounting requirements and with the published rules of the
SEC with respect thereto and in accordance with GAAP, except, in each case, as
may be noted therein, subject to normal year-end audit adjustments in the case
of unaudited statements.
SECTION 4.05 Proxy Statement. None of the information in the
Proxy Statement and any amendment or supplement thereto or any other documents
to be filed by the Company with the SEC or any other governmental entity in
connection with the transactions contemplated by this Agreement will at the time
of the mailing of the Proxy Statement and at the time of the Special Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. If at any time prior to the Closing Date, any event with
respect to the Company, its officers and directors or any of the Company
Contributors should occur which is required to be described in an amendment of,
or a supplement to, the Proxy Statement, such event shall be so described, and
such amendment or supplement to the Proxy Statement shall be promptly filed with
the SEC and, as required by law, disseminated to the stockholders of the
Company. The Proxy Statement will (with respect to information relating to the
Company and the Company Contributors) at all times comply as to form in all
material respects with the requirements of the Exchange Act and the rules and
regulations promulgated thereunder. Each of the Company Contributors agrees
that, if it should become aware prior to the Closing Date of any information
furnished by it that would cause any of the statements in the Proxy Statement to
be false or misleading as of the time of the Special Meeting with respect to a
material fact, or to omit to state any material fact necessary to make the
statements therein not false or misleading as of the time of the Special
Meeting, to promptly inform Fleet thereof and to take the necessary steps to
correct the Proxy Statement.
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SECTION 4.06 Consents and Approvals; No Violation. Neither the
execution, delivery and performance of this Agreement by the Company nor the
consummation of the transactions contemplated hereby by the Company or any
Company Contributor will (i) conflict with or result in any breach or violation
of any provision of the respective Restated Certificate of Incorporation or
By-Laws (or other similar governing documents) of the Company or any of the
Company Contributors, (ii) require the Company or any Company Contributor to
obtain any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority or body, except (A) in
connection with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), if applicable, (B) pursuant to the Exchange Act and the
rules and requirements of the National Association of Securities Dealers, Inc.,
(C) approval of Bank Authorities, (D) approval of state insurance departments,
if applicable, and (E) filings in connection with the formation of the LLC and
maintaining the good standing and qualification of the LLC following the
Closing; (iii) result in a breach or violation of or a default under (or give
rise to any Lien, right of termination, unilateral modification or amendment,
cancellation or acceleration) under any of the terms, conditions or provisions
of any material note, license, agreement, Company Contributed Contract (other
than any Material Company Contributed Contract or any Company Contributed
Contract relating to Information Technology) or other instrument or obligation
relating to the Business to which the Company or any of the Company Contributors
is a party or by which the Company, any of the Company Contributors or any of
their respective assets may be bound, except for such breaches, violations or
defaults (or Liens or rights of termination, unilateral modifications or
amendments, cancellations or accelerations) as to which requisite waivers or
consents have been obtained prior to the Closing or which individually or in the
aggregate would not have a Material Adverse Effect, (iv) result in a material
breach or a violation or a default under (or give rise to any Lien, right of
termination, unilateral modification or amendment, cancellation or acceleration)
under any Material Company Contributed Contract except for the breaches,
violations or defaults (or Liens or rights of termination, unilateral
modifications or amendments, cancellations or accelerations) as to which
requisite waivers or consents have been obtained prior to the Closing; or (v)
violate any order, writ, injunction, decree, judgment, ordinance, statute, rule,
law or regulation, permit or agreement applicable to the Business, except for
violations (other than of orders, writs, injunctions or decrees issued against
the Company or any of the Company Contributors or naming the Company or any of
the Company Contributors as a party) which would not individually or in the
aggregate have a Material Adverse Effect.
SECTION 4.07 Litigation. There is no litigation, claim,
action, arbitration, investigation or other proceeding pending or, to the
Knowledge of the Company, threatened against the Company or any of the Company
Contributors and relating to the Business before any court or governmental or
regulatory authority or body acting in an adjudicative capacity, with respect to
which there is a reasonable likelihood of an adverse determination, which (i)
would have a Material Adverse Effect or (ii) challenges the validity or
propriety of the transactions contemplated by this Agreement. Neither the
Company nor any of the Company Contributors is subject to any outstanding order,
writ, judgment, stipulation, award, injunction or decree of any court issued
against the Company or any of the Company Contributors or naming
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the Company or any of the Company Contributors as a party relating to the
Business which has or is reasonably likely to have a Material Adverse Effect.
SECTION 4.08 Title to Properties; Encumbrances. The Company
and each of the Company Contributors has good title to or a valid leasehold
interest in, or is licensed or otherwise entitled to use, all of the Company
Contributed Assets (other than the Business real property and the Business
leased properties as to which Section 4.14 is applicable and other than the
Company Intellectual Property as to which Section 4.10 is applicable), free and
clear of all security interests, mortgages, pledges, monetary liens, conditional
sales agreements, leases, monetary liens, endorsements or charges of any kind or
character claims of third parties of any nature whatsoever (each a "Lien"),
except for Permitted Liens.
SECTION 4.09 Licenses. The Company and each of the Company
Contributors has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all governmental
authorities that are required to permit them to own and lease their properties
and to conduct the Business as presently conducted; all such permits, licenses,
certificates of authority, orders and approvals are in full force and effect
and, to the Company Knowledge, no suspension or cancellation of any of them is
threatened which, in any such case, would have a Material Adverse Effect.
SECTION 4.10 Patents, Trademarks, Trade Names, and Information
Technology.
A. Patents, Trademarks and Trade Names.
(a) For purposes of this Section 4.10, "Company
Intellectual Property" means any patent, patent application, copyright
registration, trade secret or similar proprietary information, trademark or
service mark, trademark or service mark registration or application or trade
name.
(b) All rights of ownership of, or material licenses
to use, the Company Intellectual Property held by the Company and the Company
Contributors relating to the Business are listed on Schedule 4.10A. There are no
material intellectual property rights, other than those set forth on such
schedule, reasonably necessary to and regularly used in, the conduct of the
Business as presently conducted.
(c) All rights to the Company Intellectual Property
reasonably necessary to and regularly used in the conduct of the Business as
presently conducted:
(i) have been duly registered in, filed in,
or issued by the United States Patent and Trademark Office, or the corresponding
offices of other countries identified on said schedule, or applications to
register such Company Intellectual Property have been filed and are pending;
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(ii) have been properly maintained and
renewed in accordance with applicable laws and regulations in the United States
and such foreign countries;
(iii) in the case of registered copyrights
were developed and authored as original works of authorship either by full-time
employees of the Company or any of the Company Contributors within the normal
scope of their duties as works for hire, or by third persons as works for hire
under an express written agreement so stating or under a written agreement
expressly transferring and assigning all rights to the Company, the Company
Contributors or any one or more of them;
(iv) in the case of patents or patent
applications, have been duly assigned to the Company, the Company Contributors
or any one or more of them, and such assignment(s) have been recorded in the
appropriate government offices;
(v) are owned by the Company, the Company
Contributors, or any one or more of them, free and clear of any Liens such that
no other person has any right or interest in or license to use or right to
license others to use any of the Company Intellectual Property to the exclusion
of the Company;
(vi) are freely transferable (except as
otherwise required by law); and
(vii) are not subject to any outstanding
order, decree, judgment or stipulation,
except, in the case of each of the foregoing clauses (i) through (vii), to the
extent where the failure to comply to the statements made therein would not have
a Material Adverse Effect.
(d) To the Company's Knowledge, no proceedings to
which the Company or any Company Contributor is a party have been commenced
which (i) challenge the rights of the Company or any Company Contributor to use
Company Intellectual Property, or (ii) charge the Company or any Company
Contributor with infringement of any other person's rights in Company
Intellectual Property; and to the Knowledge of the Company, no such proceeding
to which the Company is not a party has been filed, nor are any such proceedings
threatened to be filed, in either case which, if adversely determined, is
reasonably likely to have a Material Adverse Effect.
(e) To the Company's Knowledge (i) none of the rights
in the material Company Intellectual Property is being infringed in any material
manner by any other person, and (ii) neither the Company nor any Company
Contributor is infringing in any material manner upon any material intellectual
property rights of any person.
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(f) No director, officer or employee of the Company
or any Company Contributor owns, directly or indirectly, in whole or in part,
any material Company Intellectual Property right.
(g) In addition to the Company Intellectual Property
described above, the Company and the Company Contributors have the right to use,
free and clear of any claims or rights of others except claims or rights
described in the Company's Disclosure Schedule, all material trade secrets and
Company owned customer lists (collectively "Trade Secrets") required for and
used in the Business.
B. Information Technology. For purposes of this Section 4.10B.
and attached hereto as Schedule 4.10B(i) is a listing of all of the functions
reasonably necessary in any material respect to and regularly used in the
Business as presently conducted, including all of the material hardware,
software, networks and telecommunication (collectively the "Company Information
Technology"). The Company or one or more of the Company Contributors owns (free
and clear of all Liens, except Permitted Liens), or is licensed or otherwise
entitled to use the Company Information Technology which is included within the
Company Contributed Assets relating to the operation of the Business. There is
no material information technology, other than those set forth in the Schedule
4.10B(i), reasonably necessary and regularly used in, the conduct of the
Business as presently conducted. Schedule 4.10B(ii) identifies the material
contracts included in the Company Information Technology which the Company and
Fleet have jointly and mutually identified (collectively, the "Material
Information Technology Contracts"). The Company or one of the Company
Contributors has or can obtain the right to assign the Material Information
Technology Contracts to the LLC, except as otherwise stated in the Material
Information Technology Contracts.
C. Information Technology Consents and Approvals; No
Violation. Schedule 4.10C identifies those Information Technology Contracts
requiring consents of any third party in connection with the consummation of the
transactions contemplated by this Agreement. Neither the execution, delivery and
performance of this Agreement by the Company nor the consummation of the
transactions contemplated hereby by the Company or any Company Contributor will
(i) require the Company or any Company Contributor to obtain any other consent
or approval of or by any Company Information Technology contracting party; or
(ii) result in a material breach or violation of or a material default (or give
rise to any right of termination or claim for injunctive relief) under any of
the terms, conditions or provisions of any material contract relating to Company
Information Technology.
SECTION 4.11 Company Contributed Contracts.
(a) Each of the Company and the Company Contributors has
complied in all material respects with all of the respective provisions of the
Material Company Contributed Contracts and the Material Information Technology
Contracts required to be complied with by it and neither the Company nor any of
the Company Contributors, nor, to the Knowledge of the Company, any other party
thereto is in material default in any respect thereunder, and no event
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has occurred which but for the passage of time or giving of notice or both would
constitute such a material default thereunder by the Company or any of the
Company Contributors, and there is no outstanding notice of default or
termination under any Material Company Contributed Contract or Material
Information Technology Contract. The Material Company Contributed Contracts and
the Material Information Technology Contracts are each valid, binding and
enforceable in all material respects in accordance with their respective terms,
and the Contribution and the other transactions contemplated by this Agreement
will not affect the validity, enforceability and continuity of any such Material
Company Contributed Contract or Material Information Technology Contract, if
assignable and if properly assigned.
(b) With respect to the Company Contributed Contracts which
are not Material Company Contributed Contracts or Material Information
Technology Contracts each of the Company and the Company Contributors has
complied with all respective provisions of the Company Contributed Contacts
required to be complied with by it and none of the Company or any Company
Contributor is in default in any respect thereunder, and no event has occurred,
but for the passage of time or giving of notice or both, would constitute such a
default thereunder by the Company or any of the Company Contributors, except
where such noncompliance or defaults would, individually or in the aggregate,
not have a Material Adverse Effect and there is no outstanding notice of default
or termination under any Company Contributed Contract which would have a
Material Adverse Effect.
SECTION 4.12 Environmental Matters.
(a) For purposes of this Agreement, the following terms shall
have the following meanings: (i) the term "Hazardous Material" shall mean any
material, waste or substance including, without limitation, petroleum or
petroleum products that, whether by their nature or use, are subject to control
or regulation under any Environmental Requirement; (ii) the term "Environmental
Requirement" shall collectively mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (42 U.S.C. Section 9601, et seq.), the
Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.), the
Toxic Substances Control Act (15 U.S.C. Section 2601, et seq.), the Clean Air
Act (42 U.S.C. Section 7401, et seq.) and the Federal Water Pollution Control
Act (33 U.S.C. Section 1251, et seq.), all as presently in effect, any
regulation pursuant thereto, or any other law addressing environmental, health
or safety issues of or by any governmental authority; and (iii) the term
"governmental authority" shall mean the Federal government, or any state or
other political subdivision thereof, or any agency, court or body of the Federal
government, any state or other political subdivision thereof, exercising
executive, legislative judicial, regulatory or administrative functions.
(b) To the Company's Knowledge: (i) no Hazardous Material has
been or is currently located at, in, on, under or about any real estate used,
owned, operated or leased by the Company or any of the Company Contributors and
included in the Company Contributed Assets in a manner which (x) violates in any
material respect any Environmental Requirement or (y) which requires cleanup or
remedial action of any kind requiring the expenditure of more than
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$150,000 in the aggregate under any Environmental Requirement; (ii) none of the
Company or any Company Contributor is required to obtain or maintain any
federal, state and local environmental permits, certifications, licenses or
approvals with respect to any of the Company Contributed Assets, the failure to
obtain or hold which would have a Material Adverse Effect; (iii) neither the
Company nor any Company Contributor has received notice of any material
violation, lien, complaint, suit, order or other obligation with respect to any
past, present or future event concerning the environmental condition of any real
estate included in the Company Contributed Assets; and (iv) there has been no
investigation, litigation, directive or administrative enforcement proceeding
against the Company or any Company Contributor, nor have any settlements been
reached by the Company or any Company Contributor with any governmental
authority or public or private party alleging the release, threatened release,
disposal, storage or use of any Hazardous Material at, in, on, under or adjacent
to any real estate included in the Company Contributed Assets, and with respect
to which any of such items (i) through (iv) would result in a Material Adverse
Effect.
SECTION 4.13 Condition of the Company Contributed Assets. The
Company Contributed Assets (including, without limitation, all leasehold
interests included therein), constitute all of the assets reasonably necessary
or required to conduct the Business as presently conducted; provided, however,
that this representation shall not relate to any capital or capital adequacy
requirements of any Bank Authority. To the Company's Knowledge, all tangible
assets with a depreciated book value as of September 30, 1997 in excess of one
million dollars ($1,000,000) included in the Company Contributed Assets are in
good operating condition and repair, normal wear and tear excepted.
SECTION 4.14 Real Property.
(a) Schedule 4.14(a) of the Company's Disclosure Schedule
lists all real property owned by the Company or any of the Company Contributors
and included in the Company Contributed Assets. With respect to each such parcel
of owned real property:
(i) the identified owner has good and valid title to
the parcel of real property, free and clear of any Lien except for installments
of special assessments not yet delinquent, liens for Taxes not yet due and
payable, easements, covenants, and other restrictions, and utility easements,
building restrictions, zoning restrictions, and other easements and restrictions
existing generally with respect to properties of a similar character or which do
not materially reduce the value or usefulness of such property ("Permitted
Liens");
(ii) there are no leases, subleases, licenses,
concessions, or other agreements granting to any party or parties the right of
use or occupancy of any portion of the parcel of real property; and
(iii) there are no outstanding options or rights of
first refusal to purchase the parcel of real property, or any portion thereof or
interest therein.
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(b) Schedule 4.14(b) of the Company's Disclosure Schedule
lists all real property currently leased or subleased to the Company or any of
the Company Contributors and included in the Company Contributed Contracts. Each
lease and sublease listed in Schedule 4.14(b) of the Company's Disclosure
Schedule hereto is in all material respects legal, valid, binding, enforceable
against Company and the Company Contributors which are parties thereto, and to
the Knowledge of the Company, against the other parties thereto and is in full
force and effect, subject to bankruptcy, reorganization and similar laws and
general equitable principles.
SECTION 4.15 Compliance with Laws. Except for the
Environmental Requirements (compliance with which is covered by Section 4.12, as
applicable) the Company and each of the Company Contributors:
(i) is in compliance with all applicable United
States federal, state and local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable to the Business or to
the Company Credit Card Business Employees;
(ii) holds all permits, licenses, authorizations,
orders and approvals of, and has made all filings, applications and
registrations with, all governmental agencies that are required in order to
permit them to own or lease their properties and to conduct the Business as
presently conducted; and all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect; and
(iii) has not since June 30, 1996 received any
written notice from any governmental agency (A) asserting that the Company or
any of the Company Contributors is not in material compliance with any statutes,
regulations, ordinances or rules in connection with the operation of the
Business or (B) threatening to revoke any material license, franchise, permit,
membership privilege or governmental authorization necessary for the operation
of the Business which, in either (A) or (B) above, is reasonably likely to have
a material adverse effect on the ability of the Company and the Company
Contributors to consummate the transactions contemplated by this Agreement or
the ability of the LLC to conduct the Business following the Closing Date in
substantially the same manner as it is presently conducted,
except in the case of any matter referred to in clauses (i), (ii) and (iii)
above where such non-compliance or failure to hold any such items or make such
filings, applications and registrations or failure to be in full force and
effect would not have a Material Adverse Effect.
SECTION 4.16 Benefit Plans.
(a) With respect to the Company Credit Card Business Employees
identified as of the date of this Agreement, no amount paid or payable by the
Company or any of the Company Contributors or the LLC in connection with the
transactions contemplated hereby (either solely as a result thereof or as a
result of such transactions in conjunction with any other event) will be an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended.
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(b) Neither the LLC nor Fleet have any liability with respect
to the payment of any benefits or otherwise arising in connection with any
"employee benefit plan" or "plan" (as those terms are defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) of
the Company or any Company Contributor, except those payments of benefits or
other liabilities that may arise in connection with those plans or other
obligations with respect to Transferred Employees or Company Credit Card
Business Employees that are expressly assumed or otherwise agreed to by the LLC
or Fleet under the terms of this Agreement.
SECTION 4.17. Unions. The Company represents that with respect
to the Company Credit Card Business Employees: There is no pending or, to the
best of the Company's Knowledge, threatened employee strike, work stoppage or
labor dispute which would have a Material Adverse Effect. To the Knowledge of
the Company no union representation question exists, no collective bargaining
agreement exists or is currently being negotiated by the Company or any Company
Contributor, no demand has been made for recognition by a labor organization, no
union organizing activities is taking place, and none of the Company Credit Card
Business Employees is represented by any labor union or organization. There is
no unfair labor practice claim against the Company or any Company Contributor
pending before the National Labor Relations Board, or any strike, dispute,
slow-down, or stoppage pending or to the Knowledge of the Company, threatened
against or involving the Company or any Company Contributor and none has
occurred.
SECTION 4.18. Retained SmartMove Accounts. As of September 30,
1997, the total amount of SmartMove Balances outstanding equaled approximately
$667,000,000; the total amount of outstanding SmartMove Balances included in the
Retained SmartMove Accounts equaled approximately $54,000,000; and the weighted
average per annum interest rate of the SmartMove Balances included in the
Retained SmartMove Accounts equaled approximately 9.9%. The initiatives in May
1997, February 1997 and September 1996 are the only initiatives under which the
Company Contributors notified credit card account holders who maintained
SmartMove balances that the annual percentage rate on such SmartMove Balances
would be increased, although the Company Contributors have otherwise increased
annual percentage rates on SmartMove Balances as a result of delinquency or
other breaches by card holders of the credit card account agreement with the
Company Contributors.
SECTION 4.19 Other Matters. There is (i) no litigation, claim,
action, arbitration, investigation or examination by any governmental authority,
other action or other proceeding, with respect to which there is a reasonable
likelihood of an adverse determination and (ii) no material default by the
Company or any Company Contributor under any material agreement, relating in any
case to the business (including, without limitation, the Business) of the
Company, which, in the case of either (i) or (ii), would materially delay or
materially impair the ability of the Company to consummate the transactions
contemplated by this Agreement.
SECTION 4.20 AS IS Condition. Except as otherwise set forth in
this Agreement, the Company Contributed Assets to be contributed and transferred
hereunder are to
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be contributed and transferred and are to be accepted by the LLC in an "AS IS"
condition, without any representation or warranty whatsoever. EXCEPT AS
OTHERWISE SET FORTH IN THIS AGREEMENT, THE COMPANY MAKES NO REPRESENTATION OR
WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, AS TO THE COMPANY CONTRIBUTED ASSETS,
INCLUDING, BUT NOT LIMITED TO, ANY REPRESENTATION OR WARRANTY AS TO THE
MERCHANTABILITY OR THE TRANSFERABILITY OF THE COMPANY CONTRIBUTED ASSETS OR AS
TO THE FITNESS OF THE COMPANY CONTRIBUTED ASSETS FOR ANY PARTICULAR PURPOSE OR
AS TO ANY INFRINGEMENT OR VIOLATION OF ANY INTELLECTUAL PROPERTY RIGHTS BY ANY
COMPANY CONTRIBUTED ASSET OR ANY USE THEREOF.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF FLEET
Except as set forth in the Disclosure Schedule delivered to
the Company by Fleet prior to the execution of this Agreement, Fleet represents
and warrants to the Company as follows:
SECTION 5.01 Organization. Each of Fleet and the Fleet
Contributors is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or a banking
organization duly chartered by its chartering authority.
SECTION 5.02 Corporate Power, Authority Relative to this
Agreement. Each of Fleet and the Fleet Contributors has the corporate power and
authority to carry on its business as it is now being conducted and to own or
lease all of its properties and assets and to conduct the Fleet Business in the
manner currently conducted by it. Fleet has full corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby and to perform its obligations hereunder, including without
limitation causing the Fleet Contributors (after approval by their respective
Boards of Directors). The execution and delivery of this Agreement and the
consummation of the transactions hereby have been duly and validly authorized by
the Board of Directors of Fleet and no other corporate proceedings on the part
of Fleet or any Fleet Contributor (other than approval by the respective Boards
of Directors of the Fleet Contributors other than Fleet) are necessary to
authorize the execution, delivery or performance of this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Fleet and assuming that this Agreement has
been duly authorized, executed and delivered by the Company, this Agreement
constitutes a valid and binding agreement of Fleet, enforceable against it in
accordance with its terms (but subject to obtaining the approvals set forth in
Section 5.05 hereof), except that (i) enforcement may be subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or
hereafter in effect, affecting creditors'
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rights generally and (ii) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
SECTION 5.03 Absence of Certain Changes. Except as disclosed
in the Fleet Filings, since June 30, 1997 (a) Fleet and each of the Fleet
Contributors have conducted their respective businesses in the ordinary and
usual course, consistent with past practice and (b) no event has occurred or
fact or circumstance arisen that, individually or taken together with all other
facts, circumstances and events, has had, or is reasonably likely to have a
Fleet Material Adverse Effect.
SECTION 5.04 Reports. Fleet and each of its Subsidiaries have
filed all required forms, reports, definitive proxy statements, information
statements, and documents (including all prospectuses and all registration
statements) with the SEC required to be filed by it with respect to all periods
commencing on or after January 1, 1994 pursuant to the federal securities laws
and the SEC rules and regulations thereunder, all of which have complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act and the rules and regulations promulgated thereunder (the "Fleet
Filings"). None of the Fleet Filings (excluding the financial statements
included therein), at the time filed or mailed, contained, with respect to the
Fleet Business, any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements, in light of the circumstances under which they were made, not
misleading.
SECTION 5.05 Consents and Approvals; No Violation. Neither the
execution and delivery and performance of this Agreement by Fleet nor the
consummation of the transactions contemplated hereby by Fleet or any Fleet
Contributor will (i) conflict with or result in any breach or violation of any
provision of the respective Certificate of Incorporation or ByLaws (or other
similar governing documents) of Fleet or any of the Fleet Contributors, (ii)
require Fleet or any Fleet Contributor to obtain any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority or body, except (A) in connection with the HSR Act, if
applicable, (B) pursuant to the Exchange Act or the rules and requirements of
the New York Stock Exchange, Inc., (C) approval of state insurance departments,
if applicable, or (D) approval of Bank Authorities; (iii) result in a breach or
violation of or default (or give rise to any Lien, right of termination,
unilateral modification or amendment, cancellation or acceleration) under any of
the terms, conditions or provisions of any material note, license, Fleet
Contributed Contract, agreement or other instrument or obligation relating to
the Fleet Business to which Fleet or any of the Fleet Contributors is a party or
by which Fleet, any of the Fleet Contributors or any of their respective assets
may be bound, except for such breaches, violations or defaults (or Liens or
rights of termination, unilateral modifications or amendments, cancellations or
accelerations) as to which requisite waivers or consents have been obtained
prior to the Closing or which in the aggregate would not have a Fleet Material
Adverse Effect; or (iv) violate any order, writ, injunction, decree, judgment,
ordinance, statute, rule, law or regulation applicable to Fleet, any of the
Fleet Contributors or any of their respective properties or businesses, except
for violations (other than of orders, writs,
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injunctions or decrees issued against Fleet or any of the Fleet Contributors or
naming Fleet or any of the Fleet Contributors as a party) which would not,
individually or in the aggregate, have a Fleet Material Adverse Effect.
SECTION 5.06 Litigation. There is no claim, action,
arbitration, investigation or proceeding pending or, to the Knowledge of Fleet,
threatened against Fleet or any of the Fleet Contributors and relating to the
Fleet Business, before any court or governmental or regulatory authority or body
acting in an adjudicative capacity, with respect to which there is a reasonable
likelihood of an adverse determination which (i) would have a Fleet Material
Adverse Effect, or (ii) challenges the validity or property or the transactions
contemplated in the Agreement. Neither Fleet nor any of the Fleet Contributors
is subject to any outstanding order, writ, judgment, stipulation, award,
injunction or decree of any court issued against Fleet or any of the Fleet
Contributors or naming Fleet or any of the Fleet Contributors as a party
relating to the Fleet Business which has or is reasonably likely to have a Fleet
Material Adverse Effect.
SECTION 5.07 Title to Properties; Encumbrances. Fleet and each
of the Fleet Contributors has good title to all of the Fleet Contributed Assets,
free and clear of all Liens, except for Permitted Liens.
SECTION 5.08 Licenses. Fleet and each of the Fleet
Contributors has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all governmental
authorities that are required to permit them to own and lease their properties
and to conduct the Fleet Business as presently conducted; all such permits,
licenses, certificates of authority, orders and approvals are in full force and
effect and, to Fleet's Knowledge, no suspension or cancellation of any of them
is threatened, which, in any such case, would have a Fleet Material Adverse
Effect
SECTION 5.09 Fleet Contributed Contracts. Fleet and each of
the Fleet Contributors has complied with all respective provisions of the Fleet
Contributed Contracts required to be complied with by it and neither Fleet nor
any of the Fleet Contributors nor to the Knowledge of Fleet any other party is
in default in any respect thereunder, and no event has occurred which but for
the passage of time or giving of notice of both would nor might constitute such
a default thereunder by Fleet or any of the Fleet Contributors except where such
noncompliance or defaults would, individually or in the aggregate, not have a
Fleet Material Adverse Effect, and there is no outstanding notice of default or
termination under any Fleet Contributed Contract. The Fleet Contributed
Contracts are valid, binding and enforceable in accordance with their respective
terms and the Contribution and the other transactions contemplated by this
Agreement will not affect the validity, enforceability and continuity of any
such Fleet Contributed Contract, if assignable and if properly assigned.
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ARTICLE VI
COVENANTS
SECTION 6.01 Conduct of Business of the Company and Fleet.
(a) Except as contemplated by this Agreement, during the
period from the date of this Agreement until the Closing Date, the Company and
the Company Contributors will each conduct its operations relating to the
Business according to its ordinary and usual course of business, consistent with
past practice.
(b) From the date hereof until the Closing Date, except as
expressly contemplated by this Agreement, without the prior written consent of
Fleet, the Company will not, and will cause each of the Company Contributors not
to:
(i) Ordinary Course. Conduct the Business other than
in the ordinary and usual course or fail to use commercially reasonable efforts
to preserve the Business and the Company Contributed Assets and maintain their
rights, franchises and existing relations with customers, suppliers, employees,
including Company Credit Card Business Employees, and business associates, or
take any action reasonably likely to have a material adverse effect upon the
Company's or any of the Company Contributors' ability to perform any of their
respective obligations under this Agreement or to materially adversely affect or
delay the ability of any of the Company or the Company Contributors to obtain
any necessary approvals of any regulatory agency or governmental body required
for the transactions contemplated hereby.
(ii) Compensation; Employment Agreements; Etc. Enter
into or amend or renew any employment, consulting, severance or similar
agreements or arrangements (other than benefit plans) with any Company Credit
Card Business Employee, or grant any salary or wage increase or increase any
employee benefit (including incentive or bonus payments to any Company Credit
Card Business Employee) except (1) for normal individual increases in
compensation to employees in the ordinary course of business consistent with
past practice, base compensation increases not to exceed 6% per annum, (2) for
other changes that are required by applicable law, (3) to satisfy contractual
obligations existing as of the date hereof and disclosed on the Company's
Disclosure Schedule, (4) for employment arrangements for, or grants of awards
to, newly hired employees of the Business consistent with past practice (which
in no event shall include the execution of any employment agreements with such
employees); provided, however, that no such agreement or arrangement shall cause
the Company's representation in Section 4.16(a) to fail to be true as of the
Closing Date or (5) bonus payments in the ordinary course of business consistent
with past practice and in accordance with bonus plans existing on the date of
this Agreement. For purposes of this paragraph 6.01(b)(ii), the limitations
applicable to Company Credit Card Business Employees who are Potential Company
Credit Card Business Employees (as identified as such as individuals or by
category or job description) shall cease to be applicable with respect to any
individuals designated by the Company 24 hours after notice of such designation
is provided by the Company to Fleet unless
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Fleet notifies the Company of Fleet's determination to treat such individuals as
Company Credit Card Business Employees with respect to whom Fleet is required to
offer employment on behalf of the LLC.
(iii) Benefit Plans. (A) Except as set forth on
Schedule 6.01(b)(iii) of the Company Disclosure Schedule, enter into, establish,
adopt or amend (except as may be required by applicable law) any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement (or
similar arrangement) related thereto, in respect of the Company Credit Card
Business Employees, or (B) except as provided in Section 6.08(b) hereof, take
any action with respect to Company Credit Card Business Employees to accelerate
the vesting or exercisability of stock options, restricted stock or other
compensation or benefits under the Advanta Corp. 1992 Stock Option Plan (as
amended and restated), or increase the compensation or benefits, payable
thereunder. For purposes of this paragraph 6.01(b)(iii), the limitations
applicable to Company Credit Card Business Employees who are Potential Company
Credit Card Business Employees (as identified as such as individuals or by
category or job description) shall cease to be applicable with respect to any
individuals designated by the Company 24 hours after notice of such designation
is provided by the Company to Fleet unless Fleet notifies the Company of Fleet's
determination to treat such individuals as Company Credit Card Business
Employees with respect to whom Fleet is required to offer employment on behalf
of the LLC.
(iv) Dispositions. Sell, transfer, mortgage, encumber
or otherwise dispose of or discontinue any of the Company Contributed Assets,
except in the ordinary course of business consistent with past practice and in a
transaction that individually or in the aggregate with all such other
disposition or discontinuances is not material to the Company Contributed Assets
taken as a whole, or in connection with securitizations of Managed Receivables
(provided that the benefits thereof are transferable to the LLC at the Closing
without further consents of any third parties) or Household Receivables or in
connection with the monthly sale of charged-off receivables to an Affiliate of
Commercial Financial Services, Inc. pursuant to contractual obligations existing
on the date of this Agreement or the sale of receivables of bankrupt account
holders consistent with past practice.
(v) Acquisitions. Acquire all or any portion of, the
assets, business, or properties of any other entity which would be part of the
Business and included in the Company Contributed Assets, except in the ordinary
course of business consistent with past practice and in a transaction that
individually or in the aggregate with all such other acquisitions is not
material to the Business or the Company Contributed Assets.
(vi) Accounting Methods. Implement or adopt any
material change in its accounting principles, practices or methods as they apply
to the Business and are reflected in the Company Accounting Policy Manual
identified in Schedule 1.06(g), other than as may be required by GAAP or
governmental regulatory authorities as concurred in by the Company's Auditor, or
change any of its methods of reporting income and deductions for Federal income
tax
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purposes from those employed in the preparation of the Federal income tax
returns of the Company and the Company Contributors for the taxable years ending
December 31, 1997 and December 31, 1996 and, if applicable, December 31,1998,
except as required by changes in law or regulation or except to the extent such
changes do not materially adversely effect the federal income tax treatment of
the Company Contributed Assets while owned by the LLC.
(vii) Reconciliations. Fail to reconcile all general
ledger accounts consistent with past practice but in no event later than
forty-five days after the month end other than those accounts which are
reconciled quarterly (i.e., general ledger accounts 124007, 152619 and 157001).
(viii) Contracts. Except in the ordinary course of
business consistent with past practice, enter into or terminate any Material
Company Contributed Contract or amend or modify any Material Company Contributed
Contract or Material Information Technology Contract (other than renewals of
such contracts without material changes of terms), or amend any Company
Contributed Contract (other than a Material Company Contributed Contract or a
Material Information Technology Contract) in such a manner as to cause such
Company Contributed Contract to become a "Material Company Contributed
Contract".
(ix) Indebtedness. As soon as practicable after
appropriate SEC and other regulatory approvals have been obtained, issue any
notes in connection with the Advanta National Bank note program unless such
notes may be transferred in accordance with the terms of this Agreement at the
Closing without any additional consent of the holder thereof.
(x) Credit Policies. Amend or revise in any material
respect its credit policies relating to the Business, including, without
limitation; underwriting, delinquency and charge-off policies.
(xi) Deferred Acquisition Costs. Amortize the DAC
account other than in a manner consistent with past practice or, except in the
ordinary course of business consistent with past practice, change in any
material respect its policies with respect to the transfer of prepaid
advertising expenses to the DAC account.
(xii) Solicitation Campaigns. Conduct solicitation
campaigns other than in the ordinary course of business consistent with past
practice and in substantial accordance with its current marketing plans (e.g.,
if the current marketing plans call for four campaigns, then five campaigns
would not be a breach of this covenant but ten campaigns would be a breach) and
in a manner that such campaigns would not have a material adverse effect on the
LLC's ability to operate the Business after the Closing Date in substantially
the same manner as the Business is presently operated.
(xiii) Commitments. Agree or commit to do any of the
foregoing.
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(c) Except as contemplated by this Agreement, from the date of
this Agreement until the Closing, Fleet and the Fleet Contributors will each
conduct its operations relating primarily or solely to the Fleet Business
according to its ordinary and usual course of business, consistent with past
practice.
SECTION 6.02 No Solicitation.
(a) From the date of this Agreement until the earlier of the
Closing or the termination of this Agreement, the Company and each of the other
Company Contributors and their respective executive officers shall not (and will
use their respective commercially reasonable efforts not to permit any of its
other officers, directors, agents or affiliates to) directly or indirectly (i)
solicit, encourage inquiries or proposals with respect to, engage in discussions
or negotiate with any person (whether such discussions or negotiations are
initiated by the Company or otherwise) or take any other action intended or
designed to facilitate the efforts of any person (other than Fleet) relating to
the possible acquisition of the Business (whether by way of contribution,
purchase of capital stock, purchase of assets or otherwise) (with any such
efforts by any such person, including a firm proposal to make such an
acquisition, to be referred to as an "Alternative Acquisition"), (ii) provide
information with respect to the Business to any person, other than Fleet,
relating to a possible Alternative Acquisition by any person, other than Fleet,
(iii) enter into an agreement with any person, other than Fleet, providing for a
possible Alternative Acquisition, or (iv) make or authorize any statement,
recommendation or solicitation in support of any possible Alternative
Acquisition by any person, other than by Fleet.
(b) The Company shall immediately cease any of its activities,
discussions or negotiations conducted prior to the date of this Agreement with
any parties other than Fleet with respect to any of the foregoing, and shall use
its commercially reasonable efforts to enforce any confidentiality or similar
agreement relating to an Alternative Acquisition. In the event the Company shall
receive a proposal for an Alternative Acquisition, it shall promptly inform
Fleet as to the Alternative Acquisition and the substance thereof (including the
identity of the person making such Alternative Acquisition), and advise Fleet of
any developments with respect to such Alternative Acquisition promptly after the
occurrence thereof.
(c) From the date of this Agreement until the earlier of the
Closing or the termination of this Agreement, Fleet and each of the other Fleet
Contributors and their respective executive officers shall not (and will use
their respective commercially reasonable efforts not to permit any of its other
officers, directors, agents or affiliates to) directly or indirectly (i)
solicit, encourage inquiries or proposals with respect to, engage in discussions
or negotiate with any person (whether such discussions or negotiations are
initiated by Fleet or otherwise) or take any other action intended or designed
to facilitate the efforts of any person (other than the Company) relating to the
possible acquisition of the Fleet Business (whether by way of contribution,
purchase of capital stock, purchase of assets or otherwise) (with any such
efforts by any such person, including a firm proposal to make such an
acquisition, to be referred to as an "Fleet Alternative Acquisition"), (ii)
provide information with respect to the Fleet Business to any person, other than
the Company, relating to a possible Fleet Alternative Acquisition by any
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person, (iii) enter into an agreement with any person, other than the Company,
providing for a possible Fleet Alternative Acquisition, or (iv) make or
authorize any statement, recommendation or solicitation in support of any
possible Fleet Alternative Acquisition by any person, other than by the Company.
Notwithstanding the foregoing, Fleet may furnish information concerning the
Fleet Business to a person (other than the Company) and may negotiate and
execute an agreement with such person if counsel to Fleet advises the Board of
Directors of Fleet, or a committee thereof, that the failure to furnish such
information or negotiate with such person could subject the Fleet's directors to
liability for breach of their fiduciary duties. In the event Fleet shall receive
a proposal for a Fleet Alternative Acquisition, it shall promptly inform the
Company as to any such proposal. In addition, notwithstanding any other
provisions of this paragraph (c), the term Fleet Alternative Acquisition shall
not include, and there shall be no limitations whatsoever imposed upon Fleet,
its officers, directors, agents or affiliates with respect to, any proposal
relating to the acquisition of Fleet whether by merger, consolidation, purchase
of assets or otherwise.
SECTION 6.03 Access to Information.
(a) Between the date of this Agreement and the Closing, upon
reasonable prior notice to the Company and subject to applicable laws relating
to the exchange of information, the Company will give Fleet and its authorized
representatives reasonable access during normal business hours to the offices
and other facilities and to the books and records of the Company and the Company
Contributors relating to the Business, and to the Company Credit Card Business
Employees and will permit Fleet to make such reasonable inspections during
normal business hours as it may reasonably request and will cause its officers
and those of the Company Contributors to furnish Fleet with such financial and
operating data and other information relating to the Business as Fleet may from
time to time reasonably request; provided, however, that all such access and
inspections shall be coordinated by Fleet with a designee of the Company (who
shall be identified to Fleet promptly following the date hereof) and shall be
conducted in such manner so as not to unduly interfere with the normal business
operations of the Company or any of the Company Contributors. Notwithstanding
the foregoing, neither the Company nor any of the Company Contributors shall be
required to provide access to or to disclose information where such access or
disclosure would jeopardize the attorney-client privilege of the institution in
possession or control of such information or contravene any law, rule,
regulation, order, judgment, decree or binding agreement entered into prior to
the date of this Agreement. The parties hereto will make appropriate substitute
disclosure arrangements to the extent practicable under circumstances in which
the restrictions of the immediately preceding sentence apply.
(b) All information received by Fleet and its representatives
pursuant to this Section 6.03 will be subject to the Letter Agreement dated May
12, 1997 between Fleet and the Company.
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SECTION 6.04 Commercially Reasonable Efforts.
(a) Subject to the terms and conditions herein provided, each
of the parties hereto agrees to promptly effect all necessary filings under the
Bank Acts and, to the extent applicable, the HSR Act (which the parties shall
file with the United States Federal Trade Commission and the Antitrust Division
of the United States Department of Justice on or prior to November 20, 1997 if
they determine a filing is so required) and use its commercially reasonable
efforts to secure all government clearances (including by taking all reasonable
steps to avoid or set aside any preliminary or permanent injunction or other
order of any federal or state court of competent jurisdiction or other
governmental authority) to consummate and make effective the transactions
contemplated by this Agreement. Each of the parties shall have the right to
review in advance, and, to the extent practicable, each will consult with the
other, in each case subject to applicable laws relating to the exchange of
information, with respect to (i) all material written information submitted to
the SEC or (ii) descriptions of this Agreement and the transactions contemplated
hereby submitted to any rating agency or any other third party, in connection
with the transactions contemplated by this Agreement.
(b) In exercising the foregoing right, each of the parties
hereto agrees to act reasonably and as promptly as practicable. Each of the
parties hereto further agrees to use its reasonable efforts to take, or cause to
be taken, all action, and to do, or cause to be done, all other things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
In particular, subject to the provisions of Section 11.09 of this Agreement,
Fleet and the Company will use their respective commercially reasonable efforts
to obtain all other consents, authorizations, orders and approvals required in
connection with, and waivers of any material violations, breaches and defaults
that may be caused by, the consummation of the Contribution or the other
transactions contemplated by this Agreement. For those of the Material
Information Technology Contracts set forth on the Company's Disclosure Schedule
which require consent (or any other form of conditional approval) from any third
party prior to or after any assignment by the Company, the Company and Fleet
will each diligently and in good faith exercise reasonable commercial efforts
towards obtaining such consents or satisfying any conditions imposed by any
third party. Each party hereto further agrees that it will consult with the
other party hereto with respect to the obtaining of all permits, consents,
approvals, and authorizations of third parties and governmental authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement, and each party will keep the other party appraised of the status of
material matters relating to the completion of the transactions contemplated
hereby.
SECTION 6.05 Public Announcements. Fleet and the Company will
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Contribution, the transactions
contemplated hereby or this Agreement and shall not issue any such press release
or make any such public statement prior to such consultation, except as may be
required by law, regulation or the rules of any national securities exchange or
The Nasdaq Stock Market.
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SECTION 6.06 Purchase of Shares. From the date hereof until
the Closing or the termination of this Agreement in accordance with its terms,
and for a period of twelve months thereafter, neither Fleet nor any Subsidiary
or Affiliate of Fleet shall acquire beneficial ownership (within the meaning of
Rule 13d-3 under the Exchange Act), except in a fiduciary capacity in cases
where the person for which it is acquiring beneficial ownership is not Fleet or
any such Subsidiary or Affiliate, of any shares of capital stock of the Company
without the prior written consent of the Company.
SECTION 6.07 Notification of Certain Matters.
(a) The Company shall give prompt notice to Fleet, and Fleet
shall give prompt notice to the Company, of (i) the occurrence or nonoccurrence
of any event the occurrence or non-occurrence of which would be likely to cause
any representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Closing, (ii) any failure
of the Company or Fleet, as the case may be, to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it hereunder, (iii) any notice or other communication from any
third party alleging that the consent of such third party is required in
connection with the transactions contemplated by this Agreement, (iv) the
receipt of written notice from any governmental agency (A) asserting that the
Company or any of the Company Contributors is not in material compliance with
any statutes, regulations, ordinances or rules in connection with the operation
of the Business or (B) threatening to revoke any material license, franchise,
permit, membership privilege or governmental authorization necessary for the
operation of the Business or (v) any Material Adverse Effect or Fleet Material
Adverse Effect, as applicable.
(b) The Company and Fleet shall confer on a regular and
frequent basis with each other with respect to the Business, the Fleet Business
and other matters relevant to the Contribution, and the other transactions
contemplated by this Agreement, and Fleet and the Company shall promptly advise
the other, orally and in writing, of any change or event, including, without
limitation, any complaint, investigation or hearing by any governmental entity
(or communication indicating the same may be contemplated) or the institution or
threat of litigation, having, or which, insofar as can be reasonably foreseen,
would have, a Material Adverse Effect or a Fleet Material Adverse Effect.
SECTION 6.08 Employment Matters
(a) Employment Matters
(1) Between the date hereof and the Closing Date,
Fleet shall offer, on behalf of the LLC, employment effective as of the close of
business on the Closing Date to all Company Credit Card Business Employees.
Company Credit Card Business Employees who accept such offer of employment shall
hereinafter be referred to as the "Transferred Employees."
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(2) If any Company Credit Card Business Employee who
is, on the Closing Date, absent on an authorized leave in accordance with
Company policies, seeks to return to active employment, within the period that
such Company Business Card Employee's reemployment rights are protected by law,
Fleet, on behalf of the LLC, shall offer immediate employment to such Company
Credit Card Business Employee; provided that Fleet's obligation to offer
employment on behalf of the LLC to any Company Credit Card Business Employee
whose authorized leave was based upon a medical condition of such Company Credit
Card Business Employee shall be subject to the Company Credit Card Business
Employee being medically capable to perform the essential functions of the
position occupied immediately before such leave. For purposes of this Section
6.08(a)(2), an authorized leave shall mean short-term disability, maternity,
military, family and medical leaves and such other leaves of absence where the
opportunity to return to active employment is subject to statutory requirements.
Any Company Credit Card Business Employee who accepts the LLC's offer of
employment pursuant to this Section 6.08(a)(2) shall thereafter be considered a
Transferred Employee for all purposes of this Agreement.
(3) Fleet shall not be required to offer employment
on behalf of the LLC to any Credit Card Business Employee who is (i) on
short-term disability on the date hereof and who thereafter becomes eligible for
long term disability benefits without returning to active employment, (ii) on
long term disability from Company or any of its Affiliates on the date of this
Agreement or (iii) eligible to receive long term disability benefits on or
before the Closing Date.
(4) Nothing in this Agreement shall be deemed to
require or guaranty the employment of any Company Credit Card Business Employee
to be continued by the LLC for any particular period of time after the Closing
Date. Employment of the Transferred Employees by the LLC shall be employment "at
will" and nothing herein shall be construed to be an employment agreement for
the benefit of any Company Credit Card Business Employee, or to interfere with
the right of Fleet or the LLC to terminate the employment of any Company Credit
Card Business Employee.
(5) The LLC will reimburse the Company and the
Company Contributors in connection with any severance costs incurred by any of
them with respect to Company Credit Card Business Employees who (i) are not
offered employment pursuant to this Section 6.08(a) on terms consistent with the
Change of Control Plans and (ii) do not accept employment with the LLC.
(b) Company Benefits. Between the date hereof and the Closing
Date, the Company shall take reasonable actions necessary to provide that:
(1) Effective on the Closing Date, the Advanta
Corporation Employee Savings Plan account balances of all Company Credit Card
Business Employees shall become fully vested.
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(2) The Company, or its Affiliates, pay, or cause to
be paid, consistent with past practice, all claims by Transferred Employees and
their dependents for medical and dental benefits covered by any of the Company's
medical or dental plans which relate to services rendered on or before the
Closing Date to the extent such plans would honor such claims in accordance with
their terms.
(3) The Advanta Management Incentive Plans with Stock
Election (II, III and IV) ("AMIP") are amended as provided in Schedule
6.01(b)(iii).
(4) The Advanta Corp. 1992 Stock Option Plan (as
amended and restated) is amended, as necessary, to provide for the benefits
described in Schedule 6.08(b)(4).
(5) The Company makes its election to distribute
funds held by it pursuant to its Executive Deferral Plan to Company Credit Card
Business Employees by lump sum or over three years, as determined by the
Company.
(6) The Change of Control Plans assumed by the LLC
pursuant to Section 6.08(c)(2)(i) are amended as provided in Schedule
6.01(b)(iii).
(7) On the Closing Date, the Company shall pay 50% of
the aggregate benefits payable to those persons listed on Schedule 6.08(c)
hereof pursuant to the terms of those letter agreements dated as of April 28,
1997 between each such person and the Company (the "Company Letter Agreement
Payments").
(c) LLC Benefits. After the Closing Date, Fleet will ensure
that:
(1) the LLC will maintain employee benefit plans,
programs, policies and arrangements for the Transferred Employees on terms and
conditions generally applicable to similarly situated employees of Fleet ("FFG
Benefits").
(2) notwithstanding Section 6.08(c)(1):
(i) with respect to the Transferred
Employees, the LLC shall assume the Advanta Employees Change of Control
Severance Plan and the Advanta Senior Management Change of Control Severance
Plan (the "Change of Control Plans") and will pay benefits to the Transferred
Employees in accordance with such Change of Control Plans;
(ii) the LLC shall pay 50% of the aggregate
of all Company Letter Agreement Payments; and
(iii) the LLC and the Company shall
cooperate in order to cause, as soon as practicable following the Closing Date,
a trustee to trustee transfer of the account balances of all Transferred
Employees held under the Advanta Corp. Employee Savings Plan to a defined
contribution plan meeting the requirements of Section 401(a) of the Internal
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Revenue Code of 1986, as amended (the "Code"), maintained for the benefit of
employees of the LLC (the "LLC Plan"), such transfer to consist of the cash or
other investments held in such accounts; provided, however, that no such
transfer shall be made with respect to any Transferred Employee who is not, as
of the date of such transfer, an employee of the LLC. The Company and the LLC
shall cooperate in all matters related to such transfer, including making
appropriate amendments to the plans involved and in timely filing with the
Internal Revenue Service or other governmental or regulatory agencies such
returns or other documentation as may be required. All liabilities associated
with the accounts of Transferred Employees that are actually transferred to the
LLC Plan shall be assumed by the LLC Plan;
(3) Transferred Employees (to the extent otherwise
eligible) shall be given credit for all service with the Company and its
Affiliates (and predecessors) to the same extent as such service was credited
for such purpose by the Company and its Affiliates, under all FFG Benefits for
purposes of eligibility and vesting but not for benefit accrual purposes;
provided, however, that for all purposes under the Fleet Financial Group, Inc.
Pension Plan, including, but not limited to, eligibility, vesting and benefit
accrual, each Transferred Employee shall be considered a new employee of Fleet
as of the close of business on the Closing Date;
(4) each Transferred Employee's current level of
vacation or paid time off entitlement will be grandfathered, so that vacation or
paid time off entitlement under the LLC's vacation policy will never be less
than what such Transferred Employee is entitled to on the date hereof; and
(5) the LLC shall waive any limitations for
preexisting conditions under its medical, dental and disability plans with
respect to any Transferred Employee provided such Transferred Employee was
participating in a comparable benefit plan of the Company or any of its
Affiliate on the Closing Date. In addition, the LLC shall waive any
service-based eligibility requirement for its employee benefit plans with
respect to any Transferred Employee who is otherwise eligible for such plan and
was participating in a comparable benefit plan of Company or any of its
Affiliates on the Closing Date.
(d) Company Obligations. The Company shall pay (including,
without limitation, by issuance or vesting of stock) to the Transferred
Employees or reimburse the LLC (if the Company and Fleet agree to cause the LLC
to pay) all amounts due under AMIP with respect to the 1996 Bonus Protection
Payment, the 1997 Bonus Protection Payment and the 1997 Bonus Payment no later
than such time as the Company otherwise makes payments under such plans.
(e) Employee Records. After Closing, the parties hereto will
cooperate with each other in the administration of all applicable employee
compensation and benefit plans including providing reasonable access to any and
all records necessary to administer all employee compensation and benefit plans.
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(f) No Third Party Beneficiaries; No LLC Limitations. Nothing
expressed or implied in this Section 6.08 shall create any third party
beneficiary or other rights in any Company Credit Card Business Employee in
respect of continued employment with Company, the LLC or any of their respective
Affiliates or with respect to any benefits that may be provided, directly or
indirectly, from the Company or under any FFG Benefits. Additionally,
notwithstanding anything contained herein to the contrary, no provision of this
Agreement shall constitute a limitation on rights to amend, modify or terminate,
after the Closing Date, any specific plan or arrangement of Company, the LLC or
any of their respective Affiliates, except to the extent that comparability
requirements as to a type of plan, program, policy or arrangement may create
such a limitation or such limitation is imposed under the terms of any plan
expressly assumed by the LLC.
SECTION 6.09. Tax Reporting The Company and the Company
Contributors and Fleet and the Fleet Contributors agree that they shall treat
the Contribution as an exchange for membership interests in the LLC that will
qualify for nonrecognition of gain or loss to each contributor and the LLC
pursuant to the provisions of Subchapter K of the Code and, accordingly, the
parties hereto further agree that each of them and the LLC will report the
income tax consequences of the Contribution in a manner fully consistent with
viewing the Contribution as resulting in the nonrecognition of gain or loss and
further agree that they will not take any income tax position inconsistent with
viewing the Contribution as resulting in the nonrecognition of gain or loss
unless such position would subject the reporting person to a penalty.
SECTION 6.10 Real Estate Matters. Title to owned real estate
which is part of the Company Contributed Assets and Fleet Contributed Assets
will be conveyed by special warranty deed, free and clear of all Liens, except
Permitted Liens to the extent valid and enforceable. Real estate taxes on the
real estate which is part of the Company Contributed Assets or Fleet Contributed
Assets, minimum water and sewer rents, rents under any leases in which the
applicable contributor is the landlord and other items customarily apportioned
in the jurisdiction in which the real estate is situate, shall be apportioned
pro rata between the contributor and the LLC on a per diem basis as of the close
of business on the Closing Date.
SECTION 6.11 Cooperation in Obtaining Approval and Consents.
(a) The LLC and Fleet agree, and Fleet shall cause Fleet's
Affiliates to agree, to cause Fleet National Bank, at the option of the Company,
to assume or to join as joint and several indemnitors, and irrevocable and
unconditional guarantor and surety of the obligations of the LLC and Fleet
Credit Card Bank (i) to the extent requested by the applicable trustees or
rating agencies and any other party whose consent, approval or action is
required in connection with transfer of the assets and liabilities of the
Company and the Company Contributors relating to Master Trust I and Master Trust
II; and (ii) with respect to any obligations of Advanta National Bank which are
part of the Company Transferred Liabilities, including, without limitation,
those arising under promissory notes and certificates of deposit.
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(b) Upon the terms and subject to the conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action, to do, or cause to be done, and to
assist and cooperate with the other party hereto in doing, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement, including, but not limited to, the obtaining of
all necessary consents, approvals or waivers from holders of notes of Advanta
National Bank. In connection therewith, the Company will prepare and file with
the applicable Bank Authorities a solicitation statement with respect to the
notes, if necessary. Fleet will furnish the Company with such information,
including, but not limited to, financial information regarding Fleet and its
Subsidiaries, as the Company may reasonably request for incorporation into such
solicitation materials, and shall take all such other actions as the Company may
reasonably request in connection with any such action.
(c) The Company and Fleet agree to cooperate in good faith to
determine which contracts relating to Information Technology should be assigned
to the LLC, retained by the Company, split to the extent possible between the
Company and the LLC and/or shared by the Company and the LLC.
SECTION 6.12 Good Faith Negotiation. The parties shall use
their best efforts to negotiate the form of the agreements and documents
referred to in Section 1.03 which are to be executed concurrently with or prior
to the Closing.
SECTION 6.13 Actions of Company Contributors, Fleet
Contributors and Others. The Company hereby agrees that it will use its best
efforts to cause the Company Contributors and Fleet hereby agrees that it will
use its best efforts to cause the Fleet Contributors, to take any and all such
actions (as sole shareholder or otherwise) as they are required to take pursuant
to this Agreement.
SECTION 6.14 Supplements to Schedules.
(a) Prior to the Closing Date, each of the Company and Fleet
shall promptly supplement or amend their applicable Disclosure Schedule with
respect to any matter hereafter arising which, if existing or occurring at the
date of this Agreement, would have been required to be set forth or described in
the schedules and shall supplement or delete from the lists of Company
Contributed Assets, Fleet Contributed Assets, Company Transferred Liabilities
and Fleet Transferred Liabilities any assets or liabilities which should be so
added or deleted in accordance with the terms of this Agreement. Solely for
purposes of determining the accuracy of representations and warranties of the
Company and Fleet contained in this Agreement for the purpose of determining the
fulfillment of the conditions set forth in Sections 8.02(b) and 8.03(b), the
Disclosure Schedules delivered by the Company and Fleet, as applicable, shall be
deemed to include only that information contained therein on the date of this
Agreement and shall be deemed to exclude any information contained in any
subsequent supplement or amendment thereto.
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(b) For purposes of determining satisfaction of the closing
condition set forth in Section 8.03(f), Fleet shall have the exclusive right to
review any supplements to the list of Company Contributed Contracts and to
determine, in its reasonable discretion (applying substantially the same
standards of materiality used to establish the list of Material Company
Contributed Contracts as of the date of this Agreement), whether any additional
Company Contributed Contracts should be deemed Material Company Contributed
Contracts; provided, however, that in no event shall any such additional Company
Contributed Contract be deemed to be a Material Company Contributed Contract
unless Fleet gives the Company written notice thereof within five Business Days
after a copy of such contract is submitted to Fleet.
SECTION 6.15 Non-Competition and Non-Solicitation.
(a) During the period beginning on the Closing Date and ending
on the fifth anniversary thereof (the "Non-Competition Period"), except as
required in connection with the Retained SmartMove Accounts and the Rewards
Accelerator Accounts, neither the Company nor any of its Subsidiaries or any
entity which is an Affiliate of the Company (individually and collectively, the
"Company Parties") shall directly or indirectly engage in any consumer credit
card business or activity which is in competition with the Business or the Fleet
Business in the United States; provided, however, that ownership of less than 2%
of the outstanding capital stock of any publicly traded corporation which is in
direct competition with the Business or the Fleet Business in the United States
shall not violate the foregoing agreement not to compete.
(b) During the period beginning on the Closing Date and ending
on the fifth anniversary thereof, neither the Company nor any of its
Subsidiaries shall, directly or indirectly use any past or present customer list
of the Business or any list of prospective customers generated by use of the
know-how, trade secrets or other intellectual property of the Business (whether
in hard copy or data file or otherwise) to solicit, directly or indirectly, any
customer of the Business or the Fleet Business for any consumer debt product or
in its business credit card operations; provided, however that nothing in this
Section 6.15 shall require the Company or any of its Affiliates to destroy any
customer lists relating to the Business that it may have in its possession
(whether in hard copy, data file or otherwise) or to sort or cull any customer
list used by the other businesses of the Company or its Affiliates and nothing
in this Section 6.15(b) shall restrict the general use of know-how by the
Company in the conduct of its business.
(c) For the period beginning as of the close of business on
the Closing Date and ending on the third anniversary thereof, neither the
Company nor any of its Subsidiaries shall, directly or indirectly, solicit for
employment, retain as an independent contractor or consultant, induce to
terminate employment with Fleet, any of its Subsidiaries or the LLC or otherwise
interfere with any employee of Fleet, any of its Subsidiaries or the LLC, in all
such cases, engaged in the Business or the Fleet Business; provided, however,
that persons solicited by the Company and its Subsidiaries pursuant to the use
of any general advertisements or general solicitations not specifically directed
to employees of Fleet, any of its Subsidiaries or the LLC shall not violate the
terms of this covenant.
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(d) For the period beginning as of the close of business on
the Closing Date and ending on the third anniversary thereof, neither Fleet nor
any of its Subsidiaries shall, directly or indirectly, solicit for employment,
retain as an independent contractor or consultant, induce to terminate
employment with the Company or any of its Subsidiaries or otherwise interfere
with any employee of the Company or any of its Subsidiaries; provided, however,
that persons solicited by Fleet and its Subsidiaries pursuant to the use of any
general advertisements or general solicitations not specifically directed to
employees of the Company or any of its Subsidiaries shall not violate the terms
of this covenant.
SECTION 6.16 Access. From and after the Closing Date, the LLC,
Fleet and the Fleet Contributors shall give the Company and the Company
Contributors, without charge, reasonable, prompt and timely access to the
Company Contributed Assets, books and records relating thereto, the Company
Credit Card Business Employees and First Data Resources, Inc., all as may be
reasonably requested by the Company, in order to enable the Company and the
Company Contributors to (i) administer and otherwise deal with the Retained
SmartMove Accounts and the Credit Insurance Business; (ii) participate in the
preparation of the Closing Balance Sheet and the resolution of any disputes
relating thereto; (iii) permit the performance of any covenants required to be
performed under this Agreement after the Closing Date by the Company or any
Company Contributor; (iv) permit the preparation of any Tax Return or other
document required to be filed with any governmental authority; (v) respond to
any necessary proceeding or claim made, or request for information, by any
governmental authority or any third party; and (vi) permit the processing or
responding to any claim made under this Agreement, and the LLC, Fleet and the
Fleet Contributors shall reasonably cooperate with the Company and the Company
Contributors, if requested, in connection with the foregoing. Notwithstanding
the foregoing, neither the LLC, Fleet nor any of the Fleet Contributors shall be
required to provide access to or to disclose information where such access or
disclosure would jeopardize the attorney-client privilege of the institution in
possession or control of such information or contravene any law, rule,
regulation, order, judgment, decree or binding agreement entered into prior to
the date of this Agreement.
SECTION 6.17 SmartMove and Rewards Contribution.
(a) At any time, and from time to time, on or after the
Closing Date, the Company and the Company Contributors may tender to the LLC,
and the LLC will accept and assume, within 15 days after such tender, pursuant
to documents relating thereto in form reasonably satisfactory to the LLC and the
other parties thereto, Qualified SmartMove Accounts subject to certain
liabilities. For purposes of this Section 6.17, "Qualified SmartMove Accounts"
are Retained SmartMove Accounts as to which (i) a release of all claims in
respect of SmartMove Promotions has been obtained, (ii) a final judgment from
which any right to appeal has lapsed has been rendered in connection with
litigation relating to such Retained SmartMove Account or (iii) full restitution
has been made in respect of the repricing of such Retained SmartMove Accounts or
some other event (including, without limitation, the passage of time) shall have
occurred relating to such Retained SmartMove Accounts and, in either such case
in the reasonable judgment of the LLC, no further liability to the LLC exists in
respect of such
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Retained SmartMove Accounts or an indemnity therefor from the Company in form
and substance reasonably acceptable to the LLC is satisfactory to satisfy any
such remaining liability. The book value of the liabilities assigned by the
Company and the Company Contributors and assumed by the LLC with respect to such
Qualified SmartMove Accounts shall equal the product of the amount of credit
card receivables relating to such Qualified SmartMove Accounts multiplied by
1.0438. Such liabilities will be composed of interest bearing liabilities with
characteristics consistent with Section 1.06(a).
(b) At any time after the Closing Date, the Company and the
Company Contributors may tender to the LLC, and the LLC will accept and assume,
within fifteen (15) days of such tender, pursuant to documents relating thereto
in form reasonably satisfactory to the LLC and the other parties thereto,
Qualified Rewards Accelerator Accounts subject to certain liabilities. For
purposes of this Section 6.17, "Qualified Rewards Accelerator Accounts" are
credit card accounts which were Rewards Accelerator Accounts on the Closing Date
but subsequently ceased to be Rewards Accelerator Accounts. The book value of
the liabilities assigned by the Company and the Company Contributors and assumed
by the LLC with respect to such Qualified Rewards Accelerator Accounts shall
equal the product of the amount of credit card receivables relating to such
Qualified Rewards Accelerator Accounts multiplied by 1.0438. Such liabilities
will be composed of interest bearing liabilities with characteristics consistent
with Section 1.06(a).
SECTION 6.18 Cooperation in Litigation.
(a) Fleet agrees to take commercially reasonable actions
necessary to make Transferred Employees who are knowledgeable with respect to
the matter in question available to the Company after the Closing Date with
respect to any action, suit, proceeding or investigation ("Actions") to which
the Company is a party or is otherwise involved with regard to the Business,
whether commenced before or after the Closing Date, including, without
limitation, Actions relating to Retained SmartMove Accounts. Fleet agrees to use
its reasonable efforts to provide that any such employees who terminate their
employment with the LLC or any of its Affiliates and enter into termination
agreements or similar agreements, arrangements or understandings, will be
obligated to continue to assist the Company in the defense of any such matters,
whether as consultants, expert witnesses, or otherwise. Fleet further agrees to
use its commercially reasonable efforts to ensure that all decisions as to the
legal representation of any such Transferred Employees in connection with any
such Actions shall be made by the Company, exclusive of joint representation.
The Company agrees to reimburse the LLC for reasonable out-of-pocket expenses
incurred by the LLC in connection with requests by the Company pursuant to this
Section 6.18(a) (excluding salary and fringe benefits paid to such employees).
(b) Fleet and its Affiliates will not provide information
relating to the Business or its operations prior to the Closing Date to any
person if Fleet has Knowledge that such information is being requested in
connection with any litigation, arbitration or other proceeding in which the
Company or any of the Company's Affiliates is a party. If Fleet or any
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of its Affiliates becomes legally compelled (by deposition, interrogatory,
request for documents, subpoena, civil investigative demand or otherwise) to
disclose such material, Fleet will provide the Company with prompt prior written
notice of such requirement so that the Company may seek a protective order or
other appropriate remedy to prevent the dissemination of such information. In
the event that such protective order or other remedy is not obtained, or that
the Company waives compliance with the terms hereof, Fleet agrees to furnish
only such information which it reasonably believes is legally required.
(c) The Company and Fleet shall cooperate, to the extent
reasonably requested by either of them, in the handling and disposition of any
Actions, whether or not listed on the Company Disclosure Schedule and whether or
not pending or threatened prior to the Closing, that arise out of or are related
to any event or occurrence with respect to the Business prior to the Closing;
provided, however, that the party ultimately responsible for discharging such
Action shall have the authority to take such actions as it deems necessary or
advisable, in its sole discretion, to discharge such Action subject, however, to
the provisions of this Agreement.
SECTION 6.19. Preservation of and Access to Books and Records.
Fleet shall cause the LLC to preserve and keep all books and records of the
Business and all information relating to the accounting, business, financial and
Tax affairs of the Business in existence on the Closing Date or which come into
existence after the Closing Date but relate to the Business prior to the Closing
Date for a period of seven (7) years thereafter, or for any longer period (i) as
may be required by any federal, state, local or foreign governmental body or
agency, (ii) as may be reasonably necessary with respect to the prosecution or
defense of any audit, suit, action, litigation or administrative arbitration or
other proceeding or investigation that is then pending or threatened, or (iii)
that is equivalent to the period established by any applicable statute of
limitations (or any extension or waiver thereof) with respect to matters
pertaining to Taxes. For a period of four (4) years following the seven (7) year
period specified above, if the LLC wishes to destroy such records, the LLC shall
first provide the Company the opportunity to take possession of same.
SECTION 6.20 Guarantees. Fleet shall take such commercially
reasonable actions as necessary to cause Fleet National Bank to replace the
Company under the Guarantees listed in Schedule 6.20 and to ensure that the
Company has no remaining obligation under such guarantees after the Closing
Date.
SECTION 6.21 Pro Forma Statements of Operation. The Company
shall deliver to Fleet prior to the date of mailing of the Proxy Statement to
stockholders of the Company, a pro-forma statement of operations of the Business
for the year ended December 31, 1996 and the nine months ended September 30,
1997 (the "Pro Forma Statement of Operations"). The Pro Forma Statement of
Operations will reflect pretax earnings for the nine month period ended
September 30, 1997 of no less than $30 million.
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SECTION 6.22 Employee Designations. It is acknowledged that
Schedule 2.01(x) does not, in certain instances, give specific names of
employees, but rather the number of employees who will be part of the Company
Credit Card Business Employees to fill positions in particular departments (the
"Potential Company Credit Card Business Employees"). Fleet shall use its best
efforts to provide the Company with the names of specific employees to fill such
positions within fifteen days after the date of this Agreement, and in any event
shall give all of such names to the Company within 30 days after the date of
this Agreement (it being agreed that all such selections shall be subject to the
reasonable approval of the Company). If all of such names are not given to the
Company within 30 days after the date of this Agreement, then the Company shall
be permitted to designate those employees from such departments who will fill
the positions for which names of specific employees were not given by Fleet
within such 30 day period. Upon the identification and approval of Potential
Company Credit Card Business Employees, such employees shall be deemed to be
Company Credit Card Business Employees.
SECTION 6.23 VISA and MasterCard. The Company shall take such
commercially reasonable actions as reasonably requested by the LLC and as
necessary to obtain any required consent of VISA USA Inc. ("VISA") and
MasterCard International Inc. to the use of the bin numbers of Advanta National
Bank in respect of the Company Contributed Assets; provided, however, that the
Company shall not be required to take any actions which would reasonably be
expected to affect adversely the ability of the Company to obtain a refund of
its sixteen million dollar ($16,000,000) deposit with VISA or to materially and
adversely effect the Company's ability to hold the Retained SmartMove Accounts
and the Rewards Accelerator Accounts.
SECTION 6.24 Strategic Business Assets. From and after the
Closing Date, the parties agree that the strategic business assets identified on
Annex A-8 to Schedule 1 as shared assets (the "Shared Strategic Assets") may be
used by each of the LLC and the Company in their respective businesses;
provided, however, that, except in connection with a sale, transfer or other
disposition of a substantial portion of the assets of a business unit or the
Company as a whole, the Company shall not sell, transfer or otherwise dispose of
such Shared Strategic Assets in any manner which would permit any person not
Affiliated with the Company to the use of such assets in any manner which would
compete with the consumer credit card business of the LLC.
ARTICLE VII
INSURANCE
SECTION 7.01 Liabilities to be Retained. The parties hereto
acknowledge that the Non-Assumed Liabilities include any and all obligations of
the Company and the Company Contributors to pay claims which were (for any
particular claim) incurred on or prior to the Closing Date under the credit
insurance policies and debt cancellation contracts sold by or on behalf of the
Company to certain of its customers on or before the Closing Date (the "Credit
Insurance Business"). Notwithstanding the fact that the accounts receivable from
certain of these customers and the credit cards issued to such customers
(including all contractual rights relating thereto) and the deferred acquisition
costs associated with the Business (including the
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Credit Insurance Business) are included as part of the Contributed Assets, the
parties hereto agree as follows:
(a) The LLC, or an Affiliate thereof, pursuant to the terms of
the Administration Agreement shall administer all claims made with respect to
the Credit Insurance Business.
(b) Within 5 Business Days' notice of receipt of notice
thereof, together with appropriate backup documentation, the Company shall pay,
or cause one of its Affiliates to pay, any and all proper Credit Insurance
Business claims which were (for any particular claim) incurred on or prior to
the Closing Date, whether or not the claim is made on or after the Closing, and
shall promptly reimburse Fleet and its Affiliate if any one of them shall pay
any such claim on behalf of the Company.
SECTION 7.02 Assets to be Retained. The parties hereto
acknowledge that the assets retained by the Company and the Company Contributors
include all reserves relating to the Credit Insurance Business and the Company
Contributed Assets include all deferred acquisition costs related to the Credit
Insurance Business.
SECTION 7.03 Insurance Proceeds. The parties agree that in the
event insurance proceeds in respect of policies with American Bankers Life, or
other insurance companies, are paid to such party or any of its Affiliates in
respect of liabilities of the other party or its Affiliates, such proceeds will
be promptly paid, without setoff, to the other party.
ARTICLE VIII
CONDITIONS TO CLOSING
SECTION 8.01 Conditions to Each Party's Obligation to Effect
the Contribution. The respective obligations of each party to effect the
Contribution and the other transactions contemplated by this Agreement are
subject to the satisfaction or waiver, where permissible, prior to or
concurrently with the Closing, of each of the following conditions:
(a) This Agreement shall have been adopted by the affirmative
vote of a majority of the votes entitled to be cast by the holders of the Class
A Shares and the Class A Preferred Shares, voting together as a single class;
(b) All regulatory approvals required to be obtained by such
party to consummate the transactions contemplated hereby, including, without
limitation, any required approvals of the Bank Authorities, shall have been
obtained and shall remain in full force and effect and all statutory waiting
periods in respect thereof shall have expired; and no such approvals shall
contain any conditions or restrictions which the Board of Directors of either
Fleet or the Company reasonably determines in good faith will have a Material
Adverse Effect or a Fleet Material Adverse Effect or a material limitation on
the ability of Fleet to operate the LLC
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or the Company to redeem shares of its capital stock following consummation of
the transactions contemplated by this Agreement;
(c) No statute, rule or regulation shall have been enacted or
promulgated by any governmental authority of competent jurisdiction which
prohibits the consummation of the Contribution and the other transactions
contemplated by this Agreement;
(d) There shall be no order, judgment, decree or injunction
(whether temporary, preliminary or permanent) of a United States Federal or
state court of competent jurisdiction in effect precluding or materially
restricting or making illegal consummation of the Contribution and the other
transactions contemplated by this Agreement;
(e) The Ancillary Agreements (other than the Lease Agreements)
shall have been executed, provided that this paragraph (e) shall not be a
condition to the obligations of any party to effect the Contribution and the
other transactions contemplated by this Agreement if such party has not
negotiated in good faith and used its best efforts to negotiate and execute such
agreements.
SECTION 8.02 Conditions to the Company's Obligation to Effect
the Contribution. The obligations of the Company and the Company Contributors to
effect the Contribution and the other transactions contemplated by the Agreement
are also subject to the satisfaction or waiver, where permissible, prior to or
concurrently with the Closing of each of the following conditions:
(a) Fleet and the Fleet Contributors shall have performed in
all material respects their agreements and covenants contained in or
contemplated by this Agreement which are required to be performed by them at or
prior to the Closing;
(b) The representations and warranties of Fleet set forth in
this Agreement (without regard to any Fleet Material Adverse Effect
qualification in such representation or warranty) shall be true and correct (i)
on and as of the date hereof and (ii) on and as of the Closing Date, with the
same effect as though such representations and warranties had been made on and
as of the Closing Date, except for representations and warranties that expressly
speak only as of a specific date or time which need only be true and correct as
of such date and time, and except for such failures to be true and correct as
individually or in the aggregate will not have a Fleet Material Adverse Effect;
(c) The Company and the Company Contributors shall have
sufficient liabilities as provided in Schedule 1.06(a) which may be transferred
to the LLC in accordance with the terms of this Agreement to permit the Closing
Balance Sheet to reflect the Agreed Deficit; provided, however, that in the
event the Company is unable to satisfy this condition and all other conditions
to Closing have been satisfied or waived, then the Closing shall be delayed
until a date which is within 20 Business Days after the Company is first able to
satisfy this
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condition, with the exact date and time of Closing to be specified by the
Company by notice to Fleet given at least three Business Days prior thereto;
(d) The Company shall have received a certificate signed on
behalf of Fleet by an executive officer of Fleet, dated as of the Closing Date,
to the effect that the conditions set forth in Sections 8.02(a) and 8.02(b)
hereof have been satisfied;
(e) The Company shall have received the opinion of Edwards &
Angell, counsel to Fleet, relying on Pennsylvania counsel as necessary, in form
and substance reasonably satisfactory to the Company.
SECTION 8.03 Conditions to Fleet's Obligation to Effect the
Contribution. The obligations of Fleet and the Fleet Contributors to effect the
Contribution and the other transactions contemplated by this Agreement are
subject to the satisfaction or waiver, where permissible, prior to or
concurrently with the Closing of each of the following conditions:
(a) The Company and the Company Contributors shall have
performed in all material respects their agreements and covenants contained in
or contemplated by this Agreement which are required to be performed by them at
or prior to the Closing;
(b) The representations and warranties of the Company set
forth in this Agreement (without regard to any Material Adverse Effect
qualification in such representation or warranty) shall be true and correct (i)
on and as of the date hereof and (ii) on and as of the Closing Date, with the
same effect as though such representations and warranties had been made on and
as of the Closing Date, except for representations and warranties that expressly
speak only as of a specific date or time which need only be true and correct as
of such date and time, and except for such failures to be true and correct as
will individually or in the aggregate not have a Material Adverse Effect;
provided, however, that for purposes of this paragraph (b), any change in the
financial condition or results of operations of the Business shall be deemed not
to result in a breach of any of the representations and warranties of the
Company set forth in this Agreement;
(c) Fleet shall have received a certificate signed on the
Company's behalf by an executive officer of the Company, dated the Closing Date,
to the effect that the conditions set forth in Sections 8.03(a) and 8.03(b)
hereof have been satisfied;
(d) Fleet shall have received the opinion of Wolf, Block,
Schorr and Solis-Cohen LLP, counsel to the Company, in form and substance
reasonably satisfactory to Fleet, including an opinion regarding the valid
transfer of Master Trust I and Master Trust II;
(e) Since the date of this Agreement, no bona fide claim which
challenges the consummation of the transactions contemplated by this Agreement
shall have been filed which is reasonably likely to materially and adversely
affect the ability of the LLC to operate the Business in substantially the same
manner as it is presently operated; and
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(f) All consents and approvals of any persons required in
connection with the assignment of the Material Company Contributed Contracts
shall have been obtained (including, without limitation, the consent of the
trustees to the amendment of Master Trust I and Master Trust II).
ARTICLE IX
TERMINATION; AMENDMENTS; WAIVER
SECTION 9.01 Termination. This Agreement may be terminated and
the transactions contemplated hereby may be abandoned, notwithstanding approval
thereof by the stockholders of the Company, at any time prior to the Closing:
(a) by mutual written consent of Fleet and the Company;
(b) by either Fleet or the Company if the transactions
contemplated by this Agreement have not been consummated by March 31, 1998 (as
such date may be extended by mutual agreement or pursuant to the proviso to this
sentence, the "Outside Termination Date"); provided, however, that the right to
terminate this Agreement under this Section 9.01(b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure to consummate the transactions
contemplated by this Agreement by the Outside Termination Date; provided,
further, however, that if the failure to consummate the transactions
contemplated by this Agreement by the Outside Termination Date result from the
failure to satisfy the condition set forth in Section 8.02(c), then the Outside
Termination Date shall be extended to June 30, 1998;
(c) by either Fleet or the Company if any court of competent
jurisdiction or other governmental body within the United States shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Contribution and such order,
decree, ruling or other action shall have become final and nonappealable;
(d) by Fleet, if (i) Fleet shall discover that any
representation or warranty made by the Company in this Agreement (without regard
to any Material Adverse Effect qualification in such representation or warranty)
is untrue at the time such representation or warranty was made or (except for
those representations and warranties made as of a particular date which need
only be true and correct as of such date) shall not be true and correct as of
the Closing Date, except where the failure to be so true and correct
individually or in the aggregate would not have a Material Adverse Effect,
provided that if any such failure to be so true and correct is capable of being
cured prior to the Outside Termination Date, then Fleet may not terminate this
Agreement under this paragraph (d) until the Outside Termination Date, unless
Fleet provides notice to the Company, at or prior to the date originally
scheduled for Closing by the Company specifying in reasonable detail the
untruthfulness in the representations or warranties claimed by Fleet, and in no
event may Fleet terminate this Agreement under this
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paragraph (d) if such failure is corrected prior to the Outside Termination
Date, (ii) there shall have been a breach of any covenant or agreement on the
part of the Company or any Company Contributor under this Agreement resulting in
a Material Adverse Effect which shall not be capable of being cured prior to the
Outside Termination Date, (iii) the stockholders of the Company fail at the
Special Meeting to approve the Contribution and the other transactions
contemplated by this Agreement; or (iv) the Company's Board (x) fails to
recommend approval and adoption of this Contribution and the other transactions
contemplated by this Agreement by the stockholders of the Company or withdraws
or amends or modifies in a manner adverse to Fleet its recommendation or
approval in respect of this Agreement and the Contribution, (y) makes any
recommendation with respect to an Alternative Acquisition other than a
recommendation to reject such Alternative Acquisition or (z) fails to convene
the Special Meeting on or prior to the Outside Termination Date (other than as a
result of any restraining order or injunction or court order or failure of the
SEC to clear the Proxy Statement for mailing to the Company's stockholders on or
before that date which is 35 days prior to the Outside Termination Date); or
(e) by the Company, if (i) the Company shall discover that any
representation or warranty made by Fleet in this Agreement (without regard to
any Fleet Material Adverse Effect qualification in such representation or
warranty) is untrue at the time such representation or warranty was made or
(except for those representations and warranties made as of a particular date
which need only be true and correct as of such date) shall not be true and
correct as of the Closing Date, except where the failure to be so true and
correct would not have a Fleet Material Adverse Effect or materially adversely
affect (or materially delay) the consummation of the Contribution and the other
transactions contemplated by this Agreement, provided that if any such failure
to be so true and correct is capable of being cured prior to the Outside
Termination Date, then the Company may not terminate this Agreement under this
paragraph (e) until the Outside Termination Date, unless the Company provides
notice to Fleet, at or prior to the date originally scheduled for closing by the
Company specifying in reasonable detail the untruthfulness in the
representations and warranties claimed) by the Company, and in no event may the
Company terminate this Agreement under this paragraph (e) if such failure is
corrected prior to the Outside Termination Date or (ii) there shall have been a
material breach of any covenant or agreement in this Agreement on the part of
Fleet which shall not be capable of being cured prior to the Outside Termination
Date.
SECTION 9.02 Effect of Termination.
(a) In the event of the termination and abandonment of this
Agreement pursuant to Section 9.01 hereof, this Agreement shall forthwith become
void, without liability on the part of any party hereto except as provided in
this Section 9.02 and Sections 6.03(b) and 11.09; provided, however, that, other
than in the case of a termination pursuant to Section 9.01(d)(iii), termination
will not relieve a party in breach of this Agreement from liability for any
willful breach of this Agreement giving rise to such termination.
Notwithstanding the foregoing, neither Fleet, on the one hand, nor the Company,
on the other hand, shall have any rights against each other with respect to the
recovery of expenses, except as provided for in Section 9.02(b)(i)
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and except to the extent that the non-breaching party may recover such expenses
pursuant to the proviso contained in the immediately preceding sentence.
(b)(i) If Fleet shall have terminated this Agreement pursuant
to Sections 9.01(d)(iii) or 9.01(d)(iv)(z) and an Alternative Acquisition is
approved by the Board of Directors of the Company prior to the first anniversary
of the termination of this Agreement, then in such case the Company shall
promptly, but in no event later than two Business Days after approval by the
Board of Directors of an Alternative Acquisition, pay Fleet a termination fee
equal to $50 million, by wire transfer of immediately available funds to an
account previously designated by Fleet and shall have no obligation to pay any
other amounts or have any other liability on account of damages, expenses or
otherwise.
(ii) Notwithstanding any other provision hereof, no fee or
any other amount shall be paid pursuant to this Section 9.02(b) or otherwise to
Fleet if it or any Fleet Contributor shall be in material breach of its material
obligations hereunder.
SECTION 9.03 Amendment. Prior to the Closing Date, this
Agreement may be amended by action taken by or on behalf of the Boards of
Directors of the Company and Fleet at any time before or after adoption of this
Agreement by the stockholders of the Company, but no amendment shall be made if
it would violate applicable law or, after the approval of this Agreement and the
transactions contemplated hereby at the Special Meeting, which materially
adversely affects such stockholders, without further approval of the
stockholders of the Company. This Agreement may not be amended except by an
instrument in writing signed on behalf of all the parties.
SECTION 9.04 Extension; Waiver. At any time prior to the
Closing, the parties hereto, by action taken by or on behalf of the respective
Boards of Directors of the Company and Fleet, may (i) extend the time for the
performance of any of the obligations or other acts of any other applicable
party hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein by any other applicable party or in any document, certificate
or writing delivered pursuant hereto by any other applicable party or (iii)
waive compliance with any of the agreements of any other applicable party or
with any conditions to its own obligations. Any agreement on the part of any
other applicable party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party. Such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
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ARTICLE X
INDEMNIFICATION
SECTION 10.01 Indemnification by the Company and Company
Contributors.
(a) Following Closing, Company and the Company Contributors
shall jointly and severally indemnify and hold the LLC, Fleet and the Fleet
Contributors harmless from and against any Losses sustained by the LLC, Fleet or
any of the Fleet Contributors:
(i) arising from any breach of any representation or
warranty on the part of the Company or any Company Contributor (and for this
purpose the representations and warranties of the Company, except for those
contained in Section 4.07, shall not be deemed to include qualifications as to
materiality or Material Adverse Effect, and the Knowledge standard shall be as
set forth in the proviso to the definition thereof);
(ii) arising from any breach of any covenant on the
part of the Company or any Company Contributor;
(iii) arising from a challenge to the validity of the
transfer of Master Trust I or Master Trust II (other than arising out of actions
or failures to act of Fleet and its Affiliates);
(iv) related to any action taken by the Company or
any of the Company Contributors with respect to any of its employee benefit
plans, including any amendment thereto resulting from the transactions
contemplated by this Agreement; and
(v) related to any Non-Assumed Liability which is a
liability of the Company or any of the Company Contributors, including, but not
limited to, the Retained SmartMove Accounts and the Reward Accelerator Accounts.
(b) Any and all Losses referred to in this Section 10.01 shall
be computed on a net basis, after taking into account any amounts received or,
in the reasonable opinion of Fleet, receivable by Fleet or any Fleet Contributor
under any insurance policies.
SECTION 10.02 Indemnification by Fleet and Fleet
Contributors..
(a) Following Closing, Fleet and the Fleet Contributors shall
jointly and severally indemnify and hold the LLC, the Company and the Company
Contributors harmless from and against any Losses sustained by the LLC, the
Company or any Company Contributor:
(i) arising from any breach of any representation or
warranty on the part of Fleet or any Fleet Contributor under this Agreement (and
for this purpose the representations and warranties of Fleet, except for those
contained in Section 5.06, shall not be
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deemed to include qualifications as to materiality or Material Adverse Effect
and the Knowledge standard shall be as set forth in the proviso in the
definition thereof;
(ii) arising from a breach of any covenant on the
part of Fleet or any Fleet Contributor;
(iii) arising from or resulting from any liability of
Fleet or any of the Fleet Contributors which are not included as part of the
Fleet Transferred Liabilities; and
(iv) arising from or resulting from any guaranty
listed in Schedule 6.20 to the extent such Losses arise after the Closing Date.
(b) Any and all Losses referred to in this Section 10.02 shall
be computed on a net basis, after taking into account any amounts received or,
in the reasonable opinion of the Company, receivable by the Company or any
Company Contributor under any insurance policies.
SECTION 10.03 Other Indemnification.
(a) Following Closing, Fleet shall, and shall cause the Fleet
Contributors and the LLC to, jointly and severally, indemnify and hold harmless
the Company and the Company Contributors from and against any and all Losses
sustained by the Company or any of the Company Contributors arising out of the
Company Transferred Liabilities, including, without limitation, Ordinary Course
of Business Liabilities, or the Fleet Transferred Liabilities.
(b) Any and all Losses referred to in this Section 10.03 shall
be computed on a net basis, after taking into account any amounts received or,
in the reasonable opinion of the Company, receivable by the Company or any
Company Contributor under any insurance policies.
SECTION 10.04 Requirement for Notice. In the event that any
claim is asserted or action, suit, or proceeding is commenced against a party
hereto ("Indemnitee") which can reasonably be expected to result in any
liability or indemnity being imposed on another party hereto ("Indemnitor"), the
Indemnitee shall promptly give notice thereof to Indemnitor. Indemnitor then
shall have the opportunity to defend such claim, action, suit or proceeding with
counsel reasonably satisfactory to Indemnitee. Indemnitor shall have control of
any defense or settlement, and if Indemnitor accepts such defense and diligently
defends or pursues a settlement, then Indemnitor shall not be liable to the
Indemnitee for any of the Indemnitee's attorneys' fees or other costs and
expenses. If Indemnitor does not accept such defense (i) Indemnitor nevertheless
shall have the opportunity to participate in (but not to control) the defense
against such claim, action, suit or proceeding and to participate in any
negotiations with respect thereto and (ii) Indemnitee shall have control of any
defense. Notwithstanding the foregoing, no settlement of any claim as to which
indemnification is required or may be sought
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hereunder shall be made without the consent of the Indemnitor, which consent
shall not be unreasonably withheld.
SECTION 10.05 Limitation on Indemnification.
(a) Notwithstanding anything to the contrary contained herein,
(i) neither the Company nor the Company Contributors shall have any obligation
with respect to any indemnification payments pursuant to the provisions of
Sections 10.01(a)(i) or 10.01(a)(iii) except to the extent that the aggregate
indemnification obligations of the Company and the Company Contributors exceed
$15,000,000 in the aggregate, and the Company and the Company Contributors shall
have no obligation with respect to such initial $15,000,000 amount, (ii) the
indemnification provided for herein shall not cover, and in no event shall any
party hereto be liable for, any consequential, incidental or special damages,
and (iii) in no event may any claim for indemnification be made in an amount
which is less than $50,000.
(b) Notwithstanding anything to the contrary contained herein,
(i) neither Fleet nor any of the Fleet Contributors shall have any obligation
with respect to any indemnification payments pursuant to the provisions of
Section 10.02(a)(i) except to the extent that the aggregate indemnification
payments of Fleet and the Fleet Contributors exceed $15,000,000 in the aggregate
and Fleet and the Fleet Contributors shall have no obligation with respect to
such initial $15,000,000, (ii) the indemnification provided herein shall not
cover, and in no event shall any party hereto be liable for, any consequential,
incidental or special damages, and (iii) in no event may any claim for
indemnification be made in an amount less than $50,000.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01 Survival of Representations and Warranties. All
covenants, agreements, representations and warranties contained in this
Agreement, including the schedules hereto shall survive the Closing and the
consummation of the transactions contemplated by this Agreement, provided that
the representations and warranties survive only for a period of one year after
Closing, except for the representations set forth in Sections 4.02, 4.12 and
5.02 hereof, which shall survive the Closing for the applicable statute of
limitations period. Notwithstanding the foregoing, the parties hereto (including
their permitted assigns) shall be entitled to indemnity under Article X (subject
to the limitations on indemnity set forth therein) for any and all claims made
to the party breaching such representation or warranty within the periods
indicated above, as the case may be, based upon the breach or violation of such
covenants, agreements, representations and warranties. The termination of any
covenant, agreement, representation or warranty shall not affect any person's
right to prosecute to conclusion any claim made in writing as aforesaid (which
describes such claim with reasonable specificity) prior to the termination of
such covenant, agreement, representation or warranty.
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SECTION 11.02 Brokerage Fees and Commissions. Except for BT
Wolfensohn, the Company hereby represents and warrants to Fleet with respect to
the Company and its Affiliates, and except for Lehman Bros., Inc. and Merrill
Lynch & Co., Fleet hereby represents and warrants to the Company with respect to
Fleet and its Affiliates, that no person is entitled to receive from the Company
or Fleet, respectively, or any of their respective Subsidiaries or Affiliates,
any investment banking, brokerage or finder's fee or fees for financial
consulting or advisory services in connection with this Agreement or the
transactions contemplated hereby.
SECTION 11.03 Entire Agreement; Assignment. This Agreement
(including the Disclosure Schedules and the other documents and instruments
referred to herein) (a) constitutes the entire agreement among the parties with
respect to the subject matter hereof and supersedes all other prior agreements
and understandings, both written and oral (other than the agreement referred to
in Section 6.03(b) hereof and this Section 11.03), among the parties or any of
them with respect to the subject matter hereof, (b) shall be binding upon the
parties hereto and their successors and permitted assigns and (c) shall not be
assigned without the prior written consent of the other parties hereto;
provided, however, that the Company hereby covenants and agrees that in the
event that the Company sells all or substantially all of its assets within six
years after the Closing Date, it will assign its obligations hereunder to the
purchasers of such assets (and may, at its option, assign all or any portion of
its rights hereunder to such parties), and the consent of Fleet shall not be
required for an assignment pursuant to this proviso; provided, further, however,
that in no event shall the sale or other disposition of the Company's interests
in Advanta Information Systems, Inc. Advanta Partners LP and/or Advanta Business
Services Corp. be a sale of all or substantially all of the assets of the
Company for purposes of this Agreement.
SECTION 11.04 Validity. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, each of which shall remain in full
force and effect.
SECTION 11.05 Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be deemed to
have been duly given when delivered in person or by next business day courier to
the respective parties as follows:
If to Fleet or any Fleet Contributor:
Brian T. Moynihan
Managing Director, Strategic Planning
and Corporate Development
Fleet Financial Group, Inc.
One Federal Street
37th Floor
Boston, MA 02116
with copies to:
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Drew J. Pfirrman, Esq.
Assistant General Counsel
Fleet Financial Group, Inc.
One Federal Street
9th Floor
Boston, MA 02110
Edwards & Angell
2700 Hospital Trust Tower
28th Floor
Providence, RI 02903
Attention: V. Duncan Johnson, Esq.
If to the Company or any Company Contributor:
Advanta Corp.
Welsh and McKean Roads
Spring House, PA 19477
Attention: William A. Rosoff
Vice Chairman of the Board
with a copy to:
Advanta Corp.
Welsh and McKean Roads
Spring House, PA 19477
Attention: Elizabeth Mai, Esquire
Senior Vice President and General Counsel
with a copy to:
Wolf, Block, Schorr and Solis-Cohen LLP
111 South 15th Street
Philadelphia, Pennsylvania 19102
Attention: Herbert Henryson II, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof). Any such notice shall be effective upon receipt, if personally
delivered or sent by facsimile transmission, or one day after delivery to a
courier for next-day delivery. Nothing in this Section 11.05 shall be deemed to
constitute consent to the manner and address for service of process in
connection with any legal proceeding (including
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litigation arising out of or in connection with this Agreement), which service
shall be effected as required by applicable law.
SECTION 11.06 Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the Commonwealth of
Pennsylvania, regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws thereof.
SECTION 11.07 Descriptive Headings. The descriptive headings
herein are inserted for convenience of reference only and are not intended to be
part of or to affect the meaning of interpretation of this Agreement.
SECTION 11.08 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
SECTION 11.09 Expenses. Except as otherwise specifically
provided herein, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement, shall be paid by the party
incurring such expenses; provided, however, that all costs and expenses
(including transfer fees, consent fees and penalty fees) incurred in connection
with the assignments of the Material Company Contributed Contracts (except one
such agreement as to which the parties have agreed that all costs and expenses
shall be borne by the Company) and the Material Information Technology
Contracts, and all recording fees, transfer fees, documentary stamps and sales
taxes payable in connection with the Contribution of the Company owned real
property and personal property, shall be paid 50% by the Company and 50% by
Fleet, and the LLC shall bear all costs and expenses (including transfer fees,
consent fees and penalty fees) incurred either before, or after the Closing, in
connection with the Contribution of all other Company Contributed Contracts and
Fleet Contributed Contracts.
SECTION 11.10 Third Party Beneficiaries. Except for, from and
after the Closing hereunder, the rights of holders and obligees of interest
bearing liabilities included in the Company Transferred Liabilities to
performance of the obligations assumed by the LLC to pay such holders and
obligees the amounts owed to them, this Agreement is not intended to, and does
not, create any rights or benefits of any person other than the parties hereto.
SECTION 11.11 Construction; Interpretation. The parties hereby
agree that any rule of law or any legal decision that would require
interpretation of any claimed ambiguities in this Agreement against the party
that drafted it has no application and is expressly waived.
SECTION 11.12 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDINGS
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
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SECTION 11.13 Effect of Investigation. Except to the extent
provided in this Agreement, no investigation by the parties hereto made before
or after the date of this Agreement or the provisions of any documents (other
than the Disclosure Schedules), whether available pursuant to this Agreement or
otherwise, shall affect the interpretation of the representations and warranties
of the parties which are contained herein.
SECTION 11.14 Joinder. The parties hereto shall cause the LLC
to be formed prior to the Closing Date and shall cause the LLC to enter into a
joinder to this Agreement pursuant to which the LLC agrees to be bound by all of
the terms and provisions of this Agreement applicable to the LLC.
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed under seal on its behalf by its officers thereunto duly
authorized, all as of the day and year first above written.
FLEET FINANCIAL GROUP, INC.
By: /s/ Brian T. Moynihan
-----------------------------------
Name: Brian T. Moynihan
Title: Managing Director, Strategic
Planning and Corporate
Development
ATTEST:
/s/ H. Jay Sarles
- -----------------------------------
Name: H. Jay Sarles
Title: Chief Administrative Officer
ADVANTA CORP.
By: /s/ Dennis Alter
-----------------------------------
Name: Dennis Alter
Title: Chairman
ATTEST:
/s/ William A. Rosoff
- -----------------------------------
Name: William A. Rosoff
Title: Vice Chairman
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ANNEX II
October 28, 1997
Board of Directors
Advanta Corp.
Welsh & McKean Roads
P.O. Box 844
Spring House, Pennsylvania 19477
Dear Gentlemen and Madame:
BT Wolfensohn has acted as financial advisor to Advanta Corp. ("Advanta") in
connection with the proposed transfer of substantially all of the assets of its
consumer credit card business (the "Business") pursuant to the Contribution
Agreement, dated as of October 28, 1997, by and among Advanta and Fleet
Financial Group, Inc. ("Fleet") (the "Contribution Agreement"), which provides,
among other things, for Advanta and Fleet to contribute and transfer,
respectively, certain assets and liabilities of their respective consumer credit
card businesses to a newly created limited liability company (the "LLC") in
exchange for membership interests in the LLC (the "Transaction"). The value of
the Transaction to Advanta is primarily derived from the book value of the
liabilities of the Business in excess of the book value of the assets of the
Business transferred by Advanta to the LLC plus the capital that Advanta
presently uses in connection with the Business and that will be retained by
Advanta following the Transaction (the "Consideration"), and will become
available for other corporate purposes. In addition, the LLC has agreed to make
certain additional distributions to Advanta contingent upon the LLC achieving
certain performance criteria. The terms and conditions of the Transaction are
more fully set forth in the Contribution Agreement.
You have requested BT Wolfensohn's opinion, as investment bankers, as to the
fairness, from a financial point of view, to Advanta of the Consideration.
In connection with BT Wolfensohn's role as financial advisor to Advanta, and in
arriving at its opinion, BT Wolfensohn has, among other things:
(i) reviewed the publicly available consolidated financial
statements of Advanta for recent years and interim periods to
date, and certain other relevant financial and operating data
of Advanta and the Business available from public sources or
provided to BT Wolfensohn by Advanta;
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The Board of Directors
Advanta Corp.
October 28, 1997
(ii) reviewed certain internal financial analyses, projections and
operating information relating to Advanta and the Business,
provided by Advanta management to BT Wolfensohn;
(iii) discussed the business, financial condition and prospects of
Advanta and the Business with certain officers and certain
members of management of Advanta and the Business;
(iv) analyzed the pro forma impact of the Transaction on the
capital of Advanta;
(v) considered the strategic objectives of Advanta as outlined to
BT Wolfensohn by Advanta management;
(vi) reviewed the trading prices and activity for the Class A and
Class B Common Stock of Advanta;
(vii) reviewed the financial and other terms of the Contribution
Agreement and the other agreements referred to therein to be
entered into in connection with the Transaction;
(viii) reviewed the financial terms, to the extent publicly
available, of selected transactions in the credit card
industry;
(ix) reviewed certain public information pertaining to companies
engaged in businesses that BT Wolfensohn believes to be
generally comparable to those of Advanta's card operations,
including, without limitation, the trading prices for the
equity securities of such companies; and
(x) performed such other analyses and examinations and considered
such other information, financial studies, analyses and
investigations and financial, economic and market data as BT
Wolfensohn deemed relevant.
BT Wolfensohn has not assumed responsibility for independent verification of any
information, whether publicly available or furnished to it, concerning Advanta
or the Business, including, without limitation, any financial information,
forecasts or projections, considered in connection with the rendering of its
opinion. Accordingly, for purposes of its opinion, BT Wolfensohn has assumed and
relied upon the accuracy and completeness of all such information including,
without limitation, that the allowances for loan losses for Advanta and the
Business are in the aggregate adequate to cover such losses. In addition,
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The Board of Directors
Advanta Corp.
October 28, 1997
BT Wolfensohn has not reviewed individual credit files or conducted a physical
inspection of any of the properties or assets, and has not prepared or obtained
any independent evaluation or appraisal of the assets, and liabilities, of
Advanta, the Business or any of Advanta's other subsidiaries. With respect to
the financial forecasts and projections made available to BT Wolfensohn and used
in its analysis, BT Wolfensohn has assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of Advanta and the Business, as the case may be, as
to the matters covered thereby and in rendering its opinion BT Wolfensohn
expresses no view as to the reasonableness of such forecasts and projections or
the assumptions on which they are based. BT Wolfensohn's opinion is necessarily
based upon economic, market and other conditions as in effect on, and the
information made available to us as of, the date hereof.
For purposes of rendering its opinion, BT Wolfensohn has assumed that, in all
respects material to its analysis, the representations and warranties of Advanta
and Fleet contained in the Contribution Agreement are true and correct, that
Advanta and Fleet will each perform all of the covenants and agreements to be
performed by it under the Contribution Agreement and all conditions to the
obligation of each of Advanta and Fleet to consummate the Transaction will be
satisfied without any waiver thereof. BT Wolfensohn has also assumed that all
material governmental, regulatory or other approvals and consents required in
connection with the consummation of the Transaction will be obtained and that in
connection with obtaining any necessary governmental, regulatory or other
approvals and consents, or any amendments, modifications or waivers to any
agreements, instruments or orders to which Advanta is a party or is subject or
by which it is bound, no limitations, restrictions or conditions will be imposed
or amendments, modifications or waivers made that would have a material adverse
effect on Advanta or materially reduce the contemplated benefits of the
Transaction to Advanta. In addition, you have informed BT Wolfensohn that the
Transaction is expected to be tax-free to Advanta, and accordingly for purposes
of rendering its opinion BT Wolfensohn has assumed that the Transaction will be
tax-free to Advanta.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of Advanta and is not a recommendation to the stockholders of Advanta
to approve the Transaction. This opinion is limited to
the fairness, from a financial point of view, to Advanta of the Consideration
and BT Wolfensohn expresses no opinion as to the merits of the underlying
decision by Advanta to engage in the Transaction.
BT Wolfensohn is engaged in the merger and acquisition and client advisory
business of Bankers Trust and, for legal and regulatory purposes, is a division
of BT Alex. Brown Incorporated, a registered broker dealer and member of the New
York Stock Exchange. BT Wolfensohn will be paid a fee for its services as
financial advisor to Advanta in connection with the Transaction, a substantial
portion of which is
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The Board of Directors
Advanta Corp.
October 28, 1997
contingent upon consummation of the Transaction. BT Wolfensohn and certain of
its affiliates have, from time to time, provided investment banking and other
financial services to Advanta and Fleet or their affiliates for which it has
received compensation. In the ordinary course of the business of BT Alex. Brown
Incorporated and its affiliates (collectively, "BT Affiliates"), BT Affiliates
may actively trade in the securities of Advanta and Fleet for their own accounts
and for the accounts of their customers. Accordingly, the BT Affiliates may at
any time hold a long or short position in such securities.
Based upon and subject to the foregoing, it is BT Wolfensohn's opinion as
investment bankers that the Consideration is fair, from a financial point of
view, to Advanta.
Very truly yours,
BT WOLFENSOHN
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ADVANTA CORP. PROXY
SPECIAL MEETING-JANUARY __, 1998
The undersigned appoints Dennis Alter and William A. Rosoff,
and each of them, as Proxies each with the power to appoint his substitute, to
represent and vote as designated below, all shares of the undersigned at the
Special Meeting of Stockholders of Advanta Corp. at [ ], at 10:00 a.m. on [ ],
and any adjournment or postponement thereof.
The Board of Directors recommends a vote FOR:
Approval and adoption of the
Contribution Agreement and the [ ] FOR [ ] AGAINST [ ] ABSTAIN
transactions contemplated thereby
(Continued and to be signed and dated on the other side)
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DATE _______________ , 199_
___________________________
___________________________
___________________________
PLEASE DATE AND SIGN ABOVE
EXACTLY AS SAME APPEARS
INDICATING IF APPROPRIATE,
OFFICIAL POSITION OR
REPRESENTATIVE CAPACITY. IF
STOCK IS HELD IN JOINT
TENANCY, EACH JOINT OWNER
SHOULD SIGN.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS
DIRECTED OR, IF NO DIRECTION IS GIVEN WILL BE VOTED FOR THE
PROPOSAL. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF ADVANTA CORP.
